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JD.com, Inc. (NASDAQ:JD)
Q2 2018 Earnings Conference Call
Aug. 16, 2018, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello and thank you for standing by for JD.com's second quarter 2018 earnings conference call. At this time, all participants are in 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. Thank you. Please go ahead.

Ruiyu Li -- Senior Director of Investor Relations

Thank you, operator, and good day, everyone. Welcome to our second quarter 2018 earnings call. Joining me today on the call are Richard Liu, our CEO, and Sidney Huang, our CFO, and Jianwen Liao, our Chief Strategy Officer. For today's agenda, Mr. Huang will discuss financial and operating highlights for the second quarter, followed by brief remarks from Mr. Liao. After the prepared remarks, management will be available to answer your questions.

Before we continue, I refer you to our Safe Harbor statement in the earnings press release, which apply 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 direct 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 -- Chief Financial Officer

Thank you, Ruiyu Li, and hello, everyone. Thank you for joining us today. On today's call, we also have our Chief Strategy Officer, Jianwen Liao, on the line. I will discuss our financial performance first and the Jianwen will discuss recent industry trends and the company's development strategies.

We are pleased to report another quarter of solid, top line growth, improving profitability for the core e-commerce business, and exciting developments in our smart technology initiatives. For investors to better track the progress of our business, starting this quarter, we will begin providing segment information and more detailed revenue information on our different business lines on a semi-annual basis. I believe the increased disclosure will give investors additional insights into the strength of our core business, as well as our significance initiatives.

During the second quarter of 2018, our net revenues grew 31.2%. In particular, growth from net service revenues was 51% year-on-year, driven by a strong momentum from supply chain management and advertising. In the first half of 2018, our marketplace and advertising revenues grew 37% year-on-year, of which, commission income has been negatively impacted by the anti-competitive practice in the industry, particularly in the apparel sector. On the other hand, advertising revenue continued to grow at an encouraging rate, as our text-driven advertising products show improving ROI for our brand customers.

Meanwhile, growth from logistics and other service revenues accelerated to 151%, mainly resulting from the robust growth from our supply chain management and technology service revenues. Investing in our third-party logistics service business remained a focus during the quarter. While this continued to impact the gross margin line, I am pleased to report that loss ratio further narrowed during the second quarter, and that we maintained a relatively stable gross margin at the group level.

Non-GAAP gross margin in the second quarter was 13.3% compared to 13.4% in the same quarter last year. If we look at the JD Mall, non-GAAP gross margin again showed an improving trend from last year's level, reflecting steady gross margin expansion in our first-party business and fast growth in advertising revenue. Gross margins for the direct sales business improved over 50 basis points on a year-over-year basis in Q2 2018 due to increased economies of scale across all key categories.

During the second quarter, we continued to invest heavily in R&D and technology, which we believe will drive JD's long-term growth. Our R&D expenses totaled ¥2.8 billion or 2.3% of total revenue, up approximately 60 basis points from same quarter last year, mainly due to the continued investment in top R&D talent and the technology infrastructure to further enhance our capabilities in smart consumption, smart supply, and smart logistics. We believe these R&D investments are critical to extending our competitive strengths and transforming ourselves for the next phase of growth driven by retail infrastructure services.

Fulfillment expense ratio improved to 6.7% in the second quarter, the best level in 3 years, supported by higher average ticket size in the June promotion season. Marketing expense ratio and the G&A expense ratio were 4.3% and 1.1%, respectively, comparable to the same quarter last year. As a result of our continued investments in R&D, non-GAAP operating margin was 0.1% in the second quarter. Excluding new businesses, the non-GAAP operating margin for JD Mall was 1.1% this quarter, up from 0.8% in the same quarter last year, supported by higher gross margin, partially offset by the higher R&D spending.

In the first half of 2018, non-GAAP operating loss from new business increased by approximately ¥2 billion on a year-over-year basis, while JD Mall further improved the profitability and booked ¥3.4 billion in non-GAAP operating profit, with a record high non-GAAP operating margin of 1.6%, the highest in any 6-month period since our IPO.

Our free cash flow was ¥13.1 billion during the quarter, driven by healthy operating cash flow of ¥16.4 billion, partially offset by higher capex in logistics real estate assets. As we mentioned previously, we are in the process of monetizing some of the logistics properties we have built in the past few years, which should unleash both cash flow and hidden value underlying these highly sought after real estate assets.

I'm also pleased to share with you that over the past two quarters, we have built a logistics asset management company with a dedicated team of experienced professionals. This will be the third separate business after JD Finance and JD Logistics, that we've built by leverage the capabilities and infrastructure of our core JD Mall operations. The role of the logistics asset management company is to develop, monetize, and operate JD's massive logistics property portfolio, both before and after the properties are sold to outside investors or co-investment vehicles.

As of the end of July, we already owned over 2.5 million square meters of completed warehouse space, which could unlock billions of R&D in value appreciation and a steady flow of future management income. This portfolio is only a fraction of the pipeline we have signed or under construction. As a separate business, the logistics capex will be an integral part of this operation. Leveraging existing portfolio and our large pipeline, we expect the development, sales, and management operations will begin generating significant cash flow in operating profit in the next 6 to 12 months.

In addition, we also began to see operational progress in other new initiatives this year. For example, as a result of our retail-as-a-service initiatives, we are now serving and empowering nearly 1 million business customers through multiple offerings, including supply chain management, marketing solutions, logistics services, and technology support. We're also gaining traction with brands on the WeChat store mini-program toolkits that we launched at the end of Q1. On average, we launch more that 80 WeChat stores each day for our brand partners during the second quarter. Most of the new initiatives are yet to produce meaningful financial results, but we believe we have made good traction since doubling down on technology last year, and we remain optimistic about our future growth.

This leads us to our financial outlook. We expect Q3 net revenue growth to be between 25% and 30% on a year-over-year basis. Our Q3 guidance is affected by the relatively soft sales growth after the June promotion season through the end of July, due to a few seasonal factors, including the seemingly increased seasonality this year and also an exceptionally strong July for JD last year. We are pleased to see the growth rate has resumed to a normal pace since the beginning of August.

I would also like to comment on our full-year earnings outlook. As many of you may have observed, there are several new changes in the industry and economic environment we are in, along with tremendous opportunities in front of us. We would like to reiterate our commitment to a stable and improving margin on our core e-commerce business, while retaining the flexibility to invest in R&D and the new business initiatives that Jianwen will further elaborate in a minute. We also expect the monetization of our logistics properties. When realized, we will compensate part or all of the additional investments in technology initiatives this year and next year. While this may create some non-linearity in earnings improvement between this year and next year, we hope the underlying earnings trends remain intact.

This concludes my prepared remarks and I now turn the call to Jianwen, who will highlight a few observations on the industry and our plans on the new business initiatives.

Jianwen Liao -- Chief Strategy Officer

Thanks, Sidney Huang. Thanks, all, for joining us today. As many of you know, I joined JD as Chief Strategy Officer nearly 1.5 years ago. Today, I'm pleased to offer a view on the retail of the future and related technology and JD's overall long-term vision.

Let me begin with the overall industry. We believe the e-commerce industry is at a strategic inflection point. While we've maintained healthy growth, we have observed changes taking place that may fundamentally reshape future development in four key areas. First, we are seeing a shift from centralization to decentralization. The boundary between retail and other industries has become increasingly blurry, which is why we define the future of retail as boundaryless. China is uniquely seeing a influx of retail innovation across industry boundaries. This includes the emergence of a common commerce, social commerce, AI commerce, IoT commerce, to name just a few.

As such, the retail space will become more disruptive and decentralized than ever before. Second, e-commerce is moving away from focusing on mass traffic to position targeting. Retail is no longer just about flection, quality, and pricing, but is increasing about the shopping moment, providing the right products to the right customers in the right settings and at the right time. This fast evolution of technology and big data, AI, IoT, and a host of other areas enables retailers to interact with customers at more touch points and thus manage the business at a more granular level.

We believe that to succeed, players need to move from an everyday store mentality to everyone's store, meaning from on the approach of a mass market to a market of one. Thirdly, supply chain is increasingly more important than a pure platform model. Retail innovation and the supply chain complement are clearly two of the most important drivers of success, both for online and offline retail. This is exactly why JD has emerged as a leader despite entering the market later. It is also the reason why we remain dedicated to investing in smart supply chain solutions, which I will elaborate on more later on.

Four, the [inaudible] market has proven to hold great potentials. In China, there are many e-commerce companies focusing on 2B business innovation. Meanwhile, the 2B internet is still at this nascent stage and the recognizable market leader remains absent. By contrast, in the U.S., to 2B internet accounts for 40% of market cap by some metrics. Over the past few years, we have seen start-ups gain individual shift attention toward 2B market in the field of enterprise service, SaaS service, and AI service. We believe that 2B market will soon take off in the near future in China, which opens up an attractive opportunity for JD to extend its capability into this sphere.

Now, let me turn to how we view technology. Along with the changes I just mentioned, is technology innovation, which continuously expands the possibility in retail across areas, including cost, efficiency, and customer experience. Retail has made clear that there are only three key words for the next decades of JD: technology, technology, and technology. Investing in technology is what drives companies for the next decades, much like logistics has given us a major advantage over the last decade. Our vision is to leverage technology to develop lower cost, tech-based, supply chain platform capabilities, integrating both hardware and software solutions. In particular, we will focus our efforts on three key areas: smart consumption, smart supply, and smart logistics. These three areas remains the focus of our continuing investment in R&D.

Let me explain how those three areas will drive our development. Smart consumption smooths the barriers for retailers and the customers across online and offline channels. The goal is to improve the consumer experience at every stage, creating more a engaging experience with greater customer retention and loyalty. [Inaudible] supply chain, with the goal of improving the operational efficiency of brand, AI technology has been broadly used on supply related applications such as sales planning, dynamic pricing, and inventory replenishment. As a result, we are able to improve brand's time to market, inventory control, and product design.

Smart logistics helps get product into the hands of our consumers with better speed and lower cost. JD is still the market leader in smart warehouse and smart transportation assistance. We are also pioneering unmanned warehousing, delivery, and driverless delivery. Continuous development in these areas remain critical for us to maintain and extend our competitive advantages.

Now, I'd like to discuss our overarching strategy of retail-as-a-service. In short, Ross, which you might have heard us discuss about before. You see us covering both retail and retail infrastructure. First and foremost, we will continue to expand our current retail business and also talk some retail innovation. In the meantime, in the light of the future of boundaryless retail, JD will continue to develop and, most importantly, open up retail and structural capabilities, such as smart supply chain to enable and empower more retail innovation for us to accomplish through leverage.

More specifically, we identified three categories of business for future growth under Ross with different growth models. Let's start with core business. The first area where we can grow is in our flagship online retail business. We can do this both through new customer acquisition, especially in Tier 3 to Tier 5 cities, as well as expanding our relationship with existing customers by increasing the customer loyalty and spending with us. We have more than 300 million high quality customers, including approximately 200 million who have joined us in the last 3 years. This growing customer base and expanded relationship offers us tremendous room for future growth of our core business.

Now, let's look at our growth business. We believe we can expand our online capabilities to the categories that are underpenetrated and ready for high-growth rate. In [inaudible], we call these categories 100 billion [inaudible]. Those categories tend to be growing at least double the average for JD categories and they also tend to be in areas where quality is particularly important, a key strategic differentiator for JD. Some examples include fresh food and sales to enterprise. Achieving the full potential of these categories will drive our long-term growth in retail.

Finally, we have future business. This covers our retail business, as well as the retail infrastructure, with a focus on retail innovation and employment. Into this area, we will continue to place great emphasis on offline retail innovation and common commerce, social commerce, and in IoT commerce. In the 2B area, we will open our capabilities in advertising, store tax, supply chain, and logistics, and the cloud to empower brand and other retailers.

Sidney has just mentioned that we have invested ¥2.8 billion last quarter with the majority investment invested in our retail infrastructure development. While the investment is significant, we have already seen some positive early results, as Sidney mentioned, logistic and other service revenue has increased by 150% this quarter. We have confidence that with our continuous focus. Retail infrastructure can be our next core competency and product driver.

In summary, JD is moving from a vertical reintegrated model to an open model, to become a tech-driven retailer and a technology-based retail infrastructure service provider at the same time. There will be challenges, for sure, but we believe that we have a clear vision, determination, and the capability to achieve our goals. At the end of the day, delivering trust to our consumers, partners, investors, employees, and broader society is something that sets us apart from our competitors. With that, we will take your questions. Thank you.

Questions and Answers:

Operator

Thank you. The question-and-answer session of this conference call will start in a moment. In order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, please request to join the question queue again after your first question has been addressed.

Our first question comes from the line of Eddie Leung of Merrill Lynch. Please ask your question.

Eddie Leung -- Bank of America Merrill Lynch -- Analyst

Thank you for taking my question. I have a question on perhaps the information that Sidney, you mentioned, perhaps starting in the third quarter. Could you elaborate a little more on some of the macro factors and seasonal factors we have seen that might affect the future growth of our business? And then related to that, would that affect our near-term margin [inaudible] given the timing of the investment in areas of new initiatives? Thank you.

Sidney Huang -- Chief Financial Officer

Sure, Eddie. I think you were asking about Q3 sales guidance. As I mentioned, July, actually after our June 18th promotions in the last 10 days of June, we started to observe somewhat of a softness in our sales growth, but we have since seen a recovery in August basically back to the normal pace. We internally analyze, we believe there are mainly seasonality factors, partly for this year, we may have seen a stronger than before seasonality post-promotion and two is that we did have a very strong July last year in JD. So, I think it's a combination of these factors. Obviously, there's also some particular category was affected by the overall market environment. But in any event, starting in August, we have seen pretty well recovery across all categories. So, we are still quite optimistic looking ahead.

You asked about our view on the macro. I think we are still cautiously optimistic, given that in China the overall consumption growth, consumer income, and also consumption as a percentage of GDP are all pointing to a continuous consumption growth for many years to come. So, we are still quite bullish in terms of growth outlook.

Operator

Thank you. Our next question is from the line of Alicia Yap of Citigroup. Please ask your question.

Alicia Yap -- Citigroup Global Markets Asia Ltd. -- Analyst

Hi, good evening, management. Thanks for taking my questions. I have a couple questions, if I may. Could you actually maybe perhaps elaborate and share with us any update on the closer collaboration with Google so far since the strategic investment in June? And in the event, if Google has interest to launch the Google Shopping Action program in China, will JD be the strategic partner to work with them? Then a housekeeping question, Sidney. Given all these initiatives, I wasn't quite sure, are we still retaining the full-year net margin guidance of 1% to 2%? Thank you.

Jianwen Liao -- Chief Strategy Officer

Okay, I will take the Google questions. Of course, JD and Google are very much complementary in terms of a lot of skillsets. The partnerships between Google and JD were very much mutually beneficial for both companies. Of course, in United States, JD of course will work closely with Google Shopping Action as a gateway for JD products to be listed on Google Shopping platform. Of course, on behalf of [inaudible] domestically, we have 170,000 high-quality merchants. So, Google Shopping Action will be an important gateway for those high-quality merchants as well. So, clearly, of course, we have great ambition in working closely with Google in many ways.

Now, [inaudible] collaboration, I think there will be much more initiatives coming on the way. So, we'll see how this unfolds as time goes by.

Sidney Huang -- Chief Financial Officer

On your second question on the earnings guidance, I mentioned that will remain committed to the JD Mall core margin being stable, but we are investing more in other initiatives, as I mentioned. To compensate for that, we actually accelerated our monetization plan for logistics properties, which when realized, should be more than compensating, or at least compensating the shortfall due to the additional investments. But as I mentioned earlier, the timing of the monetization is relatively, we don't necessarily guarantee it will be completed by the end of this year. So, that will create some non-linearity in earnings trend from this year and next year. I don't know if that will answer your question.

Operator

Thank you. Our next question is from the line of Alex Yao of JP Morgan. Please ask your question.

Alex Yao -- JP Morgan Securities Asia Pacific Ltd. -- Analyst

Hi, good evening, management. Thank you for taking my question. Sidney, can you elaborate a little bit more on the JD Logistics asset management to business. How does it work? How does it generate revenue and free cash flow? What is the long-term vision for this initiative? I think you mentioned in the prepared remarks the financial contribution from this part of the initiative will increase into the second half of this year in terms of revenue and free cash flow. Can you maybe elaborate on the magnitude of the contribution? Also, a follow-up on Alicia's question. What exactly does it mean the earning or the margin trend that will be non-linear toward the rest of the year? Does it mean the margin could be more volatile than the historical pattern? Thank you.

Sidney Huang -- Chief Financial Officer

We actually mentioned in the past few quarters that the reason we were investing in logistics assets is because JD is in a very unique position to acquire the land resources by working with the government. Obviously, we're creating jobs for the local economies. As a result of that effort, we have now built over 2.5 million square meters of logistics properties, but we actually have a lot more than that in the pipeline. When we have that portfolio, we are in a very good position to monetize these properties in several ways.

One is to sell it to outside investors. There are already investors for this type of asset in China and, actually, globally, because the logistics assets have been appreciating quite steadily and with steady rental increase. So, it has been a very attractive asset class for many, very long-term investors globally and domestically. So, there are already investors to purchase these assets, which will help us realize the hidden value appreciation that has not been realized currently on our financial statements.

After the transaction, we would also continue to serve as the management company for those assets. For that, as I mentioned, we established separate operations, which will continue to develop those warehouse facilities and they will also monetize in the sales transaction, and also manage those properties afterwards, so there will be management income after we monetize those products. I mentioned that will happen in the next 6 to 12 months, so it may not have a very near-term impact on our financials in the second half. That is why I said the non-linearity, meaning that essentially the monetization could happen by next year. So, then it will impact our overall bottom line forecast for this year.

Operator

Thank you. The next question is from the line of Ron Keung of Goldman Sachs. Please ask your question.

Ronald Keung -- Goldman Sachs Asia LLC -- Executive Director

Thank you. Thank you, Richard, Sidney, Jianwen, and Ruiyu. I guess I'll ask a similar question as last quarter. I just want to hear any updates on your apparel. Particularly, we see a lot of new initiatives for JD Mall within the marketplace, encouraging merchants to sell more targeted sales and with commissions and advertising bundled together. I just want to hear how apparel growth has resumed back to at least positive growth in the second quarter, how we're looking on our strategy for apparel in the second half of this year as we lap the one year of exclusive partnership partnership of our competitor. Thank you.

Sidney Huang -- Chief Financial Officer

Sure. First, we have not yet passed the one-year anniversary of that anti-competitive practice by our competitors last year, which started in August. As a result, during the second quarter, unfortunately, our fashion certainty is still under the shadow of this unfortunate anti-competitive practice, which essentially uses traffic control to force apparel merchants to stay off our platform. In fact, also other platforms. So, this practice does affect our fashion business line, but also has a little effect on our overall profitability. But we have been working very hard through other categories to better serve our customer base or enhancing our merchant products and services. So, we remain optimistic about regaining the momentum in this category in the next few quarters.

Operator

Thank you. The next question is from the line of Jerry Liu of UBS. Please ask your question.

Jerry Liu -- UBS Securities Asia Ltd. -- Executive Director

Thank you. My question is about JD Mall. I understand when we look outside of that there are some maybe milestones, right? Such as the logistics asset management milestones that may or may not fall in this year and that complicates the net margins a little bit. But if we just focus on JD Mall, how do we see the margins trending in the second half of the year versus last year or versus the first half of this year? Thank you.

Sidney Huang -- Chief Financial Officer

So, when we look at the second quarter, gross margin did expand on the first-party business over 50 basis points, actually, so quite meaningful improvement, and also we continue to see robust growth in our advertising revenues. So, these are the main drivers for our profitability for the JD Mall business, which we believe will remain stable margin and the potentially higher margin for the remainder of the year.

Operator

Thank you. The next in line to ask a question is Thomas Chong of Credit Suisse. Please ask your question.

Thomas Chong -- Credit Suisse Hong Kong Ltd. -- Analyst

Thanks, management, for taking my questions. I have three questions. The first question is about our 2B initiatives. Can management gives us some KPI that we may have over the next couple years? My second question is about 7Fresh. Can management comment about how is the status so far? My third question is also about the net margin question. Is there any color that the 1% to 2% net margin guidance that we still keep it as is? Thank you.

Sidney Huang -- Chief Financial Officer

I think we have now, if you look at our service revenue, the vast majority of that is from 2B business segments. But these are today a majority of that is still coming from our platform business and we have one recent example is that we have been putting a lot of investment in third-party logistics services or supply chain management services. We have seen great traction in that business line. Going forward, the investment we have made in technologies will also produce what we believe very solid revenue going forward and there are also areas that we can invest in the supply chain capability, leverage supply chain capabilities we have.

On the 7Fresh, we have a couple stores that we have been observing the results of those stores, which actually had shown very encouraging results. Overall, our sales per square meters have seen at least 2-4x the traditional offline supermarkets. So, we're very encouraged by the initial results and we are in the process of opening up another 20 to 30 stores in the next few months.

Operator

Thank you. The next question is from the line of Wendy Huang with Macquarie. Please ask your question.

Wendy Huang -- Macquarie Capital Ltd. -- Managing Director

Thank you. My question is mainly about your logistics. You mentioned the appreciation [inaudible] off your logistics asset. Can you give us some color regard the self-owned warehouses versus the [inaudible] warehouses among the 521 warehouses you are operating right now or maybe a split between the 200 million square meter size, that's fine as well. And also, can you give us some color on the number?

Sidney Huang -- Chief Financial Officer

The space that we own is over 2.5 million square meters out of the 12 million warehouse space we have. So, just for those self-owned facilities, we can see, in fact, billions of R&D in unrealized appreciation. There are also multiple times of that space in the pipeline. So, we do see great potential in this business as a stand-alone, separate operation.

Operator

Thank you. Next is [inaudible] of New Street Research. Please ask your question.

Hi, guys. Just a couple questions on the advertising front. I understand that the advertising seasonality is a little bit more positive in the second half of the year, with 1111 and so forth. But I just wanted to see how you're looking at that business. If you could share with us some of the metrics behind that, including the number of advertisers, ad loads, or anything that you could share with us, that'd be great. And second of all, on the logistics.

Sidney Huang -- Chief Financial Officer

Advertising, we mentioned that today or really in the past couple of years, our strategy has been using technology and artificial intelligence to provide a better position and better ROI for our brands. So, we have seen very, very good results of that effort. This is what's driving our advertising revenue growth. As far as ad loads, we have not been very aggressive increasing ad load at all. If anything, we are under-monetizing in this area, but for JD, we want to maintain the right balance between monetization and the customer experience. So, we will continue to adopt that approach and use more of a technology-driven approach to enhance our advertising revenue.

Operator

Thank you. Our next question is from John Choi of Daiwa. Please ask your question.

John Hyungwook Choi -- Daiwa Capital Markets Hong Kong Ltd. -- Executive Director

Thank you. I just want to ask more of a broader question regarding the overall industry. Right now, we're obviously seeing a very intense competition here. How does the management think about the long-term growth outlook that we're seeing here? First half was very good, particularly in first quarter. Starting from later parts of second quarter, we've seen some sort of slow-down. So, how would we think about the growth? On that, are you seeing any new retail having any negative to our core business? Thank you.

Sidney Huang -- Chief Financial Officer

I think Jianwen has elaborated quite a bit on our growth strategy that we still have a very long growth trajectory for our core e-commerce business and we are also investing in some of the underpenetrated categories that will produce ¥100 billion on the revenue potential. We also have a third growth curve that's focusing on the 2B business and also some of the innovation and empowerment driven businesses. So, internally we have a very clear strategy. We have various task forces to drive these initiatives and we hope as we continue to grow the core business, you will start to see other streams of revenue being generated through these efforts.

Operator

Thank you. Our next question is from Wayne Wang from HSBC. Please ask your question.

Wayne Wang -- HSBC Global Research -- Analyst

Hi, thank you, management, for taking my question. My question is on the margin trend. If [inaudible] in terms of gross margin improvement in some of the key drivers here, can you elaborate a little bit on the expansion in core business gross margins, which technically have risen [inaudible] more improvement here. And also, you mentioned about in terms of the robust growth in ads and that also helps you drive the overall margins. Can you elaborate a little more in terms of the advertisers that you have been seeing? Are those coming from the luxury brands or are those coming from usually the big brands that you have seen [inaudible] as you mentioned [inaudible] recent development? What types of advertisers have you been seeing mostly and in which categories? Thank you so much.

Sidney Huang -- Chief Financial Officer

As far as gross margin drivers, we do see gross margin expansion in all categories in the second quarter. Those are driven by our scale economies, as we purchase more from the brands, we get natural rebates for gross margin expansion. So, not only on the electronics and the home appliance categories, which we continue to see margin enhancement, but also FMCG, for example, we are also gaining more and more scale economies with the brands. So, that's essentially the driver both on gross margin and also on our ability to provide competitive pricing to our customers, which we suspect will continue to drive our business for many years to come.

As far as for the brand advertising, it's the usual suspects. Obviously, the consumer goods brands. Actually, brands across all industries have been working closely with us. Obviously, the brands that we work, the categories that are the strongest will provide more advertising spending with us.

Operator

Thank you. Our next question is from the line of Natalie Wu of CICC. Please ask your question.

Natalie Wu -- China International Capital Corp. -- Analyst

Hi, good evening. Thanks for taking my question. Just curious, what's your view on the industry competitive landscape change? Especially at the rising of some social e-commerce platforms? Did you see any kind of an impact in terms of shopping frequency for your [inaudible] category? Thank you.

Jianwen Liao -- Chief Strategy Officer

As I mentioned in my statement, we have seen an influx of new innovators in the landscaping. However, JD is a quality internet platform. Now, with those emerging social commerce platforms, I think they provide tremendous opportunities to educate new customers. So, [inaudible], we do see this as a consumption upgrading, rather than downgrading, as many of you have pointed out. What I mean by upgrading is the new social commerce provides customers with a choice, meaning in the past you had no choice. Now, they have a choice. Now, of course from no choice to have a choice, and then JD, on the other hand, from have a choice to have a better choice. So, in this case, I think the customer education will provide a foundation for the future in terms of JD's growth. So, in other words, there will be new customers moving to the online space, which provides better growth opportunities for JD.

Sidney Huang -- Chief Financial Officer

We also have our own team purchase product called Pinko on our WeChat interest point. Interestingly, we are also seeing a lot of demand from both our merchants and from our customers on this team purchase product that we offer. So, just to give you a couple of data points, in the second quarter, the percent of merchants that participated in our Pinko program, up from 16% in Q1 to 40% in Q2. So, very active participation on the high quality SKUs participating in our Pinko program. If you look at the purchase orders for our 3P platform. The Pinko transaction volume is now over 10% already.

Operator

Thank you. Our next question is from Grace Chen of Morgan Stanley. Please ask your question.

Grace Chen -- Morgan Stanley -- Analyst

Yes, thank you for taking my questions. I have two questions. The first question is about the overall consumer demand in the market. There have been some talks about demand slowdown. So, would you share with us your observation of the consumer demand? And, if possible, by second, such as home appliance, safety, apparel, FMCG? Then my second question is a follow-up of the margin guidance. Specifically on JD Mall margin, we talked about JD Mall margin to be stable. But does that mean we are expecting to see a flattish JD Mall operating margin year-over-year? If you can add a little bit more call in terms of JD Mall margin trends, that would be great. Thank you.

Sidney Huang -- Chief Financial Officer

On the consumption trend, as I mentioned, other than the somewhat soft July sales, which we believe is more due to seasonality, we actually don't see much of an impact at this point starting in August. The growth is still quite solid and I think we are, given that the consumer income growth continues to be faster than the GDP growth, employment level continues to be very high in China, and also the consumption as a percent of GDP is still quite low. So, I think given all those dynamics, we do feel still quite optimistic about the consumption trend.

On the JD Mall margin, as I mentioned, it should remain stable with some upside throughout this year. Again, this is driven by our economies of scale in the first-party business and also driven by our advertising growth.

Operator

Thank you. Our next question is from the line of Tian Hou of T.H. Capital. Please ask your question.

Tian X. Hou -- T.H. Capital LLC -- Founder and Chief Executive Officer

Hi, Sidney and management. I have two questions. One is again, related to the company's margins. So, Sidney, you give rather new guidance as a combined entity -- JD Mall and logistics. Now, we know the JD Mall margin is going to be stable with some upside. So, I wonder on the investment side on the logistics, how much you expect to have with margin drag? So, that's on the logistics side. And also, how much revenue contribution should we expect from logistics? So, that is No. 1 question.

Sidney Huang -- Chief Financial Officer

On the logistics margin, we are pleased to see margin, the loss ratio has been narrowing in the second quarter, but this year is an investing year for JD Logistics. So, we do expect some losses in the remainder of this year and we do hope the loss margin will continue to narrow. The growth rate is well over 150%. We did separate the logistics and services in a separate line in our half-year supplemental information section. So, we wanted to provide some color on this new business, along with a few other new business lines. So, very strong growth rate. Very good corporate customer adoption of our service. So, very good revenue growth, but we'll continue to sustain some short-term losses.

Operator

Thank you. Our next question is from the line of Xiaoyan Wang of 86Research. Please ask your question.

Xiaoyan Wang -- 86Research -- Analyst

Management, thank you for taking my question. As we noticed in second quarter, JD Logistics launched a fresh delivery initiative. So, can you offer more color on this new delivery model? For example, what kind of category are you focusing on? Do you expect to expand this kind of more fresh delivery to consumers, to expand in geography expansion, and also the category expansion and currently what kind of, if any, [inaudible] or orders in from this model?

So, on Fresh delivery, we have always stayed in the innovation forefront for logistics services. So, this is just one of the recent examples that we established a new product, really providing customers with one-hour delivery in select cities. So, it is another really higher service level delivery product that we offer. But even before that, as I mentioned, for over 90% of all of our first-party orders, we deliver either within same day or next day across the country. Our own delivery and warehouse network will cover well over 2,800 counties and districts. Essentially, 99.9% of the country is covered by our differentiated logistics services. So, we will introduce more and more differentiated products at different tiers of the cities providing differentiated services to our customers.

Operator

Thank you. We are now approaching the end of our conference call. I'll now turn the call over to JD's Ruiyu Li for closing remarks.

Ruiyu Li -- Senior Director of Investor Relations

Thank you, operator, and thank you, everyone, for joining us on the call. Please feel free to contact us if you have any further questions. We look forward to talking with you in the coming months.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

Duration: 56 minutes

Call participants:

Richard Liu -- Chairman and Chief Executive Officer

Sidney Huang -- Chief Financial Officer

Jianwen Liao -- Chief Strategy Officer

Ruiyu Li -- Senior Director of Investor Relations

Eddie Leung -- Bank of America Merrill Lynch -- Analyst

Alicia Yap -- Citigroup Global Markets Asia Ltd. -- Analyst

Alex Yao -- JP Morgan Securities Asia Pacific Ltd. -- Analyst

Ronald Keung -- Goldman Sachs Asia LLC -- Executive Director

Jerry Liu -- UBS Securities Asia Ltd. -- Executive Director

Thomas Chong -- Credit Suisse Hong Kong Ltd. -- Analyst

Wendy Huang -- Macquarie Capital Ltd. -- Managing Director

Analyst -- New Street Research -- Analyst

John Hyungwook Choi -- Daiwa Capital Markets Hong Kong Ltd. -- Executive Director

Wayne Wang -- HSBC Global Research -- Analyst

Natalie Wu -- China International Capital Corp. -- Analyst

Grace Chen -- Morgan Stanley -- Analyst

Tian X. Hou -- T.H. Capital LLC -- Founder and Chief Executive Officer

Xiaoyan Wang -- 86Research -- Analyst

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