The Saga of the Ghost Kitchen of China

Update on JD

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The Beijing cake decorated with toxic, inedible chemical flour from a vendor claiming to have 400 physical locations but possessing zero that blew up the Quick Commerce war in China

The exact reported figures from JD.com’s quick commerce (Not all segments just quick Commerce) are:

The Exact Revenue Change

• Q4 2025 (Three months ended Dec 31, 2025): RMB 14,085 million
• Q1 2026 (Three months ended Mar 31, 2026): RMB 6,279 million
• Absolute Reduction: RMB 7,806 million
• Percentage Change: -55.42%

Analysis of the Financial Impact

This sharp drop of more than half of the sequential revenue highlights a massive contraction following the major Q4 shopping festivals (like Double 11 and Double 12) combined with the structural slowdown of the Lunar New Year holiday in Q1.

However, looking at the cost line, the cost of revenues for this segment in Q4 2025 was RMB 14,412 million, which means the segment was operating at a negative gross profit during that promotional peak due to heavy shipping and user subsidies.

The dramatic 55.42% sequential collapse in revenue was a direct result of JD intentionally pulling the plug on a hyper-subsidized price war. And the losses at JD quick retail division shrunk significantly as a result from around 14 bi RMB to 10 RMB

No Reclassification Took Place

• Consistent reporting: JD’s reportable segments remained exactly the same across both quarters.
• Segment definition: New Businesses consistently tracked JD Food Delivery, JD Property, Jingxi, and overseas initiatives.
• Fulfillment changes: No assets or revenues were shifted to JD Retail or JD Logistics during this window.

What Actually Caused the 55% Drop

• The Q4 subsidy bubble: In Q4 2025, JD and others like Meituan flooded the market with consumer subsidies. This artificially inflated New Businesses revenue to RMB 14,085 million.
• Unprofitable GMV: That revenue growth came at a massive cost. The segment ran a negative gross profit, costing RMB 14,412 million to generate.
• The Q1 correction: In Q1 2026, management stepped back from unconstrained spending. They cut user coupons and rider subsidies.
• The revenue floor: This rationalization caused revenue to fall to its real, unsubsidized floor of RMB 6,279 million.

JD was certainly betting on its logistics ability to operate at cheaper costs to eventually win this war.

THE CAKE FOUL PLAY

The “unchecked origin of cakes” incident was a massive national enforcement action announced by China’s top market regulator, the State Administration for Market Regulation (SAMR), on April 17, 2026.

The regulatory sweep did not single out JD.com in an act of targeted foul play. Instead, it was an industry-wide crackdown targeting seven major tech giants simultaneously for allowing systemic food safety fraud.

The reality behind the “Ghost Cake” scandal and how it directly shaped the Q1 financial results involves several key elements:

1. The Core Scandal: 67,000 Ghost Bakeries

• How the scam worked: Virtual storefronts listed themselves on delivery apps using fake addresses and cloned licenses, claiming to be high-end bakeries. When a customer ordered an expensive birthday cake, an app-based routing system auctioned the order to cheap, unverified underground kitchens to fulfill it for a fraction of the cost.
• The trigger: The nationwide investigation began after a Beijing consumer complained about receiving a cake decorated with toxic, inedible chemical flour from a vendor claiming to have 400 physical locations but possessing zero.
• The scale: The SAMR task forces discovered that over 3.6 million fraudulent cake orders had been processed through these unverified networks.

2. The Penalty: A 3.6 Billion Yuan Hammer

• The Industry Fine: SAMR slapped the seven platforms—Pinduoduo, Meituan, JD.com, Ele.me, Douyin, Taobao, and Tmall—with a combined record penalty of 3.6 billion yuan (~$494 million USD) in fines and asset confiscations.
• Pinduoduo hit hardest: Pinduoduo (PDD) absorbed the heaviest blow, being fined roughly $219 million and handed a 9-month suspension on registering any new bakery vendors after regulators found nearly 9,500 completely unlicensed outlets on its app.
• Executive Penalties: Aside from corporate fines, company legal representatives and food safety directors were personally fined an additional 19.7 million yuan combined.

3. The Connection to the Q1 Revenue Collapse

This massive investigation explains why JD’s New Businesses revenue cratered by 55.42% in Q1 2026.

During Q1, as the SAMR investigation reached its peak, platforms were forced to completely purge their systems. JD, Meituan, and Alibaba had to forcefully pull down thousands of sketchy, low-cost “ghost kitchen” food vendors that had previously been pumping up their quick commerce order volumes.

To comply with the regulator’s strict new vendor tracing laws, platforms chose to drop hyper-subsidized, high-risk merchant volumes entirely. This shift cleaned up their supply chain but caused a sharp correction in quick commerce revenue to a more realistic floor.

BABA Avoids the plunge in Sales

Alibaba (BABA) actually avoided the plunge. Unlike JD.com, Alibaba’s quick commerce division managed to sidestep the downward spiral entirely.

In its official March Quarter (Q1) 2026 earnings call on May 13, 2026, Alibaba surprised the market by announcing that its quick commerce revenue (driven by Ele.me and Taobao Instant Commerce) actually surged 57% year-over-year to RMB 20 billion.

Alibaba managed to break the downward trend due to a completely different operational playbook and defensive maneuvers during the food safety regulatory sweep:

1. The Structure Protected Ele.me from “Ghost Kitchens”

Unlike newer e-commerce apps that rely heavily on unverified virtual third-party vendors, Alibaba’s Ele.me is built on an established restaurant-first model with physical footprints.

• When the State Administration for Market Regulation (SAMR) dropped the hammer on “ghost bakeries,” Ele.me’s strict merchant verification systems were already mature.
• While they still paid a portion of the fine, they did not have to forcefully purge vast portions of their active merchant base the way JD’s New Businesses or Pinduoduo did.

2. Upgraded Subsidies Kept Orders High

Alibaba managed to sustain high order velocity through a fundamental structural shift in how it funds user engagement:

• The “Contra Revenue” Strategy: Alibaba upgraded its merchant development program. Instead of handing out loose cash coupons to users (which burns margins immediately), they tied platform subsidies directly to merchant marketing spend.
• Volume Sustained: This strategic shift allowed Alibaba to avoid a post-holiday order collapse, helping them secure a massive 57% surge in quick commerce sales.

3. The Financial Catch: Profitability Blew Up

While Alibaba won the battle for revenue growth and order volume, the financial toll was brutal.

• EBITA Collapse: Because Alibaba prioritized scaling quick commerce and acquiring users at all costs, its overall adjusted EBITA plunged by 84% to just $740 million.
• First Operating Loss: The intense capital requirements to aggressively scale instant retail—combined with massive AI cloud spending—swung Alibaba into a rare $123 million operating loss for the quarter.

In short: JD chose to protect its bottom line by cutting subsidies and letting its quick commerce sales collapse by 55%. Alibaba took the opposite path—they pumped billions into protecting their market share, kept orders soaring at 57% growth, but sacrificed their short-term profits to do it.

Tying Coupons to marketing spend at BABA

Tying user coupons directly to the restaurant’s marketing spend instead of handing out free platform cash changed the game for Alibaba’s unit economics.

When a platform hands out loose cash coupons (e.g., “$5 off your order”), the platform bears 100% of that financial loss immediately as an expense. By tying the coupon to a restaurant’s marketing spend, Alibaba created a shared-cost ecosystem that turned user discounts into a profitable ad network.

Here is exactly how that mechanism protected Alibaba’s order volume while shifting the financial burden:

1. The “Co-Investment” Discount Model

Instead of Alibaba paying for the entire user discount, the merchant and the platform split the cost. For example, if a user gets a RMB 10 discount coupon on Ele.me:

• The Restaurant pays RMB 6 out of its own marketing budget to bid for premium placement on the app.
• Alibaba pays RMB 4 as a platform subsidy.
• The Result: The user still sees an attractive RMB 10 discount—keeping order volumes high—but Alibaba only pays 40% of the cost to generate that transaction.

2. Turning Subsidies into Advertising Revenue

Alibaba forced merchants to “earn” platform subsidies by purchasing ad space inside the app’s bidding system.

• To get their dishes featured on the front page or included in holiday flash sales, restaurants had to spend money on Alibaba’s merchant marketing platform.
• Alibaba then took a portion of that incoming ad revenue and recycled it back to the consumer as user coupons.
• The Result: The money used to attract the customer was funded by the merchants’ advertising budgets, allowing Alibaba to maintain high order volume without draining its core cash reserves on pure consumer subsidies.

3. Automatic Fraud and “Ghost Kitchen” Filtering

This mechanism created a natural economic shield against the “Ghost Cake” scandal.

• Legitimate restaurants with high margins (like established chains) have the budget to spend on marketing to clear inventory. They happily co-funded the coupons.
• Fraudulent ghost kitchens operate on razor-thin margins by selling cheap, fake food. They could not afford to pay into Alibaba’s marketing bidding system.
• The Result: The algorithm automatically pushed legitimate, verified restaurants to the top of the app because they were the ones funding the marketing loop. Fraudulent vendors were naturally starved of visibility and orders without Alibaba needing to shut down whole categories.

Summary: The Strategic Divergence

• JD’s Approach: Cut coupons completely => Lower costs, but revenue collapsed by 55%.
• Alibaba’s Approach: Shifted coupon funding to merchants =>
• Revenue surged 57%, though aggressive infrastructure spending elsewhere still squeezed their total quarterly EBITA.

CONCLUSION: The Quick Commerce was actually creating a drag on earnings short-term with the potential long term benefits of an increase market share in this segment. The long term benefit is gone however when did our valuation we did many times assumed a ZERO value for the quick commerce and the stock would end up trading at a steep discount to this division anyways.

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About the author

Geoffrey provides unique insights. As DM and EM start to switch places in fiscal dominance regimes, his experience from a firm that traded EM bonds in the early 2000s will prove crucial. He is also versed in pre-FX as reserve monetary systems ( prior to 1922) and it will prove handy to understand local ccy trading, and its impact in FX, bonds, PM and currencies. 

 Former portfolio manager of 15 years at York Asset Management, a US and UK based firm specialized in Global Risk Arbitrage & Special Situations, Geoffrey is now CEO of DocuTalk, a NY-based software company that pioneered a new visual format to interactively present documents in video format using patented technology (and featured in the ’30 year anniversary’ edition of the Investor Relations Magazine New York).