JD.com's logistics service breaks even after 5 years of investment

Dive Brief:

After posting more than 90% revenue growth for the second quarter in a row, JD.com's logistics service has reached breakeven, JD.com Group CEO Richard Liu told analysts and investors on a Tuesday earnings call.
Logistics and other service revenue was up 98% year-over-year in the second quarter and operating margins were up to 14.7% from 13.5% in the same period last year.
"And after years of investments and our increasing our fulfillment and our opening strategies, our fulfillment expense costs continued to decline," said Liu.

Dive Insight:

JD.com began building out its logistics capacity, serving its own parcel volume and that of third parties, in 2014 with the strategy of adding capacity ahead of demand. Today it operates roughly 600 warehouses in 28 cities covering "almost all cities and districts in China," according to slides released with the earnings call.

Profit margins for the e-commerce company's overall parcel fulfillment operation naturally suffered, especially as the retail side of the business began to pursue more transactions at smaller basket sizes from consumers in 2015.

"Now, five years later, when all the dust finally settled down, we emerged as a much stronger and a more efficient, modern logistics operator that can fulfill six and a half times more daily orders than five years ago," said CFO Sidney Xuande Huang.

Economies of scale, along with advanced technology, eventually shifted the balance sheet, said Huang, who added JD.com's backend efficiencies have given it a significant leg up on competitors. He also acknowledged the company was not always certain whether the logistics business would eventually become profitable.

"So for quite a few years, we couldn't tell whether we are ever going to have operating leverage or we just simply continue to increase the expense ratio. So by this quarter, it’s a good illustration that the fulfillment expense ratio actually went back to a historical low level since our IPO," said Huang.

Celebrations notwithstanding, Huang emphasized the company is still in an investment phase on the logistics side, with many, less-populated areas of China still to cover. Zhenhui Wang, CEO of JD Logistics, assured analysts the company expects to see further profitability improvements despite further expansion into what the company calls "lower-tier" cities.