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JD’s Retail Chief Takes Lead as Billionaire Founder Recedes

Zheping Huang
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JD’s Retail Chief Takes Lead as Billionaire Founder Recedes

(Bloomberg) --

Over two decades, Richard Liu built a tiny suburban electronics outlet into China’s second largest e-commerce empire. Now, the billionaire entrepreneur is retreating from the spotlight and entrusting fast-rising lieutenant Xu Lei with steering JD.com Inc. through the greatest crisis since its founding.

Liu is gradually ceding more control to Xu, who runs JD’s core retail operation and devised its answer to Alibaba Group Holding Ltd.’s widely celebrated Singles’ Day phenomenon. Xu has led JD’s delegation to Davos since 2019 and replaced Liu as head of a key subsidiary this month, burnishing his credentials as presumptive heir.

In an exclusive interview, the 45-year-old sketched out how JD’s business withstood the initial shock of Covid-19 and where it plans to go in the future. In five years, the flagship JD.com website and platform should contribute less than half of the company’s revenue as consumers gravitate toward social media town squares like Tencent Holdings Ltd.’s WeChat. Xu wants to create more platforms tailored toward different consumers and shopping behavior along the lines of JD’s recently launched Groupon-like discounts app. The Covid-19 pandemic is accelerating that by pushing people toward apps that support multiple functions from live video streaming to chatting, making bespoke or specialized services more appealing.

“Many people still know JD as online shopping, but we have many businesses and sales that come from all channels, both online and off-line,” Xu said in a video-conference interview. “JD will connect with users more closely. JD will be everywhere.”

Xu spent much of the past decade climbing the corporate ladder at a company with more sales than Boeing or Sony, till he assumed formal stewardship of JD’s main operation in 2019. He’s viewed as Liu’s hand-picked choice to lead the company into the future of hyper-retail, where the lines between physical and online commerce blur through technology such as augmented reality. JD made it through China’s outbreak and subsequent lockdown by relying on its own warehouses and delivery personnel -- a costly approach rivals and analysts have questioned.

Read more: JD Leaps to 20-Month High After Sales Outlook Quells Virus Fears

JD, China’s closest analog to Amazon.com Inc., already serves more than 360 million people -- surpassing the U.S. population. Xu now hopes to extend its presence on social media and invest in hot new areas like grocery delivery.

Xu’s steady ascent now places him in the unenviable position of piloting the company’s bread-and-butter business through potentially the greatest global economic shock in at least a generation. That came on the heels of a Chinese slowdown as well as the rise of upstarts such as Pinduoduo Inc., which in 2019 overtook JD in market value.

Born and raised in a military compound in Beijing, Xu decided early on to take a different tack by going into sales and marketing. He maintains a subtly rebellious patina to this day, sporting a tattoo on his left arm and ear-stud to go along with a passion for the Rolling Stones. After early careers with PC maker Lenovo Group Ltd. and digital ad agency Allyes, he joined JD in 2009 to oversee marketing for its then-nascent online mall. After taking a two-year hiatus to try and get a footwear-selling startup off the ground, he returned in 2013 to oversee an overhaul of JD’s main online website, scrapping its years-old 360buy appellation, and launched the site’s now-familiar dog mascot.

How Singles’ Day Became Biggest Shopping Spree Ever: QuickTake

But by far his biggest success was a riposte to Alibaba’s Nov. 11 Singles’ Day sales bonanza. It was Xu who insisted in 2014 that JD needed to come up with its own signature gala to counter an event that was racking up records annually. But opposition to the idea was fierce because executives knew it couldn’t afford to host a 24-hour deals-fest that could cast its logistics network in disarray -- for context, in 2019, Alibaba’s partners delivered upwards of a billion packages. “When I made the call, most people were against me,” Xu recalled.

His solution was to stretch it out over several weeks around the company’s June 18 anniversary and use JD’s longstanding expertise in electronics. “6.18” was born and others including Alibaba played catch-up. In 2019, sales during the campaign hit a record $29 billion.

“Apart from Liu, those who did real jobs at JD are now emerging from the backstage, which is a good thing to investor confidence,” said David Dai, a Hong Kong-based analyst with Bernstein. On Liu, he said: “I don’t think he has a clear succession plan, but it’s clear that he now has a second in command.”

To be sure, no one’s predicting Liu will relinquish all control imminently, and many things could change during a volatile post-Covid 19 era. The billionaire maintains an iron grip on the company thanks to a dual-share structure in which he owns roughly 15% of equity but 79% of the vote. Tencent and Walmart Inc. have stakes in the firm as well.

But that’s precisely what investors worried about after Liu was arrested in the U.S. on suspicion of rape in 2018. Authorities in Minneapolis decided not to press charges after reviewing evidence, but the investigation highlighted key-man risk at the e-commerce giant, forced Liu to back away from the public spotlight and hurt JD’s stock in 2018.

Read more: Police Release Files on China Billionaire’s Alleged Rape Case

Liu’s travails coincided with a low point in JD’s history. That year, customers shrank in the third quarter -- the first time that’s happened since listing. Pinduoduo came out of seemingly nowhere to wrest shoppers away, particularly in poorer markets. After a year of relentless share-market losses, a frustrated Liu took to social media in early 2019 to declare that people who slacked off weren’t his “brothers.”

“2018 was indeed a low point in JD’s past decade, whether we are talking about business performance or employee morale,” Xu said. “We had no major breakthroughs.”

Xu again stepped up. JD cut headcount across teams, eliminated 10% of its higher-level managers, and scrapped base salary for its couriers. He combined or canceled a lot of operations that were bleeding money or “didn’t have logic,” focusing instead on where he saw growth coming from. Examples included the Jingxi app targeting buyers from lower-tier cities and a supply chain initiative that let partners like Walmart and Coca-Cola deliver to JD users directly.

His profile climbed further when he headlined 2019’s 6.18 for once without his boss. In an internal meeting just after Xu’s 2019 promotion, the founder told assembled senior executives: “If you don’t obey Xu Lei, that means you don’t obey me.”

“I didn’t ask for this, nor did I like it,” Xu said, confirming Liu’s previously reported remarks. “He was probably anxious, hoping his endorsement will hasten the company’s transformation.”

To all appearances, JD appears back on track. It just posted an annual net profit for the first time since going public in 2014, and its sales and buyers grew faster than expected. Its direct-to-consumer sales and in-house logistics model now wins plaudits from analysts for allowing better control of shipping times and quality during China’s Covid-19 outbreak. JD’s logistics arm said in March it’s creating more than 20,000 front-line positions in roles from drivers to couriers.

The company forecast at least 10% revenue growth for the first quarter. For February, sales of fresh food on JD increased 260% from a year ago, while sales of consumer electronics like handsets and laptops also began to pick up in March. That’s one reason JD’s shares have outpaced China’s largest tech companies this year.

“The epidemic has taught a serious lesson about cash flow management for all companies and all industries,” Xu said. “Frankly speaking, in the past one or two decades in China, everyone got used to fast business growth.”

Xu argues that JD is now well-positioned to catch a recovery in consumer spending by May, when China embarks on a five-day Labor Day holiday. Merchants and brands are already stocking up on goods for the mid-year promotions, he added. For the third quarter, however, the Covid-19 pandemic will likely cause a shortage of imported items like cosmetics and gadgets with foreign chips, he said.

Longer term, Xu wants to bring about new initiatives to help speed JD’s transformation into an omni-channel retailer with supply chains at the core. But it remains far behind on some fronts. Fresh produce has proven a hot spot during the pandemic but JD is late to the game: its 7Fresh supermarket chain has around 20 stores across China, versus Alibaba’s hundred-plus Freshippo outlets.

Some investors including APS Asset Management argue that JD’s thin margins may further compress as rivalry intensifies. “At such margins, we think there is no chance for JD to survive unless an unlikely scenario happens, which is Alibaba easing considerably on its price war,” the Singapore-based fund wrote in March.

But Xu takes all that in stride. Briefly lapsing into militaristic speak -- perhaps a holdover of his upbringing -- the executive said the key was getting his troops prepared.

“When facing a war, you need to unify the minds,” he said. “The whole organization is now adjusted and ready for the war.”

(Updates with comment on third-quarter snags in the 22nd paragraph)

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