At another time, in another situation, the owners of JD.com (NASDAQ:JD) stock might cheer the company’s decision to open more brick-and-mortar locations in rural parts of China. Juxtaposed against the current backdrop of tariff wars, however, the strategy may become a negative catalyst for JD stock.
Running out of room to continue growing online, China’s second-biggest online retailer is doubling down on the development of storefronts as part of an effort to meld digital and physical retailing. The move is taking shape at a time when China’s consumer market may be close to crumbling, pushed past a point of no return by the trade conflict which seems to be a political standoff neither side wishes to back down from.
Even if the tariff battle comes to an amicable close, its damage may prove to be too much for JD stock to simply shrug off.
Back to Brick and Mortar
Whereas JD’s rival, Alibaba (NYSE:BABA), has built itself from the ground up as an online-selling middleman, JD has based a business on empowering China’s brick-and-mortar stores. JD Logistics and its supply chain tech cater to a largely underserved market of small shops peppered across the country.
JD– despite all of its internet-tech capabilities — has always had something of a soft spot for actual shops and shoppers. In 2017, its CEO, Liu Qiangdong, vowed to open 1 million convenience stores all across China by 2022, and in 2018 it opened a cashierless store in Jakarta, ripping a page from the Amazon.com (NASDAQ:AMZN) playbook.
It doesn’t appear either initiative is going to go as initially planned, but not because JD couldn’t forge ahead. Rather, its brick-and-mortar retail strategy appears to have adapted.
JD is now aiming to cultivate a network of 15,000 small stores (up from 5,000 as of the end of 2018) as a means of connecting with its customers. These units, which are best described as franchises, will serve as de facto showrooms; sales of home appliances seem to be the focal point of the strategy.
Beyond that, JD is looking to develop stores with much bigger footprints, on the order of half a million square feet, in every major city in China. Though appliances will surely be part of that division’s mix as well, it would be difficult to fill that much space with just appliances. The sheer scope of the planned stores implies they’ll look more like traditional superstores, particularly given that JD is also acquiring a major stake in established appliance retailer Jiangsu Five Star Appliance.
Right Idea, Wrong Time?
Though China’s e-commerce spending is still growing, its expansion has measurably slowed, and should continue to slow as saturation turns into a headwind.
To that end, the move to an omnichannel strategy is the right one for JD.com stock, particularly when it touches China’s more rural areas and its older consumers. More than 240 million of China’s shoppers over the age of 60 live in the more rural western part of the country, and while they’re not completely unfamiliar with the web, they’re not necessarily internet or e-commerce savvy. Many still prefer to shop in person.
No part of China, no matter how remote, however, is immune to the impact of a trade war that’s gone on far longer than many expected it would.
But the impact of the conflict is debatable. Retail spending in China during the first quarter was up a healthy 8%, defying the odds and the worriers.
The problems caused by the conflict have become clear and frequent, though. In April, China’s retail sales growth fell to a 16-year low of 7.2%, as the ripple effect of the trade war began reaching all facets of the nation’s economy.
April’s industrial output also slowed rather dramatically. Meanwhile, the conflict has affected JD stock, as JD stock price is down 5% in the last month and 32% over the last 12 months.
The Bottom Line on JD Stock
While China’s urban areas accounted for 85% of last quarter’s e-commerce growth, rural online spending grew 9.2% versus a more modest 8.2% rise in online shopping by China’s urban residents.
So there’s money to be made in the rural areas, if a company can just find a way to connect with those consumers, and assuming the country’s economy holds up in the midst of the trade tensions.
JD.com has undoubtedly mapped out a plan to make sure it’s able to connect with rural consumers, potentially boosting its profits and JD.com stock in the process.
JD is taking another step to advance that goal. Specifically, it’s planning a cost-effective delivery network. China’s Civil Aviation Administration has already given JD permission to test delivery drones in the remote northwest Shaanxi province. JD ultimately hopes to develop 10,000 drone “airports” meant to serve hard-to-reach places.
If, however, JD bets big on consumers at a time when China’s consumerism hits a wall, JD stock price could take a big hit, since brick-and-mortar retailing appears to be the biggest part of its growth plan.
It’s a potential pitfall that’s just too big for the owners of JD stock to ignore.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.