JD.com vs. Pinduoduo in the social shopping market

JD.com (NASDAQ: JD) recently launched Jingxi, a new online marketplace that allows shoppers to team up with other shoppers to make wholesale purchases at lower prices. It works as a standalone app and a mini app in Tencent‘s (OTC: TCEHY) WeChat, and it looks a lot like Pinduo (NASDAQ: PDD), which has popularized the group buying model over the past four years.

Pinduoduo now accounts for 7.3% of the Chinese e-commerce market, according to eMarketer. This puts the newcomer in third place behind Ali Baba (NYSE: BABA) and JD, which respectively control 55.9% and 16.7% of the market.

Pinduoduo already has more buyers than JD. Its number of active buyers in the past 12 months has grown 41% annually to 483 million in the last quarter, while JD’s annual active buyers grew only 2% to 321 million. Alibaba remains the market leader with 755 million monthly active mobile users across all of its Chinese marketplaces.

Image source: Getty Images.

Pinduoduo customers, many of whom live in rural areas and lower-tier cities, spend less money than JD or Alibaba customers, but this growth scares market leaders. Alibaba has already launched its Juhuasuan flash sell market and a bargain-focused version of Taobao to counter Pinduoduo, so it’s no surprise to see JD follow suit with Jingxi.

The three main advantages of JD

JD can leverage three key strengths to bolster Jingxi’s presence against Pinduoduo. Firstly, around half of JD buyers are already from the lower level cities targeted by Pinduoduo, so it might be easy to push those buyers to Jingxi.

Second, JD already has the largest fulfillment and logistics network in China, which facilitates the rapid fulfillment of wholesale orders. Part of this system is already automated, with warehouse robots, drones and autonomous delivery vehicles. Pinduoduo is still gradually building its own logistics network, but it could be difficult because it is not profitable like JD.

Finally, Jingxi’s integration with WeChat, which has over 1.1 billion monthly active users, should help it encourage more buyers to team up with group buying. JD Mall was already integrated with WeChat’s mini-apps, but shoppers didn’t really have a reason to share their purchases. Jingxi could close this gap by cloning Pinduoduo’s model.

Boxes in a warehouse.

Image source: Getty Images.

However, investors should note that Tencent, JD’s main investor, also has a significant stake in Pinduoduo. Pinduoduo also runs a popular WeChat mini app. This means that even if Tencent supports Jingxi’s growth, it probably won’t give the new platform big advantages (like free marketing) over Pinduoduo.

What this means for JD investors

JD has struggled over the past year with concerns about slowing growth, rising spending, and the economic slowdown in China. However, he continued to gain new clients as his revenue growth stabilized.

Annual growth

Q2 2018

Q3 2018

Q4 2018

Q1 2019

Q2 2019

Annual active customers

21.5%

14.6%

4.4%

2.9%

2.4%

Returned*

31.2%

25.1%

22.4%

20.9%

22.9%

YOY = Year after year. * RMB terms. Source: JD quarterly reports.

JD attributed the acceleration in revenue growth in the last quarter to strong demand for high-priced items such as consumer electronics and home appliances, and he expects his third-quarter revenue. quarter increases by 20 to 24% per year.

JD also noted that it generates stronger growth in lower-tier cities while its growth in first-tier cities – like Beijing and Shanghai – has slowed. Targeting lower tier cities with Jingxi could compensate for this slowdown while widening its gap against Pinduoduo, low-end Alibaba markets and other challengers.

Will Jingxi gain ground against Pinduoduo?

JD’s introduction of Jingxi is a smart move, but it’s unclear whether it will contain Pinduoduo’s growth. Pinduoduo has the advantage of being the first to enter the social shopping market, and its growth is much faster than JD, with revenue growth of 169% year-on-year in the last quarter. It is also growing rapidly in major cities.

Looking ahead, investors should compare the growth of JD and Pinduoduo over the next few quarters to see if the former loses buyers to the latter. If so, it could indicate that JD needs to come up with bigger guns to contain this social shopping juggernaut.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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Peggy P. Gilmore

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