The competition in China's retail sector has entered its most intense phase, evolving from an initial price war to a long-term value war. Especially as the market size continues to grow, the pursuit of value becomes more important. Since foreign retailers entered the Chinese market in 1995, the entire retail industry has entered a new development pattern, bringing unprecedented impact to local enterprises at that time. Today, the rise of new traffic, new technologies, and new platforms has prompted another transformation in retail channels. At the format level, the golden age of traditional hypermarkets has passed, convenience store formats are stabilizing, warehouse club stores have become a phenomenal indicator, and live-streaming e-commerce remains highly popular. On the consumer side, people are becoming more cautious and rational, with escalating demands for products, channels, and experiences. These new requirements are driving the retail industry to proactively change, with the prevalence of discounting aligning with current rational consumption trends. In my view, despite changes in the landscape and more rational consumption, the ceiling for the retail industry is far from reached. According to Frost & Sullivan, with a compound annual growth rate of 3.9%, China's retail market size will reach 67 trillion yuan by 2028. This means there is still room for exploration and innovation within the track, and competition is inevitable. Breaking down the supermarket format, there are now three categories: local players, foreign players, and transformation players. Local representatives include Hema and Yonghui, foreign retail giants are led by Sam's Club, Costco, and Aldi, while transformation players are mainly represented by Metro. In my view, Sam's Club and Hema, as two significant 'particles' in the track, have directly shifted competition from a 'three-kingdom' scenario to a 'two-king' confrontation through the 'Hema-Sam's War'.
'Moving the Mountain to Hit the Bull' – Hema's Supply Chain Upward When industry competition enters deep waters, the 'Hema-Sam's War' is inevitable. As early as July, Walmart executives stated in an internal meeting that Hema is the only competitor to Sam's Club in China. In late July, Hema launched a vigorous 'Moving Mountain Price' campaign, starting with durian layer cake, and Sam's Club followed by lowering prices, marking the beginning of the 'Hema-Sam's War'. Although Hema officially explained that 'Moving Mountain Price' embodies the spirit of the Foolish Old Man who moved mountains, many netizens interpreted it as targeting Sam's Club. Now, months later, 'Moving Mountain Price' has become a long-term project for Hema, expanding from durian layer cake to seafood, rice, flour, oil, and other categories, and spreading from Beijing and Shanghai to 15 cities nationwide. In December, Hema launched 'Moving the Mountain to Hit the Bull', announcing the establishment of direct-sourcing beef ranches in Australia with three companies: Newland, Yueshengzhai, and Tianpuleshi, directly attacking Sam's Club's core territory. In my view, this move has escalated the intensity of the 'Hema-Sam's War' to a new level. After all, beef is one of Sam's Club's most defensible categories, leveraging Walmart's international supply chain advantages. Sam's Club's selected grain-fed beef has always been popular among high-spending consumers. Despite higher unit prices, people are willing to pay for quality, which is the brand mentality Sam's Club has built through 'product strength'. By establishing direct-sourcing ranches and reaching into the upstream supply chain, Hema is further solidifying its competitiveness in creating hit products from the source. I understand that this can compress procurement costs by 20%, and the savings can be directly passed on to consumers in the form of more attractive beef prices. Additionally, whole-cow ordering ensures a yield rate of over 85%, meaning more edible parts at the same price level. Given Chinese consumption habits, where beef products have 'categories but no brands', when Hema presents both quality and price advantages to consumers, the answer seems obvious. If Sam's Club was previously calm, when the beef category is conquered, even the usually composed Sam's Club seems unable to sit still. After all, the initial 'Moving Mountain Price' targeted durian, which is not a trump card; there is little difference in raw materials and taste, and the main beneficiary is consumers who enjoy lower prices. When Hema attacks Sam's Club's core with the beef category, the latter must consider the impact of this local Chinese player. Image source: Xiaohongshu user @和满满一起玩 I noticed that Sam's Club first lowered prices on a series of products like beef hotpot slices to counter 'Moving the Mountain to Hit the Bull'. Additionally, Hema employees discovered that Hema's headquarters IP address was blocked by the Sam's Club app, and some netizens saw multiple questions in Sam's Club's membership experience survey directly targeting Hema, joking that 'shopping at the supermarket feels like detecting enemy intelligence'... It can be seen that this 'Hema-Sam's War' has entered its most intense phase, namely the competition for cost and efficiency at the supply chain level. Especially as Hema accelerates expansion, promotes discount reform, and strengthens its supply chain, the fight for the top spot is inevitable. In my view, both sides are still seeking a winning move, and Hema's direct attack on Sam's Club's core may bring the outcome sooner.
'The Foolish Old Man Moves the Mountain' – Hema's Supply Chain Downward The essence of the 'Hema-Sam's War' is actually shaped by supply chains, a point competitors also recognize. Hema CEO Hou Yi has publicly stated that globally, leading retail enterprises often achieve competitiveness in product procurement by integrating global supply chains and eliminating intermediate links, thereby offering products with extreme cost-performance. This is exactly the direction Hema has been continuously working towards. The Foolish Old Man moves the mountain; the pony crosses the river. In my view, this 'mountain' is both 'Sam's Club' and not entirely 'Sam's', but more so the long-established foreign competitors in the track. Young Hema, with its fearless spirit and patience and confidence in 'moving the mountain', is prepared for a 'protracted war', and its various measures are gradually pushing the competition into deep waters. Specifically, Hema is deepening its efforts in three major areas: accelerating store expansion, initiating discount reform, and strengthening supply chain advantages. First, accelerating store expansion to enhance scale advantages. Since opening its first store in October 2020, Hema has now laid out 10 membership stores nationwide, located in Beijing, Shanghai, Nanjing, Suzhou, and other places. Unlike the traditional warehouse club store location strategy, Hema opens stores in city centers with stronger spending power, higher willingness to consume, and denser consumer populations. In addition to the membership store format, Hema has also launched its first Premier store and an experience store at the Asian Games Media Center. The main format, Hema Fresh, has also opened 50 new stores in a year, with the total number exceeding 350. In my view, as store expansion accelerates and the matrix becomes more diversified, when the basic base 'gains weight' to a certain scale, Hema's foundation for 'moving the mountain' will become more solid. Second, comprehensive discount reform to establish a new supply-retail system. On one hand, stores continue to 'gain weight'; on the other, the system iterates to reduce weight. Looking at global retail industry trends, the more cautious the consumption period, the more proactive change is needed. To adapt to market changes, Hema has recently initiated discount changes, shifting focus to enhancing product price competitiveness. But this does not mean simply engaging in a price war; rather, it is about continuously presenting higher-quality hit products at low prices to consumers. Specifically, Hema has broken the original departmental classification, establishing a finished goods department centered on factories and a fresh products department centered on bases. The former builds new price and cost systems through ODM customization, OEM, and joint investment in factories, while the latter focuses on Hema villages and global sourcing. Together, they form a strong driving force for Hema's 'product strength'. Third, opening up the circulation chain to strengthen supply chain advantages. Low prices are only the surface; behind them lies the dual test of differentiation and cost-performance, which is invisible difficulty. To continuously enhance competitiveness, Hema has established a dedicated procurement department for X membership stores, creating exclusive products and supply chains to maintain lower gross margins and more streamlined SKUs, further passing benefits to consumers. Additionally, Hema's Shanghai supply chain center was fully operational in July. As the cornerstone of Hema's new retail supply chain upgrade, this center will push Hema's warehouse operations management into full automation, and through the construction of Hema's signature central kitchen, significantly improve supply chain efficiency and reduce operating costs. To do a good job, one must first sharpen one's tools. With these upgrade measures, Hema, which is inherently internet-savvy and has a deeper understanding of Chinese consumers, will continue to vertically deepen its supply chain, building a powerful tool for 'moving the mountain'.
Supply Chain Battle: Can Two Tigers Share One Mountain? In my view, 'Moving the Mountain to Hit the Bull' may just be the beginning; behind this 'Hema-Sam's War' is a comprehensive new battle across all formats, namely the competition between China's new retail representative and established foreign representatives. Looking at the current retail competition landscape, there are external players like Sam's Club and Costco ahead, internal players like Hema and fudi behind, and transformation players like Metro in between. As competition intensifies, the 'battle' for users, products, and supply chains becomes more fierce. First, the consumer base with purchasing power is limited, and people's consumption behavior is becoming increasingly rational. Therefore, the difficulty of competing for limited consumers escalates. Taking Hema and Sam's Club as examples, data from Yuehu iAPP shows that in June 2023, their user overlap rate was as high as 43.1%, not to mention other entrants also vying for users in the market, presenting the same challenge to all. Second, although China's market base is large enough, people's demands for quality and price have not decreased in the current environment, so all entrants must continuously optimize themselves to attract limited users. This means that participating competitors must have the ability to create extreme cost-performance, which includes three factors: price, quality, and experience. Looking at the future plans for 'Moving Mountain Price', Hema plans to include more high-quality products in 2024, with precise pricing per gram. Because Hema knows that in the current consumption habits, products with the same quality and source but lower customer prices will be more attractive, which is why Hema is undergoing discount reform. In terms of experience and service, Hema also strives for excellence, such as hiring professional florists to teach at flower workshops, sommeliers to assist users in product selection, and the newly opened Beijing Jianguo Road membership store has separate hand-washing areas for adults and children... These measures are actually aimed at precisely focusing on a limited customer base, because seeking breadth and completeness cannot be equated with doing well. As the 'Hema-Sam's War' becomes more public, Hema has also shifted from initial overall profitability to a new goal of '100 billion retail'. Media reports have stated that Hema's sales in 2022 were 61 billion yuan, while Sam's Club was around 66 billion, both moving towards breaking through the 100 billion revenue mark, and 'seeking efficiency from the supply chain' is a consensus both have reached. We believe that the fast-moving Hema is very aware that behind this 'Hema-Sam's War' will be a protracted 'value war', and Hema hopes to build more differentiated competitiveness by 'grinding' the supply chain. This proactive change undoubtedly increases the chances of local Chinese players winning in the entire retail track.