Click 'Read Original' for details. In 2019, new store growth will slow significantly, with smaller formats becoming the focus.
Key Points:
- Subpar performance of some stores and the drag on Alibaba's profit margins make Hema's adjustment almost inevitable.
- Re-examining the Hema model, while it brings efficiency innovations, its high requirements for population density and income levels within three kilometers limit its nationwide scalability.
- Hema cannot create new traffic; it can only absorb existing traffic. This is common sense that must be respected, not recklessly overstepped.
After a year of rapid expansion in 2018, Hema's business is entering a period of concentrated adjustment.
The first concern for management was sales per square meter (pingxiao). Pingxiao, or sales per 3.3 square meters, has been a point of pride for Hema due to the high efficiency of its "new species." According to figures released by Hema CEO Hou Yi in September last year, mature Hema stores achieved a pingxiao of 50,000 yuan, more than three times that of peers.
However, the selection of "mature stores" as a sample is debatable. For example, in the rapidly developing Jinqiao area of Shanghai, a Hema store there had already achieved a pingxiao of 56,000 yuan in 2016. Yet, when the statistics are expanded to include all stores in second- and third-tier cities, another figure emerges: according to the China Chain Store & Franchise Association's top 100 data, Hema's 2018 sales were 14 billion yuan. Considering factors such as the number of stores, opening times, and store areas, Hema's average pingxiao in 2018 was between 20,000 and 30,000 yuan.
In comparison, according to a Huatai Securities research report, in 2017, the pingxiao for standard supermarkets was 14,000 yuan, hypermarkets 13,000 yuan, and convenience stores 20,000 yuan. While Hema's figures lead the industry, the margin is far less impressive than Hou Yi claimed.
This core metric continues to decline as new stores open.
A source told Tencent News' "Qianwang" that stores in core areas of first- and second-tier cities perform slightly better, but in the past six months, many stores in third-tier and some first- and second-tier areas have not exceeded 20,000 yuan in pingxiao, with some stores only around 10,000 yuan.
Being on par with peers has hit the psychological bottom line for Hema and Alibaba's decision-makers. This directly led to the announcement on April 30 of the closure of the Kunshan Xincheng Wuyue Plaza store, Hema's first store closure.
In the view of many retail insiders, while the Hema model brings efficiency innovations, its high requirements for population density and income levels within three kilometers greatly limit its nationwide scalability.
As the initial wave of store openings covered most prime locations across the country, Hema has hit walls in some areas due to insufficient high-spending customers, making adjustments inevitable.
A person close to Hema told Tencent News' "Qianwang" that against the backdrop of high investment and high losses, Hema's returns have shown clear diminishing marginal effects. In 2019, slowing the expansion of traditional stores is almost certain. Hema's next bet is likely on smaller formats with lower costs, such as Hema Cai Shi, Hema Mini, Hema F2, and Hema Xiaozhan.
"It's almost certain that the model of using Hema to transform third-tier and other vast markets has failed."
Alibaba Has Consciously Reduced Investment
The stagnation of pingxiao is only one aspect; high investment putting pressure on Alibaba's financial reports is another key factor prompting Hema's sudden brake.
Looking back at Hema's development, although Alibaba's investment began in 2016, large-scale investment actually started in the first half of 2018. On April 28, 2018, Hema opened 10 stores in one go, bringing the total to 45.
This is directly visible in Alibaba's financial reports under the item "purchases of goods and equipment." In the second quarter of 2018, this expenditure jumped from 5.616 billion yuan to 9.759 billion yuan, a quarter-over-quarter increase of 73.77%, showing the cash consumption of Hema stores.
It's worth noting that the 45 stores opened in April 2018 included both self-operated and affiliated stores. In Hema's early development, the proportion of affiliated stores was higher than today. Even now, Gaoxin Retail's associated subsidiary Shanghai Runhe still holds operating rights for Hema in Hainan and Northeast China, while Sanjiang Shopping's Zhehai Huadi once controlled Hangzhou operations, and Fujian's operating entity Xinhe Technology had 40.5% of its shares held by New Hua Du until September last year.
It was around April 2018 that Alibaba began increasing the proportion of self-operated stores and rolling up its sleeves to personally engage in new retail transformation, marking a significant bet on Hema.
It was also in the second quarter of 2018 that Alibaba first disclosed the number of self-operated stores, and in the previous quarter, Alibaba first added a note about new retail formats like Hema under "Others" in its core commerce revenue, signaling its strategic direction.
However, curiously, a year later, despite Alibaba's trend of increasing Hema's self-operated proportion, the "purchases of goods and equipment" metric saw a significant decline in the last quarter.
(Note: Alibaba's fiscal year does not align with the calendar year. 2019Q4 corresponds to Q1 2019, and 2019Q1 corresponds to Q2 2018.)
As the chart clearly shows, during the three most aggressive quarters of investment (2019Q1, 2019Q2, 2019Q3), this metric remained high at around 10 billion yuan. But in 2019Q4 (Q1 2019), it suddenly dropped to 5.688 billion yuan, nearly halving, returning to the level of 2018Q4 (Q1 2018) before Alibaba's large-scale investment in Hema.
This is clearly not a positive signal for Hema.
Alibaba has not separately disclosed Hema's drag on profits, but the profit margin (EBITDA) of core commerce revenue, which includes Hema, has significantly declined, almost coinciding with Hema's investment period.
From this set of data, it's clear that in 2018Q4 (Q1 2018), when Alibaba first added Hema to the "Others" note, the profit margin experienced a cliff-like decline.
Before that, the two main components of Alibaba's core commerce revenue—commission income and marketing fee income—were quite stable, with profit margins maintained around 60% for a long time, never falling below 50% even in the lowest quarter of Q4 2017. Hema's arrival directly caused this metric to plummet to 43%.
In the latest quarterly report, Alibaba's core commerce profit margin further declined to 35%, hitting a new low—even a cash-rich company like Alibaba is unlikely to ignore this.
If they don't brake now, it will be bad.
Hema Model's Success and Setbacks
But it must be emphasized that even if Hema faces temporary difficulties, the new retail model represented by Hema cannot be denied. On the contrary, in the view of many practitioners contacted by Tencent News' "Qianwang," the transformation of offline retail by new retail has been affirmed. What is truly lacking now is a re-examination of the various formats from the previous stage.
The "deification" of Hema by the entire industry in the previous stage clearly needs correction—its stringent requirements on geography and surrounding population determine that its ceiling is much lower than expected.
Take the closed Kunshan Xincheng Wuyue Plaza store as an example: "surrounding population quality" not meeting standards was the direct reason for its closure. According to a previous visit by Lianshang.com, the monthly salary of the surrounding population is generally between 5,000 and 8,000 yuan, which does not match Hema's relatively high consumption positioning.
Moreover, the positioning of Wuyue Plaza itself as a "new city center" means it is still in a developing, immature stage. Hema was once a selling point for the property's leasing, clearly aimed at attracting customers.
However, Hema's delivery radius of only three kilometers means its reach is limited and difficult to expand. Once there are not enough target customers within three kilometers, the high costs of an 800-square-meter store can only lead to closure.
Hema cannot create new traffic; it can only absorb existing traffic. The closure of the Kunshan Xincheng Wuyue Plaza store is the bitter fruit of Hema's lack of detailed investigation of the area and self-awareness.
Another Hema store in Kunshan, adjacent to Kunshan Station, has significantly better customer flow. The high requirements for location still apply to Hema—this new species cannot violate the basic common sense of retail. Or rather, due to its mid-to-high-end positioning, its requirements for customer income may be even higher than those of ordinary supermarkets.
The internet transformation and new retail concepts blindly hyped over the past year cannot truly help retail enterprises at this stage. If the non-universal Hema model is promoted blindly, it will only bring enormous financial pressure that is difficult to alleviate for operators.
This can be seen from the financial data of Hema's partners.
According to data disclosed by Hema partner RT-Mart on May 31, Hainan Hema, operated by RT-Mart, had a net loss after tax of 9.72 million yuan from May 28, 2018 to December 31, 2018, with only two stores. Other affiliated companies, such as Zhehai Huadi, had 2018 revenue of 289 million yuan and net profit of -23.4914 million yuan; Xinhe Technology had 2018 revenue of 140 million yuan and total liabilities of 65.5495 million yuan. Generally, the situation is not optimistic.
This has objectively prompted affiliated companies, after a period of fresh transformation, to eventually return operating rights to Alibaba. With high investment and long return cycles, the pain period of the new retail model represented by Hema has become concentrated.
Hema is not the only company entering an adjustment period. On April 15, several stores of Xiaoxiang Fresh in Changzhou, which had been open for less than six months, announced they would close; at the same time, its Wuxi store was also reported to be closing.
Xiaoxiang Fresh is Meituan's format competing with Hema. At that time, Xiaoxiang Fresh even boasted plans to "open 20 stores in 2018 and 50 stores in 2019," but after this round of closures, its operations are limited to two stores in Beijing.
New Hua Du, empowered by Alibaba's new retail, launched the new retail brand Haiwu, but it failed to stop its six-year streak of losses. After closing 19 stores in the first quarter, it recently announced the closure of three more stores, mostly due to "long-term operating losses and no hope of turning around after adjustments."
Small Formats to the Rescue
Making formats smaller and operations more refined is a viable direction at present.
In March this year, Hou Yi first proposed adjusting the store system to "one large and four small": Hema Fresh stores over 800 square meters serve as the "one large" format, covering shopping malls, with the model of "fresh food + supermarket + dining + delivery"; the "four small" formats are Hema Cai Shi, Hema Mini, Hema F2, and Hema Xiaozhan, covering more refined and lower-tier markets.
However, it should be noted that the small format "Hema Xiaoma," previously developed in cooperation with RT-Mart under Gaoxin Retail, did not appear in the strategy.
Hema Xiaoma was once positioned as a supplementary format to Hema Fresh. Unlike regular Hema stores, Hema Xiaoma continued Hema Fresh's fresh food sales but adjusted in scale and added a sports goods section. However, in the view of some industry insiders, Hema Xiaoma omitted the "seafood preparation and sale," which is an important feature of Hema Fresh, directly leading to Hema Xiaoma not becoming a "small Hema" but rather a "small RT-Mart," with the core still being a supermarket like RT-Mart.
Hema Xiaoma, which had the new retail concept but lacked innovation in its core, saw its first store closure in April this year. After the Suzhou Wenti store was closed, whether the remaining 16 stores can survive remains uncertain.
Small formats are not easy to do. Although the investment per store is small, the demands are more diverse. Song Rui, general manager of Suning Xiaodian Beijing, said in an exclusive interview with Tencent News' "Qianwang" that there are significant differences in category selection between stores. For example, a common category like Erguotou (a type of liquor) may vary.
"We were on a store inspection once, and we saw a strange phenomenon: the residents around this community store only drink Hongxing, not Niulanshan."
At this point, it becomes extremely important to establish a flexible model that can be supported at the backend and supply chain. Wang Jun, CFO of Miss Fresh, told Tencent News' "Qianwang" that in markets like fresh food, because the demand side is highly localized, users are operated by each city, and the supply chain has some localization attributes, but a large proportion is national. "It will enjoy the supply-side advantages of economies of scale, but regionally it may not be as obvious."
The continuous joint exploration between the sales end and headquarters, as well as balancing localization and scale effects, is a dynamic process. The difficulty goes without saying, and the time span may last quite a long time.
But this is the necessary path. New retail formats that achieve both scale and localization, and combine large and small stores complementarily, may be gradually replacing the previous single model that focused only on large stores.
This may also mean that the fresh food market, and even the entire retail industry, may usher in a new round of reshuffling.
Source: Tencent Technology