JD.com's "big gamble" on food delivery: desperate measures or a carefully crafted strategy?

Since JD.com made a high-profile entry into the takeaway market in March, it has achieved a daily order volume exceeding 25 million in just three months through substantial subsidies. However, most people in the market are not optimistic about JD.com's "war it cannot afford to lose" once again.

To date, there has been considerable discussion in the market about this, but Dolphin believes that JD.com's aggressive entry into Meituan's home turf represents a long-term war rather than a short-term venture. Its impact will gradually become clearer and more pronounced over a considerable period.

Therefore, in the following text, Dolphin will provide our thoughts on this issue from multiple perspectives, including JD.com's motivations, objectives, current status, possible outcomes, and impacts on the industry and companies.

Due to space constraints, this article mainly addresses JD.com's motivations and objectives, while the next part will focus on analyzing the impact on industry players.

The following is a detailed analysis

1. Instant retail and food delivery, closely related brother businesses

1. Not just food delivery; behind it is a trillion-dollar instant retail and multi-trillion-dollar omnichannel retail business

First of all, Dolphin believes that when analyzing and discussing "JD.com doing food delivery," the perspective should not be narrowly focused solely on food delivery (which also includes beverages, cakes, and other food items), but should be placed within the broader context of "broad instant retail" to better understand JD.com's intentions and determination in entering the food delivery market.

① The first perspective of instant retail - from "long-distance e-commerce" to "short-distance e-commerce": The narrow definition of "instant retail" (also known as "short-distance e-commerce") originated from the maturity of the "long-distance e-commerce" (i.e., traditional e-commerce) industry, where traditional e-commerce giants discovered a new niche - a new sales channel for e-commerce products with faster delivery times (within a few hours) to supplement the traditional e-commerce model. (In the following text, "instant retail" without a prefix refers to this narrow concept).

This is the mainstream perspective for viewing "instant retail" in the market and also the path JD.com is taking to enter instant retail.

② The second perspective of instant retail - from instant food delivery to instant delivery of everything: On the other hand, Meituan's approach is to transition from delivering food through "food delivery" to delivering consumer goods through "instant retail" - viewing instant food delivery and instant consumer goods as a whole "broad instant retail" perspective, which seems to be often overlooked by the market.

Most market estimates of the instant retail market size generally only consider the instant delivery of consumer goods while excluding food delivery. They separate "food delivery" and instant consumer goods' "instant retail" into two independent tracks.

③ Long-distance e-commerce vs. food delivery, which is more "similar" to instant retail? However, Dolphin's research believes that the similarity between instant retail and food delivery is higher than that between instant retail and long-distance e-commerce.

We will not elaborate on this issue, but to grasp the main contradiction, the differences and similarities between instant retail and long-distance e-commerce lie in the similarity of product categories but differences in fulfillment methods; whereas food delivery, compared to instant retail, has consistent fulfillment methods but different categories of delivered goods The uniqueness and core asset of "instant retail" clearly do not lie in what products are delivered, but rather in its closer proximity to consumers and more stringent fulfillment time requirements, with a focus on fulfillment delivery.

④ The purpose of the above statement is that the understanding of JD.com's move into the delivery business should not be seen as an e-commerce company making a cross-industry entry into a completely new industry that cannot reuse existing resources and operations—food delivery; rather, it is a company that already possesses a "narrow" instant retail business and instant offline fulfillment capabilities, expanding the types of goods for instant delivery from e-commerce products to more categories such as meals and beverages.

In simpler terms, why should JD.com limit itself to only doing "general e-commerce products" in the instant delivery business when it already has over a million Dada delivery riders? It can be said that JD.com should have expanded its instant delivery business to food delivery earlier, such as during the pandemic's boom period.

This point is evident in the following image, where JD.com and Alibaba, while strengthening the promotion of their delivery businesses, did not provide a separate entry for food delivery (although Alibaba has the independent delivery app Ele.me, it has not adopted it), but rather coincidentally treated the delivery business as a suffix, using the same entry as the "flash purchase" business (i.e., instant retail).

II. Why JD.com wants to do, and whether it should do "food delivery"

1. Advancing for offense -- The scale of delivery is larger, frequency is higher, and there are more users

The simplest and most direct reason for JD.com to enter the food delivery market is—compared to the narrow "instant retail" of delivering products (again, reminding that when "instant retail" is mentioned separately later, it refers to the narrow definition), "food delivery" is a larger and more valuable niche market. This is reflected in larger GTV/order volume, more user numbers, and stronger user stickiness/order frequency, among other aspects.

① Food delivery has a larger scale and a more concentrated market: Firstly, in terms of industry scale, although instant retail is a newer track that has significantly outpaced food delivery in growth in recent years (taking Meituan as an example, its food delivery order growth rate is only about 10% recently, while flash purchase growth exceeds 30%), by 2025, the overall scale of the food delivery industry will still be close to nearly 2x that of instant retail. According to Dolphin's predictions, combined with third-party estimates, the total scale of the food delivery industry is approximately 18 trillion, while the overall scale of instant retail is around 10 trillion.

Moreover, unlike the duopoly market of food delivery, which was basically monopolized by Meituan and Ele.me before JD.com entered, the market share of instant retail is quite fragmented. Platforms like JD.com’s instant delivery/Meituan’s flash purchase, front warehouse models like Little Elephant Supermarket/Dingdong Maicai, and integrated warehouse-store models like Hema/Sam's Club/Costco all have diverse models In other words, food delivery is a larger scale market with a market share more concentrated among a few players, simply put, a "sexier" niche segment.

② Food delivery has more users and higher frequency, naturally creating a "high frequency leading to low frequency":

In terms of user volume and stickiness, within the "instant retail" niche, the average order frequency per user for Meituan's flash purchase increased from about 5 times to about 9 times between 2021 and 2023, while the annual order frequency for users of JD.com’s on-demand delivery (JD Instant Delivery) remained around 3.6 to 3.7 times during the same period. The user frequency of Meituan's flash purchase is 2 to 3 times that of JD Instant Delivery.

Looking across different segments, the annual order frequency for Meituan's food delivery is about 45 orders, while the order frequency for users on JD.com's main site is about 12 to 15 times, and the order frequency for instant retail users is in the single-digit range .

It is evident that in terms of order frequency across different business models, food delivery > JD e-commerce (this is a unique issue for JD's "quality self-operated" e-commerce, as the order frequency for users on platform-based e-commerce like Taobao is not lower than that of food delivery) > instant retail. Therefore, the significantly higher order frequency of food delivery logically can serve as a traffic driver for lower frequency instant retail (and even JD's main site e-commerce).

The fact that the user order frequency of Meituan's flash purchase is several times that of JD Instant Delivery is partly due to the differences in the "parent business" (Meituan food delivery vs. JD main site) traffic driving capabilities.

In summary, from an offensive perspective, food delivery represents a market segment larger in scale and naturally concentrated in share compared to JD's existing instant retail business, presenting an opportunity for JD to achieve revenue far exceeding its current instant retail business; at the same time, the high opening frequency of food delivery can logically help drive traffic to JD's main site and instant retail business, which significantly lag behind competitors in usage frequency.

2. Retreat to defend—JD Instant Delivery lags behind Meituan's flash purchase, counterattacking food delivery as a means of defense

① JD, which entered "instant retail" from "e-commerce," cannot compete with Meituan, which entered "instant retail" from "food delivery," and part of JD's intention to engage in food delivery is to "attack as a means of defense." As mentioned above, both JD.com and Meituan have repeatedly emphasized that they view instant retail as an important second growth curve outside their core businesses. In reality, since 2019, the GTV volume of Meituan's flash purchase has consistently been more than twice that of JD.com’s on-demand delivery, and in recent years, the gap between the two has been continuously widening. Currently, the volume of Meituan's flash purchase may have reached about three times that of JD.com’s on-demand delivery.

Due to the huge gap in scale, the instant delivery business model heavily relies on the scale effect of order volume, and Meituan's average profit per order (UE) is also significantly better than that of JD.com’s instant delivery.

According to estimates, between 2022 and 2024, Meituan's flash purchase UE model has successfully turned profitable, while JD.com's instant delivery (formerly known as JD Daojia JDDJ) was still losing over 1 yuan per order by 2023.

In short, in this important incremental track of instant retail, JD.com is clearly lagging behind Meituan's flash purchase in both scale and profitability. More “ghost story” thinking suggests that if Meituan's flash purchase continues to seize consumers' perceptions of “good” and “fast” in daily necessities and 3C categories where JD.com has advantages, there are voices that believe JD.com's main station business could be threatened by Meituan's flash purchase.

Therefore, from the perspective of defending against Meituan's attack on JD.com's instant delivery and main station e-commerce business, “attacking as a defense” and penetrating into Meituan's business territory is clearly an important consideration behind JD.com's choice to engage in food delivery.

② Why can't JD.com's instant delivery compete with Meituan's flash purchase?

Further examining, what are the reasons that led JD.com's instant delivery to fail against Meituan's flash purchase? First, the first point mentioned above is that Meituan's delivery business significantly outperforms JD.com's main station e-commerce in terms of traffic diversion capability.

The second point is a judgment from Dolphin in the first paragraph, “the similarity between ‘instant retail’ and ‘food delivery’ is higher than that between ‘remote e-commerce’.” In terms of data, the overall user numbers of Meituan and JD.com are roughly comparable, with the former slightly higher at about 680 million and the latter at about 610 million (both as of 2022), with not much difference. However, the number of users for Meituan's flash purchase is about 3 times that of JD.com's instant delivery. (If you have other thoughts, feel free to add the assistant WeChat “dolphinR124” to join the group for discussion.)

An important reason behind this is that over 1/3 of Meituan's overall users have converted to flash purchase users, while only about 13% of JD.com's group users have converted to flash purchase users. Therefore, it can be seen that the user groups of food delivery and instant retail are highly overlapping, and this overlap is much higher than that between “instant retail” and “remote e-commerce.”

The third reason is that we believe the product categories on JD.com’s instant delivery are limited to supermarket goods and 3C products (partly due to JD.com having a stronger brand and merchant advantage in these categories). In contrast, Meituan's flash purchase offers a significantly more diversified range of product categories, covering various types of goods and store formats.

Due to the limitations in product categories, JD.com’s home delivery has become a high-ticket but very low-frequency consumption behavior. Although JD.com’s instant delivery accounts for about 1/3 of Meituan's flash purchase in terms of GTV, the order volume of JD.com’s home delivery is only about 1/6 to 1/7 of Meituan's flash purchase, showing a much larger gap. The scale and density of order volume are precisely the most critical indicators for instant delivery business, significantly impacting the UE model, which is one of the key reasons why JD.com’s home delivery profits are far lower than Meituan's flash purchase in a single quarter.

To summarize, the three main reasons JD.com loses to Meituan in instant retail include: ① the traffic diversion capability of its existing core business, which is much weaker than takeout, ② the conversion between e-commerce user groups and instant retail users is not as smooth as that between dining takeout and instant retail users, ③ JD.com’s instant delivery has a narrow coverage in product categories and store formats, leading to low order volume scale and density, resulting in a poor UE model.

Therefore, one of the purposes of doing takeout is to reverse the above three major deficiencies.

3. Core Value -- Reuse of Delivery Capacity

Since the efficiency of fulfillment and cost optimization capability is the core competitiveness of the market consensus "instant delivery" business model (perhaps there is no other), and also one of the main determinants of profit, we will expand on this key point.

First, the order volume of instant delivery inversely correlates with fulfillment costs, while it positively correlates with average profit per order, which is a conclusion that is quite evident both logically and in data.

As shown in the chart below, the turning point for Meituan's takeout business to turn profitable was when its average daily order volume reached 20 million during 2018-2019, therefore the consensus indicator within the industry for whether instant delivery can achieve breakeven is whether the average daily order volume can reach 20 million or more.

The decisive factor behind this rule is the "utilization" of the delivery team (i.e., the delivery riders). The more we can maximize the delivery riders' capacity and reduce their "idle" time, the higher the average unit economics (UE) we can achieve. This is similar to the "capacity utilization" in industrial manufacturing, "loading rate" in the express delivery industry, and "occupancy rate" in the transportation industry.

① Case Study: The Peaks and Valleys of Demand Ensure Idle Capacity

Let's expand on this with a case study from Dolphin Research when analyzing the ride-hailing industry. Taking city "A" in the following diagram as an example, the demand for ride-hailing in the city fluctuates between 0 and 3,500 vehicles throughout the day, averaging around 2,000 to 2,500 vehicles. Logically, if the demand for ride-hailing is evenly distributed throughout the day, the optimal supply of ride-hailing in the city would be around 2,500 vehicles, maximizing fleet utilization while meeting demand.

However, in reality, the demand for ride-hailing experiences peaks and valleys, with demand during peak hours reaching around 3,500 vehicles. To ensure passenger experience (controlling wait times) and to accommodate unexpected demand, the actual supply of ride-hailing in the city needs to maintain some surplus above the peak, which in this case is around 4,500 vehicles. This means that the average utilization rate of the ride-hailing fleet in the city is only 50%, with nearly half of the time being idle.

② How to Fill the "Valleys" of Capacity Demand

A similar situation exists in the instant retail industry. To ensure fulfillment capability and timeliness during peak meal demand, it is inevitable that the capacity team will have "idle" time and resource "waste" during non-meal times.

To address the inevitable issue of idle capacity, instant retail companies have two solutions: one is to form dynamic capacity through crowdsourcing, allowing capacity to fluctuate with demand.

Another perhaps more important method is to use other non-meal delivery demands to fill the idle capacity during demand valleys, thereby improving overall capacity utilization and spreading out capacity costs.

In this regard, Meituan uses afternoon tea, late-night snacks, and non-meal demands from Meituan Flash Purchase to fill the idle capacity outside of peak meal times. For JD.com, due to the originally low order volume of JD Home (still not exceeding 1 million orders per day in 2023), using food delivery, especially low-priced but high-volume orders like beverages, can quickly scale up order volume and improve capacity utilization.

Moreover, in many business models, there are usually not many profit requirements for these high-volume or "fill order" businesses; being close to breakeven is sufficient. For example, low-priced e-commerce parcels and time-sensitive parcels in the express delivery industry, or economy class passengers and business class users in the airline industry Therefore, for JD.com, one of the values of food and beverage delivery is to quickly expand its on-demand business scale, optimize the overall perspective of on-demand fulfillment efficiency and costs, and it does not need to obtain much profit from these high-volume businesses themselves.

4. Summary: JD.com's strategic choice to enter the delivery market is not problematic, but rather depends on tactical execution and capability.

In the first major part of this article, Dolphin primarily discusses the possible motivations and objectives behind JD.com's decision to enter the delivery market. Through the previous discussion, Dolphin Research believes that JD.com's choice to enter the delivery market has sufficient and logical strategic motivations.

From the broader perspective of instant retail, entering the delivery market is a natural extension of JD.com's existing JD Daojia business, and it is expected to bring greater market space, more users, stronger stickiness, help rapidly scale the on-demand business, thereby improving delivery efficiency, enhancing the delivery user experience model, and many other favorable factors.

Therefore, Dolphin believes that JD.com's entry into the delivery market will be a well-considered and determined choice, rather than a simple trial, and it will not easily give up. In other words, the competition for JD.com in the delivery industry is likely not a short-term subsidy war, but rather a long-term battle.

Of course, we believe that JD.com's entry into the delivery market is a reasonable strategic choice (or attempt), but this does not mean we believe JD.com will definitely succeed in the delivery business, realize the favorable effects mentioned earlier, and ultimately bring good results to JD.com (especially in the short term).

After all, a good vision does not necessarily translate into good results; it also depends on JD.com's actual execution capabilities and how effective its tactical approaches are, as well as the responses of competitors. Therefore, in the second major part of the following text, Dolphin will discuss how JD.com is currently performing in the delivery market, whether there is hope for it to succeed in the delivery business, and what impacts it may have on itself, Meituan, and the entire industry.

Risk Warning and Disclaimer

The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial conditions, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investing based on this is at one's own risk