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What Led to JD.com’s Negative Operating Margins?

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JD.com’s operating expenses growth in 2016 and 2017

JD.com’s (JD) operating expenses rose 48% and 41% in 2016 and 2017, respectively. Operating expenses for 2017 amounted to 51.7 billion renminbi ($7.9 billion). Fulfillment, marketing, technology, and content expenses drove the company’s total expenses and translated into negative income from operations for the periods. However, the company has been able to decrease the rate of decline from 52% in 2016 to 33% in 2017.

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Operating expenses in Q2 2018

The operating expenses increased by 34% and 24% on a YoY and quarter-over-quarter basis to 17.5 billion renminbi ($2.7 billion) in the second quarter of 2018. The company’s massive investment in R&D and technologies led to the high operating expenses. The expenses ate up almost 17% of the company’s revenue for these periods. As a result, the company recorded a loss from operations of 1 billion renminbi ($156.2 million) in the second quarter of 2018 against an income of 4.4 million renminbi in the first quarter of 2018 and a loss of 403 million renminbi in the first quarter of 2017.

Operating expenses in H1 2018

The expenses rose by 37% to 31.7 billion renminbi ($4.8 billion) in the first half of 2018. The expenditures consumed 14% of the company’s revenue in H1 2017 and H1 2018. As a result, the company noted a loss from operations of 1 billion renminbi ($155.6 million) in the first half of 2018 against an income of 258.3 million renminbi in the first half of 2017.

Peers’ operating margins

Alibaba Group Holding’s (BABA) operating margins were 27.9%, 29%, and 27% for 2016, 2017, and 2018, respectively. Amazon’s (AMZN) operating margins for 2016 and 2017 were 3.1% and 2.3%, respectively. eBay’s (EBAY) operating margin stood at 25.9% and 23.7% in 2016 and 2017, respectively. Walmart’s (WMT) operating margins were 5%, 4.7%, and 3.5% in 2016, 2017, and 2018, respectively.

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