BEIJING, August 18 (TMTPost)— China’s leading online retailer JD.com, Inc. defended its major promotional effort even recent financial performance flagged margins hit by the sales campaign.

Credit：Visual China

The argument that JD’s pursuit of low prices will inevitably impact user experience and profitability is wrong, the CEO Xu Lei, also known as Xu Lei, told analysts at a call following the quarterly financial report earlier week. “With lower cost and higher efficiency generated through our supply chain, we are able to provide more value and extra service to our customers,” Xu said. He took the grand discount program worth of RMB10 billion for an instance. The third party gross merchandise value (GMV) contribution with the program, also know a subsidy campaign, has gradually increased to more than 50% in July, and JD was still able to maintain a healthy bottom line in the second quarter of the year, according to Xu.

JD Chief Financial Officer Ian Shan then said the program has been effective in boosting shopping frequency and across category purchases on the platform, and also contributed meaningfully to attract new users and activate low shopping frequency users. Shan reconfirmed the key performance indicators (KPIs) that management is focusing are GMV, profitability and cash flow. He pledged to remain committed to long-term strategies and felt confident that JD’s core business growth will maintain robust momentum. 

Commenting on performance in the first half and the 618 promotion event in the second quarter, Xu said a series of actions to further optimize JD’s price strategies and enhance user experience has been well received by consumers, exceeding the company’s expectations. He believed the success of the grand promotion can be treated as an indirectly proof that users still have a very strong mentality toward promotions, which also means that it takes a relatively long period of time for users to change their mindset. “Therefore, our commitment to promoting the everyday low-priced daily sales model needs time and dedication,” Xu said.

JD beat the Wall Street estimates at top and bottom line. It reported net revenue of RMB287.93 billion (US$39.7 billion) for the quarter ended June 30 with a 7.6% year-over-year increase, topping the analysts’ estimated RMB279.14 billion. Revenue growth accelerated greatly compared with the first quarter with a 1.4% increase, the lowest ever yearly growth for the company. Non-GAAP diluted net income per American Depositary share (ADS) surged 32.8% YoY to RMB5.39 versus the expectation of RMB4.90. Non-GAAP net income for the second quarter rose by 31.9% to RMB8.6 billion, representing net margin of 3.0%, the highest ever quarterly margin since the company founded in 1998.

The robust growth in revenue was driven by the core business JD Retail. The segment generated RMB253.3 billion with a 4.9% YoY increase, well above JD’s original guidance of flat on growth and also stronger than its revised guidance of low-digit increase. While sales in the second quarter typically benefit from 618, the second largest online shopping festival in China created by JD, the company’s promotional efforts initiated long before the event this year.

JD launched a subsidy campaign worth of RMB10 billion (US$1.45 billion) to promote online sales in March, turning the previous promotion mode during shopping festivals into daily sales mode. The campaign was deemed as JD management’s consensus about low pricing as the top strategy for the retail business. The subsidies were directly used to lower prices, covering 3C household appliances, beauty makeup, fresh food, life services, medical and health care, and other categories.

Despite the grand promotion, JD Retail not only slowed down compared with the previous quarter with a 7% increase, but failed to outrun peers in the June quarter. Alibaba’s key e-commerce arm Taobao Tmall Group posted a 12% YoY growth in revenue that quarter, and the online retail sales of physical goods climbed 10.8% on a YoY basis, according to National Bureau of Statistics of China. JD Retail’s laggard highlighted increasingly fierce competition in China’s e-commerce market, and financial results confirmed profit squeeze due to aggressive promotions amid such competition. JD Retail posted operating income of RMB8.14 billion in the second quarter, missing analysts’ forecast of RMB8.37 billion. Operating margin of before unallocated items for the quarter was 3.2%, down from 3.4% for the same period last year.