---
title: "Hema and Yonghui Learn from Each Other: The Battle for Lower-Tier Markets Enters a 'Long Season'"
description: "At a residential area outside Beijing's South Fourth Ring Road, a small Hema Fresh Outlet store is crowded with customers waiting for opening before 8 a.m. daily. The store mainly sells near-expiry products from Hema Fresh at ultra-low discounts. Despite a chaotic shopping experience, this community store model has brought unexpected growth for Hema, with outlet and neighborhood stores growing 555% year-on-year by end of 2022. Meanwhile, Yonghui, a traditional supermarket giant, is undergoing a painful digital transformation, and both companies are now learning from each other as they compete in lower-tier markets."
author: "墨迪"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
telephone: "+8615854817671"
published: "2023-06-06"
language: "en"
canonical: "https://xinjignxiao.com/en/articles/hema-and-yonghui-learn-from-each-other-the-battle-for-lower-tier-markets-2d91cca0/"
markdown: "https://xinjignxiao.com/en/articles/hema-and-yonghui-learn-from-each-other-the-battle-for-lower-tier-markets-2d91cca0.md"
original_source: "https://mp.weixin.qq.com/s/U7liejV8p-XAhV6IQYhp-g"
translation: "https://xinjignxiao.com/zh/articles/%E7%9B%92%E9%A9%AC%E6%B0%B8%E8%BE%89%E4%BA%92%E5%81%B7%E5%B8%88-%E6%96%B0%E9%9B%B6%E5%94%AE%E4%B8%8B%E6%B2%89%E4%B9%8B%E4%BA%89%E8%BF%9B%E5%85%A5-%E6%BC%AB%E9%95%BF%E7%9A%84%E5%AD%A3%E8%8A%82-2d91cca0.md"
attribution: "New Distribution — https://xinjignxiao.com/en/articles/hema-and-yonghui-learn-from-each-other-the-battle-for-lower-tier-markets-2d91cca0/"
usage_policy: "https://xinjignxiao.com/ai-policy.txt"
---

# Hema and Yonghui Learn from Each Other: The Battle for Lower-Tier Markets Enters a 'Long Season'

> At a residential area outside Beijing's South Fourth Ring Road, a small Hema Fresh Outlet store is crowded with customers waiting for opening before 8 a.m. daily. The store mainly sells near-expiry products from Hema Fresh at ultra-low discounts. Despite a chaotic shopping experience, this community store model has brought unexpected growth for Hema, with outlet and neighborhood stores growing 555% year-on-year by end of 2022. Meanwhile, Yonghui, a traditional supermarket giant, is undergoing a painful digital transformation, and both companies are now learning from each other as they compete in lower-tier markets.

At a residential area outside Beijing's South Fourth Ring Road, a small storefront is always crowded with customers waiting for it to open before 8 a.m. every day. This Hema Fresh Outlet store, located in Jiaomen, Beijing, mainly sells near-expiry products from Hema Fresh. Items that didn't sell out at Hema Fresh's offline stores are delivered to the outlet the same night and sold at ultra-low discount prices the next day.

Unlike traditional supermarkets, the Hema Outlet store is usually crowded, with people jostling shoulder to shoulder, even livelier than a wet market. Many elderly customers place items in their shopping carts early and wait for the discount period to check out. Many customers frequently complain that the store's merchandise is disorganized and prices are chaotic. Most discounted items have to be "grabbed."

Despite the poor shopping experience, this unassuming community store model has brought unexpected growth for Hema. As a supplement to Hema's three main business formats, outlet stores reduce spoilage and turnover of fresh products while also cutting store losses and waste.

Official data shows that by the end of 2022, Hema Fresh's sales grew over 25% year-on-year, while Hema Outlet and Hema Neighborhood grew at a staggering 555%.

Under the new circumstances, the status and positioning of the outlet format within Hema have undergone major changes. Hema's chief operator Hou Yi said its role far exceeds that of today's Hema Fresh and Hema X Membership Store. In April this year, Hema Outlet welcomed a new head: Li Guo, former CEO of Yonghui Superstores. During his time at Yonghui, Li Guo was widely recognized for his strong supply chain management capabilities. His departure was interpreted as a divergence within Yonghui over the direction of digital transformation.

The job change of this key industry figure precisely reflects the delicate situation of two retail models: on one hand, Hema, the new retail leader, is eager to strengthen its supply chain capabilities; on the other, Yonghui, the traditional supermarket standout, is pushing digital transformation at the cost of heavy losses. Both have reached a deep-water zone where they need to learn from each other.

The movement of people makes the competition between new retail and traditional supermarkets increasingly complex. Yonghui may lack internet genes, but for Hema, conquering the vast lower-tier market is also full of uncertainties.

**Yonghui's Pain**

The bombshell of Li Guo's departure brought the long-quiet Yonghui back into the spotlight.

As a supermarket giant born in China, Yonghui, which has always been at the forefront of change, has won people's hearts. After its A-share listing in 2010, Yonghui's market value once exceeded 100 billion yuan, and it was unrivaled in the following years.

With the capital market's push after 2015, and the eruption of new formats like front warehouses and community group buying, traditional supermarkets like Yonghui suddenly realized that the underlying logic of retail might be changing.

One of the most direct impacts was the emergence of Hema Fresh in 2017. Hema, under the banner of new retail, integrated online and offline, using large seafood and upscale stores to draw people back offline. By 2018, Hema had opened 88 stores in a year, almost at a pace of "one store every four days," conquering major cities nationwide.

That same year, Yonghui's profits plummeted for the first time, down 40.8% year-on-year. To avoid waiting for death, Yonghui had to incubate formats like "Super Species" and "Yonghui Life," aggressively chasing internet models.

Take "Super Species" as an example: at its peak, it had nearly 90 stores, but now only a handful remain. In 2019, "Yonghui Mini" opened 573 stores; by 2020, only 7 new stores were opened, and 74 were closed. The continuous closures of mini stores proved the failure of Yonghui's "small store model" exploration.

If the attempts at new formats caused Yonghui to suffer from aggressiveness, its defense of existing business was also unsatisfactory. Official data shows that Yonghui Superstores' store count gradually declined after reaching a peak of 1,440 in 2019, decreasing by 18.6% in 2020 and another 7% in 2021, leaving only 1,090 stores, with a total of 388 closures over three years.

After huge losses, Yonghui quickly decided to retreat to traditional supermarkets. In 2019, Li Guo was promoted from executive vice president to president of Yonghui. The following three years were Yonghui's highest revenue years, but gross margins declined year by year. From 2018 to 2021, Yonghui Superstores' revenue rose from 70.517 billion yuan to 91.062 billion yuan, but gross margin fell from 22.15% to 18.71%. In 2021, Yonghui suffered its first net loss of 3.94 billion yuan.

All this, as an important project promoted during Li Guo's tenure, was hard to shirk responsibility for. It was also in August of that year that Li Guo applied to resign as CEO of Yonghui Superstores, moving to head a supply chain company under Yonghui.

At that time, Li Guo had worked at Yonghui for over 20 years. In the early years, the industry circulated the legendary story of Li Guo rising from a small loss prevention officer to CEO. At this moment, Li Guo's bleak departure and career trajectory reflect the turbulence of the retail industry over the past few years.

However, the consecutive losses in 2021 and 2022 may not be a bad thing for Yonghui. **If you look at the sources of losses in the financial reports, these two years of losses had strategic intentions of "shedding burdens" and "paving the future"—one, reducing inventory, and two, accelerating digital construction.** In 2021, Yonghui proposed its latest strategic goal of becoming an "omni-channel digital retail platform." From this perspective, the losses have an element of "one-time write-off."

As the most "restless" company in the supermarket industry, Yonghui began transforming into warehouse supermarkets in 2021. One of the most competitive strategies of warehouse business is offering low-priced goods and making money through membership fees; but Yonghui's warehouse business has very low profit margins while also charging zero membership fees, which continuously raises overall operating costs.

How Yonghui navigates the painful period of digital transformation has become a concern for the entire industry.

**Can Hema Outlet Conquer the "Outside Fifth Ring"?**

It's not just Yonghui facing difficulties. In the past three years, large domestic supermarkets have hit crises one after another. If you pay attention to their financial reports, you'll find that in the first half of 2022, among 17 listed supermarket companies, only 3 achieved positive growth in both revenue and net profit.

In contrast, Hema is more like an octopus, having tried more than a dozen formats, and its difficulties are no less than Yonghui's.

The lower-tier market is a determined but tortuous exploration for Hema. Its "Hema Neighborhood" project once sparked controversy. According to LatePost, more than a year ago, there were fierce disagreements within Alibaba over the project.

In a media interview in 2021, Hou Yi proudly summarized Hema Fresh, Hema X Membership Store, and Hema Neighborhood as the "three carriages" of Hema's store exploration. In Hou's vision, the first two were responsible for first- and second-tier cities, while Neighborhood was to conquer the lower-tier market. This is quite similar to Yonghui's initial positioning of its mini stores.

It is reported that in 2022, Hema's overall GMV was around 45 billion yuan; in 2023, the target is set at 100 billion yuan, a growth rate of over 100%. Behind this extremely aggressive number lies deep meaning.

Considering that Yonghui Superstores and Gaoxin Retail each have annual sales of around 100 billion yuan, Hema's benchmarking intent is clear.

The reality, however, is that after the launch of lower-tier market projects represented by Hema Neighborhood, Hema continuously cut costs, but its costs in all aspects were higher than competitors. As a supplement to the "community group buying" format, Hema Neighborhood's products were not cheap, nor were they of high quality, leading to sparse customer traffic in most stores, continuous losses, and ultimately large-scale store closures.

Hoping to find more extreme cost-performance for users, Hema Outlet was born. The outlet store was initially positioned as a supplementary format to help Hema Fresh handle near-expiry products and reduce losses, but from recent moves, outlet stores have become Hema's tentacle to attack the "outside Fifth Ring" market.

**Hou Yi publicly stated that starting in 2023, "Hema Outlet" will be the brand's most important strategic project, bar none**, even vowing to offer prices half of ordinary supermarkets. At this point, supply chain capabilities become crucial.

In July last year, foreign media reported that Hema Fresh was seeking a new round of $400-500 million in financing at a pre-investment valuation of about $6 billion. This figure is 40% lower than Hema's peak valuation, but financing is still progressing slowly.

Behind this is the ebb of new retail and new consumption. In the capital-explosive 2020, financing in the new retail industry reached 12.16 billion yuan, up 69.4% year-on-year. By the first half of 2022, this figure had shrunk to around 2.2 billion yuan. Not to mention strong competitors like Miss Fresh and Dingdong Maicai, representing front warehouse models, have already declared phased retreats.

This year, Alibaba Group confirmed that Hema is preparing for an IPO within the next 6 to 12 months.

**However, what Yonghui failed to explore, Hema has not succeeded in either. Facing a lower-tier market with lower fault tolerance, Hema's continuous investment also indicates that it is gradually entering the "deep water zone" of new retail.** This "deep water zone" is also where Yonghui and its peers excel.

**Telling the Story the Other Is Good At**

By 2023, it is no longer the one-way chase of the old king, nor the pride of the new king; integration has become the new proposition of the retail industry.

**Yonghui, which started with the entrepreneurial dream of "moving the wet market into the supermarket," now wants to become a high-tech platform; Hema, which wanted to disrupt retail with the internet, is now honestly telling the story of supply chain systems.**

Internet and traditional retail have never been so close to each other as this year.

Yonghui, emerging from the trough, is beginning to see the dawn of digitalization. According to Yonghui's latest financial report, Q1 2023 operating revenue reached 23.802 billion yuan, up 24.07% quarter-on-quarter from Q4 2022, with net profit attributable to parent of 704 million yuan, up 40.24% year-on-year. Despite slowing offline sales, Yonghui's online growth is commendable. In 2022, Yonghui Superstores' online business achieved sales of 15.936 billion yuan, up 21.37% year-on-year, accounting for 17.69% of total revenue. In Q1 2023, online sales reached 4.02 billion yuan, with average order value up 6%.

In terms of market share changes, as of March this year, Yonghui Superstores accounted for 5.7% of China's retail market, second only to Gaoxin Retail Group's 7.8%, and higher than Walmart Group's 5.6%.

Externally, in 2022, China's fresh produce market exceeded 5 trillion yuan, but the online penetration rate was only about 15%, meaning the dividend of fresh e-commerce has not been fully released. The "long bull market" for Chinese local retail companies may just be beginning.

After announcing that its main format Hema Fresh has achieved profitability and "as a new retail format, has completed the first phase of its goals," the lower-tier market represented by Hema Outlet has become Hou Yi's next target. He believes that Hema Outlet's role far exceeds that of today's Hema Fresh and Hema X Membership Store; outlet stores truly provide Chinese consumers with good products at cheap prices.

The Hema team, including Hou Yi, has long realized how difficult it is to sustain so-called middle-class consumption upgrades; to gain a larger share, they need to win more hearts.

Looking globally, Hema's benchmark is Costco—founded in San Diego, California in 1976, called by Munger a company he wants to "take to the grave"—which, after traversing multiple cycles, became a retail giant with a market value exceeding $200 billion.

Reviewing Costco's history, it's clear that its popularity is inseparable from historical progress. In the 1980s, the first and second oil crises erupted globally, with oil prices soaring twice, leading to low U.S. economic growth and stagnation, and rising inflation. The crisis affected hundreds of millions of American middle-class consumers. In an era of economic stagnation and price inflation, they had to find more cost-effective shopping places. Costco's predecessor, warehouse wholesale store Price Club, thus stood out.

This is quite similar to the situation Hema and Yonghui are facing now.

People have summarized Costco's success as benefiting from its unique business model and innovative methods. In terms of business model, it pays attention to details, is user-centric, and achieves cost control. More importantly, it masters the supply chain of global manufacturing. All this is also the direction Hema and Yonghui are striving for.

For Hema and Yonghui, their opponent seems to be only each other. With vast online space and endless lower-tier markets, who will become the favorite retail giant of Chinese consumers remains unknown. The only certainty is that the future will return to the essence of business and retail.

The long competition has just begun.

*Tip: Due to changes in the official account's push rules, to help readers get the latest articles as soon as possible, please set a star: Click the profile name "New Distribution" ➤ Click the "..." button in the top right ➤ Set as star ⭐*


---

## Copyright and AI use

This article is sourced from New Distribution. Search, quotation, summarization, and model training are permitted, but every use must credit New Distribution and retain the canonical source URL.

Contact: zhaobo258@gmail.com · +86 158 5481 7671