Dada Nexus Limited (NASDAQ:DADA) Q2 2022 Earnings Conference Call August 22, 2022 9:30 PM ET
Company Participants
Caroline Dong – Head of Investor Relations
Philip Kuai – Chairman & Chief Executive Officer
Beck Chen – Chief Financial Officer
Jeff Huijian – President
Conference Call Participants
Ronald Keung – Goldman Sachs
Thomas Chong – Jefferies
Eddie Leung – Bank of America Merrill Lynch
Alicia Yap – Citigroup
Andre Chang – JPMorgan
Wei Xiong – UBS
Operator
Good morning, ladies and gentlemen and thank you for standing by for Dada’s Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the management’s prepared remarks, there will be a question-and-answer session. As a reminder, today’s conference call is being recorded.
I will now turn the meeting over to your host for today’s call, Ms. Caroline Dong, Head of Investor Relations for Dada. Please proceed, Caroline.
Caroline Dong
Thank you, operator. Hello, everyone, and thank you for joining our second quarter 2022 earnings conference call. On the call today from Dada, we have Mr. Philip Kuai, Chairman and CEO; Mr. Jeff Huijian He, incoming President; Mr. Beck Chen, CFO; and Mr. Jun Yang, Co-Founder and CTO.
Mr. Kuai will talk about our operations and company highlights, then Mr. Chen will discuss the financials and guidance. They will all be available to answer your questions during the Q&A session that follows.
Before we begin, I’d like to remind you that this conference call contains forward-looking statements, please refer to our latest Safe Harbor statement in the earnings press release on our IR website.
Also, during this call, we will discuss certain non-GAAP financial measures. Please also refer to our earnings press release, which contains a reconciliation of non-GAAP measures to the comparable GAAP measures.
Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in RMB.
It’s now my pleasure to introduce our Chairman and CEO, Mr. Kuai. Philip, please go ahead.
Philip Kuai
Thank you, Caroline, and thank you all for joining us today. Today with mix emotions I announced my resignation from Dada as Chairman of the Board and CEO. I’d like to take this chance to thank everyone who joined our journey together. I am inspired and proud of what we have achieved. I believe this transition will take Dada to the next chapter and we are now more ready than ever before to the turn the leads.
I am extremely pleased to announce that Jeff Huijian He, our Vice President and my trusted business partner has been appointed as our President. Jeff has been instrumental in our tremendous growth in the past eight years and our deepened collaboration with JD. Such contributions speaks for himself. With demonstrated strategy execution and the leadership capabilities, he has won the trust and support from the team and the Board.
Meanwhile, I am also thrilled to welcome Mr. Xin Lijun to join us as the Chairman of the Board. Under leadership of Jeff, Jun and Beck, with the long-standing support from Lijun and JD.com, Dada will be in good hands. I look forward to the continued strong partnership with JD to create more compelling value for our shareholders and the society.
Now let’s discuss our second quarter results. We are pleased to announce another strong quarter in which Dada Group maintained record revenue growth with continuously improving operating efficiencies. During the second quarter of 2022, total net revenue increased by 55% and adjusted net loss margin narrowed by 20 percent points year-over-year.
I’d like to highlight some general market developments before providing more updates on the two platforms. Beck Chen will go through our financial results in greater detail. Starting with the current industry and regulatory environment, Dada Group fully embraced the employment through consumption policies.
Recently, we supported consumption recovery and employment stability through participation in major government led promotional events such as 2022 International Consumption Season in Shanghai, as well as the pilot program of Work-Related Injury Insurance Providers.
Meanwhile, as China aims to promote the robust development of the platform economy, Dada Group firmly supports regulatory policies we will see the opportunity of high quality growth to develop our platforms in fully compliance with regulations. We believe our innovative and a solid business model can play a part in improving the efficiency of resource allocation and facilitating the progress of the domestic economy.
On the anti-pandemic fronts we actively cooperated with the local governments in Shanghai, Beijing and other cities affected by COVID-19 during the second quarter to maintain the local supply of daily necessities, leveraging our strengths as an on-demand retail and delivery platform to fully embrace our social responsibilities.
In June, we received an appreciation letter from the Shanghai Municipal Commission of Commerce. Dada Group’s significant contribution to the COVID-19 fight in Shanghai were highly valued by the local government.
Next I would like to provide updates on our deepened cooperation with JD.com. During the second quarter, the GMV of Shop Now, or Xiaoshigou, the unified brand for all on-demand retail services within the JD ecosystem, more than tripled year-over-year. For the search result optimization in the second quarter, we’ve further expanded Shop Now’s merchant base and product offerings to improve the availability of one hour delivery options in each local grids.
As a result, our search exposure rate in JD increased by three percent points, compared with the previous quarter.
For nearby or Fùjìn, we further roll out this entry point to more cities. So far nearby has covered more cities nationwide in which we have launched the Shop Now service. Driven by the improvements in exposure click-through rate and the conversion rates, the GMV from nearby tab increased by more than 80% quarter-over-quarter.
Now, let me walk you through the operational highlights of our two platforms, JDDJ and Dada Now. Before going into the business details, I would like to highlight the results of June 18’s grand promotion, a major mid-year online shopping festival in China. Both JDDJ and Dada Now made breakthroughs in this year’s promotion.
For JDDJ, GMV on the peak day surpassed RMB 600 million and GMV during the promotion increased by more than 70% year-over-year. For Dada Now, number of daily orders delivered exceeded 10 million for two consecutive days.
Now let’s spend more time on JDDJ, the leading local on-demand retail platform in China. As of the end of June 2022, the number of annual active users on JDDJ increased by 42% year-over-year to RMB 72.8 million. Retailer empowerments, brand cooperation and technology innovation continued to be the focus of JDDJ in the second quarter. I will elaborate on each of the three areas.
Firstly, we have continuing our efforts to empower retailers. Dealing with the supermarket category, we have now established partnerships with 87 out of the top 100 supermarket chains in China. In addition to onboarding more top 100 supermarket chains, we are also signing up more local or regional leaders.
Moreover, supermarket category is gaining momentum in Shop Now. Thanks to the increase in online traffic and the conversion rates, as well as offline customer acquisition. GMV of supermarket merchants in Shop Now channel increased by multiple times year-over-year.
Let’s move on to the consumer electronics and home appliance category. Based on our consumer insights at the grid level, we continued to move the right products supplied online. During the second quarter, more than 10,000 consumer electronics and home appliance stores were newly launched on JDDJ.
In the smartphone sub-category, as three largest wholesale sales platform for Xiaomi product, we established an official partnership with Xiaomi brand in the second quarter. As of now, there are more than 3,000 Xiaomi home stores listed on JDDJ. GMV generated by MI – the Xiaomi home stores increased by more than 10 times year-over-year in the second quarter.
In the PC and accessories sub-category, we further expanded offerings and penetrated new segments. During the quarter, we formed new partnerships with leading brands including Canon and Aurora. In the home appliance sub-category, in collaboration with merchants, we enhanced our service capability of integrated delivery, installation and after sales service for large home appliance. As a result, the GMV of home appliance sub-category more than doubled on a sequential basis.
In the mom-and-baby category, we facilitated the cooperation between leading retailer chains and mom-and-baby brands such as [Indiscernible] Yili As a result, GMV of mom-and-baby chains on JDDJ more than tripled year-over-year.
We also worked more closely with chains in the [Indiscernible] such as JD [Indiscernible] and 1919. The GMV of [Indiscernible] stores more than doubled in year-over-year. In the home and furniture category, we have further penetrated smart home products, for example, in the second quarter, JDDJ has established partnerships with more than 10 smart lock chains including like [Indiscernible] and brought 2,000 smart log stores online providing users with a convenient one stop shopping experience integrating delivery and installation.
Secondly, we continue to push forward our cooperation with brands. During the quarter, we continued to solidify our leadership in the auto space in terms of both the number of brands we work with and the depth of engagement with the brands. Our online marketing services recorded year-over-year growth exceeding over 80% in the quarter.
In the second quarter, we further expanded our diversified brand partner base. We tried several new partnerships with food and beverage brands such as [Indiscernible] as well as beverage alcohol brand such as Daojia and [Indiscernible].
In addition, we signed up mom-and-baby brands such as Abbott and pharmaceutical brands such as Johnson. We also saw impressive results from our brand marketing campaigns. On June 1, JDDJ teamed up with 11 mom-and-baby brands including [Indiscernible] and Huggies to launch a joint marketing campaign and as creating a virtual mom-and-baby shop that offers intensive products in good price and available for one hour delivery. Total GMV of participating brands increased nearly four folds on a year-over-year basis.
On June 17th with JD’s 18 grand promotion that start at 8 PM, we partnered with 23 brands including P&G, Pepsico and [Indiscernible] to launch a live streaming campaign with a slogan Placing Orders at 8 PM and Get delivered to your door slot by 9 PM. On the day of the live streaming campaign, total GMV of these brands increased by more than three times year-over-year.
Thirdly, we also continued our efforts to empower retailers and brands with innovative technologies. At the end of June, the Haibo system of our omni-channel to offer the systems for retailers has been deployed by more than 200 merchants in around 7,700 retailer stores.
In addition, Haibo have successfully penetrated new categories including like pet stores and mom-and-baby stores while serving more supermarkets and convenient stores. We continued rolling out new Haibo features to address what merchants need most and help them wherever they see challenges. While deploying that we launched a new model enabling merchants to directly connect to JD’s warehouse system through Haibo when they source supplies from JD.
This helps retailers procurements that save significant labor hours. As a result, merchants adopting this model saw their procurement efficiency improved by three times. Our Earth Grid System, or Kunce, which helps brands boost sales by providing them with by grid or by store shelf data has been welcomed by a growing number of brands.
In addition, as Shop Now becomes an increasingly important channel for brands shelf growth, we upgraded Kunce’s SKU analysis feature to help brands simultaneously monitor the availability of their goods at both JDDJ and Shop Now. So that brands can improving the product supply and sales.
Our digitized in-store picking service Dada Picking also made significant progress. Since the establishment of our partnership with Carrefour, we have helped them improve picking fulfillment rate, customer experience and cost efficiency.
For example, customer complaint rates related with picking was lowered by a half three months after [Indiscernible] started to utilize Dada Picking. As a result of the impressive results, we have continued to deepen our collaboration with Carrefour. Now, Dada Picking covers all of the chain to key auto stores.
Driven by expanded store coverage and increased penetration of Dada Picking in partnering with stores the total number of orders received by Dada Picking in the second quarter increased by more than three times year-over-year.
Now, let’s move to Dada Now, the leading local on-demand delivery platform in China. While total revenue maintained revenue growth, Dada Now’s operating efficiency also improved significantly as we optimize pricing strategy and merchant portfolios.
I will start with our KA or chain merchants business. Revenue of our on-demand and delivery services to KA merchants increased by 45% year-over-year, while average gross profit for other turned positive. Our ability to provide integrated fulfillment services consisting of warehousing management picking and delivery gives us unique advantages.
Therefore, we continue to consolidate our leading position in the supermarket KA category. In the second quarter, revenue generated from supermarket KAs increased by over 50% year-over-year. In addition, we signed up new supermarket chains like Walmart.
In the Restaurant and Beverage KA category, revenue generated from beverage KAs maintained record growth more than double in year-over-year.
Moving on to our Send C2C business, orders fulfilled increased by over 30% year-over-year, while we continued to optimize unit economy significantly year-over-year. Thanks to our further penetration into lower tier cities, orders fulfilled for SME merchants increased by more than 40% year-over-year.
Lastly, on last mile services, for last mile delivery, we continued to leverage our flexible cross-sourcing network to ensure the fulfillment of JD Logistics orders, especially amid the pandemic and during peak promotional campaigns. For pickup service, orders maintained strong growth momentum mainly driven by our further penetration into virus picking scenarios.
And to wrap up, I would like to say a few words on ESG. As sustainable development plays an increasingly important role in China’s economic strategy, we are committed to creating value, integrating social responsibility with corporate strategy, empowering our partners, pairing for employees’ developments and to satisfying consumer needs so that we can achieve results that bring benefit to the company, our shareholders and the society at large.
At the end of June, we released our first ESG report providing stakeholders with a comprehensive overview of our efforts and progress on key ESG issues. Going forward, we will continue to integrate ESG initiatives into our long-term development strategies and actively shoulder our corporate social responsibilities.
With that, I will now pass the call over to Beck Chen to go over our financials for the quarter. Thank you.
Beck Chen
Thanks, Philip. Before we go over the numbers, just a few housekeeping items in advance. We believe year-over-year comparisons are the most useful way to judge our performance. Therefore, all percentage changes I am going to give will be on that basis and all figures are in Renminbi, unless otherwise noted.
Total net revenues in the second quarter increased by 55% to RMB 2.3 billion. Net revenue from Dada Now increased by 37% to RMB 816 million, mainly driven by the increases in order volume of intercity delivery services to chain merchants.
Net revenues from JDDJ increased by 66% to RMB 1.5 billion, mainly due to the increase in GMV, which was driven by increases in the number of active consumers and average order size. The increase in online marketing services revenue as a result of the increasing promotional activities, also contributed to the revenue growth of JDDJ.
Moving over to the expense side. Operations and supporting costs were RMB1.4 billion. The increase was primarily due to an increase in rider cost as a result of increasing order volume for intercity delivery incentives provided to chain merchants on the Dada Now platform and the meters on the JDDJ platform.
Selling and marketing expenses were RMB1.2 billion. The increase was primarily due to the growing absolute dollar amount of incentives to JDDJ consumers, an increase in advertising and marketing expenses to attract new consumers to JDDJ platform, and the amortization of the business cooperation agreement rising from share subscription transaction with JD.com in February this year.
G&A expenses were RMB100 million, flat year-over-year as a result of our expenses control measures. R&D expenses rose to RMB 160 million mainly attributable to the increase in research and development personnel cost as the company continues to strengthen its technology capabilities.
The non-GAAP net loss attributable to ordinary shareholders of DADA was RMB396 million. Non-GAAP net loss margin was 17% improving by more than 20 percentage points year-over-year and six percentage points quarter-over-quarter. In addition, JDDJ’s margin turned positive during the quarter making a remarkable milestone in our path to profitability.
As of June 30, 2022, the company had RMB4.35 billion in cash, cash equivalents, restricted cash and short-term investments. Pursuant to our US$70 million share repurchase authorization announced in March 2022 as of June 30, 2022, we had repurchased approximately US$33 million of ADSs under this repurchase program.
In terms of our outlook for the third quarter of 2022, we expect total net revenue to be between RMB 2.25 billion and RMB 2.35 billion, representing a year-over-year growth rate of 39% to 45%. In addition, we expect the net loss margin in the third quarter of 2022 to continue to significantly narrow year-over-year and achieve sequential improvement for the sixth consecutive quarter.
This concludes our prepared remarks. And operator, we are now ready to begin the Q&A session. Thank you.
Question-And-Answer Session
Operator
[Operator Instructions] Our first question is from the line of Ronald Keung from Goldman Sachs. Please go ahead.
Ronald Keung
Thank you. Thank you, Philip, Beck and Caroline. So, I have two questions. First is, how should we think about this Board changes? Would it be a future CEO role as that they get now through the President and Chairman roles respectively? And also see an increase in independent director. So is that part of a kind of Board change to align with some of the Hong Kong Stock Exchange guidelines and any comments on eventual lifting or do a primary listing in Hong Kong?
And my second question is on the encouraging 18 percentage points improvement in net margins if you flag that Beck so where has user subsidy rates trended so far? And are we continuing to expect the direct margin breakeven this year and EBIT turnaround by next year? Thank you.
Beck Chen
Okay. So, thank you for the question, Ronald. And, for the first question, yes, so we have actually not added only independent directors and now actually three out of six directors are independent which is fully compliant with the potential Hong Kong listing rule. And also right now, four out of six more directors are female directors which are very satisfied and they all have very solid international backgrounds and we hope that all those directors will contribute to the growth of the company in the future.
And also we are being proactively push forward the Hong Kong listing procedures to protect our shareholders’ interest. And also, I want to thank for the contribution of Philip to the company for the past eight years. So after internal discussion, we are now positioning a CEO role and actually a President that will be a security and be responsible and in charge of the daily operations and report to the Board in the future.
And about the second question, yes, so actually our overall subsidy’s ratio actually decreased by 20 BPS compared to the first quarter. So in Q2, actually our consumer incentives have decreased to 4.5% as a percentage of JDDJ’s GMV and in the third quarter, we expect incentive ratios will be decreased more and they will all be contributing to our direct margin level and for the whole year, we maintained forecasted that the direct margin will be turning positive and the company will be turning positive profits in the first half of next year.
Ronald Keung
Thank you, Beck, and thanks, Philip.
Philip Kuai
Thank you, Ronald.
Operator
Thank you. Our next question comes from the line of Thomas Chong from Jefferies. Please go ahead.
Thomas Chong
Hi, good morning. Thanks management for taking my questions. My first question is about the competitive landscape as we are seeing increasing number of agents entering into the space these days that somehow like a social media and different peers also launch services. How should we think about the competitive advantage of JDDJ? And my second question is about, after the Board change, how should we think about our cooperation with JD going forward? Should we see accelerating synergies with JD? Thank you.
Thomas Chong
[Foreign Language]
Jeff Huijian
Okay, so, this is Jeff. So, – and the first and foremost, our positioning as a pure play marketplace and our enabling and digitization capabilities has enabled us to work more extensively with those – all those leading chain merchants and brands. So, which makes us more competitive in the variety, quality and prices of products price.
Thomas Chong
[Foreign Language]
Jeff Huijian
Yes, so, we always tell our partners as a pure marketplace, we never compete with our retail partners. So we are now engaging retailing ourselves. So, that’s why now those retailers are more willing to work with us.
Thomas Chong
[Foreign Language]
Jeff Huijian
So, even though our competitors are statistically increasing more but the impact to us is very limited and our – as I said, so our intention ratios are decreased sequentially. So, the rationale behind is that difficulties only drive us demand but it needs to continues to fueled with high quality supplies. So, partnering with those leading retailers gave us a clear age on the supplying chain front over our peers and so for the long-term.
Thomas Chong
[Foreign Language]
Jeff Huijian
Okay. So, and we also enable our retail partners with our capabilities in the supply aging. So, for example, take Haibo system as an example, so, we continue to rolling out our new Haibo features to address what merchants need most and help them reduce costs while enhancing the operating efficiencies. So, as of the June 30, it has been deployed in around 7,700 retail chain stores.
And another example is our integrated fulfillment solutions consisting of warehousing management picking and delivery. So, there is a key difference between the on-demand retail and the food delivery. So, this is picking and packing in the retail stores. So, our integrated fulfillment solutions enable retailers to reduce the order picking time while our order picking service help them mitigate labor shortage through innovative and digitized consulting model which are more highly valued by our retail partners. And lastly, our Kunce or the Earth Grid System helps brands sales by optimizing channel supply down to each like the grid of the period.
Thomas Chong
[Foreign Language]
Jeff Huijian
And we are also proactively expanded across different categories. So, and our capabilities in the system and of digital issuing can easily help us to expand from the most complicated supermarket categories to other categories like – categories, advance categories as we have said before. So, this is also a purely valued capability of our platform compared to our peers companies.
Thomas Chong
[Foreign Language]
Jeff Huijian
And also the brand partnerships, so the top retailers we have extensive partnerships with the brands since the retail chains and our platform are critical offline distribution channels to mainly consumer product brands we can offer our brand partners integrated marketing service across both online and offline channels and also, as well as digitization tools. So through our collaboration, brands are not only able to generate more sales, but also improve their consumer insights and the channel insights. And we can also leverage JD’s resources to bring more brands on board and in particular like brands in consumer electronics, where JD enjoys strong consumer mind share. So, and our peer is actually liking us in terms of both number of the brands and that’s of the engagement with the brands.
Thomas Chong
[Foreign Language]
Philip Kuai
Let’s talk about the collaboration with JD. So, we continue to deepen cooperation with JD.com and during the quarter, the second quarter of this year, GMV of Shop Now, Shops Go more than tripled year-over-year.
Thomas Chong
[Foreign Language]
Philip Kuai
In the second quarter, we further expanded Shop Now’s merchant base and the product offerings to improve the availability of one hour delivery options in each local grid. So, as a result, our search exposure rate in JD increased by three percentage points quarter-over-quarter.
Thomas Chong
[Foreign Language]
Philip Kuai
So for nearby or Fùjìn tab, we further rolled out this entry points to more cities. So far the nearby tab has covered all cities nationwide in which we have launched the Shop Now services and – driven by the improvements in exposure, picks rate and conversion rate, the GMV from nearby tab increased by more than 80% quarter-over-quarter and contributing a 10% of Shop Now’s GMV.
Thomas Chong
[Foreign Language]
Philip Kuai
Thank you, so much.
Operator
Thank you. Our next question comes from the line of Eddie Leung from Bank of America Merrill Lynch. Please go ahead.
Eddie Leung
Good morning, guys. I have two quick questions. The first one is about consumer behavior. Could you give us an update on the observations of what consumers are doing in these months after the opening of Shanghai and amid inflation? For example, any change in their purchases of all the categories. And then, secondly, could you remind us the AOV of JDDJ? I think you mentioned that you have seen AOV continuously going up.
Beck Chen
Okay. So, Eddie, let me answer this second question first and I’ll pass the first to Philip to answer. So, the average order value of our JDDJ platform and shops go platform in Q2 was RMB 225, which is increasing by RMB 10 compared to the first quarter and in the long term, we think we will continue to drive up the average order value as we said. So we will have more diversified levers and new categories products and they are all with higher AOV and contribute positive direct margin to the platform which will also not only help us to increase the diversity of our products to be offered to the consumers and also contribute to our profit improvement.
Philip Kuai
And Eddie, I will give you some updates on both the supply side and demand side from short term and long term perspective, our observation. So, in short term, we are seeing from the supply side – sorry from the – yes, supply sides, we are working with the key merchant chains with the strong supply chain capabilities and they are much more resilient to the turbulence. So therefore under this challenging environment, the retailers are – the retailer we have been working with are much stronger to deal with the challenge. At the same time, most of the retailers are facing difficulties to get offline customers in store. That’s why they really need to extend out to our business. That’s why our partnership with the retailers have been further improved over the last couple of quarters. So that’s from the supply side.
And from the demand side, we are seeing that, for example in July, after Shanghai reopened and the COVID continues to happen in different cities across July and August, it is absolutely bringing some uncertainties and we are seeing the confidence of the consumers and their willingness to pay or do you have some way to recover and it does has some impact on our business as well. So, I think going forward, the – we were confident and we believe that demand side will pick up over time, while our supply side remain very strong. And for the long-term, I think the on-demand retail penetration as a percentage of the local retail is still very low at the single digits. That’s why the room for long term growth is just tremendous. And most of the retailers and brands believe that auto is the future, the absolutely number one growth area for the fulfillment future. So we are very much confident.
Eddie Leung
Thank you, Philip and Beck.
Philip Kuai
Thank you.
Operator
Thank you. Our next question comes from the line of Alicia Yap from Citigroup. Please go ahead.
Alicia Yap
Hi. Thank you. Good morning, management. Thanks for taking questions and congrats on the solid results. I have a follow-up on the competitive landscape for JDDJ. So, I think we are fulfilling more players actually more aggressively penetrate no non-supermarket categories that which I think JD and Dada actually use and the synergies and advantage. So can management comment if you expect the landscape especially for the non-supermarket category to get more intensified? If so, how would that affect that gateway or even the margins and volume growth in the future? And then, a follow-up on that is, what do we expect for the direct margins target for JDDJ in the next, I mean, in the medium term which is in two to three years? Thank you.
Philip Kuai
Hi Alicia. I’ll give you some of my thoughts and see if Jeff and Beck has anything to add. So, we are seeing more players coming onboard in the non-supermarket category. But more of the followers as we have been successful in expanding the non-supermarket categories, so they are following us without too much of the developments. So if you break down the so-called non-supermarket category, you will see that the category we are talking about mainly covers like consumer electronics, the mom-and-baby parenting, the liquors or the home appliance. So all those categories have very different consumer mindsets comparing to restaurant food delivery. So this is totally different. It’s very – it’s very remotely linked for any consumers to think of like buying a smartphone or buying a home appliance from a restaurant food delivery platform. So I think that’s a key. And for JD, we are very happy and we are – I think we very lucky to deeply collaborate with JD that the consumers come onboard on JD, they have the strong mindset to buy those category products on JD and with the development of our Shop Now business, so we can easily leverage the traffic and consumer mindset on those categories. I think those are the advantages we enjoy that all of the other players – it’s very difficult for them to – due to the similar mind sharing anytime soon.
Beck Chen
And also about the take rates and also about the direct margin, so, all those new categories, actually we are every subsidy we are subsidizing much less compared to the supermarket categories, so which means that they all generate positive direct margin and to the company. So, we are welcoming all those new categories onboard. And about the trend of our company’s direct margin – the JDDJ direct margin level, we – actually in Q2, our direct margin turned positive to 0.4%. So, we are expecting the direct margin level to be further increasing to 1% or more than 1% in the second half of this year and we believe towards the keeping to increasing 2023 which is very key and intentional to the company’s overall profit break even.
Alicia Yap
Thank you.
Operator
Thank you. Our next question comes from the line of Andre Chang from JPMorgan. Please go ahead.
Andre Chang
Thank you, management for taking my question. I have a follow-up question regarding our cooperation with JD. So, now with this infrastructure laid out by the Shop Now and nearby path, the ads flow et cetera, so I wonder how we would try it further the growth driven by JD or cooperation JD. For example, will there be more ad load or they will be more exposure or ads from different category like beyond electronics, FMCG, et cetera? Or we are going to promote more to get more visibility for consumers within JD ecosystem, et cetera. So, any color for the drivers in the second half and next year to increase our traffic contribution from JD will be helpful. Thank you.
Philip Kuai
Hi, Andre. I’ll also give you some of my perspective and see if the rest of the team has anything more to add. So, in terms of the driver for our growth on JD, I think there are few key things we’re looking at. Number one is penetration of the user base. So, we are fully aligned with JD to increase the penetration of consumer on JD.com. So, now the penetration is at the single digits, while quickly growing and then we are aiming at 50% penetration in the long term. So, I think this is the number one driver in short term and in long term. And there are few things to help us to improve the penetration. For example, like exposure, so we are getting more and more space, if you will on JD.com and you are able to see us more and more often everywhere. At the same time, we are expanding geographically and also bringing more and more supply from various categories. So therefore, when people are searching or browsing products from various categories, now they can see us more and more often, because before we don’t even have the supply of the products in that new categories. Now as we expand and bring more stores and suppliers onboard, the customers are able to see them on JD.com. So, all those help us to improve the exposure and the penetration. And in terms of promotion, I don’t think it will be a heavy promotion-driven expansion at all. And other than that, we actually can fully leverage or the existing successful promotion on JD already like the June 18s or W11 and so on and so forth. So, JD has lot of successful promotion. Now we can write together with them. So I think those are the strategies we are looking at.
Andre Chang
[Foreign Language]
Jeff Huijian
Okay. So, I will further talk – elaborate on the exposure opportunities. So for example, if a consumer is searching the fresh produce products in the search tab, they will be much closer to the Shop Now’s prices. So, for next step we will expose, we will expand it to more category products, for example those heavier products or the bulk products in the supermarkets. And also, we will further increase exposures in different channels like the second kidding channels and also when the consumers are placing the orders, so when they finish and complete the orders, there will be recommendation for them for the nearby stores. And this all in the taxing and procedures and so we are very confident that we – as Shop Now and JDDJ will be acquiring more traffics in the consumer minds within the JD ecosystem. Thank you, Andre.
Operator
Thank you. Our next question comes from the line of Wei Xiong from UBS. Please go ahead.
Wei Xiong
Hi. Thank you management for taking my question. My question is around – I want to follow on the supply side advantage that you guys mentioned just now. I wonder how do we see the churn rate of merchants, especially on the SME side after the very challenging second quarter. Will that offset our product supply for certain long tail categories? I understand this might not be a issue with our partnership with the leading supermarket chains, but I do believe we do have a large number of smaller merchants on the platform. So just want to hear your thoughts on this. Thank you.
Philip Kuai
Sure. For our supply side, so our strategy is to firstly work with the key chains, not only supermarket chains, but also other vertical specialty store chains like consumer electronics, mom-and-baby, liquor and so on. So, all those key chain retailers are much more resilient and all of them are still there and the business are relatively well. So, we are not seeing any substantial impacts from the supply side. And on the other hand, we are actually happily seeing that almost all of our retailer partners have strengths and partnerships with us, because they are seeing more challenges and looking for our help. So, I think the partnership is seeing the – with our retailers have actually got improved and we are very much confident that we will be able to going through all the turbulence – any like circumstances.
Operator
Thank you. There are no further questions at this time. I will now hand back the conference to Ms. Caroline Dong for closing remarks.
Caroline Dong
Thank you, Operator. In closing, on behalf of Dada’s management team, we’d like to thank you for your participation in today’s call. If you require any further information feel free to reach out to us directly. Thank you for joining us today. This concludes the call.
Operator
Thank you. The conference of Dada has now concluded. Thank you for your participation. You may now disconnect your lines.
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