May 6, 2020
E-Commerce in China: The COVID-19 Impact
Within our Emerging Internet cluster, our largest portfolio exposure is to e-commerce, where we have invested in e-commerce platforms in China, Latin America, and Southeast Asia. We believe the core value proposition of these e-commerce platforms is similar – more products, offered at better prices, delivered through a compelling user experience — and so is the long-term investment thesis, that across each of their end markets, consumer wallet share will continue to secularly shift online for decades to come.
Despite these similarities, the operations of e-commerce platforms vary widely – some own their inventory and operate in-house logistics, some do not, and many are a hybrid. When these systems and processes are stressed, as was the case during the economic and health crisis posed by the COVID-19 (“COVID”) crisis in early 2020, these differences are thrown into stark relief.
Below we discuss how this crisis accelerated the ongoing shift toward online commerce and how the operational differences between two of the largest e-commerce platforms in China, Alibaba (“BABA”) and JD.com (“JD”), impacted how they performed during this period.
Online retail share gain
As the Chinese government responded to the COVID outbreak with nationwide measures that slowed or shut down a large part of the economy, China experienced its first decline in national retail sales in decades.
During this period, consumers shifted their spending online, with the online share of total retail spending reaching levels normally only seen during the November seasonal “Double Eleven (Singles’ Day)” shopping spree.
JD.com outperformed Alibaba during COVID
Within online spending, performance by platform was sharply divergent. BABA — China’s largest e-commerce platform, with approximately 4x the scale of JD in terms of gross merchandise value (GMV, the value of goods and services transacted on its marketplace) — had GMV growth that, based on estimates, appeared flat or even declining, while JD sharply increased its estimated GMV growth in the first three months of the year.
Our research shows several factors underlying the variance in performance between BABA and JD, including:
Inventory management. Substantially all of BABA’s GMV is from third-party (3P) sales, whereas this represents approximately 50% of GMV for JD. (3P sales are generated by merchants who use e-commerce platforms to find customers and deliver their products, but who are responsible for their own inventory, whereas first party (1P) sales refer to inventory that is owned by the platform, i.e., BABA or JD.) During the COVID crisis, many 3P marketplace sellers struggled to source inventory from manufacturers, and some closed entirely. On the other hand, e-commerce platforms like JD with 1P inventory were able to manage their supply and demand in a more organized fashion. In the chart below, you can see how important access to inventory was in terms of fulfilling consumer demand during the early days of the COVID outbreak by separating out the relative performance of JD’s 1P and 3P business during this period.
In-house logistics. Having goods to sell is the primary gating factor for any platform or merchant. The second is getting these items to the consumer. Across China, every component of the logistics supply chain was impacted in some way – getting the goods from sellers/manufacturers to the e-commerce platforms (first-mile delivery); organizing, sorting, and warehousing these goods (fulfillment); and, finally, sending packaged products to consumers’ homes (last-mile delivery). Last-mile delivery was particularly impacted by COVID, given its lack of automation and reliance on in-person delivery teams. JD’s logistics operations, including last-mile delivery, is broadly operated in-house – this allowed them to manage teams more efficiently, changing worker incentives and safety & protection standards to maintain its operations.
Consumer preference. JD’s origins are in customer trust and product quality – it began as a distinct alternative to Taobao, the dominant e-commerce marketplace that nonetheless suffered from consumer skepticism of product authenticity and quality. Over the years, while BABA has improved in this dimension, we estimate that consumer net promoter score (NPS), a measure intended to capture customer satisfaction, is higher for JD for logistics, product quality, and pricing, though behind in product breadth, given BABA’s larger scale and 3P focus. In recent quarters, JD has realigned its internal focus and team compensation around NPS, and we believe that this incremental focus allowed them to attract customers who may have had a heightened concern about quality in certain product categories (e.g., cleaning products/disinfectants). These customers were both existing online shoppers who may have changed preferences for JD over BABA during the COVID outbreak, as well as first-time online shoppers (especially prevalent in smaller cities and towns).
In combination, these factors provided JD an advantage both in serving existing customers and in acquiring new customers through this crisis period. In a recent consumer survey we conducted, we observed a meaningfully higher transaction penetration for JD, which rose 400bps to 39% share during 1Q20 while Taobao and TMall, BABA’S two largest e-commerce platforms, were relatively flat. Further, our survey work showed that 80% of these newly acquired customers plan to purchase again on JD.
E-commerce beyond COVID
We continue to monitor changes to the broader e-commerce landscape in China, and whether and to what extent the gains JD made during this period persist. In February and March, we observed third-party inventory and logistics supply chains resume, which will again shift the competitive landscape. We are also researching the potential for accelerated growth in the purchases of lower-priced goods given the post-COVID economic stresses. This trend could underlie the 500bps share gain observed in Pinduoduo (“PDD”), a 3P e-commerce platform specializing in low-priced goods. BABA and JD also have competing low-priced offerings tailored to lower-tier cities, and we have increasingly focused our research on this newly emerging battleground amongst e-commerce providers.
Disclosures
The information presented in the above post is provided for informational purposes and is intended to provide an update concerning Kora Management LP (together with its affiliates, “Kora”) and the funds and accounts managed by Kora (collectively, the “Funds”), and does not constitute an offer to sell or the solicitation of an offer to purchase any securities, including those of the Funds. The information presented in the above post is confidential and may not be reproduced in its entirety or in part, or redistributed to any party in any form, without the prior written consent of Kora, and does not constitute legal, tax, investment, or other advice, or a recommendation to purchase or sell any particular security. The information contained in the above post is current only as of the date specified, irrespective of the time of posting or of any investment, and does not purport to present a complete picture of Kora or the Funds. Past performance is not indicative of, and not a guarantee of, future results. Notwithstanding the information presented in the above post, investors should understand that Kora is not limited with respect to the types of investment strategies it may employ or the markets or instruments in which it may invest, subject to the terms set forth in the Funds’ offering and governing documents. The investments discussed in the above post have been included to provide a general market update, and are not intended to be, and should not be construed as, investment advice or a recommendation to purchase or sell any particular security. As of the time of writing of the above post, certain of the Funds held a long position in JD and a portfolio hedge expressed through a short position in BABA. Both before and after the time of writing the above post, without making any public or other disclosure except as may be required by applicable law, such Funds may, at any time, buy and sell securities and instruments of JD and/or BABA (and other companies mentioned herein) based upon such factors as Kora may, in its discretion, deem relevant. The information included in the above post has been obtained from sources Kora believes to be reliable; however, these sources cannot be guaranteed as to their accuracy or completeness. The above post contains certain “forward-looking statements,” all of which are subject to various factors, any or all of which could cause actual results to differ materially from projected results. Nothing contained herein is designed to constitute an offer of new or additional investment advisory services.