China’s e-commerce business is booming, with revenue exceeding 120 billion RMB (US$17.5 billion) last year alone, more than double the previous year, and it shows no signs of slowing down. One example of e-commerce success is online retailer Jingdong Mall, which achieved an ambitious target to almost triple its annual revenue to nearly 4 billion RMB (US$585 million) between 2008 and 2009.
360buy Jingdong Mall is now China’s biggest computer, communication and consumer electronics (3C) online retailer. Its CEO and founder, Liu Qiangdong, recently announced new growth targets to help annual revenue hit 10 billion RMB this year.
How did a run-of-the-mill Beijing electronics shop transform itself into an online business-to-consumer (B2C) powerhouse? The company’s ascension began with what some would call a lucky move into e-commerce in 2003. But its 300% revenue growth in the five years since has had much more to do with business acumen than luck. How is it managing such fast-paced growth? What makes its CEO so sure that the company can achieve 10 billion RMB of turnover in 2010? And what is it about the company that helps it stand apart from competitors? China Knowledge at Wharton asked Liu these and other questions.
The following is an edited transcript of interview.
China Knowledge at Wharton: I’d like to thank you for taking the time to speak with me today, Mr. Liu. To start, can you talk about the origins of Jingdong Mall?
Liu Qiangdong: In 1998, I quit my job at a foreign company and started my own business in Zhongguancun, selling magneto-optical products. My first goal was to establish a chain of stores selling IT products and I planned to have 200 stores by 2008.
Soon, I found prices for IT and digital products were increasing much too quickly. The price of home appliances changed every month. Much like the futures market, the prices of IT products, such as for CPUs, fluctuated by the day. Even if the overall pricing trend was decreasing, chain stores couldn’t adjust prices quickly enough so that prices often fell before the product was even delivered to the end user. Additionally, leading chain stores, such as Gome and Suning, also entered the 3C market, and we didn’t have much of a chance competing directly against them.
Then, in 2003, the SARS epidemic broke out, and Beijing was the worst hit city in China. Our customers were afraid to go outside to shop, and our sales declined sharply. We were forced to find alternate ways to promote our products. We began posting product information online, and the response was overwhelmingly positive. Going into e-business also effectively reduced high inventory and operating costs. However while many people at the time were aware that online shopping was available, few used it. In the first half of 2005, I decided to completely abandon the physical store and changed my business model from a traditional store model to that of a 3C e-business. I headed up a group of IT technicians and we developed our own information system.
China Knowledge at Wharton: But you weren’t alone. At the time, there were many companies jumping into B2C e-business with similar business models. Yet Jingdong Mall came out on top. What is the secret to Jingdong Mall’s success? Can it be replicated?
Liu: The most fundamental reason for Jingdong Mall’s success is focus. Though many traditional retailers and suppliers use e-business, they tend to look at it as a complementary unit and not a main source of income. For us, e-business was everything, which led us to allocate resources differently. For example, in 2005, after we transferred all our business online, our sales were only 30 million RMB, less than half of what they were previously. But we stuck with it. Of course, some people attribute our success to our choice of product. Compared with other products, 3C products are more standardized and have higher unit prices. We don’t deny that this also influenced our sales.
But unlike some of our peers who talk big about flashy concepts, we kept it simple, focusing on three things: improving information systems, building teams and optimizing supply chains. We will focus on this for the next decade. We look at Jingdong Mall as a retailer, not as an IT company. Although there are some small differences, our main purpose differs little from that of a retailer – we buy and sell. Our central development plan is based on products, prices and service. The key to winning in this business is not the so-called business model but the implementation of details.
Take packaging. Jingdong Mall uses six different kinds of cardboard boxes to deliver products. If a large box is used to deliver a small product, it increases costs – not only of the box itself, but also of the foam and tape for the packaging. How do we control this? We keep regular records and analyze the performance data of each employee involved in packing our products. If there are any deviations, we can pull the employee aside and remind him of proper packing procedures. Currently, we deliver thousands of packages a day, and if we don’t pay attention to the small details, the accumulative cost would be staggering. However, balancing cost and customer service is also important, and we devote a lot of financial resources to building local distribution teams in dozens of cities. This home-grown logistics system monitors service delivery easily, and allows for [point-of-sale] payments to enhance the customer experience.
Jingdong Mall’s business model is no secret. Many of our competitors do the same thing. The difference is whether we can continue to improve price, product and service performance. I devote 30% of my time every day at work to reading customers’ emails, and our old customers also e-mail me directly, which helps us improve service.
China Knowledge at Wharton: Some people are critical of Jingdong Mall’s business model, saying that it uses a low-price strategy to enlarge its consumer base, resulting in weak profits and a business plan that is unsustainable in the long term. What is your response?
Liu: As our company is not listed, I’m under no obligation to release profit numbers. At this stage, profits are not our main concern. Our first concern is to use the business model to increase sales volume by creating value for our customers and suppliers. As sales increase, profits come from a range of sources and are not limited to pricing. In fact, 30% of Jingdong Mall’s current profits come from other sources, such as advertising and brand and event promotions.
Keeping prices low requires cost-control capabilities, not just changing price tags. First, 90% of our supplies come directly from manufacturers or top sales agents. Second, we pay attention to small details to reduce unnecessary costs, keeping in mind that our customers pay for any waste. Finally, we don’t seek to attain very high profit margins. We will always have low prices. This is not a temporary tactic, and we will always strive to have lower prices than our competitors. As for keeping a cost advantage, there is no real secret, although it involves thousands of employees and hundreds of processes.
China Knowledge at Wharton: You mentioned that profits are not your first concern. What is your first concern? Is it scale? Do low prices serve to increase the scale of the company rapidly?
Liu: I do not deny that low prices increase the scale of the company, but that is not our only intention. I would like to emphasize that you can’t have low prices without low costs. With annual sales in the billions, we can’t afford even a 1% loss. Presently, Jingdong Mall is looking forward to reaching its goal of sales of several billion RMB as quickly as possible. To me, until a retailer has achieved 10 billion RMB of sales, he can’t exert any influence on the industry.
China Knowledge at Wharton: You have publicly declared your goal of reaching 10 billion RMB of revenue in 2010. What’s the reason for your optimism when you have less than 15 months to achieve it?
Liu: According to our sales performance over the past eight months, we should hit a target of nearly 4 billion RMB this year. Over the past five years, Jingdong Mall has recorded an average annual compound growth rate of 300%. At this rate, a 10 billion RMB revenue target is feasible. Of course, as our customer base expands, we don’t expect growth to always be this fast.
In fact, one of the main bottlenecks for us is not the number of orders, but logistical capacity, such as delivery and storage. What our customers complain about most is slow delivery times.
Earlier this year, we received a second round of [private equity] financing to invest US$21 million in expanding our three major warehouses in Beijing, Shanghai and Guangzhou, which will give us capacity to handle the processing and distribution of 10 million RMB of orders. The expansion will be finished by the end of October. In addition, we have speeded up the construction of our local distribution centers, and an increasing number of cities can access our logistics services. In terms of sales promotions, we plan to advertise, but don’t plan to spend much money on it. Advertising fees account for less than 1% of sales. In short, we will continue to focus on product, price and service. Regardless if the revenue target is 4 billion RMB or 10 billion RMB, our business model will essentially remain the same.