Nov 19, 2018
Executives
Ruiyu Li - IR Richard Liu - Chairman and CEO Lei Xu - Chief Marketing Officer, and CEO, JD Mall Sidney Huang - CFO Jianwen Liao - Chief Strategy Officer
Analysts
Eddie Leung - BAML Alicia Yap - Citi Ronald Keung - Goldman Sachs Alex Yao - JP Morgan Jerry Liu - UBS Thomas Chong - Credit Suisse Jin Yoon - New Street Research James Lee - Mizuho Securities Wendy Huang - Macquarie Jialong Shi - Nomura Natalie Wu - CICC Tian Hou - T. H.
Capital Binnie Wong - HSBC Hans Chung - KeyBanc Capital
Operator
Hello, and thank you for standing by for JD.com's Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode.
After management's prepared remarks, there will be a question-and-answer session. Today's conference is being recorded.
If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today's conference, Ruiyu Li.
Ruiyu Li
Thank you, operator, and welcome to our Q3 2018 earnings call. Joining me today on the call are Richard Liu, our CEO; and CMO, and CEO of JD Mall; Sidney Huang, CFO; and Jianwen Liao, our Chief Strategy Officer.
For today's agenda, Mr. Huang will discuss highlights for the third quarter 2018.
Other management will join the Q&A session. Before we continue, I refer you to our Safe Harbor statements in our earnings press release which applies to this call, as we will make forward-looking statements.
Also, this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release, which contains a reconciliation of non-GAAP measures to the most directly comparable GAAP measures.
Finally, please note that unless otherwise stated, all the figures mentioned during this conference call are in RMB. Now, I would like to turn the call over to Sidney.
Sidney Huang
Thank you, Ruiyu Li and hello, everyone. Thank you for joining us today.
We are pleased to report healthy development in major financial metrics in the third quarter. Our core e-commerce business continued its solid performance on both the top line and bottom line in our new businesses encouraging progress.
Net revenues in the third quarter grew a decent 25.1% year-on-year in spite of slowing consumption affecting the large ticket electronics and appliances categories. General merchandise revenues continued strong momentum with over 40% year-over-year growth during the quarter.
Also notable is our fulfilled GMV which grew over 30% in the third quarter, supported by better long-tail product performance as a result of our focus on improving marketplace operations since last year. Our fulfilled marketplace GMV grew over 40% across both electronics and general merchandise categories as we welcomed more than 20,000 merchants to our marketplace platform this quarter.
Existing merchants also enjoyed our improving ecosystem with both top-tier and mid-tier merchants seeing reaccelerated growth on same-store sales in the quarter. We are pleased to see JD.com remain one of the most attractive platforms for merchants in China to engage with end customers.
In addition, net service revenues grew 49% year-on-year and contributed more than 10% of our total quarterly net revenues for the first time supported by strong growth in advertising and JD Logistics third-party services. Gross margin was relatively stable year-over-year, thanks to the gross margin expansion from the core JD Mall business offset by JD Logistics which is in an investment phase, but has seen sequential improvement in unit economics over the past three quarters.
Non-GAAP gross margin in the third quarter was 15.2% compared to 15.3% in the same quarter last year. If we look at JD Mall, gross margin on our direct sales business improved 15 basis points on a year-over-year basis on top of a very strong third quarter last year, driven by continuous increase in economies of scale across all key categories.
During the third quarter we continued to invest in R&D and technology infrastructure. Our R&D expenses totaled RMB3.4 billion or 3.3% of total revenue, up approximately 120 basis points from the same quarter last year.
For the first nine months of 2018 R&D expenses increased 88% to a total of RMB8.6 billion. We believe these investments are critical to position ourselves for the next phase of growth.
With the key leaders and various teams now in place we expect R&D expense ratio to begin to stabilize going forward. Our fulfillment expense ratio improved 20 basis points in the third quarter driven by better unit economics.
Our marketing expenses ratio and G&A expense ratio was [3.9%] [ph] and 1.3% respectively comparable to the same quarter of last year. Non-GAAP operating margin was 0.6% in the third quarter compared to 1.8% last year with the difference mostly attributable to the higher R&D expenses.
Non-GAAP operating margin for JD Mall was 2.2%, 2.1% lower than the same period last year. For the first nine months of 2018 Non-GAAP operating margin of JD mall was 1.7% comparable to the level in the same period last year, thanks to continued improvement on our core e-commerce gross margin offset by higher R&D expenses at JD Mall.
Our operating cash flow remained positive after the seasonally high second quarter, while free cash flow was negative due to high CapEx during the quarter, including RMB3.6 [ph] billion in land use rights and construction of warehouses and RMB5 billion in IT infrastructure. As on September 30, 2018, our cash position remained strong with cash and short-term liquid investments totaling RMB42.9 billion.
In addition, as we communicated last quarter, we're in the process of transferring some of our logistics real estate assets into a core fund which should help unlock the hidden value of these assets and further strengthen our cash position. Now let's discuss our financial outlook.
We expect Q4 2018 net revenue growth to be between 18% and 23% on a year-over-year basis. Our Q4 guidance reflects relatively soft retail sales in certain durable goods categories as indicated in the latest National Bureau of Statistics Report.
Despite slowing retail sales, according to the NBS data, we are encouraged by the Double 11 promotion season when most categories showed above the industry growth rates based on our brand partner feedbacks and third-party industry report. And our marketplace continued to grow faster during the promotion season.
This concludes my prepared remarks. We will now take your questions.
Operator
Thank you. [Operator Instructions] Our first question is from the line of Eddie Leung from Merrill Lynch.
Please go ahead.
Eddie Leung
Hi, good evening. Could you comment on the macro environment, especially in the retail space and how does it affect your monetization strategy, as well as your logistics expansion plan?
And then just a followup question on the increase in R&D investment, could you talk a little bit about how various projects have helped your business in the past couple of quarters, any examples and use cases would be great? Thank you.
Richard Liu
Okay, so I will start and others may contribute later. So on the macro I mentioned that we did see some impact on durable goods categories, and but during our latest promotion season we actually saw JD continue to lead the industry growth when we checked with our brand partners, but there seems to be some impact on the big ticket size items, while for general merchandise categories we continue to see very healthy growth rate.
And in terms of impact because we are a mass market retailer our scale gives us unique pricing competitive advantage. So even in economically slowing time we believe our value proposition with quality products everyday low price and better services will continue to win customers.
So we do not see any major impact on our overall profitability trend moving into next year. Now on the logistics investments, the type of customer experience that this service can provide is clearly showing the JD unique advantage, not only on our first party business, but as I mentioned earlier, our marketplace business has expanded faster and part of that growth is from our logistics services that are increasingly utilized by our top merchants.
Sidney Huang
One more add, in terms of technology investment, of course we continue to invest in retail innovation in terms of social commerce and [common] [ph] commerce. I think this will be next frontier [indiscernible] JD, but additionally we are mainly looking to buy smart logistic and smart consumption in terms of pushing the frontier of efficiency and cost and the customer experience as well.
Eddie Leung
Understood, thank you.
Operator
Thank you for the questions. Next question comes from the line of Alicia Yap from Citi.
Please go ahead.
Alicia Yap
Hi, good evening management. Thanks for taking my questions.
I have a question on JD initiative on these retail as a service and overall JD positioning. So could you help us understand a bit more about this Zu Chongzhi platform, which industry vertical will that specifically target?
How is that service JD’s offering different from the service provided by the bigger peer? And related to that, appreciate if management could also help us redefine JD’s positioning.
Will JD continue to sign up global brands on your platform and since that JD is moving away from the local brands and put more focus on servicing the international brand, so any change of JD visions of being the retailer or is it JD shifting focus to become more a service provider? Thank you.
Richard Liu
Yes, let me explain the retail as a service concept first. As I mentioned in my previous earnings call, we defined the future of retail as Boundaryless Retail, which means to put retail industry will become even more [recommended] [ph] and decentralized than ever before.
So in this case JD is moving away from a vertical integrated model to more open model. So you’re not working in the past.
The very reason why JD has become so successful is because we provide end-to-end solutions for retailers, so we have JD Mall, we have JD Logistics, and so on and so forth. So, moving forward, we have to open up our retailing structure to [indiscernible] value chain.
So in other words we wanted to provide a retail and logistic service toward the other retailers as well. Meaning, if you look at the, a lot of retail innovation like [common] [ph] commerce, social commerce and so on and so forth.
It is has been inconceivable for [logistics] [ph] innovators to develop [low signal] [ph] heavy asset and network based retail infrastructure. So in this case JD really wanted to open up retail infrastructure to enable and empower more retail innovation.
So this is how we define retail as a service which basically consist of two components, number one, of course JD will continue to focus on retail innovation and that’s our main focus, and at the same time it will open a lot of retailing structure like logistics, like our technology to connect and enable retail innovations, so let’s call it by retail as a service.
Alicia Yap
Sorry, what about the positioning as kind of a service provider versus the traditional retailer?
Richard Liu
Yes, of course the retail structure will become the service provider for other retailers, so we do expect us indicating on your revenue model and the service and the revenue have been growing significantly and is a part of our Retail as a Service strategy.
Alicia Yap
Okay, alright, thank you.
Operator
Thank you for the questions. Next question is from the line of Ronald Keung from Goldman Sachs.
Please go ahead.
Ronald Keung
Thank you, thank you Richard, Sydney, Xu Lei, [indiscernible] we are pleasantly to see - pleasant to the [3P] [ph] growth, the strong growth of 40% which is above the industry growth over the quarter. Could you share like what categories has brought this healthy growth, particularly how did apparel perform during the quarter and how does management see sort of the 2019 for your marketplace growth with the new e-commerce law coming out in the upcoming year?
Thank you.
Richard Liu
Sure, so we have seen actually growth of course multiple categories on our marketplace mainly from our long-tail products and the long-tail merchants. We added a fairly large number of new merchants now total over 200,000 merchants on our platform; both our electronics categories and general merchandise has categories saw growth rate over 40%.
So it is really a part of a result of our overall platform improvement. We’re also pleased to see that the general merchandise GMV as a total of our overall for further GMV now surpassed 50% mark during the third quarter, which is again a great validation that JD continues to become a full category platform that attracts the customers and merchants across all the key categories.
Operator
Thank you for the questions. Next question is from the line of Alex Yao from the JP Morgan.
Please go ahead.
Alex Yao
Hi, good evening. Thank you for taking my question.
Can you help us understand your top strategic focus for 2019 given the macro outlook for the emerging growth opportunities across offline retail logistics et cetera, et cetera, where will you be focussing on for 2019? And then related to that how would you prioritise the financial resource allocation i.e.
in a macro consumption backdrop when your financial flexibility is relatively weaker, would you continue to invest aggressively across the new initiatives or these initiatives will [still down] [ph] a little bit pending on the macro conditions? Thank you.
Richard Liu
Our overall growth strategy has always been long-term driven, so we'll continue to invest for various long term initiatives. However, after the last couple of years of investments particularly for example in R&D areas, we have now have our key teams and key leaders in place and some of our initiatives over the past two years have beginning to see some very positive results.
So we will continue to invest for the future while we will obviously put more discipline at the same time on our more developed, more close business, so that there will be a very good balance. In the future we will always be mindful of the resources we have and strike up a good balance of course long term growth and the near term financial results.
Sidney Huang
I think we have to have a new closed mindset moving forward, it will result in three different balances. No one, our balance in the topline and the bottom line to make it more profitable, that's the first one.
Number two, to balance core business, clothes business and its future business to make it more sustaining. Number three, to balance profit, people and the place to make it more sustainable.
So I think in that sense a new way we define our growth mindset.
Operator
Thank you for the questions. Next question comes from the line of Jerry Liu from UBS.
Please go ahead.
Jerry Liu
Thank you. Sidney and Jon, from your comments so far on this call I am hearing about logistics, unit economics, improving R&D expense ratios, stabilizing no macro impact on the profitability trends and just now talking about balancing topline and bottom line.
So despite year-to-date net margins being lower this year than last year, I'm hearing a lot of things to suggest maybe net margins can stabilize or improve as we head into next year is that the right read? Thanks.
Sidney Huang
Sure, yes we have maintained that on a long term basis our margins should gradually improve. So this year because of JD Logistics was in an investing year, so my last earnings call, we mentioned that this year will be more now making sure that JD Mall will maintain a stable margin trend with some upside.
But if you look at from a couple more years or from last year to next year we do see the margin continue to gradually improve. Obviously there will be some of the other new business lines, like I mentioned JD Logistics real estate business as part of the contribution as well.
So overall, we do intend - have the full intention to grow the business investing for the long term, while gradually improving the bottom line.
Jerry Liu
Got it. Thank you.
Operator
Thank you for the questions. Next question is from the line of Thomas Chong from Credit Suisse.
Please go ahead.
Thomas Chong
Hi, thanks management for taking my questions. I have two questions.
My first question is about the customer - well, during the quarter. We are seeing negative sequential growth, can management explain about the reason and how we should think about the trend going forward?
And my second question is about our CapEx, how should we think about the CapEx in 2019 and 2020 as a percentage of revenue if there is any? Thank you.
Richard Liu
Yes, I’ll take the CapEx question first and Xu Lei will take on the user question. So for CapEx this is definitely a very heavy CapEx investment year.
Probably it is driven by our logistics warehousing build out and probably it is because of IT infrastructure. But both of which we hope will complete the heaviest investing phase this year and there should be somewhat of a moderating trend moving into unequally into next year.
Lei Xu
[Foreign Language] Let me take the question about users. [Foreign Language] As the economies and those down and in the light of JD.com having already more than 100 billion, say 100 billion user, I think at this particular stage that we need to focus more on the quality of growth, quality of users.
[Foreign Language] As our logistics network penetrates into the lower tier cities, we have recently started to step up our marketing efforts towards those areas. [Foreign Language] And also we find that’s very effective, attractive to new users, particularly lower tier users and the female users through initiatives in the area with decentralized and now open shelf models like go buy mini programs and [indiscernible].
[Foreign Language] Some categories enjoy ample room for growth of lines, especially in lower tier cities. To capture this opportunity, we will integrate online with offline operations come up with new product models and trades new offline setting scenarios.
[Foreign Language] And also I'd like to add two more points. One is that we find there are plenty of middle income and low income people in first and second tier cities.
We have extensive market penetration and brand awareness, so we will tap into that segment too. [Foreign Language] We would also like to boost our retention rate and ARPU average revenue per user by enhancing our cross category penetration.
Thomas Chong
Thank you.
Operator
Thank you for the questions. Now we will go onto the next questions from Grace Chen from Morgan Stanley.
Please go ahead. Ms.
Grace Chen from Morgan Stanley, your line is open. You may unmute locally.
We will move onto our next questions from the line of Jin Yoon from New Street Research. Please go ahead.
Jin Yoon
Hey guys, thanks for taking my question. Sidney, in your prepared remarks, you talked about strength in advertising, can you just talk about the drivers behind that in the quarter, any potential structural meaningful changes you have seen in the recent quarter as well?
Thanks.
Sidney Huang
[Foreign Language] Let me take the question. The continuous growth in our advertising is mainly due to the optimization of our algorithm and the improvement in technology capacity.
Our ECPM is on a constant rise. [Foreign Language] Since JD’s retail business includes both direct sales and marketplace platform, we will balance advertising income with user experience, also in the utilization of traffic we would try to strike a balance between retail sales and advertising monetization.
[Foreign Language] Also our algorithm optimized, we have changed the composition of our advertising products cutting down CPD [ph] and getting up RTB, however our advertising income has still maintained very good growth momentum. We aim to get win-win situation but both ad monetization and regular [ph] satisfaction.
Operator
Thank you for the questions. I will now move onto the next questions from James Lee from Mizuho Securities.
Please go ahead.
James Lee
Yes, thanks for taking my question. And this question is for Richard specifically, maybe can you help us understand how your role will be changed at the firm going forward given that a new leadership team has been put in place and what is your key focus going forward and what business segment will you be focusing on personally?
Thanks.
Richard Liu
[Foreign Language] As you correctly pointed out, the leadership team of JD has already been put in place and is doing very steady good job. [Foreign Language] For me personally, I will focus more on new businesses, for mature businesses our team can handle that.
[Foreign Language] Since some friends have raised the question about our growth strategy for next year, I would like to take this opportunity to say a few words about that. [Foreign Language] As we’ve just mentioned R&D expenditure for the first nine months from January to September experienced growth of 88% year-on-year and that number actually hasn’t included Jingdong's [indiscernible] R&D expenditure.
[Foreign Language] We have started a lot of newer R&D projects and also we encourage competition across among different R&D teams, for example our store faced technology we encourage them to compete. [Foreign Language] In the past year, we’ve tried out in many ways and now actually we can see the future, see the direction where it would be.
So we are now deploying our teams to the right R&D projects to the right direction. [Foreign Language] So for next year, the total amount of R&D expenditure might not increase, will not grow.
[Foreign Language] At the same time the net profitability of JD Logistics will boost a lot. [Foreign Language] So I just think next year our net profit performance will be better than this year.
[Foreign Language] In terms of growth, customer will grow faster than industrial average to gain more market share. [Foreign Language] Because in terms of cash flow, this year the underwriting cost and logistics investment becoming this year, so put our cash flow position into quite strong pressure, but next year - severe pressure, next year I do see we will improve a lot in this area.
[Foreign Language] In a nutshell, next year we will grow much higher than the industrial average and we will improve our gross profit and also net profit. [Foreign Language] And with that - this consistent investment in R&D for so many years I just think next year we can get the result, we will do better in technology income.
[Foreign Language] For me, I personally focus on four things; one is strategy, the other is culture, then team, and then new businesses.
Operator
Thank you. I will continue with the next questions from Wendy Huang from Macquarie.
Please go ahead.
Wendy Huang
Thank you. I just have two quick questions.
Why is the competitive landscape in logistics say, so on one hand you are expanding aggressively into third party logistics with similar initiatives in past two quarters, but on the other hand we also noted the competition only they are fighting back and just move to they are set to build a large augmatic sorting center initially as well. So maybe if you can give any color on that will be great?
And second thing is Richard is on the call. I just wonder if you can give us any update on the allegation against the prison case?
Thank you.
Richard Liu
Okay, so on the logistics, as we mentioned in the past, you know JD Logistics has built a unrivaled infrastructure by serving our own first party e-commerce business and along the way earned great customer and very, very good service quality and over the years. So and as we continue to implement our retail infrastructure strategy, that's a service strategy be that for service strategy we have seen merchants actually and their brands came to us to provide similar logistic services to these third party partners.
So this has been a theme that we mentioned since earlier of this year and obviously with the sales growth this year added triple digits for the past several quarters, clearly there are very unique value being provided by the JD Logistics. And on your second question, I just want to answer that, we really do not have any new information to share with you.
And honestly, we cannot further comment, because it is important that we respect the due process of the U.S. justice system.
As you see Lei Xu has been back to work as usual in the company and the situation that did not and was not expected to have any material impact on JD's base relations. Our strong senior leadership team with most of its members having spent five to 10 years with the company continues to effectively guide our company towards its goal to grow our business and serve our customers.
So as the purpose of today's call is to discuss our earnings results, so we would appreciate you limiting further questions to this topic. Thank you.
Operator
Thank you. I'll take the next questions from Jialong Shi from Nomura.
Please go ahead.
Jialong Shi
Good evening management. Thanks for taking my call.
I will ask my question first in Chinese and I will translate into English myself. [Foreign Language] So I have two questions and my first question is about 7Fresh and I just wonder what's management's store open plan under 7Fresh initiative and whether or not 7Fresh will be accounted as the part of JD Mall, and how should we assess the margin impact from 7Fresh for this year and next year?
And for JD Logistics and I just wonder if the management can provide an update on the progress of capitalizing the JD Logistics, some of JD Logistics resources which Zhenhui mentioned on last quarterly call, and I just wonder how should we assess the margin impact from this initiative? Thank you.
Richard Liu
Sure. So for 7Fresh we expect in aggregate a dozen or so stores by end of this year end, probably another 20 plus stores in the first half of next year.
Now because we want to expand the business in a prudent manner we are actually opening stores in a very careful and be well prepared for all the initial preparations. So in terms of impact on the margins, we do not expect any material impact on our overall margins and for the current performance of the existing stores.
We are actually pretty comfortable that on a single store basis the margin should be breakeven and turn positive in a relatively short period of time. And for the logistics assets, we are transferring some of the existing assets into a core fund and we've received very good initial investor interest, very good indication.
We still expect that transaction to happen in the first half of next year.
Operator
Thank you. Next question comes from the line of Natalie Wu from CICC.
Please go ahead.
Natalie Wu
Hi. Good evening.
Thanks for taking my question. Just wondering for the contract with Tencent regarding the wasting [ph] - Level 1 access point to be terminated next year.
Can management update us the following, the newer progress? Thank you.
Sidney Huang
And of course since, investment in the JD we have been in collaborating very well in a number of fronts, in terms of investment, in terms of offline re-trading such as [indiscernible]. I think for next level of collaboration of course we are expand the - from phase take away access to multiple fronts, fluctuation of social commerce and 2B business as well.
So right now we continue discussion and we should have more updates in the near future. Thank you.
Operator
Thank you for the question. Next question is from the line Tian Hou from T.
H. Capital.
Please go ahead.
Tian Hou
Yes, good evening management. The question is related to the category expansion.
So as Xu Lei mentioned the general merchandise the first time was about 50%. I remember since the day JD had become a public listed company this has been the goal and seems like you have finally accomplished that.
And however, given the fact that cell phones and home appliances are facing some headwinds, what is the company’s strategy in expanding in other categories rapidly to really offset this headline in other two major categories? [Foreign Language]
Richard Liu
So as we mentioned in the past, JD as a platform always invested first in overall marketplace operations improving merchant experience and we talked about for some time. And also from our overall strategic planning point of view, Jon mentioned last time that we in addition to growing a more established, we have been also investing in some of the so called $100 billion club into some of the new categories.
So it’s really a result of all of these efforts that helped us expand our general merchandize categories. So we did mention some of the categories in the past, obviously our home products, FMCG, fresh products, also our – a number of other ones that we mentioned along the years, because when you look at these categories we do see fairly consistent growth across all of these categories.
So it is really the power of the overall platform rather than any particular focus on just one of them.
Operator
Thank you for the questions. Next question is from the line of Binnie Wong from HSBC.
Please go ahead.
Binnie Wong
Hi, good evening management, thank you for taking my question. My first question is on the retail side of the strategy.
So I think in the last few quarters we have been seeing that we have been gaining traction as we open up to a wide range of partners. So can management update or share with us any progress update in terms of like the number of partners or any use cases of how our strategy has improved the productivity for retail partners and also update on any monetization strategy in this area would be very helpful?
And my second question is a followup on the growth strategy, right because I think management has mentioned that the decline in the annual active customers this quarter was because we want to focus on the quality. So we also of course see the GMV per customer has been improving.
So just want to see that that focus is it mainly like the driver for the GMV increase like the quality customer, is it mainly from the consumption upgrade or is it because the customers are buying more categories, so how should we think of that? And second to that is that on the loyalty program, because we see good progress right on the premium membership, how much higher is the users that have the premium membership, how much bigger bucket size are they buying versus stores that do not have this premium membership?
Thank you.
Richard Liu
Yes, so try to limit two questions as I expressed. I will try to answer the first one and I think Xu Lei can answer the plus membership program.
So for the 2B business I mentioned first our service revenue has surpassed 10% of total revenue for the first time, so a lot of that is happening, obviously namely with JD Logistics is one of them, but also our many programs on the, we call the project capital internally as Xu Lei mentioned earlier, these are all also generating meaningful progress for our merchant spends and also for our customers and the partners. So some of these in terms of revenue contribution it’s still small, but clearly we are gaining traction in these areas.
Lei Xu
[Foreign Language] In the third quarter Plus members have exceeded 10 million, these are our core users, so with the strongest purchasing power performing great in terms of buying frequency and average revenue per user ARPU. [Foreign Language] We will continue to optimize and invest in membership benefits with more and more brands and partners coming aware of level of those Plus members, co-membership and value added service will be our focus for the next stage.
[Foreign Language] Our co-membership or project with IT has been doing very well. We will look at expanding from reduced travel to entertainment, catering, knowledge [indiscernible] et cetera.
Operator
Thank you. Our next question is from the line of [indiscernible] from RBS.
Please go ahead.
Unidentified Analyst
Hi, hello, good evening. Thank you for taking my questions.
Could management update 7Fresh operating data for example the sale per square meter versus the traditional supermarket and the online order contributions and could management share how the retail strategy differentiate from the competitors? Thanks.
Richard Liu
Yes on 7Fresh because the current scale is still relatively small, but I did mentioned last quarter that sales per square meter is roughly 3 to 4 times of the traditional offline retail sales figures. Sorry, I lost your second question.
What is second question again?
Unidentified Analyst
Yes, sure. I would like management to share how the retail strategy differentiate with your other competitors?
Richard Liu
I think while moving in - I mean because we look at retail in different ways, as such we have different strategies. From JD standpoint, we move from vertical integrated model to become over model and comparatively speaking all competition is moving from older model to become more vertically integrated model, so let this way we put in.
Operator
Thank you. Next question is from the line of Hans Chung from KeyBanc Capital.
Please go ahead.
Hans Chung
Good evening management. Thank you for taking my question.
So I have a question regarding the JD Logistics and the management team mentioned earlier the profitability will improve a lot next year. So I just wanted to know is this driven by the pricing or new customer growth or the cost reduction in incentives?
And then followup is when we'll start to see the logistics start to breakeven? Thank you.
Richard Liu
Yes, sure. It’s actually from multiple areas as we mentioned because it was the initial year.
We did expand capacities at the beginning, so that we can have ample capacity to serve the new customers very well. So initially there was some overcapacity that was the one initial reason, two is that we offered discounted trial period for the customers to try out our services.
Part of the reason for that is our supply chain management services involving the integrated warehouse and delivery service. So for the warehousing part there is a natural kind of startup cost because the merchants and clients tend to have their own warehouses, existing warehouses.
So any migration to our service may incur initial incremental cost. So our initial trial period essentially lowered the barrier for this initial service period.
And as we move past those initial periods obviously also with the capacity, warehouse capacity better utilized, loss ratio will gradually shrink. So that's actually a fairly natural outcome after the initial investing phase.
So for the third quarter, which is actually a seasonally low quarter, we were very pleased to see continued narrowing on loss ratio because the business volume still grew on a sequential basis for this particular business which continued to have better improving the utilization for our overall capacity.
Operator
Thank you. We are now approaching the end of the conference call.
I'll now turn the call over to JD.com's Ruiyu Li for closing remarks.
Ruiyu Li
Thanks, operator, and thank you everyone for joining us today. Please feel free to contact us if you have any further questions.
We look forward to talking with you in the coming months. Thanks.
Operator
Thank you for your participation in today's conference. This concludes the presentation.
You may now disconnect. Good day.