Could Inc (ADR) (JD) Overtake Alibaba Group Holding Ltd (BABA)?

JD.Com Inc(ADR) (NASDAQ:JD) is the second largest e-commerce company in China, behind only the better-known Alibaba Group Holding Ltd (NYSE:BABA). JD stock also is just behind BABA stock in year-to-date performance, but at 73% to 81%, no one in the former’s camp is complaining.

Could Inc (ADR) (JD) Overtake Alibaba Group Holding Ltd (BABA)?

Over the past 10 years, JD has built a hard-to-replicate logistics network, investing billions into infrastructure. In the world of e-commerce retailing, it’s the companies with scale across a still fragmented delivery ecosystem that will win customers, which will in turn enhance scale and drive down delivery prices. Lower prices and fast delivery leaves you with a happy customer.

The result of executing on its infrastructure has indeed resulted in a very competitive cost structure, and leveraging this, JD has been growing with no signs of slowing. Since 2012, JD has improved revenues from 41.4 billion RMB ($6.2 billion) to 260.1 billion ($38.8 billion) last year.

For the first half of 2017, year-over-year growth is up 42%, and it reasonable to assume the given its positioning, can continue to post such growth figures into the future.

The total addressable market is just that big.

JD’s Engaged Customer Base

With over 258 million active customer accounts, JD has built a loyal customer base, not unlike, Inc. (NASDAQ:AMZN) whereby trust has been earned via delivering on its promise. When JD first started building out its logistics network, there was no company that handled a delivery solution from flash-to-bang.

From online retail platform through to delivery of the item to both urban and difficult-to-reach rural areas, JD facilitates the movement of goods along the value chain.

Rather than primarily focusing on being a marketplace for buyers and sellers (BABA’s model), by selling directly to consumers, thus having more control over the quality of service and goods, JD has been wooing customers away from BABA. There is more faith in the authenticity of their products and fast delivery times.

JD’s understanding of the customer’s pain points led to the creation of their 211 program. If you place an order before 11am, they qualify for same day delivery; orders placed by 11pm will get to their destination by 3pm the next day. For customers who routinely had to put up with long shipping times and undelivered packaged, JD won business. It’s one of many examples of JD launching really effectives initiatives to drive adoption.

JD’s Drone Fleet

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With its commitment to customer satisfaction, JD has also been upping the ante in the drone game. AMZN’s drones that are currently being tested seem frail in comparison to JD’s that are “capable of delivering payloads weighing one ton or more.”

And without the regulatory hassles faced in the U.S., my money would be on JD or a non-U.S. company at the very least turning drones into a full-fledged fleet. JD already has 30 drones delivery packages to more remote villages in China.

With the heavy load capacities, JD has the potential to disrupt traditional logistics business grounded in trucks and ferries. Inland farmers could send perishable items quickly to customers without the risk of road blockages that could expire.

At full scale, this would be a game changer. (Note that Alibaba still has to rely to third-party freight companies to get package delivered.)

Can JD Overtake BABA?

Well, JD has certainly been taking market share from the current number one. But over the long-run, say the next decade, I wouldn’t bet against JD becoming the top dog in Chinese e-commerce. It’s certainly a loaded statement, but JD has been making material progress toward usurping that spot.

In 2016, JD’s share of B2C Chinese e-commerce sales increased to 25% to BABA’s Tmall marketplace, which had a 57% share. Over the span of about two years, JD gained 7%, up from 18% as of Q4 2014. BABA’s share in turn declined from 61%. That’s a few percentage points per year worth of market share pie that JD is taking. It’s making gains steadily.

Meanwhile, Chinese e-commerce as a whole is sporting 19% year-over-year growth, so there remains still a massive opportunity ahead of JD.

What’s clear is that JD’s investments in infrastructure, guaranteed fast delivery times, and more assurance regarding quality of products, are huge assets in its battle for the number one spot. BABA may have the bigger marketplace now, but JD owns its customers, a base that is growing rapidly. And they’re stickier Alibaba’s.

The secular tailwinds are there. The customer base is there. The industry dynamics play to its favor. JD’s super-charged growth has years ahead it.

As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.

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