Click to read the original text for details In 2022, Hema stands at a watershed moment. Since its independence from Alibaba at the end of 2021, Hema has undergone significant changes, shifting from 'unlimited' investment to a clear goal of comprehensive profitability. Earlier this year, there were reports that Hema was seeking independent funding at a valuation of $10 billion. Having once 'run at breakneck speed,' Hema now needs to further prove its industry value on the basis of careful budgeting. With the company's independence as a dividing line, Hema completed its first-phase mission before this: cultivating user mindshare, achieving rapid growth, and establishing a national retail chain brand. During this phase, Hema was relatively light-footed and moved forward with big strides. On one hand, backed by Alibaba's financial support, consumer big data, and even group marketing and PR resources, from Ma Yun personally visiting the store at its opening to the innovative concept of 'Hema District,' it established its brand within just six years. On the other hand, Hema targeted the gap between supply and demand in the domestic retail industry at the time, entering the sector with the concept of 'new retail,' focusing on food, especially fresh produce, a category that traditional retail had not adequately addressed, and initiating a series of reforms in traditional retail. Remaking Hema was a logical necessity for a super-large internet ecosystem's strategy to advance deeply. It was born with a clear path and direction, naturally carrying sufficient determination and optimism. However, the traditional retail industry has its own strong traditions, some of which are exceptionally complex and entrenched. Determination must endure complexity, and optimism will always confront solidity. Independent Hema thus enters its second phase. It faces a competitive environment different from six years ago, a more uncertain future, and an accelerating, tiered consumer market. In other words, the retail industry transformation that Hema initially leveraged with light model innovation has now entered a heavier stage of industry reform. In fact, China's retail industry itself has reached a historical juncture for further transformation. Hema has consistently played a role in stimulating traditional retail and prompting reflection on the industry's status and development dilemmas. Now, the overall cognition and consensus of the entire Chinese retail industry are gradually aligning, with lessons repeatedly summarized. The cognitive dividend Hema enjoyed in its first phase is becoming thinner in density. In this sense, the freshness and challenges Hema brought to the industry over the past few years are like a microcosm of the entire retail industry's turbulent transformation. The future it now faces is the future that Chinese retail is facing. At the watershed, Hema needs to pay more attention to its goals, direction, and health than before independence. Its competition with peers is more direct. Whether the characteristics brought from the internet, through constant tactical choices, regional battles, and organizational changes, can remain a stable advantage remains to be seen. This is a new competitive landscape that requires new judgment and observation. Chen Liping, a professor at Capital University of Economics and Business and executive dean of the China Consumer Big Data Research Institute, frankly stated that Hema's generation of new retailers is more likely to be a transitional form within the entire domestic retail industry. Standing at the watershed, we review the challenges and compromises Hema has made to traditional retail over the past six years, restore the many changes this retailer has experienced during the industry's transition, and seek what solutions it can still offer to Chinese retail as it moves toward the future.
1 Starting with Products and Categories For Alibaba, Hema meets its strategic need to penetrate traditional retail through internet methods. In the year the first store opened, Ma Yun formally proposed the concept of 'new retail' at the Hangzhou Yunqi Conference. He believed that the era of pure e-commerce would soon end, and the boundaries between e-commerce and traditional retail would be broken. The future of retail lies in the deep integration of online and offline retail, layered with modern logistics and innovative technologies such as big data and cloud computing. The stores Hema opened were a concrete manifestation of the above concept. On this basis, Hema leveraged its e-commerce genes to make various traffic-generation attempts on the operational side. These new plays also stimulated the traditional industry at the time. For example, early Hema stores used large seafood, such as king crab and Boston lobster, which were scarce in retail channels at the time, as a gimmick to attract attention and traffic. Whether large seafood became the standard for 'new retail' was once a topic of discussion. Such operations were guided by traffic logic. 'Alibaba's starting point for Hema was to do e-commerce with physical stores, operating around traffic,' Hema CEO Hou Yi said in early interviews. Today, Hema's traffic tactics have further focused on products that interact most directly with consumers. 'Ask products for traffic' is the slogan Hema shouts today. One concrete manifestation is its private brand rate. Currently, the private brand rate in Hema Fresh stores exceeds 20%, and in its X Membership stores, it exceeds 40%. Within its complex product network, Hema prioritizes food as the key category for development. The core reason is that food is not only a category that attracts traffic, but also because the severe mismatch between supply and demand in food leaves huge room for transformation. Over the past 30 years, the younger generation has grown up in rapidly urbanizing cities. They have spending power and their dietary structures have undergone structural changes. However, domestic retail, whether e-commerce or traditional chain retail, has not fully explored product development and retail scenarios for 'eating.' This makes 'eating' the opportunity Hema tries to seize for traffic and profitability through the development and iteration of private brand products. This exploration process has been accompanied by constant strategic adjustments, with its positioning of products' traffic value shifting from early broad-brush traffic-driving items to a focus on differentiated development and operation of the products themselves. For example, in its early days, Hema prioritized fresh produce and developed a series of private brands based on daily necessities like fruits and vegetables, such as 'Organic Fresh,' 'Daily Fresh,' and 'Mountain Fresh.' However, in the last two years, this strategy has changed. A clear signal is the increasingly prominent performance of 'Hema Workshop,' which focuses on 3R (Ready-to-eat, Ready-to-heat, Ready-to-cook) foods. It not only has a rich product structure design but also faster product iteration efficiency. Behind this change may be a rethinking by Hema and the entire retail industry of the value of the fresh produce category. In its early days, Hema chose to enter with fresh produce, related to the industry's positioning of the category's value to channels at the time. At that time, both e-commerce and traditional retail viewed fresh produce as a major opportunity. For the former, fresh produce was a category that had long remained unconquered after completing various standardized industrial products; for the latter, Chinese people's love for fresh fruits and vegetables, along with their high purchase frequency and short shelf life, made fresh produce naturally suitable for in-store sales, and it was labeled as a 'traffic-driving product' by traditional retail. Yonghui's rapid growth back then was closely related to its emphasis on fresh produce. However, as competition around fresh produce intensified across the industry, and given the domestic retail industry's insufficient ability to develop differentiated fresh produce products, competition between formats fell into homogenization and price wars. This made it difficult for fresh produce to bring profitability to stores, and even its traffic-driving effect did not meet expectations. In hindsight, facing such a competitive environment, Hema further clarified its response with a differentiated product strategy. Specifically, it is divided into two aspects: First, more segmented development in the fresh produce category. For example, in the last two years, it has attempted a single-category private brand strategy within fresh produce, successively launching private brand fruit items such as 'Quanhong Strawberries' and 'Shudinghong' fragrant pears. Second, seeking new growth points beyond fresh produce. 'Hema Workshop' is a typical representative. This private brand has now grown into the best-selling private brand on Hema's shelves. In 2020, stimulated by the pandemic, Hema gave this department greater autonomy. The department specifically responsible for Hema Workshop was upgraded to an independent 3R business unit. In the same year, it proposed a plan for independent stores, with its first independent store being 'Hema Bakery,' focusing on baked goods. Compared to fresh produce, such processed foods have two advantages: demand is easier to concentrate, and profits are higher. Through big data analysis and seasonal food R&D and operations around the 24 solar terms, Hema Workshop has shown greater profit potential and traffic value than fresh private brand products. In terms of profit, as early as 2019, Huang Haifei, responsible for product R&D at Hema, revealed in a public speech that its post-loss gross margin could reach 32%. In terms of traffic, the differentiation of Hema Workshop has brought competitive advantages for Hema's further market expansion. In a recent sharing, Hou Yi also cited the performance of Hema's private brand bakery products in Zhengzhou stores as an example: although the pricing of this category is higher than that of other local supermarkets, it attracts a steady stream of orders to Hema stores, selling an average of 100,000 items per day. On this basis, Hou Yi believes that in the upcoming market expansion, the creation of such differentiated products will become one of their important means of competing with local and regional retailers. 'In terms of deep cultivation in the local market, we cannot compete with local enterprises in livelihood products because they have a deep supply chain foundation locally. But today's consumption upgrade trend is an upgrade of the entire brand and supply chain, and local enterprises may not necessarily be able to compete with national chain retail.'
2 The Pursuit of Efficiency in Retail Transactions Choosing food as the entry point for channel differentiation also places higher demands on Hema's retail transaction side. Because food generally has a shorter shelf life, it requires higher retail circulation efficiency. At the same time, food is a category that is relatively harder to standardize. Consumer demand often carries strong immediacy, experientiality, and individual differences. These characteristics have led Hema to innovate and transform its retail transaction side, including both fulfillment models and retail channel operations. This has also been a process of innovation, compromise, and accumulation. In terms of fulfillment, Hema has established an efficient 'last mile' distribution solution based on the integration of store and warehouse. It designed a hanging chain technology to help stores connect in-store warehousing, sorting, and distribution, achieving '30-minute delivery' efficiency. Delivery efficiency earned Hema customer trust and word-of-mouth in its early days. Especially at that time, competition in new retail often focused on fresh produce, and '30-minute delivery' was almost standard for startups in this category. However, fulfillment efficiency alone cannot constitute an absolute competitive barrier for Hema. In the subsequent years of industry competition, traditional formats accelerated online-offline integration, and new e-commerce formats such as community group buying emerged and grew rapidly. At the same time, the entry of third-party platforms with urban distribution capabilities, such as Meituan, made the competitive atmosphere even more tense. Merely ensuring delivery speed cannot bring stable traffic and orders to Hema; instead, it brings long-term cost problems that are difficult to solve. Facing this pressure, Hema re-examined the value of offline and sought answers through repeated attempts at formats and in-store scenario innovation. Starting in 2017, on the basis of its large Hema Fresh stores, it tried about 10 formats. Among them, attempts from 2017 to 2019 were mainly small formats, such as the convenience store format Hema F2, the breakfast-focused self-pickup cabinet Pick'n go, the front-warehouse model Hema Xiaozhan, and the community-serving Hema mini. For Hema during this period, the frequent attempts at small formats revealed its reflection on its early neglect of site selection. After all, they were trying to make up for areas that Hema Fresh stores could not cover spatially. In Hema's early design, 70% of store orders relied on online. In a theoretical environment, a high online order ratio could help stores avoid high rent and reduce costs, but after several years of practice, this account still didn't balance. On one hand, Hema faced persistently high fulfillment costs; on the other hand, its food-focused product structure brought significant spoilage, coupled with increasingly fierce competition in the retail industry, forcing many Hema stores under heavy profitability pressure. These factors forced Hema to reconsider the value of space. Many customer acquisition attempts still rely on offline channels. Especially as online traffic dividends peak, retailers can still obtain stable transactions and customer interactions through refined regional operations. For example, in the last two years, Hema has begun to expand into second-tier cities and suburbs of large cities, successively launching Hema Neighborhood and Hema Fresh Outlets targeting these regional populations, who are more price-sensitive. Based on the crowd screening of these formats, Hema further implemented product tiering and supply chain construction on its original product system. At the same time, adjustments to Hema Fresh large stores have continued, especially reflected in changes to its 'dining + retail' model. Since the opening of its first store, Hema has tried to show a different posture from traditional retail stores. Its 'dining + retail' model was also seen as a hallmark of new retail stores at the time. Although this store model was not pioneered by Hema, imitating Italy's Eataly, it drove a wave of domestic retailers imitating advanced overseas models. For example, Yonghui and JD.com also launched 'Super Species' and '7Fresh,' which also added dining. Unfortunately, in subsequent practice, this model failed to sustain its ideal effect. One reason is that dining in China is an industry with dispersed demand and supply chain resources. Nevertheless, Hema has not completely given up. With its improving front-end market demand insight and product R&D capabilities over the following years, in 2019 Hema iterated its 'supermarket + dining' model, launching a hot pot season where customers could buy dishes and cook hot pot in the store. Unlike the previous 'supermarket + dining' model, this time Hema is more focused on the dining format and strongly related to its product capabilities. Because the hot pot season was launched against the backdrop of good sales of its private brand products developed for hot pot ingredients. Similar explorations focusing on specific dining themes and strongly correlated with its own product performance will continue as the pandemic stabilizes. For example, the 'Hema Night Market' launched on June 1 this year attracts customers to the store for late-night snacks. This model is also strongly tied to Hema's product capabilities. The crayfish and craft beer featured at this 'Night Market' are both products from its private brands launched in recent years that have performed well in sales and have strong synergy with upstream supply chains. An interesting figure is that this year, to prepare for the night market, Hema purchased 8,000 tons of crayfish from the two major production areas in Hubei, double the amount from the previous year. It is worth noting that this year, Hou Yi's statement on the ratio of online to offline orders has also changed. He replaced the original 70/30 online-offline order ratio with a 50/50 split. 'Our night market is an attempt to use different methods at different times and dimensions to invite consumers to the store, allowing them to obtain sufficient consumption services and experiences.' Offline space can provide experiences that online channels cannot, especially for food products, which are strongly related to actual experience. When Hema re-clarifies the value of offline, its improved product capabilities over the years may in turn become one of its means to polish offline consumption scenarios. These explorations essentially point to one direction—driving traffic offline and promoting more transaction increments. For Hema, which has begun to bear its own profits and losses, this direction is crucial.
3 Multi-layered Supply Chain Construction Behind product capabilities lies the accumulation of a complete supply chain system. The product strength displayed by 'Hema Night Market' is backed by both Hema's layered supply chain construction over the years and a series of changes in its supply-side investment. Over the years, to meet the needs of front-end retail competition, Hema's supply chain construction around the food category includes three parts: fresh produce supply chain, processed food supply chain, and global supply chain. Fresh produce is the category Hema first heavily invested in and the earliest chain it laid out in the backend. This is also a supply chain that is difficult to build. Because domestic primary agricultural products have dispersed supply and demand at both ends. Even chain retailers that have grown in recent years, with a certain scale of centralized procurement, still face considerable difficulty in leveraging transformation of the fresh produce supply chain. After all, this is a gradual process with many predecessors. Hema's exploration in the fresh produce supply chain also reflects this. In 2020, Hou Yi, in his capacity as president of Alibaba's Digital Agriculture Division, announced its origin warehouse plan. The latter, in coordination with Hema's city warehouses, constitutes a complete supply system serving the efficiency of fresh produce circulation. Origin warehouses are built in five cities close to production areas and with convenient transportation. Their core role in the entire network is to perform post-harvest commercialization processing of fresh produce, i.e., grading, sorting, packaging, and logistics distribution, and other primary processing of agricultural products. This function addresses the issue of product standardization of primary agricultural products in circulation. Although it cannot fundamentally guarantee the stable quality of fresh produce, the transformation of circulation links can to some extent alleviate the problems of high circulation loss and commercialization processing faced by channels. Today, this solution has been adopted within Alibaba and further optimized in the practice of its various channels. Taote is an example. After heavily investing in agricultural products, it also laid out origin warehouses based on its self-operated sales orders. However, Taote did not choose the supply network built by Alibaba's Digital Agriculture Division but instead cooperated with Cainiao's rural logistics brand Xiniao to lay out origin warehouses based on its own commercial flow. Compared with the 'origin warehouse + sales warehouse' model of Alibaba's Digital Agriculture Division two years ago, the new generation of fresh produce supply chain network has undergone many adjustments. The biggest change is that Alibaba's origin warehouse site selection is increasingly moving down to lower-tier areas, which is also in line with the distribution characteristics of China's agricultural production areas. Because a large number of production areas are concentrated in county towns, which are broader and more complex geographic spaces, the construction of county-level origin warehouses requires greater investment and larger-scale orders as support. Based on this status quo, the construction of origin warehouses has been handed over to Cainiao. In 2021, Cainiao took the lead in launching a plan to build 100 origin warehouses down to county towns within three years. The transformation of the fresh produce supply chain cannot be driven solely by retail channels; it also requires the transformation and cooperation of upstream production supply chains. This is a more complex chain involving the transformation of multiple parties such as growers, agricultural materials suppliers, and breeding institutions. Therefore, the construction of the domestic fresh produce supply chain is destined to be longer. Facing this status quo, Hema's investment focus has also changed. A signal is that after 2020, Hou Yi no longer appeared publicly as president of Alibaba's Digital Agriculture Division. Hema's construction in the fresh produce supply chain also stopped at the circulation link, without extending further upstream into agricultural production supply chains. Hema has also become more careful in its investment in the circulation chain. For example, media recently reported that Hema has opened some of its warehousing facilities in certain regions, including all-temperature warehouses (frozen, refrigerated, ambient), to cooperative suppliers, third-party traders, and suppliers. After stopping endless investment in the fresh produce supply chain, Hema shifted its construction focus to supply chain layouts that can release profit space. Among them, the processed food supply chain and global supply chain fall into this category. Compared to the fresh produce supply chain, these are industrial chains with relatively higher industrialization, and the production entities are more enterprise-oriented and organized than the fresh produce supply chain. The standardization and industrialization transformation difficulties faced by these two supply chains are also lower than those of fresh produce. Through investment in these two chains, Hema hopes to bring economies of scale and reduce product costs. The construction of the processed food supply chain corresponds to changes in front-end product strategy. In Hema's retail product structure, the importance of processed foods is gradually increasing. Based on insights into the needs of young urban populations, it continuously launches new product R&D plans and initiates integration demands upstream in the supply chain. This has promoted deep cooperation between Hema and related suppliers. Taking 'Hema Workshop' as an example, based on the diverse needs of 3R new product R&D, it more actively seeks out potential supplier resources upstream and promotes deep cooperation with upstream industry giants. For example, in 2020, affected by the pandemic, retail-oriented catering products quickly opened up the market, and Hema Workshop initiated cooperation with established catering brands to jointly develop retail products; in January this year, Hema announced deep cooperation with domestic aquatic giant Guolian Aquatic, with plans for in-depth cooperation on prepared aquatic dishes. Similar cooperation has also leveraged Hema's national centralized procurement advantages, which are ultimately reflected in its pricing. For example, 'Hema Craft Beer' showed explosive growth in 2021, related to its supply chain integration efficiency. Since 2018, Hema Craft Beer has launched fresh beer products in multiple flavors. Based on the order scale of the national market, it formulated product processing standards and circulation standards for suppliers and leveraged upstream suppliers to jointly produce. Under this cooperation model, Hema reduced the cost of craft beer. Currently, a single 300ml bottle of Hema Craft Beer is priced as low as 9.9 yuan, attracting considerable transactions. Lowering prices is a manifestation of Hema's backend supply chain integration capability. This capability is also reflected in its global supply chain. Since Hema opened its first X Membership store in 2020, it has also emphasized its procurement capability and price advantage in the global supply chain. For example, in Hema X Membership stores, 500ml Evian is priced at 79.00 yuan per case, equivalent to only 3.29 yuan per bottle, while the same specification of Evian is priced at 84.00 yuan per case at Sam's Club. Today, imported goods with a certain cost-performance ratio provided by the global supply chain are also seen by Hema as an important means to compete for young target groups in regional markets. Hou Yi once used Hema's bakery products as an example, saying that this category attracted a large number of transactions to Hema stores in Zhengzhou. He believes that one of the core reasons is that the raw materials come from the world's leading supply chain. For example, its croissant products are made from frozen dough purchased from a leading French supplier, which also supplies many five-star hotels in China. Such supply chain advantages are difficult for local retail brands to provide. 'It can leverage its national scale order advantages to leverage the globalized industrial chain and stimulate various innovative value capabilities to compete with local players.'
4 Organizational Change Full of Game-playing Organizational change is a hidden line in Hema's supply chain transformation over the years. All of Hema's above-mentioned product-centric retail and supply chain transformations are closely related to its relationships with upstream suppliers. For a long time, domestic retailers and suppliers have traded shelf space in stores rather than the products themselves. This trading system has limited the release of product power. In overseas retail experience, whether retail channels charge suppliers represents two types of retailer-supplier relationships, behind which lies the game of interests between retailers and suppliers. For retailers, whether to charge is not a constant model; it depends on the development stage of the product supply side. Given the current development status of the domestic retail industry, all parties have entered the stage of competing on products, so the entire industry indeed needs a transformation of retailer-supplier relationships. Hema is one of the most vocal. In a public speech a few years ago, Hou Yi stated that the current trading system is one of the bottlenecks restricting the development of the domestic retail industry. 'Our trading system is full of countless rebates, countless deductions, and countless interests, which cannot be changed in this lifetime. But today, after Hema's operations, our fresh produce has all adopted a procurement system. We require buyers to find products to sell, rather than sitting in the office waiting for suppliers to come.' Based on this thinking, in 2018 Hema proposed New Retailer-Supplier Relationship 1.0, canceling entry fees, channel fees, and other fees, with all cooperation starting from the product. In New Retailer-Supplier Relationship 1.0, buyers play a key role. This is vividly reflected in the Hema buyers we have come into contact with across various categories. Their responsibilities are not only to facilitate transactions between Hema and suppliers, but more importantly, buyers must also have the ability to insight into market demand and intervene in upstream supply chain quality control. Although the new product development and procurement driven by buyers may not all achieve market success, they have indeed narrowed the information gap between upstream and downstream retail. This is an organizational change beneficial to both Hema's retail transaction side and its supply chain. A clear effect is reflected in the efficiency of private brand R&D implementation. In 2020, Hema's deputy general manager of procurement and sales, Xiao Lu, stated that Hema's average new product R&D cycle was about 6 months, about one-third of traditional retail. However, New Retailer-Supplier Relationship 1.0 cannot completely eliminate procurement corruption. This is a historical status quo that has been repeatedly prohibited in China's traditional retail industry and has become relatively accepted by practitioners. In other words, how to promote thorough changes on the issue of procurement corruption is our observation point for the new generation of retailers and an internal requirement for becoming a transformative Chinese retailer. Hou Yi admitted the resistance in a public speech in 2021. 'This path is still difficult to walk. Because channel fees are very high, making retail enterprises overwhelmed, this system completely distorts product value. We hope to change it at Hema, but after three years, it is difficult to change. On one hand, procurement is not resolute, and procurement fees are unwilling to be given up; on the other hand, many people are unwilling to change the status quo.' In the same year, a list of Hema employees who violated laws and disciplines was exposed by 'Shangyou News,' with most involving corruption issues of procurement heads. To address this difficult problem, Hou Yi's proposal is to achieve monitoring and management through full-chain digitalization. However, this is a difficult thing to achieve in practice. It requires the gradual completion of informatization transformation and accumulation across the entire industry chain, and it also involves the degree of trust and openness between retailers and suppliers. Establishing this relationship is more difficult than canceling channel fees. Hema is also aware of this. In May 2021, it updated and proposed 'New Retailer-Supplier Relationship 2.0,' announcing the establishment of the 'Hema X Accelerator,' aiming to take a step forward in its relationship with suppliers. The accelerator focuses on supporting brands and suppliers related to the food category. Hema not only provides marketing and supply chain resources to participating companies but also opens its product R&D capabilities and channel capabilities to them. Relying on the accelerator's organizational structure, Hema hopes to connect suppliers with its internal organizational resources. However, since the first batch of accelerator camps opened in September 2021, there has been little concentrated news disclosure. Compared to the changes Hema brought on the traffic side in its early days, the changes driven by organizational change are a slower process. Especially in the past six years, under Hema's 'unlimited' high-speed expansion, many problems were buried under speed. For example, in its rapid expansion into new markets, it continuously absorbed talent from the traditional retail industry. They brought traditional experience and connections, but inevitably also brought interest chains and unspoken rules under the traditional trading system. Organizational problems are ultimately people problems. The talent Hema needs at this stage is also scarce in the industry. To break this dilemma, on one hand, Hema needs to respond to the new retailer-supplier relationship at the organizational level; on the other hand, it also needs more patience and time. This is not a lesson that Hema alone needs to learn; it is also a collective compulsory course that China's retail industry needs to make up after experiencing barbaric growth and crossing the river individually. Retailers that grew up in developed countries, with over a hundred years of industry accumulation, have precipitated advanced experience that still requires one or even two generations of effort by Chinese retail people to make up for. Hema's image today is no longer as disruptive as when it made its grand debut. As a transitional form during a period of drastic change, it is more like a role that constantly challenges the inherent system, and with its reform momentum, continuously brings advanced overseas experience into the country and stimulates industry progress. Especially after independence, facing the pressure of comprehensive profitability, what Hema needs to do is a multiple-choice question: find a balance between maintaining sufficient innovation and reform capability and ensuring a reasonable financial structure, so that reform efforts can efficiently translate into positive financial feedback. In fact, over the past year or two, it has already made some choices amid constant changes. For Hema, the structural gap in the retail industry for food products has not yet been filled, and this remains its opportunity. In terms of that spirit, maintaining the rapid adjustment capability of a reformer is also Hema's only unchanging strategy. Only by running 'fast' enough does Hema have the opportunity to sprint toward a future. Source: Zhibo (ID: exact-interaction) Author: Zhu Ruomiao