Hello. Thanks 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'll be a question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I'd now like to turn the meeting over to your host for today's conference, Ms. Ruiyu Li. Thank you. Please go ahead.
Thank you, operator. Good day, everyone. Welcome to our second quarter 2018 earnings call. Joining me today on the call are Richard Liu, our CEO, 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. 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.
I would like to turn the call over to Sidney.
Thank you, Ruiyu. 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'll discuss our financial performance first. Then 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, 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 strategic 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 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 tech-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'm pleased to report that loss ratio further narrowed during the second quarter, and 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 margin 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 technologies, which we believe will drive JD's long-term growth.
Our R&D expenses totaled RMB 2.8 billion, or 2.3% of total revenue, up approximately 60 basis points from the 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 three 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 growth 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 RMB 2 billion on a year-over-year basis. While JD Mall further improved the profitability and booked RMB 3.4 billion in non-GAAP operating profit, with a record high non-GAAP operating margin of 1.6%, the highest in any six-month period since our IPO. Our free cash flow was RMB 13.1 billion during the quarter, driven by healthy operating cash flow of RMB 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 built by leveraging the capabilities and infrastructure of our core JD Mall operations. The role of the logistics asset managing 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 sq m of completed warehouse space, which could unlock billions of RMB 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 its operations. Leveraging existing portfolio and a large pipeline, we expect the development, sales, and management operations will begin generating significant cash flow and 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 launched more than 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, we believe we have made good traction since doubling down on technology last year, we remain optimistic about our future growth. This leads us to our financial outlook. We expect the Q3 2018 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 exceptional 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 observe, 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, 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 the next year, we hope the underlying earnings trends remain intact.
This concludes my prepared remarks. I now turn the call to Jianwen, who will highlight a few observations on the industry and our plans on the new business initiatives. Thank you, Jianwen.
Thanks, Sidney. Thanks for all for joining us today. As many of you know, I joined JD as Chief Strategy Officer nearly one and a half 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 it maintain 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 an influx of retail innovation across industry boundaries.
This includes the emergence of content commerce, social commerce, AI commerce, IoT commerce, to name just a few. As such, the retail space will become more disputed 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 selection, quality, and pricing, but was increasingly 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 touchpoints, and thus manage the business at a more granular level. We believe that to succeed, players need to move from an every store mentality to every one store. Meaning from 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 completing enhancement are clearly the two most important drivers of success, both for online and offline retail. That's 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 a bit more later on. Four, the 2B market has proven to hold great potentials. In China, there are many e-commerce companies focused on 2B business innovation. Meanwhile, the 2B internet is still at its nascent stage, and the recognizable market leader remained absent. By contrast, in the U.S., 2B internet accounts for 40% of market cap by some metrics.
Over the past few years, we have seen startups and venture capital shift attention towards 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 field. Now let me turn to how we view technology. Underlying the changes I just mentioned is technological innovation, which continuously expands the possibility in retail across areas, including cost, efficiency, and customer experience. Richard had made it clear that there were only three keywords for the next decade of JD: technology, and technology. Investing in technology will drive this company 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 world-class 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 remain the focus of our continuing investment in R&D. Let me explain how those three areas will drive our development. Smart consumption smooth the barriers for retailers and customers across online and offline channels. The goal is to improve consumer experience at every stage, creating more engaging experience with greater customer retention and loyalty. Smart supply improves the upstream supply chain with goal of improving the operational efficiency of brand. AI technology has been largely used on supply-related application such as sales planning, dynamic pricing, and inventory replenishment. As a result, we are able to improve brands' 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 leaders in smart warehouse and smart transportation systems. We are also pioneering unmanned warehousing, and drone delivery, and driverless delivery. Continuous development in these areas remain critical for us to maintain and extend our competitive advantages. Now I would like to discuss our overarching strategy of Retail as a Service. In short, RaaS, which you might have heard us discuss about before. You'll see this as covering both retail and retail infrastructure. First and foremost, we will continue to expand our current retail business and also focus on 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 infrastructure capabilities such as smart supply chain to enable and empower more retail innovation for other companies to leverage. More specifically, we identify 3 categories of business for future growth under RaaS, with different growth model. Let's start with the 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 loyal customers, including approximately 200 million who have joined us in the last three years.
The growing customer base and expanded relationship offers tremendous room for future growth for our core business. Now let's look at our growth business. We believe we can expand our online capabilities to the categories that are under-penetrated and ready for high growth rate. Internally, we call these categories 100 Billion Club. 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 example includes fresh food and sales to enterprise. Achieving the full potential of this category will drive our long-term growth in retail. Finally, we have the future business. This covers innovation in the retail business, as well as the retail infrastructure, with a focus on renovation and empowerment.
In the 2C area, we will continue to place great emphasis on offline retail innovation and content commerce, social commerce, and IoT commerce. In the 2B area, we will open our capabilities in advertising, store tech, supply chain and logistics, and cloud to empower brand and other retailers. Sidney had just mentioned that we have invested RMB 2.8 billion in R&D last quarter, with the majority invested in our retail infrastructure development. While the investment is significant, we have already seen some positive early results. As Sidney mentioned, logistics and other service revenue has increased by 150% this quarter. We have confidence that with our continuous effort focus, retail infrastructure can be our next core competency and a profit driver. In summary, JD is moving from a vertically integrated model to another 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. 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.
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 to ask a question.
Good evening. Thank you for taking my questions. I have a question on perhaps the environment that, Sidney, you mentioned, perhaps starting in the third quarter. Could you elaborate a little bit more on some of the macro factors and seasonal factors we have seen that might affect the future growth of our business? Related to that, would that affect our near-term margin profile given the timing of the investment in various new initiatives? Thank you.
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. We have since seen a recovery in August, basically back to the normal pace. We internally analyzed, we believe there are mainly seasonality factors. Partly, it is for this year, we may have seen a stronger than before seasonality post-promotion. Two is that we did have a very strong July last year in JD. I think it is a combination of these factors. Obviously, there is also some particular category was affected by the overall market environment. In any event, starting August, we have seen pretty well recovery across all categories. 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 percent of GDP are all pointing to a continuous consumption growth for many years to come. We are still quite bullish in terms of our growth outlook.
Thank you. Our next question is from the line of Alicia Yap of Citigroup to ask a question.
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 collaborations with Google so far since the strategic investment in June? 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? 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%-2%? Thank you.
Okay. We'll take another couple of questions. Of course, JD and Google are very much complementary in terms of a lot of skill set. The strategic partnerships between Google and JD were very much mutually beneficial for both companies. Of course, in the U.S., JD, of course, will work closely with the Google Shopping Action as a gateway for JD products to be listed on Google Shopping platform. Of course, on behalf of owning domestically, we have 170,000 high-quality merchants. Google Shopping Action will be a very important gateway for those high-quality merchants as well. Clearly, of course, we have great ambition in working closely with Google in many ways. With this kind of strategic collaboration, I think, there'll be much more initiatives coming along the way. We'll see how this will unfold as time goes by. Yeah.
On your second question on the earnings guidance, I mentioned that we'll remain committed to the JD Mall core margin being stable. We are investing more in other initiatives, as I mentioned. To compensate for that, we actually accelerated our monetization plan for logistics properties, and which, when realized, should be more than compensating or at least compensating the shortfall due to the additional investments. As I mentioned earlier, the timing of the monetization, we don't necessarily can guarantee it will be completed by the end of this year. That will create some non-linearity in earnings trend from this year and the next year. I don't know if that will answer.
Thank you. Our next question is from the line of Alex Yao of JPMorgan. Please ask your question.
Hi, good evening, management. Thank you for taking my question. Sidney, can you elaborate a little bit more on the JD Logistics asset management business? How does it work? How does it generate revenue, free cash flow? What is the long-term vision for this initiative? I think you kind of mentioned in the prepared remark that the financial contribution from this part of the initiative will increase into the second half this year in terms of revenue and free cash flow. Can you maybe elaborate on the magnitude of these contributions? Follow-up on Alicia's question, what exactly does it mean, the earning or the margin trend will be non-linear towards the rest of the year? Does it mean the margin could be more volatile than the historical pattern? Thank you.
Yeah, sure. 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, and obviously, we're creating jobs for the local economies. As a result of that effort, we have now built over 2.5 million sq m of our own 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 by several ways. One is to sell it to outside investors. There are already investors for this type of assets in China and actually globally, because the logistics assets have been appreciating quite steadily and with a steady rental increase.
It has been a very, very attractive asset class for many very long-term investors globally and domestically. 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. There will be management income after we monetize those products. I mentioned that will happen in the next 6-12 months, 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 part of that, essentially the monetization could happen by next year. It will impact our overall bottom line forecast for this year.
Thank you. The next question is from Ronald Keung of Goldman Sachs. Please ask your question.
Thank you. Thank you. Richard, Sidney, Jianw en and Ruiy u. I guess I'll ask a similar question as last quarter, just want to hear any updates on your apparel. Particularly, we see a lot of new initiatives, for JD Mall within the marketplace, from just encouraging merchants to sell more targeted sales and with commissions and advertising bundled together. Just want to hear how apparel growth, has it 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 lapse the one year of exclusive partnerships as seen at our competitor. Thank you.
Sure. Yeah. First, we have not passed the one year anniversary of that impact competitive practice by our competitors last year, which started in August. As a result, during the second quarter, unfortunately, our fashion category is still under the shadow of this unfortunate anti-competitive practice, which essentially uses its traffic control to force apparel merchants to stay off our platform. In fact, also other platforms. This practice does affect our fashion business line, but also have a ripple effect on our overall profitability. We have been working very hard through other categories to better serve our customer base or enhancing our merchant products and services. We remain optimistic about gaining the momentum in this category in the next few quarters.
Thank you. Next question is from Jerry Liu of UBS. Please ask your question.
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. 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.
When we look at the second quarter, gross margin did expand on a first-party business, over 50 basis points, actually. Quite meaningful improvement. We continue to see robust growth in our advertising revenues. These are the main drivers for our profitability for the JD Mall business, which we believe will remain a stable margin and potentially higher margin for the remainder of the year.
Thank you. Next in line to ask a question is from Thomas Chong of Credit Suisse. Please ask your question.
Hi, thanks management for taking my questions. I have a few questions. The first question is about our 2B initiatives. Can management give us some KPI that we may have over the next couple of years? My second question is about 7Fresh. Can management comment about how's the status so far? My third question is also about the net margin question. Is there any color that the 1%-2% net margin guidance that we still keep it as is? Thank you.
If you look at our service revenue, a vast majority of that is from 2B business segments. Today majority of that is still coming from our platform business. 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've 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. There are also areas that we can invest in the supply chain capability, leveraging supply chain capabilities we have. On the 7Fresh, we have a couple of stores that we have been observing the results of those stores, which actually has shown very encouraging results.
Overall, our sales per square meters have seen at least three to four times the traditional offline supermarkets. 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.
Thank you. Next is Wendy Huang of Macquarie. Please ask your question.
Thank you. You mentioned about the appreciation value of your logistics asset. Can you give us some color regarding the self-owned warehouses versus the third-party warehouses among the 521 warehouses you are operating right now? Or maybe a split between the 2 million square meters size, that's fine as well. Also, can you give us some color on the numbers?
Okay. Yeah, the space that we own is over 2.5 million square meters out of the 12 million warehouse space we have. Just for those self-owned facilities, we can see, in fact, billions of RMB in unrealized appreciation. There are also multiple times of that space in the pipeline. We do see great potential in this business as a standalone separate operation.
Thank you. Next is Jin Yoon of New Street Research. Please ask your question.
Hi, guys. Just a couple of 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 11.11 and so forth, just wanted to see how you're looking at that business. If you could share with us some metrics behind that, including the number of advertisers, ad loads or anything that you could share with us, that'd be great.
Yeah. On advertising, we mentioned, I think 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 a better ROI for our brands. We have seen 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 in increasing ad load at all. If anything, we are under-monetizing in this area. For JD, we want to maintain the right balance between monetization and the customer experience. We will continue to adopt that approach, use more of a technology-driven approach to enhance our advertising revenue.
Thank you. Our next question is from John Choi of Daiwa. Please ask the question.
Thank you. I just want to ask a more broader question regarding the overall industry. Right now we are obviously seeing very intense competition here. How does the management think about the long-term growth outlook? The first half was very good, particularly the first quarter. Starting from the later part of the second quarter, we're seeing some sort of slowdown. How should we think about the growth? Just on that, are you seeing any new retail having a negative impact to our core business? Thank you.
I think John has elaborated quite a bit on our growth strategy that we still have a very long growth trajectory for our core e-commerce business, we are also investing in some of the under-penetrated categories that will produce RMB 100 billion 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. Internally, we have very clear strategies, we have various task forces to drive these initiatives. We hope as we continue to grow the core business, you will start to see other streams of revenue being generated through these efforts.
Thank you. Our next question is from Charlene Liu of HSBC. Please ask the question.
Hi. Thank you, management, for taking my question. My question is on the margin trend. I think that you have shared with us in terms of the gross margin improvement, some of the key drivers here. Can you elaborate a little bit on the expansion in core business gross margins? Which category have you been seeing more improvement here? You mentioned about in terms of the growth in ads, and that also helps to drive our overall margins. Can you elaborate with us 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 mostly the big brands that you have been launching? As you mentioned in your recent business developments, what type of advertisers have you been seeing mostly? In which category? Thank you so much.
Yeah, sure. 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. Not only on the electronics and the home appliance categories, which we continue to see margin enhancement, but also on FMCG, for example, we are also gaining more and more scale economies with the brands. That's essentially the driver, both on gross margin and also on our ability to provide competitive pricing to our customers, which we expect will continue to drive our business for many years to come. As far as for the brand advertising, it's the usual aspect. Obviously, the consumer goods brands and actually brands across all industries have been working closely with us.
Obviously, the brands that we work, the categories who are the strongest will provide more advertising spending with us.
Thank you. Our next question is from the line of Natalie Wu of CICC. Please ask your question.
Hi, good evening. Thanks for taking my question. Just curious, what's your view on the industry competitive landscape change, especially as the rising of some social e-commerce platforms? Did you see any kind of impact in terms of shopping frequency for your certain category? Thank you.
As I mentioned in my statement, we have seen an influx of new innovators into landscape. However, JD is a quality internet platform. With those emerging social commerce platforms, I think they provide tremendous opportunity to educate new customers. In other words, 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 provide customers with a choice, meaning in the past, they have no choice. They have a choice. Of course, from no choice to have a choice, and then JD, on the other hand, from choice to have a better choice. In this case, I think the customer education will provide a foundation for the future in terms of JD's growth.
In other words, there'll be new customers moving to the online space, which provide better growth opportunities for JD.
We also have our own team purchase product called JD Pingou on our WeChat entry point, and 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. Just give you a couple of data points. In the second quarter, the % of merchants that participated in our JD Pingou program up from 16% in Q1 to 40% in Q2. Very active participation on the high-quality SKUs participating in our JD Pingou program. If you look at the purchase orders for our 3P platform, the JD Pingou transaction volume is now over 10% already.
Thank you. Our next question is from Grace Chen of Morgan Stanley. Please ask your question.
Yes. Thank you for taking my question. I have two questions. The first question is about the overall consumer demand in the market. There have been some talks about demand slowdown. Would you share with us your observation of the consumer demand and if possible, by segment such as home appliance, 3C, apparel, FMCG? My second question is a follow-up of the margin guidance, specifically on JD Mall margin. We talk about JD Mall margin to be stable. Does that mean we are expecting to see a flattish JD Mall operating margin year-over-year? If you can add a bit more color in terms of JD Mall margin trend, that would be great. Thank you.
Yeah. 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 impact at this point starting August. The growth is still quite solid, and I think given that the consumer income growth continue to be faster than the GDP growth, employment level continues to be very high in China. Also, the consumption as a percent of GDP is still quite low. 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, it's driven by our economies of scale in the first party business and also driven by our advertising growth.
Thank you. Our next question is from Tian Hou of T.H. Capital. Please ask your question.
Hi, Sidney and management. I have two questions. One is, again, related to the company's margin. Sidney, you gave a revenue guidance as a combined entity, JD Mall and JD Logistics. Now we know the JD Mall margin is going to be stable with some upside. I wonder, investment side on the logistics, how much you expect to have a margin drag? That's on the logistics side. Also, how much revenue contribution should we expect from logistics? That's the number one question. Number two
Yeah, sure. On the logistics margin, we are pleased to see margin. The loss ratio has been narrowing in the second quarter. This year is an investing year for JD Logistics. 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 other services in a separate line in our half-year supplemental information section. We wanted to provide some color on this new business, along with a few other new business lines. Very strong growth rate, very good corporate customer adoption of our service. Very good revenue growth, but we'll continue to sustain some short-term losses.
Thank you. Our next question is from the line of Xiaoyan Wang of 86Research. Please ask your question.
Management, thank you for taking my question. We noticed in the second quarter, the JD Logistics launched the Flash Delivery initiative. 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 faster delivery to consumers to expand in geography expansion and also the category expansion? Currently, what kind of % of GMV or orders is from this model? I think my second question would be, we know your-
Yeah. On Flash Delivery, we have been always stayed in the innovation forefront for logistics services. This is just one of the recent examples that we established a new product, really providing customers with one-hour delivery in select cities. It is another really higher service-level delivery product that we offer. But even before that, as we 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. We will introduce more and more differentiated products at different tiers of the cities, providing differentiated services to our customers.
Thank you. We are now approaching the end of the conference call, and I'll turn the call over to JD.com's Ruiyu Li for closing remarks.
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.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Goodbye