JD.com (NASDAQ:JD), the second largest e-commerce player in China, could be returning to Russia soon, according to a recent Kommersant report. JD previously entered the Russian market in 2015, but it retreated a year later after struggling with cross-border logistics issues, merchant partnerships, and high marketing expenses.
JD's previous effort featured partnerships with payment providers Qiwi (NASDAQ:QIWI) and Yandex's (NASDAQ:YNDX) Yandex. Money, logistics provider SPSR-Express, and online retailer Ulmart. This time around, JD.com could partner with AlfaGroup's X5 Retail Group, which owns a nationwide network of Pyaterochka discount stores, Perekrestok supermarkets, and Carousel hypermarkets.
JD will let Russian customers purchase products online, and those goods will be delivered to Pyaterochka, Perekrestok, and Carousel stores for pickup. The partnership seems like a win-win deal for both companies -- JD can piggyback its online operations off X5's network of stores instead of launching new logistics services, and X5 adds more non-food products to its stores.
The deal should also lower marketing costs for JD with co-marketing campaigns: Ads for JD's products are appearing in Pyaterochka stores, and will likely appear in Perekrestok and Carousel stores in the near future. The partnership could also revive JD's previous relationships with Yandex and Qiwi, which both hold partnerships with X5.
Why does JD.com need the Russian market?
JD and its bigger rival Alibaba (NYSE:BABA) have been looking for growth opportunities beyond the Chinese market. The two companies are already clashing across Southeast Asia, where JD's marketplace faces stiff competition from Alibaba-backed Lazada.
Both companies are also targeting Western markets. JD recently announced its plans to expand into Western Europe, and a new partnership with Alphabet's Google will help it sell products to American shoppers. JD also lets Chinese shoppers buy overseas products from various countries through its cross-border e-commerce platform, JD Worldwide.
Alibaba's AliExpress platform, which lets Chinese sellers reach overseas buyers, is popular in Russia and Eastern Europe. 14% of European shoppers (including 69% of Russian shoppers) bought goods on AliExpress last year, according to Ecommerce News Europe. That makes it the second biggest e-commerce platform in Europe after Amazon, which controlled a quarter of the market. Alibaba also recently launched a dedicated version of Tmall for Russian shoppers.
Alibaba's popularity in Russia is troubling for JD, which seemingly surrendered the market to its rival with its premature exit. It's also bad news for JD's top investor, Tencent (OTC:TCEHY), which also reaches some Russian users with WeChat, the top mobile messaging app in China. In China, JD relies heavily on its integration with WeChat -- which has over a billion monthly active users -- to display ads, sell products, and accumulate shopper data.
The Russian market is trickier. Its mobile messaging market is dominated by apps like VK, WhatsApp, Skype, and Viber, which don't have comparable relationships with JD.
Russia has a relatively high internet penetration rate of 71%, and about half of Russians shop online. Yet e-commerce transactions could only account for 3% of the country's retail market this year according to eMarketer, which suggests that many shoppers still rely on brick-and-mortar retailers. For comparison, e-commerce sales could account for 29% of China's retail sales this year according to eMarketer and InsideRetail Hong Kong.
The key takeaway
Those numbers suggest that the Russian market is still ripe for a major e-commerce disruption. Alibaba will be a tough competitor for JD, but partnering with X5 Retail is a smart move since Russian shoppers still rely on brick-and-mortar stores. If JD can attract more partnerships, its second attempt could prove more fruitful than its first.