Alibaba, Tencent, JD.com, Meituan and other giants enter the fray, new retail has moved into the mid-game after a period of cost-no-object exploration, with the core of competition becoming who can truly achieve profitability. At this point, a 'mid-game review' is needed: What detours were taken in the past? Where is the future direction? 2020 may become a major node in the transformation of China's retail industry. Since Jack Ma introduced the concept of 'new retail' at the 2016 Yunqi Conference, Tencent, JD.com, Meituan and other giants have followed suit. With capital backing, the traditionally 'hard and low-margin' traditional retail industry quickly became a large battlefield with many entrants, frequent innovations, and no shortage of copycats. Soon, 'new retail' entered a bottleneck period. In the view of industry insiders, new retail is about using digital technology to improve the operational efficiency of traditional retail. The key for internet companies to become the 'water, electricity, and coal' of traditional retail lies in opening up the core data at the bottom of enterprises. But at this stage, the participation of online companies in traditional retail is still mainly exploratory and experimental, and the traffic thinking of internet companies in 'enclosing land' seems unsustainable under the logic of 'heavy gross margin' and 'heavy operational efficiency' in traditional retail. The entire industry stands at a crossroads. Should they continue burning money to expand territory, or should they seek efficiency from operations and achieve profitability as soon as possible? After a period of cost-no-object exploration and experimentation, new retail has reached the 'mid-game moment' of competing in profitability. The sudden outbreak of the COVID-19 pandemic seems to have pressed the 'fast-forward button' for the development of the entire industry. Under special circumstances, the demand side has changed, and online orders have surged, breaking the boundary between online and offline once again. At this time, the industry needs a 'mid-game review' more than ever: What detours were taken in the past three or four years? How can new technologies be integrated and implemented in various scenarios? How can profitability be achieved under technology-driven development? How can a better business model be found? -01- Blindly Running: What Detours Were Taken No one can deny Hema's performance during the pandemic. On the evening of February 15, Hema CEO Hou Yi posted on his social media: Beijing is snowing, Wuhan is under lockdown, and Hema will break through the original delivery model and switch to community group buying. Does this mean that Hema, which previously claimed not to do front warehouses, fresh food small stores, or community group buying, is breaking its promise to do community group buying? Soon, this news was denied by Hema-related personnel. The person said that the so-called 'community group buying' and 'sharing employees' with catering companies were just an attempt during the pandemic. But immediately, Hema launched a recruitment plan for 30,000 people, and within just one week, 6,000 employees had already started working at Hema. Apart from the surge in online orders during the pandemic, does Hema really have such a large-scale demand for personnel? In Hou Yi's plan, Hema was originally going to accelerate development in 2020. Earlier, Hou Yi told China Entrepreneur, 'In 2020, Hema will accelerate the expansion of coverage in cities where it has already entered.' Beijing currently has 27 stores. Hou Yi hoped that Hema would open at least 50 stores in Beijing in 2020 and enter 1-2 new cities. At the same time, Hema is about to launch its eighth business format, and 'this format is related to fresh food.' But the pandemic disrupted Hema's plans. Previously, although Hema made some mistakes, these mistakes were quickly clarified in 2019. In Hou Yi's own words, Hema filled the 'pit' it dug itself, so Hou Yi and his team were full of confidence about the future. In January 2016, Hema's first store landed in Shanghai Jinqiao, becoming an important footnote in the development of 'new retail.' The background at the time was that traditional supermarkets were affected by e-commerce and had been sluggish for years, while the internet also encountered traffic bottlenecks. 'E-commerce has developed for many years, and the only bone that hasn't been chewed is fresh food. Fresh food has low standardization, high operating costs, and it's difficult to increase average order value,' He Xiaoqing, President of Kearney Greater China, told China Entrepreneur. In her view, Hema is the first fresh food e-commerce model to run out using the 'new retail' approach, and precisely because of this, there are many imitators. In January 2018, JD.com's fresh food supermarket 7FRESH officially opened. At that time, JD.com had just completed a new round of organizational restructuring, with former Group CMO Xu Lei becoming the second-in-command after Liu Qiangdong. Wang Xiaosong was transferred to JD Fresh Business Unit, fully responsible for the 7FRESH project, reporting directly to Xu Lei. Such personnel appointments were enough to demonstrate JD.com's determination to develop its fresh food business, as Wang Xiaosong had previously helped JD.com conquer territory in the 3C business. Compared with Alibaba, JD.com's advantage lies in its strong logistics system. In the fresh food field, JD.com's 1-hour delivery and next-day delivery home services are particularly critical. However, JD.com's 7FRESH was difficult to straighten out due to frequent internal changes. In December 2018, JD.com divided its business into three parts: front office, middle office, and back office. On the front end, JD Mall's fresh food business unit merged with 7FRESH, unified under Wang Xiaosong's leadership. At that time, some analysts believed that this move meant that JD.com's two major fresh food business segments were finally unified. But the good times didn't last long. After only a few months, Wang Xiaosong was transferred away, and the already slow-developing 7FRESH was completely shelved, with even rumors that it would be 'sold.' Another company stumbling in new retail is Meituan's Xiaoxiang Fresh Food, but compared with 7FRESH, Meituan can be considered to have stopped losses in time. In October 2018, Xiaoxiang opened three stores simultaneously in Changzhou. Almost at the same time, Jiang Yueping, then head of Xiaoxiang Fresh Food, left his post. Subsequently, Chen Liang took over Meituan's large retail business. Behind personnel changes often lies business strategy adjustments. During the 2019 Spring Festival, Meituan Maicai was officially launched, and the competitor changed from 'Hema' to 'Miss Fresh.' In April of the same year, Xiaoxiang Fresh Food successively closed 5 stores in lower-tier markets, leaving only two 'experimental fields' in Beijing. However, during the pandemic, Meituan Maicai also saw a surge in orders. Whether this momentum can continue after the pandemic is worth observing. In April 2019, Hema's 'franchisee' - 'Sanjiang Shopping' - released its performance announcement, which exposed Hema's profitability dilemma. According to the announcement, Hema's sales per square meter was around 12,000 yuan, far from the 50,000 yuan previously announced by Hema. At the same time, media reported that 'Yonghui Superstores also issued a profitability ultimatum to 'Super Species' in some regions.' Although this news was denied by Yonghui, profitability has clearly become an unavoidable proposition for new retail companies. 'In fact, fresh food supermarkets are projects with a long cultivation period,' a former head of a Hema region told China Entrepreneur, which means companies need to give more patience and support. 'Generally speaking, opening a Hema store requires an investment of 30 million yuan, and there will be a loss of several million yuan in the first year.' 'The profits of traditional retail are already very thin, and with the additional delivery cost for home services, there must be a higher average order value to support it. This is also the reason why Hema and other fresh food supermarkets target mid-to-high-end customers. But this part of the user base is limited, and lower-tier markets lack a large demand for mid-to-high-end stores,' He Xiaoqing told China Entrepreneur. In her view, it was expected that fresh food supermarkets would collectively 'choke on water.' Players in new retail can generally be divided into two categories: The first category is internet companies that have moved from online to offline. Within this, there are two situations: to C-end fresh food players (including fresh food e-commerce companies with the front warehouse model); and to B companies represented by 'Alibaba Retail Link' and 'JD New Channel' that want to break the traditional retail distribution system through technology. The second category is traditional retail companies that actively seek change, such as Wu Mart founder Zhang Wenzhong's second venture to establish Dmall, and Yonghui Superstores' active layout of 'Yonghui Yun Chuang.' 'Compared with traditional retail companies, internet companies are closer to technology, but they lack the most basic retail experience,' new retail expert Bao Yuezhong said bluntly. 'The entire new retail is still in the exploration stage and needs continuous iteration.' An industry insider once revealed to China Entrepreneur that some internet companies' developed systems simply couldn't be implemented. In the view of Haolinju CEO Tao Ye, traditional retail companies understand their own needs better. In the process of building digital systems, internet companies must, like retail owners, always be 'rooted' offline. If it's difficult to do so, the initiative should be given to the stores. Discussions within Hema about the operating model have never stopped. It is worth mentioning that Hou Yi once wavered on the issue of whether to do 'front warehouses.' In March 2019, Hou Yi suddenly announced that he would do front warehouse model Hema Xiaozhan in Beijing and Shanghai. The so-called front warehouse model is the warehousing and distribution model adopted by fresh food retail, where each store is a small and medium-sized warehousing and distribution center. But a few months later, Hou Yi called off the project. 'At that time, I saw that front warehouses were developing very fast, and I was not firm in my heart. But after a period of exploration, I still believe that under the fresh food e-commerce model, front warehouses cannot solve the three major problems of 'low average order value, high loss rate, and low gross margin caused by limited SKUs.' 'Now many fresh food e-commerce companies say they have high gross margins, but as far as we know, they calculate logistics and processing costs outside of product costs. Even if the dishes are simply packaged, labor costs will cause gross margins to plummet.' Therefore, Hou Yi decided to suspend Hema Xiaozhan. 'Fresh food e-commerce does have strong traffic value, but whether this traffic can be monetized still needs consideration. We also hope to find a solution,' Hou Yi told China Entrepreneur. -02- Core Issue: Who Can Truly Achieve Profitability Hou Yi's observation exposed another major problem of new retail from another angle - whether digital transformation is effective in improving retail operational efficiency. This directly determines whether new retail companies can achieve profitability, which is obviously a core issue. 'Now the to VC mentality in various fields is too heavy.' In the view of Wei Zhe, chairman of Harvest Capital, from O2O to the sharing economy, too much emphasis has been placed on user experience. 'In the early stages of fresh food e-commerce companies, they would even deliver a scallion or a few eggs. The user experience is good, but efficiency is sacrificed.' Wei Zhe told China Entrepreneur that in the context of fresh food e-commerce, the front warehouse has a '35 yuan' lifeline. If the average order value cannot reach this standard, profitability cannot be achieved. 'So far, I haven't seen any fresh food e-commerce company's 'single warehouse efficiency' truly work.' What exactly is 'new' about new retail? An industry insider once said bluntly to a China Entrepreneur reporter, 'It's what's hidden behind Hema's stores.' From a sensory perspective, Hema Fresh is different from traditional supermarkets. In stores of more than 4,000 square meters, more than 30% of the area is set aside for dining. The 'raw-cooked linkage' model is also seen as one of the main reasons Hema can have 'high average order value.' In addition, more importantly, behind Hema stores is a huge logistics center. The 'warehouse-store integration' model gives Hema an assembly-line-like in-store logistics. Behind the electronic price tags that update every second, there is also an intelligent digital system to ensure the unity of online and offline inventory and prices. All of this is because Hema has a strong internet gene. But in He Xiaoqing's view, the participation of internet giants has still not changed the basic pattern of high fragmentation in China's traditional retail industry. It is difficult to achieve cross-regional industrial chain integration and deployment in the short term. Whether new retail in the exploration period can significantly improve the profits of traditional stores remains to be tested by time. In November 2017, Alibaba used HK$22.4 billion to directly and indirectly hold 36.16% of Sun Art Retail Group. Subsequently, the two sides will cooperate with big data and commercial internetization as the core. A month later, Tencent held 5% of Yonghui Superstores for 4.2 billion yuan. Since then, AT seems to have begun to compete in the new retail field. Two years later, the transformation of traditional stores by 'new retail' has been unsatisfactory. As can be seen from Sun Art Retail Group's just-released 2019 financial report, although its parent company's net profit has increased, from historical data, the company's overall revenue still shows a downward trend year by year. Hema is also continuously consolidating its traditional retail foundation. So what about traditional retail companies that have always hoped to improve operational efficiency through technology? In 2019, the combination of Wu Mart and Dmall acquired Metro China, which made people re-examine this traditional retail giant that had been dormant for several years. After years of following step by step, the 'bottom-up' force of traditional retail companies began to emerge. 'Chain retail companies must rely on data. The increase in the number of stores is often accompanied by a doubling of management costs,' Liu Guihai, partner of Dmall, told China Entrepreneur. As early as the 1980s, 7-ELEVEn introduced its own ERP system; in 1987, Walmart successfully launched the world's first commercial communication satellite to uniformly manage the purchase, sale, and inventory information of all products in more than 4,000 stores. Such technology seems not inferior to the current 'new retail.' Liu Guihai even believes that compared with Alibaba, Dmall began exploring the new retail model earlier. In order to solve the problem of logistics and warehousing, Dmall built an 'e-commerce cabin' in Wu Mart stores in 2015, which is exactly the same as the current front warehouse. But after a period of exploration, the contradiction between the pure e-commerce model and offline stores became serious. 'At the end of 2015, consumers began to grab goods, but we couldn't allocate goods between warehouses. There were more and more relationships to handle, including the relationship between stores and warehouses, the relationship between the consumer side and the supply chain, and the relationship between online and offline prices.' So Dmall decided to build a comprehensive digital system, which was also a process of crossing the river by feeling the stones. According to Zhang Wenzhong, by the end of 2019, Dmall's 'Dmall OS' system had completed the overall system switch with multiple merchants other than Wu Mart, and 70% of Wu Mart's sales had been achieved through the Dmall app. Can the efficiency improvement brought by technology offset the invested costs? That is, can new retail truly achieve profitability? In this regard, Liu Guihai believes that it still needs to rely on the 'marginal effect' of the Dmall platform. In addition, Wu Mart has indeed returned to the forefront of retail through Dmall, and from the data provided by Dmall, the future is promising. As of now, Dmall has cooperated with 108 users, among which Yili's sales in the first three quarters of 2019 increased by 200% year-on-year. Photography: Deng Pan The case of Haolinju can also illustrate this issue. During the pandemic, convenience stores were more affected than traditional retail supermarkets, but Haolinju's self-developed intelligent system 'Xbrain Convenience Store' gave Haolinju a lot of space to respond quickly. 'Overall, although it's not profitable, revenue can temporarily cover the costs invested in all stores,' Haolinju CEO Tao Ye told China Entrepreneur. It may take time for new retail to truly achieve profitability. In the view of more industry insiders, offline retail companies themselves have high cash flow, and it is difficult to see results in the short term from companies' investment in digital technology. This is also one of the reasons why some traditional retail practitioners were not very interested in new retail before. In addition, the logic of traditional retail and internet companies is different. Generally speaking, traditional e-commerce has only one large warehouse in a city, but offline retail uses more distributed warehousing with multiple stores. This is also the reason why Dmall wants to build a 'distributed e-commerce.' Liu Guihai believes that whether online or offline, when companies build digital systems, there will always be two extremes. 'Either you just make a particularly basic version, which is universal, but cannot be adapted to more brand stores. Or you make it particularly deep, hoping for a thousand people and a thousand stores, but it is not universal, and the investment cost is extremely high. Maybe 'a thousand people and ten stores' is very good.' In this regard, Dmall's choice is to split the entire large system into several modules. 'Our original plan for 2020 was to promote the Dmall OS system on a large scale. The Dmall OS system is for hypermarkets, and it can be split into multiple sections. For example, some users only access the supply chain system.' -03- Mid-Game Thinking: Where Is the Future Direction A pandemic will prompt many rules and perceptions to change. He Xiaoqing believes that after the pandemic, the reshuffling of the entire new retail industry will intensify, and the pattern of leading players will be further confirmed. Facing accelerated competition, players must constantly reflect and make changes. The first thing to do is to deepen the supply chain and consolidate the retail foundation. The logic behind this is to achieve profitability as soon as possible through improved operational efficiency. In fact, Hema has always been focusing on R&D investment in the entire supply chain. In October 2019, two months after Hou Yi first appeared as 'President of Alibaba Digital Agriculture Business Unit,' Zhang Yong announced a new round of Alibaba's organizational restructuring via internal email. Hou Yi began reporting to Dai Shan (nickname Su Quan, head of Alibaba's B2B business unit), with the aim of better connecting the three agricultural business lines of 'Hema, Rural Taobao, and Smart Agriculture.' Previously, no one in the Alibaba system could truly solve the problem of large-scale circulation of agricultural products. Rural Taobao was more responsible for the downward flow of products. At this time, Hou Yi's 'takeover' represents a direction for Alibaba, and Hema's business and product planning will also change more in the future. It is worth noting that during the pandemic, Miss Fresh, Meituan Maicai, Meicai, and others also increased supply chain investment, and many players increased the proportion of direct sourcing from production areas. Of course, compared with traditional retail supermarkets such as Walmart and Carrefour, fresh food e-commerce still needs some time to build its supply chain. In the view of Wang Jun, partner and CFO of Miss Fresh, in addition to polishing the supply chain, new retail players need to invest more energy in polishing the product side and the demand side in the future. In his view, this is also the reason why Miss Fresh's average order value is higher than other players in the industry. 'Our fruits are carefully selected, and the product categories are relatively rich, covering most of the people's daily needs. The product specifications include both high-end and regular products,' Wang Jun said. Miss Fresh currently has nearly 300 product buyers nationwide, strictly selecting products and implementing standardized quality control. In Hou Yi's view, transformation is a long-term gradual process, and such changes are no longer limited to the retail model. Based on changes on the consumer side, the entire product structure is also changing. 'Today's supermarket is no longer a traditional hypermarket.' In his view, companies must understand the real needs of consumers and constantly think about how to use technology to build the best service system, and more based on the demand side to reconstruct retail companies. 'But in the process of traditional retail transformation, we have always lacked a leading figure. He must have the ability to rebuild a new business system. Compared with the world, China's traditional retail is at least 20 years behind. From products to consumer research, our gap is still a long way off,' Hou Yi told China Entrepreneur. But He Xiaoqing believes that after this pandemic, almost all companies will study how to improve their operational efficiency. 'For example, we see that Hema is also reflecting on the proportion of small-packaged products and bulk products. In different scenarios, the proportion of dining also needs to be adjusted and optimized. These are very detailed problems that require hard work to solve.' The urgency of profitability also comes from another important reason: at a time when capital is relatively quiet, companies that rely on burning money can no longer sustain themselves. 'Apart from the pandemic, the entire new retail must return to the essence of business. Continuous burning of money is definitely not feasible. Companies must maintain a healthy financial condition and business model. We also need to balance user value and shareholder value,' Wang Jun said. 'The direction of digitalization itself is not wrong.' In Tao Ye's view, when pursuing digitalization, companies need to consider more about the 'degree' and pace. Whether it is traditional physical enterprises transforming upward, or traditional internet companies exploring offline physical entities, the essence of retail operations will not change. It is certain that for a long time to come, 'new retail' will still be like the 'golden apple' thrown at Newton. The battle has reached the mid-game, and the future pattern is still unclear, but changes have quietly occurred. Source: China Entrepreneur Magazine (ID: iceo-com-cn), Author: Xie Yunzi, Editor: Xu Tan