Chinese retailer JD.com plans to aggressively expand its brick-and-mortar reach— aiming for a network of 5 million physical stores in the next 3 years — as China's e-commerce companies sharpen their competition for consumers in smaller Chinese cities.
Xu Lei, chief executive of JD Retail, said the company is "aware that China's retail market is huge." But he added that JD's business model can have limitations and he therefore wants to "build offline stores on our own and partner with existing players."
The company's online model "can only service certain number of consumers. We want to apply our years of experience, including logistics, merchandising and technology to a much wider context," Xu told CNBC's Arjun Kharpal. "Therefore, last year, we determined to position JD as an all-channel retail platform."
"In addition to our centralized online app, we also have a lot of de-centralized offline platforms. The offline market is very important to us," Xu said, speaking to CNBC as part of the annual East Tech West conference, which is being held this year both remotely and in Guangzhou, China.
As part of the strategy to build its retail presence, JD opened its biggest physical store, called the JD E-Space, on Singles Day in Chongqing in November last year. But the company does not plan to build 5 million stores itself.
"What's more important is to make good use of our partner stores," Xu said. "So far we have linked up with over 2-and-a-half million stores, including our own stores. In three years, our projection is to have a network linking up to five million stores."
This year JD put $100 million of backing into appliance store operator Gome Retail Holding — one of China's largest appliance chains. The joint venture lets customers examine items at Gome's roughly 2,600 stores and then purchase the products through JD.com.
JD's moves underline the fierce competition among China's leading e-commerce retailers to get more consumers in the country's smaller cities. Alibaba – JD's biggest rival — recently acquired a 19.9% stake in Suning.com, with the intention of boosting its market share in China's smaller cities.
Small cities are important not only for internet-based merchants, but also traditional retailers across China, which is the world's second-biggest economy.
"What happens to consumers from fourth- to sixth-tier cities, when they want to buy some big-branded products, they either find out that the products are not available locally or they are sold at a much higher price than those in the upper-tier cities," said Xu. "JD is providing consumers in lower-tier markets the same kind access to products and pricing through our nation-wide logistics network. "
Going forward, the company intends to work with popular brands to tailor products from region to region.
"Many brands have come to realize the huge size of the Chinese market, so they customize products for lower-tier cities by leveraging JD's data and our supply chain capabilities," he said. "They have had great results. We've seen sales orders from lower-tier markets growing by over 100% so far this year."
— CNBC's Arjun Kharpal contributed to this report.