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.
Thank you, operator, and welcome to our Q3 2018 earnings call. Joining me today on the call are Richard Liu, our CEO, Lei Xu, our 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 the safe harbor statement 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 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.
Thank you, Ruiyu, 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, while new businesses made 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% in 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 re-accelerated growth on same-store sales in the quarter. We are pleased to see JD.com remains 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 RMB 3.4 billion, or 3.3% of total revenues, up approximately 120 basis points on the same quarter last year. For the first nine months of 2018, R&D expenses increased 88% to a total of RMB 8.6 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 were 3.9% 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 RMB 3.6 billion in land use rights and construction of warehouses, and RMB 5 billion in IT infrastructure.
As of September 30th, 2018, our cash position remains strong with cash and short-term liquid investments totaling RMB 42.9 billion. In addition, as we communicated last quarter, we are 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 the 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 Eleven promotion season, where most categories showed above the industry growth rates based on our brand partners' feedbacks and third-party industry reports.
Our marketplace continued to grow faster during the promotion season. This concludes my prepared remarks. We will now take your questions.
Thank you. The question and answer sessions 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 questions at a time from each caller. If you have more than one questions, please request to join the questions queue again after your first question has been addressed. The first question's from the line of Eddie Leung from Merrill Lynch. Please go ahead.
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 logistic expansion plan? Just a follow-up 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 that would be great. Thank you.
Okay. I will start, and others may contribute later. On the macro, I mentioned that we did see some impact on durable goods categories. During our latest promotion season, we actually saw JD continue to lead the industry growth when we checked with our brand partners. 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. In terms of impact, because we are a mass market retailer, our scale gives us unique pricing competitive advantage. Even in the economically slowing time, we do believe our value proposition with quality products, everyday low price, and better services will continue to win customers. 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. Part of that growth is from our logistics services that are increasingly utilized by our top merchants.
Just one more add. In terms of technology investment, of course, we continue to invest in retail innovation in terms of social commerce and content commerce. I think this would be the next frontier of possible growth for JD. Additionally, we mainly look into smart suppliers, smart logistics, and smart consumption in terms of pushing the frontier of the efficiency and cost and the customer experience as well.
Understood. Thank you.
Thank you for the question. Next question comes from the line of Alicia Yap from Citi. Please go ahead.
Hi. Good evening, management. Thanks for taking my question. I have a question on the JD initiative on this retail asset service. Overall JD positioning. Could you help us understand a bit more about this platform? Which industry vertical will that specifically target? How is that service JD is offering different from the service provided by the bigger peer? Related to that, appreciate if management could also help us redefine JD positioning. Will JD continue to sign up global brands on your platform? It seems that JD is moving away from the local brands and put more focus on servicing the international brand. Any change of JD's vision of being the retailer, or is JD shifting focus to become more a service provider? Thank you.
Yeah, 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 the boundless retail. The retail industry will become even more fragmented and decentralized than ever before. In this case, JD is moving away from a vertical delivery model to a more open model. In other words, in the past, the very reason why JD had become so successful is because we provide end-to-end solutions for retailers. We have JD Mall, we have JD Logistics, and so on and so forth. Moving forward, we have to open up our retail infrastructure to a couple of value chain. In other words, we wanted to provide our retail and logistics service to the other retailers as well.
Meaning, if you look at a lot of retail innovations, from commerce, social commerce, and so on and so forth, it is inconceivable for those retail innovators to develop those heavy assets and the network-based retail infrastructure. In this case, JD really wanted to open up our retail infrastructure to enable and empower more retail innovation. This is how we define retail as a service, which basically consists of two components. Number one, of course, JD will continue to focus on retail innovation, as our main focus. At the same time, we'll open up our retail infrastructure, like logistics, like technology, to connect and enable retail innovations. That's what we mean by retail-as-a-service.
Sorry, what about the positioning as kind of a service provider versus the traditional retailer?
Yeah, of course, the retail infrastructure will become a service provider for other retailers. We do expect, as indicated on the revenue model, the service revenue has been growing significantly. It is a part of our retail-as-a-service strategy.
Okay. All right. Thank you.
Thank you for the question. Next question is from the line of Ronald Keung from Goldman Sachs. Please go ahead.
Thank you. Thank you, Richard, Sidney, Xudong, Maozhong, and Ruiyu. We're pleasant to see the third 3P growth, the strong growth of 40%, which is significantly above the industry growth over the quarter. Can 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 up in the upcoming year? Thank you.
Sure. We have seen actual growth across multiple categories on our marketplace, mainly from long-tail products and long-tail merchants. We added a fairly large number of new merchants now, with total over 200,000 merchants on our platform. Both our electronics categories and general merchandise categories saw a growth rate over 40%. It is really 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 fulfilled 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 the merchants across all the key categories.
Thank you for the question. Next question is from the line of Alex Yao from JPMorgan. Please go ahead.
Hi. Good evening, guys. Thank you for taking my question. Can you help us understand your top strategic focus for 2019, given the macro outlook, but emerging growth opportunities across offline retail, logistic, et cetera? Where will you be focusing on for 2019? Then related to that, how would you prioritize 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? These initiatives will slow down a little bit, pending on the macro condition. Thank you.
Our overall growth strategy has always been long-term driven. 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 now have our key teams and the key leaders in place. Some of our initiatives over the past two years have beginning to see some very positive results. We'll continue to invest for the future, while we will obviously put more discipline at the same time on our more developed, more growth 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 a good balance of both long-term growth and the near-term financial results.
Yeah. I think we have to have a new growth mindset moving forward in pursuit of three different balances. Number one, a balance in the top line and the bottom line to make it more profitable. That's the first one. Number two, to balance core business, growth business, and the future business to make it more sustaining. Number three, to balance the profit, people, and the place to make it more sustainable. I think that's a new way we define our growth mindset.
Thank you for the questions. Next question comes from the line of Jerry Liu from UBS. Please go ahead.
Thank you. Sidney and Jianwen, from your comments so far on this call, I'm hearing about logistics unit economics improving, R&D expense ratios stabilizing, no macro impact on the profitability trends, and just now talking about balancing top line and bottom line. Despite year-to-date net margins being lower this year than last year, I'm hearing a lot of things that suggest maybe net margins can stabilize or improve as we head into next year. Is that the right read? Thanks.
Sure. Yeah. We have maintained that on a long-term basis, our margin should gradually improve. This year, because of JD Logistics, was in the investing year. On my last earnings call, we mentioned that this year will be more making sure that JD Mall will maintain a stable margin trend with some upside. 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. Overall, we do have the full intention to grow the business, investing for the long term while gradually improving the bottom line.
Got you. Thank you.
Thank you for the questions. Next question is from the line of Thomas Chung from Credit Suisse. Please go ahead.
Hi. Thanks management for taking my questions. I have two questions. My first question is about the customer growth. During the quarter, we are seeing a negative sequential growth. Can management explain about the reason and how we should think about the trend going forward? 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's any? Thank you.
Yeah. I'll take the CapEx question first, and Lei Xu will take on the user question. For CapEx, this year is definitely a very heavy CapEx investment year. Partly, it's driven by our logistics warehousing build-out, and partly it's because of our IT infrastructure. Both of which, we hope, will complete the heaviest investing phase this year. There should be somewhat of a moderating trend moving into next year.
Let me take the question about users. As the economy slows down and in the light of JD.com having already more than 100 billion users, I think at this particular stage, we need to focus more on the quality of growth, quality of users.
随着物流的布局，我们会渗透到低线城市，近期我们开始加大了在低线城市的营销的力度。
As our logistics network penetrates into the lower tier cities, we have recently started to step up our marketing efforts towards those areas.
另外，我们在做的是包括拼购、小程序、Kepler等这些去中心化、非开放式货架的业务模式，我们发现可以吸引更多的，尤其在低线和女性用户。
We find it is very effective to attract new users, particularly lower tier users and female users, through initiatives in the area for decentralized and non-open shelf models like group buying, mini programs and Kepler and etc.
一些品类，尤其是在线的耐用消费品，我们发现在低线城市线下有较大的市场空间，所以我们会采用线上线下融合的方式，包括产品型号的开拓，包括线下销售场景的这种创新，有针对性地利用好商业机会。
Some categories enjoy ample room for growth offline, especially in lower tier cities. To capture this opportunity, we will integrate online with offline operations, come up with new product models, and create new offline setting scenarios.
另外，最后还有两点补充。一个是我们发现在京东市场渗透力和品牌精度较高的1、2线城市，依然有大量可供挖掘的中低收入客群。
I would 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.
另外，通过品类的交叉渗透，我们也会挖掘现有用户，提升更大的ARPU值和留存率。
We will also work to boost our retention rate and ARPU average revenue per user by enhancing our cross-category penetration. The end.
Thank you.
Thank you for the question. Go on to the next question from Grace Chen from Morgan Stanley. Please go ahead. Miss Grace Chen from Morgan Stanley, your line is open. You may unmute locally. We'll move on to our next questions from the line of Jin Yoon from New Street Research. Please go ahead.
Hey guys, thanks for taking my question. Sidney, 在你的 prepared remarks 中，你提到了广告方面的优势。你能谈谈这一季度相关的驱动因素吗？另外，在最近的季度，你是否观察到任何潜在的结构性或有意义的变化？Thanks.
广告业务的连续增长核心原因是算法和技术能力的提升，其中的eCPM的表现也在持续提升中。
Let me take the question. The continuous growth in our advertising income is mainly due to the optimization of algorithm and improvement in technology capacity. Our eCPM is a constant rise.
因为京东包括了自营和平台的两种业务类型，所以广告业务要做好的是用户体验和广告收入的平衡，流量使用要把握好零售与变现的平衡。
Since JD's retail business includes both direct sales and marketplace platform, we will balance advertising income with user experience. In the utilization of traffic, we will try to strike a balance between retail sales and advertising monetization.
随着广告算法的优化，我们今年逐步减少了CPD的广告资源，增加了RTB广告的资源，但依旧保持了不错的增长。是因为我们希望保证广告变现效率和商家满意度的双赢。
As our algorithm optimized, we have changed the composition of our advertising products, cutting down on CPD and jacking up RTB. Our advertising income has still maintained very good growth momentum. We aim to get win-win situation with both ads monetization and merchant satisfaction.
Thank you for the question. I will now move on to the next question from James Lee from Mizuho Securities. Please go ahead.
Yeah, thanks for taking my question. 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. What's your key focus going forward, and what business segment will you be focusing on personally? Thanks.
像你刚才所说的，现在整个京东集团的管理团队已经是稳定而且成型。
As you correctly pointed out, the leadership team of JD has already been put in place and is doing a very steady, good job.
我个人的主要的关注点可能是放在新业务上，时间会多一些。比较成熟的业务呢，我们管理层都可以把它handle下来。
For me personally, I will focus more on new businesses. For mature businesses, our team can handle that.
另外呢，我想刚才很多人对我们明年的整体的增长的策略呢，很多人都提了问题，所以我想借此机会跟大家再讲讲。
Since some friends have raised the question about our growth strategy for next year, so I'd like to take this opportunity to say a few words about that.
今年整个集团对研发投入，大家也看到了，我们前九个月整个研发投入的增长同比达到88%，而且这里面还不包含京东数科的研发投入。
As we've just mentioned, our R&D expenditure for the first nine months from January to September experienced a growth of 88% year-on-year. That number actually hasn't included JD Digits R&D expenditure.
这个主要是因为集团一是增加了研发项目，同时也是在内部有很多竞争，比如我们门店科技项目，其实我们也鼓励内部不同团队之间彼此在进行竞争。
We have started a lot of new R&D projects, also we encourage competition across among different R&D teams. For example, store-based technology, we encourage them to compete.
经过这一年多的内部的竞争，其实现在我们很多研发项目已经看得很清楚，所以现在整个集团对研发团队，也在对研发的项目进行一次梳理。
In the past year, we've tried out in many ways, now, actually we can see the future, see the direction very clearly. We are now deploying our teams to the right R&D projects, to the right direction.
所以说明年我们的研发的费用的总额可能是跟今年差不多，但是基本上是不会增长。
For next year, the total amount of R&D expenditure might not increase, will not grow.
同时，京东物流的净利率也会大幅改善。
At the same time, the net profitability of JD Logistics will boost a lot.
所以说明年我认为我们净利的表现会好于今年。
I do think next year our net profit performance will be better than this year.
增长我们还会继续保持高于行业的增速，继续增加我们的市场份额。
In terms of growth, of course, we will grow faster than industrial average to gain more market share.
现金流因为今年包括集团的大楼用地以及无数的物流用地，都是集中建设和支付的一年，所以今年现金流压力稍微大一点，但我相信明年我们的现金流也会大幅改善。
In terms of cash flow, this year, the land rights cost and logistics investment are coming this year. Put our cash flow position into quite a strong pressure. Next year, severe pressure. Next year, I do see we will improve a lot in this area.
所以总体来说，就是高于行业的增速，提升毛利率和净利率，大幅改善现金流。
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.
而经过这几年的研发的投入，我相信明年公司在技术的收入方面也会有更好的表现。
With this consistent investment in R&D for so many years, I do think next year we can get the result. We will do better in technology income.
我个人重点的四件事情：战略、文化、团队，还有新业务。
For me, I personally focus on four things. One is strategy, the other is culture, then team, and then new businesses.
Thank you. I will continue with the next questions from Wendy Huang from Macquarie. Please go ahead.
Thank you. I just have two quick questions. One is on the competitive landscape in the logistics space. On one hand, you are expanding aggressively into third-party logistics with several initiatives in the past few quarters. On the other hand, we also noticed with they are fighting back and listening to you. They said to build a large automatic sorting center in as well. Maybe if you can give any color on that will be great. Second thing, since Richard is on the call, I just wonder if you can give us any update on the allegation against the personal case. Thank you.
Okay, on the logistics, as we mentioned in the past, JD Logistics has built a unrivaled infrastructure by serving our own first-party e-commerce business, along the way earned a very, very good service quality over the years. As we continue to implement our retail infrastructure strategy, retail as a service strategy, we have seen merchants actually, the brands came to us to provide similar logistics services to these third-party partners. This has been a theme that we mentioned since earlier of this year. Obviously with the sales growth this year at a triple digit for the past several quarters, clearly there are very unique value being provided by the JD Logistics. On your second question, I just want to answer that we really do not have any new information to share with you.
Honestly, we cannot further comment because it is important that we respect the due process of the U.S. justice system. As you see, Richard has been back to work as usual in the company, that this situation did not and is not expected to have any material impact on JD's day-to-day operations. 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. As the purpose of today's call is to discuss our earnings results, we would appreciate you limiting further questions to this topic. Thank you.
Thank you. Take the next question from Jialong Shi from Nomura. Please go ahead.
Good evening, management. Thanks for taking my call. I will ask my question first in Chinese, then I will translate into English myself.
我想问两个问题，第一个问题就是想问一下，就是关于我们那个7Fresh，想问一下就是到今年年底，以及2019年，我们分别打算开多少这个7Fresh的门店？然后想问一下，就是说这个7Fresh我们是放在JD Mall里面，还是在JD Mall的外面？然后就是7Fresh的这个门店，对我们今年的2018年以及2019年的OP margin的impact，大概我们怎么去评估？这是第一个问题。然后第二个问题就是想问一下，我记得Sidney在Q2的conference call有提到过，我们有一个plan，就是要把我们的物流的资产，然后把它capitalize。然后就是想问一下，那么现在最新的进展是怎么样的？然后如果说这个capitalization最后做成的话，那对我们2019年的consolidated OP margin会有多大的影响？我自己翻译一下。So I have two questions.
My first question is about 7Fresh. I just wonder what's management store open plan under 7Fresh initiative, and whether or not 7Fresh will be accounted as part of JD Mall, and how should we assess the margin impact from 7Fresh for this year and next year? For JD Logistics, I just wonder if management can provide an update on the progress of capitalizing some of JD Logistics resources, which CFO mentioned on last quarterly call. I just wonder, how should we assess the margin impact from this initiative? Thank you.
Sure. For 7Fresh, we expect in aggregate a dozen or so stores by end of this year and probably another 20 plus stores in the first half of next year. Because we want to expand the business in a prudent manner, we're actually opening the stores in a very careful and we're well-prepared for all the initial preparations. In terms of impact on the margins, we do not expect any material impact on our overall margin. For the current performance of the existing stores, we are actually pretty comfortable that on a single store basis, the margin should be break even and turn positive in a relatively short period of time. For the logistics assets, we are transferring some of the existing assets into a core fund. We've received a very good initial investor interest, very good indication.
We still expect that transaction to happen in the first half of next year.
Thank you. Next question comes from the line of Natalie Wu from CICC. Please go ahead.
Hi. Good evening. Thanks for taking my question. Just wondering for the contract with Tencent regarding the Weixin level 1 access point to be terminated next year, can management update us the following the newer progress? Thank you.
Of course, since the Tencent investment into JD, we have been collaborating really well in a number of fronts in terms of investment, in terms of offline retailing, such as Vipshop and Hailan Zhijia , and advertising as well. I think for the next level of collaboration, of course, we will expand from basic gateway access to multiple fronts, such as social commerce and 2B business as well. Right now we are continuing our discussion, and we shall have more update in the near future. Thank you.
Thank you for the questions. Next question's from the line of Tian Hou from TH Capital. Please go ahead.
Yes. Good evening, management. The question's related to the category expansion. As Sidney mentioned, the general merchandise the first time went about 50%. I remember since the day JD became a public company, this has been the goal, and seems like they finally will accomplish that. However, given the fact that cell phones and home appliances are facing some headwinds, what's the company's strategy in expanding in other categories rapidly to really offset this headline in the other two major categories?
As we mentioned in the past, JD as a platform has always invested first in the overall marketplace operations, improving merchant experience, and we've talked about for some time. Also, from our overall strategic planning point of view, as Jianwen mentioned last time, that we, in addition to growing our more established business, we have been also investing in some of the so-called hundred billion club into some of the new categories. It's really a result of all of these efforts that helped us expand our general merchandise categories. We did mention some of the categories in the past. Obviously, our home products, FMCG, fresh products. A number of other ones that we mentioned along the years. When you look at these categories, we do see fairly consistent growth across all of these categories.
It is really the power of the overall platform rather than any particular focus on just one of them.
Thank you for the questions. Next question's from the line of Binnie Wong from HSBC. Please go ahead.
Hi, good evening, management. Thank you for taking my question. My first question is on the retail as a service strategy. I think in the last few quarters, we have been saying that we have been gaining traction as we open up to a wide range of partners. Can management update or has shared with us any progress update in terms of the number of partners or any use cases of how our strategy has improved the productivity for our retail partners? Also update on any monetization strategy in this area would be very helpful. My second question is a follow-up on the growth strategy. I think Sidney has mentioned that the decline in the annual active customers this quarter was because we want to focus on the quality. We, of course, see the GMV per customer has been improving.
Just want to see that focus, is it mainly 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? How should we think of that? Second to that is that on the loyalty program, because we see good progress on the premium membership, how much higher is the users that have the premium membership, how much bigger basket size are they buying, versus those that do not have this premium membership? Thank you.
We try to limit two questions each person. I'll try to answer the first one, and then Lei Xu can answer on the Plus membership program. For the 2B business, I mentioned first, our service revenue has surpassed 10% of total revenue for the first time. A lot of that is happening, obviously, namely with JD Logistics one of them. Also our mini program, we call it Project Kepler internally, as Lei Xu mentioned earlier. These are all also generating meaningful progress for our merchants, brands, and also for our customers and the partners. Some of these are, in terms of revenue contributions, are still small. Clearly we are gaining traction in these areas. Lei Xu .
JD PLUS业务在第三季度突破了1,000万用户。这部分用户应该是京东消费能力最强的核心用户，在购物频次和ARPU值方面表现优异。
In the third quarter, Plus members have exceeded 10 million. These are our core users with the strongest purchasing power, performing great in terms of buying frequency and average revenue per user ARPU.
我们接下来会持续对PLUS会员的权益进行优化和投入。越来越多的品牌商和外部合作伙伴认识到了这部分用户的价值。联合汇集增值服务的延展是接下来运营的重点。
We will continue to optimize and invest in membership benefits, with more and more brands and partners becoming aware of the value of those Plus members. Co-membership and value-added service will be our focus for the next stage.
我们从联合汇集爱奇艺的这个合作开始，从视频开始，那么接下来会从出行、娱乐、餐饮、知识付费等各影率与合作伙伴进行这种价值延伸。
Our co-membership project with iQIYI has been doing very well. We'll look at expanding from videos to travel, to entertainment, catering, knowledge for pay, and et cetera.
Thank you.
That's it.
Thank you. Our next question is from the line of Susanna Cui from RBS. Please go ahead.
Hey. Hello, good evening. Thank you for taking my question. Could management update the 7Fresh operating data, for example, the sales per square meter versus the traditional supermarket and the online order contributions? Could management share how your new retail strategy differentiate from the competitors? Thanks.
Yeah. On 7Fresh, because the current scale is still relatively small. I did mention last quarter that sales per square meters is roughly three to four times of the traditional offline retail sales figures. Sorry, I lost the second question.
What's the second question again?
Yes, sure. I would like management to share how your new retail strategy differentiate with your other competitors. Yes.
Awesome. I think in one sentence, I think we're moving in because we look at retail of the future in a different way. As such, we have a different strategy. From JD's standpoint, we move from a vertical integrated model to become a more open model. Comparatively speaking, our competition is moving from an open model to become more vertically integrated model. That's a simple way to put it.
Thank you. Next question is from the line of Hans Chung from KeyBanc Capital. Please go ahead.
Good evening, management team. Thank you for taking my question. I have a question regarding the JD Logistics and the management team mentioned earlier the profitability will improve a lot next year. I just want to know, is this driven by the direct pricing or new customer growth or the cost reduction initiatives? Follow-up is when we'll start to see the Logistics start to break even. Thank you.
Yeah, sure. It's actually from multiple areas. As we mentioned, because it was the initial year, we did expand the capacities at the beginning so that we can have ample capacity to serve the new customers very well. Initially, there was some overcapacity. That was one initial reason. Two is that we offered a 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. For the warehousing part, there is a natural kind of startup cost because the merchants and brands tend to have their own existing warehouses. Any migration to our service may incur initial incremental cost. Our initial trial period, essentially lowered the barrier for this initial service period.
As we move past those initial periods, obviously also with the warehouse capacity better utilized, loss ratio will gradually shrink. That's actually a fairly natural outcome after the initial investing phase. 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.
Thank you. We are now approaching the end of the conference call. I'll now turn the call over to JD.com, Ruiyu Li, for closing remarks.
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.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.