In just two years, why can Jingdong Logistics turn losses into profits?

At the beginning of 2019, Liu Qiangdong released an "internal letter" to Jingdong logistics distribution employees, revealing that Jingdong logistics lost more than 2 billion yuan in 2018, mainly because of "too little external single volume", and said that "cancel the base salary but greatly increase the package commission".

At the beginning of 2021, JD Logistics submitted its prospectus in the Hong Kong Stock Exchange, and the pre-tax loss in 2018 was indeed as high as 2.76 billion yuan, but in the first three quarters of 2020, if the loss factors of convertible preferred shares were excluded (after the IPO, this part of the loss no longer exists), the pre-tax profit has exceeded 1.5 billion yuan.

In just two years, what happened to Jingdong Logistics, and what is the reason for the turnaround of the business situation? For Jingdong Logistics, where is the basic logic of its market value management?

Let's answer the profitability question first.

Jingdong Logistics originated from the support department of Jingdong Mall, announced its independence in April 2017, and began to provide solutions and services to external customers at the same time, focusing on supply chain empowerment.

At the beginning of JD Logistics' independence, external orders accounted for a very low proportion, which made it difficult to hedge the high cost of the logistics industry. In 2018, the gross profit margin was only 2.9%, while the gross profit of SF Express was as high as 17.84%, which was probably attributed to:

In order to protect the core interests of Jingdong's retail business and reduce the cost of fulfillment, Jingdong Logistics is unlikely to have too much bargaining space in the mall. In other words, at the beginning of independence, the relationship between Jingdong Logistics and the mall is not based on a pure market-oriented relationship, which is quite different from SF Express's self-adjustment of prices and costs through market-oriented mechanisms.

However, when we look at the data of the first three quarters of 2020, we find some strange things, SF Express gross profit is roughly maintained at around 15%, logistics and express industry after years of development and continuous injection of capital into the industry, the upward space of market price has been severely compressed, affecting the profit space of the industry, simply put, this is still an extremely competitive price industry. Industry practitioners have not found a way to continuously improve gross profit margins. However, in the same period, Jingdong Logistics' gross margin was as high as 10.9%, an increase of 8 percentage points from 2018.

Although Jingdong Logistics has also reduced the growth of some expenses during the period (such as administrative expenses, research and development expenses), the improvement of gross profit margin is still the main reason for the rapid turnaround of business conditions (not one of them).

After the independence of Jingdong Logistics, it is natural to pursue the profitability of independent companies and bring higher returns to investors, but whether this conflicts with the interests of Jingdong Group: will the profit of Jingdong Logistics bring the soaring cost of fulfillment of Jingdong Group, or whether the growth of gross profit margin of Jingdong Logistics is based on the premise of profit yield of the group?

In theory, if Jingdong Logistics continues to be suppressed by the group's profitability, the above two curves will roughly show a synchronous trend: Jingdong Group's performance cost growth is sluggish, then the gross profit margin of the logistics business will not be much improved. Obviously, the figure above does not conform to this law: when the gross profit margin of Jingdong logistics soared, the proportion of the group's fulfillment was roughly maintained in the same range.

Jingdong Logistics maintains a constant pricing for the group, and the improvement of gross profit margin can only be found from cost savings. We have found the cost structure of Jingdong Logistics, combined with Liu Qiangdong's "internal letter", whether to reduce costs through staff cost compression?

After comparison, the ratio of employee service expenditure to income has been compressed to a certain extent in the past three years, and the compression degree of labor cost is greater than the improvement space of gross profit margin. It is not difficult to find that after the "internal letter", Jingdong Logistics has readjust the performance standard of salary settlement for couriers, cancelled the base salary, improved the package commission, and stimulate the subjective initiative of employees. Great contribution to the later profit.

However, this has led to a new problem: labor cost compression always has a boundary, especially in the labor market supply continues to be tight, blue-collar income continues to rise under the premise of the channel, if Jingdong logistics to attract enough labor, it is inevitable to improve or maintain the existing welfare, after which, personnel expenditure will be balanced at some point.