---
title: "Hema Closes Stores to Survive"
description: "Hema's shift towards profitability is closely tied to Alibaba's operational strategy adjustments. After facing a major crisis last year, Alibaba implemented an operational responsibility system, requiring each business unit to sustain itself. As Alibaba's 'prodigal son,' Hema opened its first store in 2016, attracting attention and imitators, but after six years of trials and errors, it must now focus on profitability and survival."
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published: "2022-03-08"
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# Hema Closes Stores to Survive

> Hema's shift towards profitability is closely tied to Alibaba's operational strategy adjustments. After facing a major crisis last year, Alibaba implemented an operational responsibility system, requiring each business unit to sustain itself. As Alibaba's 'prodigal son,' Hema opened its first store in 2016, attracting attention and imitators, but after six years of trials and errors, it must now focus on profitability and survival.

Source: AI Finance and Economics (ID: aicjnews) | Author: Liu Dongxue | Editor: Chen Fang

Hema's shift in mindset to pursue profitability is closely related to Alibaba's operational strategy adjustments. After encountering a major crisis last year, the tech giant fully implemented an operational responsibility system, meaning each business segment must consider how to support itself, rather than relying on the group's continuous financial support as in the past.

As Alibaba's "prodigal son," Hema attracted countless attention when it opened its first store in 2016. Competitors, fearing they might miss out on the trend, rushed to learn from this new retail benchmark and opened similar stores.

Now, six years later, these projects are struggling. Meituan's Xiaoxiang Fresh was halted, Yonghui's Super Species closed stores after massive losses, JD's Qixian has expanded slowly, and Su Xiansheng has faded into obscurity.

Even the pioneer Hema is having a tough time. On March 1, five Hema Fresh stores closed simultaneously, including two in Nanjing, and one each in Qingdao, Chengdu, and Guangzhou.

This is not the first time Hema has reported store closures; previously, Hema had closed stores in multiple locations, always citing operational strategy adjustments.

This seems to indicate that Hema, which once declared unlimited investment, must now consider the commercial essence of making money after more than a dozen trial-and-error adjustments. In an internal letter in January, Hema CEO Hou Yi set full profitability as a new goal.

Previously, Alibaba implemented an operational responsibility system for its business lines, requiring each business segment to support itself.

Against this backdrop, some Hema stores that have long been unprofitable have been included in the list for loss-cutting closures.

On the other side of closing stores to stop losses, Hema, which can no longer burn money, has recently been reported to be expanding its fresh food outlet stores. This format not only has lower opening costs but also helps Hema solve product loss issues and reduce cost pressure.

******No More Money to Burn**

"The outlet for fresh food is here!" reads the promotional poster for Hema Fresh Outlet stores.

This is a new format. In October last year, Hema's first fresh food outlet store quietly opened on the first floor of Pudong Mall at 333 Changli Road in Pudong New Area, Shanghai.

The store was converted from a "Hema Mini store" and covers about 480 square meters. Since then, Hema Fresh Outlet stores have opened in Hangzhou, Beijing, Chengdu, Wuhan, Nanjing, Xi'an, and Qingdao.

On March 2, a reporter from Finance and Economics Weekly visited the Hema Fresh Outlet store in Tongzhou, Beijing. The store is also small, only about 200 square meters, and one can see the entire store at a glance. The simple layout, streamlined categories, and "fracture-like" prices are in stark contrast to the traditionally high-end Hema Fresh stores.

It is understood that most of the products sold at Hema Fresh Outlet stores are near-expiry "Daily Fresh" items, which were once Hema's killer feature to attract users. However, "Daily Fresh" products have faced criticism since their launch, with some calling them "Daily Throw," as they are put on shelves during the day and become near-expiry by evening.

As Hema's store count expands, this loss is enormous, and many products themselves are not actually spoiled, making it a pity to throw them away. Eventually, Hema came up with the idea of opening outlet stores.

Photo/Visual China

Hema CEO Hou Yi explained to the media that the purpose of opening fresh food outlet stores is to help Hema reduce losses in stores and processing centers, so prices are basically less than half of those in surrounding fresh food supermarkets. For example, Daily Fresh milk with two days left before expiry is sold directly at 3 yuan per bottle, down from 7.5 yuan.

Hema told Finance and Economics Weekly that Outlet is a supplement to the three main formats: Hema Fresh stores, Hema X Membership stores, and Hema Neighbor. The reasons for opening outlet stores are, on one hand, to reduce product loss, and on the other, to penetrate lower-tier markets and attract new customers.

In terms of opening costs, Hema Fresh Outlet stores are relatively low within the Hema system because of their small size.

It is understood that the seven Hema X Membership stores have an area of about 16,000 to 18,000 square meters; the next, Hema Fresh, has 300 stores with an area of 2,500 to 5,000 square meters; Hema Mini stores have an area of 500 to 1,000 square meters.

The fresh food outlet stores, which are being vigorously expanded, are much smaller, only 200 to 500 square meters.

A smaller area means lower rent and labor costs. According to Huaxia Times, opening a Hema Fresh store costs about 30 million yuan, opening a Hema Mini store costs about 2 million yuan, and opening a Hema Fresh Outlet store only costs about 1 million yuan.

While Hema is opening lower-cost fresh food outlet stores, it is also closing poorly performing Hema Fresh stores.

On March 1, Hema Fresh stores at Nanjing Xinjiekou Oriental Fulaide and Jiqingmen, as well as Qingdao Taishan Road, Guangzhou Jianhuahui, and Chengdu Tianfu Changcheng, closed simultaneously. Notices posted at the store entrances stated that the closures were due to operational strategy adjustments.

Among them, the Hema Fresh store on Taishan Road in Qingdao covers more than 4,000 square meters and was its sixth store in the area, but it closed after less than two years of operation.

Also closed were Hema Neighbor stores, a format similar to community group buying like Duoduo Maicai and Meituan Youxuan.

According to media reports, to reduce costs and refine operations, Hema closed its Hema Neighbor stores in Guangzhou, Shenzhen, and Suzhou at the end of 2021. After the contraction, only seven cities have Neighbor pickup stores.

In fact, there were earlier signals that Hema could no longer burn money. Like other loss-making business lines under Alibaba, Hema, which has been losing money for six years, has reached a critical moment where it must consider profitability.

In the internal letter at the beginning of this year, Hou Yi stated that Hema's development goal is full profitability, so in 2022, Hema must follow the essence of retail management and temporarily "tighten its belt," with "lean production and lean management."

******From Reckless Sprint to Survival**

Hema's story began in 2015, when Hou Yi, a former JD executive and general manager of the O2O business unit, left JD due to disagreements.

It is said that his envisioned online-offline integrated retail model could not be realized at JD, so he resigned in anger. After returning to Shanghai from Beijing, Hou Yi had coffee with his fellow townsman, Zhang Yong, then CEO of Alibaba, and the rest is history.

The two hit it off during that meeting. According to sources familiar with Hou Yi, Zhang Yong showed great interest after just five minutes of listening to Hou Yi.

Subsequently, the two met no fewer than 10 times in half a year to discuss the design of the new retail architecture. **Eventually, they reached an agreement, with the general direction set as supermarket + restaurant + logistics.**

On January 15 of the following year, Hema Fresh's Shanghai Jinqiao Plaza store opened, and the Hema app was launched simultaneously. Five months later, the pilot's actual operational data verified the feasibility of Hema's business model. On September 30 of the same year, Hema opened its second store, and the Hema model began to replicate rapidly across the country.

At the Alibaba Cloud Computing Conference in October 2016, the concept of "new retail" went viral. As the benchmark for Alibaba's new retail experiment, Hema received full support from Alibaba.

At that time, Hou Yi was confident, saying, "We can use Alibaba's underlying technical architecture, payment system, and membership system."

It is understood that in the year of its establishment, Hema received a score of 4 points in Alibaba's performance evaluation, which was above expectations and considered outstanding in Alibaba's evaluation system. The next level up was 5 points for excellence, but almost no project could achieve that.

Since then, Hema entered a sprint phase. At the end of 2017, Hema had only 25 stores, which increased to 149 a year later, and later proposed a plan to open 500 stores in 2019.

In Hou Yi's view, before Hema established an absolute industry barrier, this was Hema's only choice. However, rapid expansion did not translate into high-quality growth, and Hema's profitability and GMV growth both fell short of expectations.

According to media reports, in the mid-2019 performance evaluation, Hema only scored 3.25 points, slightly better than the failing grade of 3 points, and was almost at the bottom among all business segments of the group.

At that year's Alibaba Organization Department conference, Hou Yi, in front of the group's core management team of over 500 people, received the "rotten strawberry award" symbolizing the worst business performance, which Zhang Yong specifically designated for Hou Yi because Hema's progress did not meet Alibaba's expectations.

Photo/Visual China

Perhaps to change the unfavorable situation, over the next three years, Hema continuously explored new businesses in a dizzying array of forms.

From 2019 to 2021, Hema successively tried Hema Fresh, Hema X Membership, Hema Mini stores, Hema Xiaozhan, Hema Li, Hema Caishi, Pick'n Go, Hema F2, Hema Jishi, and Hema Neighbor, covering almost all retail business formats.

These businesses were tailored to different regions and customer segments. Simply put, Hema X Membership is an enlarged version of Hema Fresh, Hema Mini is a downsized version of Hema Fresh, Hema Xiaozhan is a front-warehouse model, Hema Li is a shopping center, Hema F2 is a convenience store, and Hema Caishi is a wet market.

Hema, constantly experimenting, tried to find the most suitable business format and a profitable business model. Unfortunately, most of the formats it tried ultimately failed.

In 2019, Hema focused on developing Hema Xiaozhan and Hema Mini stores because these two formats had small areas and low investment costs, allowing for rapid replication. At that time, Hou Yi planned for Hema Xiaozhan to achieve full coverage in core cities.

But just a year later, Hou Yi reversed his decision, saying that Hema Xiaozhan was just a warehouse with significant limitations, and sales relied on burning money to attract new customers, making profitability difficult. Eventually, it was halted in 2020, and more than 70 Hema Xiaozhan stores gradually exited the market, upgrading to Hema Mini stores.

Hema Mini is a small-store format, different from the large-store model of Hema Fresh, with a much smaller area and a delivery radius shortened to 1.5 kilometers.

Hou Yi once said that Hema Mini stores would become the ultimate model for fresh food e-commerce and proposed a goal of "opening 100 stores a year." However, by the end of 2020, only 14 Hema Mini stores had opened. He later reflected that his previous belief that Hema Mini was the best business model was a misjudgment.

"Because we didn't open franchising, execution was difficult and investment was large, so Hema Mini encountered significant problems in expansion," Hou Yi reflected, and then began to strongly promote Hema Neighbor, a community group buying model where orders are placed online and picked up offline the next day or delivered to the door. After its launch in 2021, it was defined as Hema's most important strategy for the next decade.

But since the end of last year, Hema Neighbor has been reported to be closing stores on a large scale, with some closing just a few months after opening, citing business adjustments.

Over six years, after more than a dozen trial-and-error adjustments and burning countless amounts of money, Hema has yet to find a viable development model. If Alibaba had not encountered a crisis, it might have continued to support Hema, but now it cannot. Hema must become independent.

In January this year, Bloomberg reported that people familiar with the matter revealed that Alibaba Group was considering seeking independent financing for Hema Fresh. Alibaba declined to comment, but Finance and Economics Weekly learned that some investors are indeed in contact with Hema.

For Hema, which intends to develop independently, continuous losses are not acceptable; it must have its own ability to generate blood. In other words, Hema must change its past "reckless sprint" to survival, which is why it is cutting losses on unprofitable stores and formats.

******Annual Loss of 10 Billion?**

How much money Hema has lost over the years, without a proven business model, has always been a mystery. Alibaba's financial reports have not disclosed related information.

Before 2018, Hema, along with Amap and DingTalk, was classified under Alibaba's innovation business and others; after 2018, Hema was promoted to the core business of China retail. However, just after joining, the profit margin of Alibaba's core commerce experienced a cliff-like decline.

However, from partners, one can see Hema's huge losses. In 2019, Sanjiang Shopping's subsidiary Zhejiang Zhehai sold its 100% stake in Sun Company Hangzhou Zhehai to Hangzhou Hema for a total price of 30 million yuan. Data shows that Hangzhou Zhehai had a net loss of 10.73 million yuan in 2018.

It is understood that Zhejiang Zhehai mainly operated Hema Fresh stores in the Ningbo area, and its subsidiary Hangzhou Zhehai was responsible for operating Hema Fresh in Hangzhou. Sanjiang Shopping's annual report shows that Zhejiang Zhehai had a net loss of 19.12 million yuan in 2017 and 23.49 million yuan in 2018, due to the high initial costs of the four Hema stores it opened.

Sanjiang Shopping is also under Alibaba; in 2016, Alibaba bought a 32% stake in it. Hou Yi once said that in the future, all Hema Fresh stores in Zhejiang would be operated and managed by Sanjiang Shopping, with Hema Fresh only exporting its brand, system, technology, and big data. Unexpectedly, this ultimately led to poor performance for Sanjiang Shopping.

Fuzhou is also one of the few regions where Hema adopted a joint venture model. In 2017, New Huadu and Alibaba Zetai each invested 100 million yuan to establish Fujian Xinhe Technology, with each holding 50% equity. The division of labor was clear: Hema was responsible for front-end store operations, while New Huadu handled the back-end supply chain.

However, just two years later, New Huadu sold all its shares in Fujian Xinhe Technology through two asset sales, and Hema's Fujian business fully returned to self-operation.

New Huadu chose to end its cooperation with Hema, also to cut losses. According to the transfer announcement, Fujian Xinhe Technology had annual revenue of 140 million yuan and a net loss of 58.8339 million yuan in 2018; in the first half of 2019, revenue was 110 million yuan, with a net loss of 40.4443 million yuan.

Fuzhou Hema, after returning to self-operation, still failed to escape losses. After closing the Fuzhou Xinhua Mall store in March 2020, the Bona Plaza and Chating International stores also ceased operations on May 7, and Hema exited the Fuzhou market.

Photo/Visual China

Similarly, on the evening of May 31, 2019, Sun Art Retail's announcement exposed the operating situation of Hainan Hema. From May 28, 2018 to December 31, 2018, Hema Hainan had a pre-tax net loss of approximately 9.72 million yuan.

E-commerce analyst Li Chengdong wrote in an article last July that an annual loss of 10 billion yuan is Hema's current development status. According to his calculations, **Hema's quarterly loss is about 3 billion yuan, with a loss rate as high as 21%.**

This result was estimated by him: Hema's quarterly revenue is about 14 billion yuan, accounting for about 20% of Alibaba's revenue. In the first quarter of last year, Alibaba's non-mature business loss was 13.656 billion yuan, and calculated at 20%, Hema lost about 3 billion yuan.

The imitators that followed Hema into the pit also failed to burn out a future.

In early 2017, following Hema's footsteps, Yonghui Supermarket's controlling subsidiary Yonghui Cloud Creation officially launched Super Species, securing considerable financing and expanding at a pace comparable to Hema.

But rapid expansion led to huge losses. At the end of 2018, Yonghui transferred its 20% stake in Yonghui Cloud Creation for 394 million yuan, citing excessive losses.

After that, Yonghui Super Species was reported to close stores in multiple locations. On May 21 last year, Yonghui Supermarket Chairman Zhang Xuansong responded to investors' questions at the annual shareholders' meeting, saying that Yonghui would return to the origin of a livelihood supermarket. This statement almost equated to abandoning Super Species.

Meituan was also among the first to cut losses. In May 2018, Meituan's Xiaoxiang Fresh opened, and within five months, it had opened 7 stores nationwide.

However, in April 2019, less than a year later, Xiaoxiang Fresh announced it would narrow its pilot scope, closing 5 stores in Wuxi and Changzhou, except for 2 stores in Beijing. As for the reason for the closures, Meituan CFO Chen Shaohui revealed that Xiaoxiang Fresh's return on investment was below expectations.

After struggling for more than a year, Xiaoxiang Fresh completely disappeared. On October 22, 2020, Xiaoxiang Fresh announced on its app that from October 29, 2020, its online services would migrate to Meituan Maicai app and be renamed "Meituan Maicai Life Supermarket," and the original Xiaoxiang Fresh app would cease to be used.

******"Daddy" Is Also Struggling**

If Alibaba were in good shape, it might continue to support Hema, but now "daddy" is also having a hard time.

In the past year, first Ant's IPO was halted, then the State Administration for Market Regulation imposed an administrative penalty on Alibaba for its monopolistic behavior of "choosing one of two" in the domestic online retail platform service market, with a fine of up to 18.228 billion yuan.

Then Alibaba Cloud had problems. Due to the discovery of a serious security vulnerability in the Apache Log4j2 component, it failed to report to the telecommunications authority in a timely manner and did not effectively support the Ministry of Industry and Information Technology in carrying out cybersecurity threat and vulnerability management. The Cybersecurity Administration of the MIIT decided to suspend Alibaba Cloud as a cooperative unit for 6 months.

Under multiple adverse factors, Alibaba's stock price continued to decline. On March 4, Alibaba's stock closed at $100.6, down 1.42%, with a cumulative decline of 15.31% since the beginning of 2022. In 2021, Alibaba's stock price had already halved, and further declines would return to 2017 levels.

In terms of total market value, Alibaba once aimed to sprint towards the trillion-dollar target like Amazon, peaking at $865.6 billion. Now Amazon is close to $1.5 trillion, while Alibaba has evaporated nearly $600 billion, leaving only $272.7 billion, less than a fraction of Amazon's.

A domestic securities analyst believes, "The pressure on Alibaba comes from both internal and external directions, and some pressure points will not disappear quickly in the short term."

Externally, there is pressure from regulation, consumption downturn, and competitors; internally, Alibaba, which recently completed strategic and structural adjustments, is still in an investment period, and continuous layout in emerging business areas is also putting sustained pressure on Alibaba's profit model.

The bigger challenge is that Alibaba's mainstay, Taobao and Tmall, are stuck in a quagmire of slowing growth. Behind this are both the objective factor of slowing overall growth in the domestic e-commerce market and the growth of competitors dividing the market.

Statistics show that in categories where the Taobao/Tmall system once had dominance, such as skincare, beauty, and apparel, a certain emerging traffic e-commerce platform's GMV in 2021 was close to half of the corresponding categories' GMV in the Taobao/Tmall system.

**On the evening of February 24, Alibaba delivered its worst report card in history. Data showed that in the fourth quarter of 2021, Alibaba's revenue was 242.58 billion yuan, lower than the market estimate of 246.366 billion yuan, a year-on-year increase of 10%; among which, revenue from the core business China Commerce segment was 172.226 billion yuan, up only 7% year-on-year.**

Net profit fell 75% year-on-year to only 20.429 billion yuan, also below market expectations.

Against the backdrop of weak growth in main businesses, Zhang Yong has repeatedly stated that Alibaba will invest more resources and energy into emerging key businesses. Among them, cloud computing, international business, lower-tier markets, and new retail are Alibaba's focus areas in recent years.

Photo/Visual China

In Alibaba, similar to Hema's format, there is also the Taocaicai business, which also involves fresh food e-commerce, making resource competition inevitable. Zhang Yong specifically mentioned at the earnings call that Taocaicai will play the role of establishing a supply chain and logistics fulfillment network serving lower-tier consumers.

A market insider close to Taocaicai's core layer said that after Dai Shan became the direct leader of the big Taobao system, the development strategy set for Taocaicai was: hold back Meituan. The market insider said that community group buying is currently the best track for online fresh food, so giants will not give up on it.

Its value lies in solving the high fulfillment cost problem of the "last mile" delivery for fresh FMCG, improving supply chain efficiency with a make-to-order model, and also driving brand penetration into lower-tier markets, which overall aligns with Alibaba's new focus areas.

Taocaicai has a strong purpose, and Alibaba's investment in it is regardless of cost. According to media reports, Alibaba capital market insiders revealed that Alibaba invested over 20 billion yuan in Taocaicai last year.

It is understandable to tilt resources and funds towards newer businesses, and the older Hema, which is still in the investment stage, naturally needs to be "sensible" and no longer rely on the burdened "old father."

Alibaba is still exploring, but Hema needs to grow up.

_-END-_


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