Following the pattern of the past two years, Hema CEO Hou Yi would typically send out a New Year's internal letter in early January, summarizing the past year and outlining the new year's business goals and specific measures. However, this year is somewhat unusual, as the external world has yet to see this "tone-setting" letter. Since October 2023, when Hema announced a full discount strategy and suspended the opening and renewal of Hema X memberships, the retailer's image has become blurred. Some media even speculated that the "Hema X Membership Store," representing Hema's exploration in the warehouse club format, might become the next casualty. However, this judgment has been refuted by industry insiders. "Hema will not give up on this track," a supplier who works with multiple warehouse clubs told the author, adding that the growth potential of this format is firmly believed in by the industry, and Hema X Membership Store has recently been seeking connections with more import suppliers. If any local retailer could successfully run this model, he believes Hema has the highest probability of success, given its superior team combat effectiveness, product strength, and customer trust. However, when Hema's procurement team approached him for cooperation, he politely declined, mainly due to concerns about Hema's current internal chaos, saying "I don't dare to do it." "This turn is quite sharp; if they can turn back, that's good..." a former Hema employee also lamented to us, saying that Hema is flexible, but some actions are too fast and prone to distortion. A company's business changing too quickly can be seen as continuous evolution under an open mindset, or as a sign of lack of focus. For example, Hema, just half a year after achieving full profitability in Q1 2023, is now in a hurry to fight a "life-and-death battle." Before regaining the trust of customers and suppliers, Hou Yi may need to answer two questions: Who exactly does Hema serve? What are his beliefs and core values? After all, the founder's cognition determines the frequency of the company's turns.
****Hema's Several Missed Opportunities with Discounting Hou Yi's former boss, Liu Qiangdong, once said that the secrets of the retail industry are on Walmart's shelves. The "discount" transformation that Hema initiated in October 2023 is a path already trodden by American retail giants Walmart and Costco, both of which are currently doing well, ranking as the first and third largest retailers in the U.S. If we look at core values from a "mission" perspective, both Walmart, targeting mass consumers, and Costco, targeting the mid-to-high-end market, emphasize extreme savings. Walmart says it wants to "help customers save every penny," while Costco aims to "provide members with the best products and services at the lowest possible prices." Between figuring out how to make more money and how to make customers save money, retailers that choose the latter have the last laugh. E-commerce platform Pinduoduo has also benefited from this. However, in 2022, Hema clearly had not yet grasped the "secret" of retail, or perhaps it saw it but couldn't achieve it. At that time, Hou Yi defined Hema's mission as "meeting consumers' growing needs for a better life." Reflected in products and services, to allow consumers to "peel" mangoes by hand rather than "cut" them, Hema sourced ripe mangoes from the origin, despite the greater loss. Hema established its "value" label but was expensive in terms of "price." In the era of consumption upgrade, Hema's limp was not a big deal because the era was the rising elevator. Standing in the elevator, no one noticed whether you limped. A host of new consumer brands probably felt the same. At that time, in Hou Yi's view, the difference between new retail and traditional retail was that "new retail advocates healthy consumption, enjoying the best products and the best services," so a 99-yuan Boston lobster became a hit at Hema Fresh stores, with online orders delivered within 3 kilometers in 30 minutes, and a 258-yuan/year gold membership offering 31 free delivery benefits per month... Traditional retailers徘徊 at the crossroads of transformation flocked to Hema stores to learn. They found that some things could be learned, such as dining scenes and live seafood; others were truly unlearnable, such as the cost-unconscious membership benefits and the kaleidoscope of new format experiments. After all, there was only one bridgehead for Alibaba's new retail. By leveraging the internet's strengths in scenario-centricity and digital efficiency, supplemented by hit product marketing, Hema Fresh had already validated the advanced nature of this format in terms of popularity, leaving only one self-proving indicator: sustained profitability. This is the foundation for a retail company to pursue an IPO. But just then, the elevator of the times clattered down to the first floor. Even someone as proud as Hou Yi could only lead Hema to quickly return to the essence of retail and compete for low-price mindshare. In October 2023, Hema announced a 20% price reduction on over 5,000 products in offline stores; suppliers were required to cut prices directly, or their brands would be removed. Hema intended to fully collide with Costco and Sam's Club with its discount Hema Fresh + X Membership Store. "In retail, you need to have a keen business sense; when you see something isn't working, you need to turn around immediately." This is one of Hou Yi's action principles. Looking back now, whether traditional retail or new retail, the essence is still differentiated product strength, and differentiation itself is measured by both price and value. The more downward the cycle, the higher the weight of the greatest common divisor of price and value in customers' minds. This is the underlying logic behind why Uniqlo's stock price rose 63% against the trend during the 2008 global financial crisis, and Walmart added hundreds of new stores worldwide. From past statements, Hou Yi actually saw the issue of product price competitiveness early on, but he also missed several opportunities with the "discount" business model. At the 2018 Hema First New Supply-Demand Relationship Conference, he bluntly pointed out, "Why are product prices in China so high? Suppliers should think deeply about this issue." He saw the imbalance in supply-demand relationships—domestic supermarkets have always been supplier-led, with retailers failing to establish their own buying systems, acting merely as rent collectors rather than operators, resulting in inefficient procurement. Hema's first step of transformation was not so much category innovation—introducing dining and large seafood—but rather restructuring supply-demand relationships—building its own buying system and de-KA-ization, which is the core of making "good products"; and not charging suppliers entry fees, just like Costco. Of course, this was only the ideal situation. The second step was to develop private brands and open up vertical supply chains one by one. This would both reduce product costs and increase retailer gross margins. This also resembles Costco. In fiscal 2021, Costco's private brand Kirkland generated $59 billion in revenue, accounting for 31% of the company's total revenue. According to Hou Yi's 2018 vision, Hema aimed to achieve 50% private brand sales within three years. If each of these two steps had been solidly executed and delivered on time, Hema would have much more room to maneuver today. The reality is that people often overestimate their efficiency, not to mention black swan events like the pandemic. Currently, Hema's private brand sales, including fresh, standard products, and 3R foods, account for 35%, still at least 30% short of Hou Yi's set target. Of course, this performance is already far higher than the average 4.3% for China's top 100 supermarket chains. As for establishing the buying system, that is the real "mountain-moving" project. Hou Yi admitted in 2021 that after three years, he found it difficult to change. On one hand, procurement was not resolute, and procurement fees were not easily given up; on the other hand, many people were unwilling to change the status quo. Reflected in competition, after entering the warehouse club track in 2020, Hema found it increasingly difficult after a year, "To form core competitiveness for each SKU, although we have a relatively better procurement system, we haven't done enough." In other words, there is still a long way to go to catch up with Costco and Sam's Club. Originally, Hema planned to open 50 X Membership Stores within two years, with GMV exceeding that of existing Hema Fresh stores. But by the end of 2023, only 10 X Membership Stores had been opened, far fewer than the number of new Sam's Club stores in the same period. A Hema supplier believes that Hema's buyers' product development capabilities still need improvement, "Good buyers need to have requirements for quality control and product sense, and need to know in their hearts whether a product can become a hit." Retail expert Wang Guoping also believes that Hema's current procurement system is not yet sufficient to fully benchmark against Costco and Sam's Club, as these two have been honing their global procurement systems and supply chains for 40 years. In his impression, the only domestic competitor Sam's Club has publicly mentioned is RT-Mart, which has a team gene from the manufacturing side, is familiar with factory processes, and in early years managed to bring an electric vehicle priced at over 3,000 yuan in the market to a retail price of 999 yuan in stores. At that time, a RT-Mart store in Hainan had annual sales reaching 1 billion yuan, leading to the industry saying, "Nothing grows around RT-Mart." Hema, founded less than 8 years ago, despite showing significant advantages in fresh and food supply chains, still needs to do more from 0 to 1 in procurement systems and vertical supply chains to benchmark against international giants and form its own characteristics. Doing hard discount requires patience, but the times have not left much buffer space for reformers. From Hema's postponement of its IPO to its decisive overturning of its previous business model, Hou Yi must have already felt the changes in the business environment and the pressure coming at him. In fact, Hema had already seen the prospects of discount operations in 2022, but strategically chose to spread its bets. At the 2022 Hema New Supply-Demand Conference, Hou Yi proposed that X Membership Stores and Hema Fresh would go upward, mainly using value innovation to meet the needs of the middle class; and Hema Outlets would go downward, using price innovation to meet the broader public's needs. The outlet format was elevated to one of Hema's "three carriages." An industry insider said that the business model data feedback for Hema Outlets is very good, with daily sales of over 100,000 yuan, almost catching up with an ordinary hypermarket, "indicating that discounting is welcomed by consumers; in fact, large supermarkets in various provinces are testing the waters." What Hema overlooked was the change in the middle class. From the development history of international retail giants, discounting is not just a need for some groups; when the middle class is squeezed by the environment, they also find Pinduoduo appealing. Hema's misses and challenges boil down to its understanding of the essence of retail.
More Urgent Than Outputting the "One Trillion" Dream After announcing the full discount strategy and suspending the membership system, Hou Yi needs to answer a question—what is Hema's belief? It sounds a bit metaphysical, but given that Hema is always changing, it needs to output constant values to customers and partners to gain long-term trust. For example, a supplier mentioned in our communication that Chinese retailers need long-termism, especially in the warehouse club track. This is also one of Hema's current three carriages. Another supplier who has cooperated with Hema emphasized, "Retail is not built in one shot; you have to be down-to-earth." It's clear that many people lack confidence in Hema's patience and focus. Of course, this depends on how Hou Yi defines Hema. The halo of new retail has long dimmed, and the label of physical retail seems not sexy enough for the capital market. Image source: Hema official website. Although Hou Yi has said on many occasions that he wants to return to the essence of retail, his own definition of Hema seems to waver—when interviewed by media in April 2023, he emphasized that Hema is a new e-commerce, not a physical store; after launching the "discount" transformation in October of that year, he said that future low prices will definitely be in physical stores, not in e-commerce. If Hema considers itself an e-commerce platform or internet company, then traffic and scale are the algorithms for training this "belief model." The past aggressive store openings, cost-unconscious membership benefit subsidies, and the "three full" strategy of full category, full format, and full channel proposed in 2023 would then have a reasonable basis. As of September 2023, Hema Fresh stores had exceeded 350; it is expected that in 2024, Hema's store opening speed will continue to surge. In terms of format, the emergence of Hema's Black Label stores, benchmarking premium supermarkets, basically completes the last piece of the puzzle for full-customer marketing. If it is a retailer, although scale is also important—it represents the channel's bargaining power over KA and vertical supply chains, as well as lower product production costs—the more core is customer trust, i.e., brand power. This requires patience and focus. Compared to the grand, abstract, scale-oriented vision of "one trillion in sales, serving one billion consumers" in the next decade that the capital market likes to hear, customers may want to know more: Why choose Hema? And is Hema worthy of long-term trust, even to the point of buying every product with eyes closed? At present, this may be a more urgent topic than outputting the "one trillion" dream. After all, chain supermarkets like Yonghui, Walmart, and RT-Mart are all marketing around "everyday fair price," "everyday low price," and "quality-price ratio" to compete for customer mindshare; the transformation directions are also similar, such as store space renovation to optimize offline experience, streamlining categories and SKUs, increasing the proportion of customized products to enhance differentiation, and developing private brands to expand vertical supply chains... Image source: offline photo. Especially after the Hema Fresh format, which targets the middle class and young people, suspended its paid membership model and wants to capture a broader consumer base through low prices offline, Hema's label has actually begun to blur. If Costco and Sam's Club satisfy members' identity recognition of a middle-class lifestyle, and premium supermarkets like Ole' target high-end consumers, then what about Hema now? Where is its uniqueness? Will changes in the customer base bring about changes in product innovation? Will multi-format stores divert traffic from each other? How much time and how frequently can the middle class and young people in first- and second-tier cities visit offline stores? How to ensure stable quality control... These all remain to be seen. From a customer perspective, Hema still needs a clearer label. Trying to have it both ways can easily lead to insufficient distinctiveness. After taking the first step—launching a full discount at the product level—Hema might be able to cross the river by feeling the stones, drawing on the transformation experience of Spanish supermarket chain Mercadona to solidify its trust foundation. Since 1993, when Mercadona committed to a "total quality" strategy, its first step was to launch "everyday low prices," which resulted in six months of severe losses. Subsequently, the company successively introduced strategies such as product shelf-life principles, in-store convenience principles, category management, and the concept of internal suppliers, positioning itself as "the provider of solutions needed by customers to complete their entire purchase process." Mercadona's managers no longer talk about market share but use household consumption potential as a trust indicator, aiming to capture 100% of household spending in the three categories it distributes. In this process, the concept of product "quality" began to evolve towards food safety, such as eliminating inappropriate additives. Before launching the full discount strategy, Hou Yi had visited Europe to study retailer transformations, so he must be familiar with Mercadona's transformation path. Behind a sustainable retail discount transformation, there needs to be a healthy supply-demand relationship and the establishment of customer-first trust. Currently, one factor in Hema's favor is the oversupply on the production side. A supply chain insider told us that factories generally need a 20% gross margin to ensure operations, but in the past two years, with oversupply and intensifying involution, "Given Hema's scale, when it demands price cuts, there will always be factories willing to cooperate. As long as there is a 10% gross margin, someone will take the order." The challenge lies in how to motivate suppliers to invest resources and cooperate with Hema in joint product innovation. Innovation has always been Hema's lifeline, but if the supply-demand relationship is not smoothed out, will suppliers still be willing to invest in riskier innovation? In an interview last year, Hou Yi said that an era must do the things of that era, and an era gives birth to the products of that era. When one era's plate dives towards another era's plate, Hema took a leap and chose to follow the direction of potential energy transmission.
This path is harder. Of course, if it succeeds, as long as consumers recognize Hema's differentiation capability, it will definitely go further.
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