Since the Yunqi Conference last year, Alibaba has accelerated its offline acquisition spree. From Suning, Intime, Sanjiang, Bailian, Xinhua, to the recent RT-Mart, Alibaba's determination to promote new retail integration is unstoppable, and Hema Fresh, as Alibaba's new retail sample, has drawn particular industry attention.

Recently, Hema founder Hou Yi and Fonterra's Cao Hui announced the official appointment of Hema's CMO (Chief Milking Officer), jointly launching the 'Hema-Anchor' Daily Fresh milk.

The new CMO, who had been widely rumored online, has officially taken office. However, Hema's new CMO is not a 'Chief Marketing Officer' but a 'Chief Milking Officer'. Its job is to work alongside over 3,500 other cows with New Zealand heritage on Fonterra's Chinese farms to supply Hema with high-quality 'Daily Fresh' milk.

So, what is Hema's purpose in launching its own brand of milk?

1 Why 'Fresh Milk'?

1. A Mega Product

'Many housewives know that the freshest milk is always at the back of the fridge; the front ones are from yesterday,' Hou Yi told reporters. In his view, this consumption detail represents a huge business opportunity. 'Since consumers want fresh milk, why not sell the freshest?'

McKinsey's 2017 China Fresh Milk Consumer Trends Report shows that with the steady improvement of consumption upgrading, more and more consumers have higher demands for dairy brand, nutrition, and freshness. Fresh milk, due to less processing and less nutrient loss, is fresher and healthier than UHT milk, but because it contains no preservatives, it typically has a shorter shelf life, unlike UHT milk which can be stored for 7-8 months.

With the improvement of living standards and health awareness, the demand for fresh milk will become increasingly strong. Hema's entry point of fresh milk starts from consumers' actual needs, a correct market choice amid the contradiction between insufficient market supply and growing demand. The value of fresh milk as a mega product lies not only in meeting differentiated consumer needs but also in increasing consumer stickiness to Hema, bringing scale and traffic benefits.

2. The Fresh Milk Market is Currently Monopolized by a Few Companies

Relevant data shows that China is now a major global producer, processor, and consumer of dairy products. In the domestic market, consumer demand for liquid milk is strong. In 2016, domestic consumer demand for liquid milk maintained a high growth rate of 41%, and fresh milk also maintained strong growth. However, due to supply chain and brand reasons, the domestic fresh milk market is currently monopolized by a few brands such as Mengniu, Yili, and Sanyuan, with relatively high prices.

Hema intends to restructure the distribution mechanism and price system by building its own brand and optimizing the supply chain, to break the monopoly of a few brands in the industry.

3. Sufficient Gross Margin at the Factory End

A senior dairy expert revealed to reporters, 'The cost of raw milk accounts for only about half of the final product price; the rest includes packaging, marketing, labor, and other factors.' For example, Mengniu Deluxe Organic Pure Milk costs over 6 yuan per 250ml box. The average procurement price of raw milk for this product is 4-5 yuan per kilogram. One kilogram of raw milk can produce four boxes, so the raw milk cost per box is only about 1 yuan, not exceeding 2 yuan.

The cumbersome layers and sufficient price differences keep the price of fresh milk high for consumers. Hema's approach is: 'As long as the manufacturer tells me the raw material cost and production cost, plus the profit margin, the rest has nothing to do with the manufacturer. I don't use the manufacturer's brand; I use Hema's brand. We bear the market costs ourselves, not the brand.' This reduces the purchase cost for consumers while protecting the producer's interests.

4. Why Fonterra?

Relevant data shows that Fonterra is the world's largest dairy exporter, accounting for one-third of global dairy trade. In my opinion, strong supply chain integration capability is one of the main reasons for the cooperation between Hema and Fonterra.

Fonterra's Tangshan farm was established in 2007, initially importing 3,000 cows from New Zealand, and now has about 6,000 cows. This farm is Fonterra's demonstration farm in China, with all milk produced according to New Zealand standards. Cooperating with Fonterra can provide Chinese consumers with high-quality fresh milk products, raise consumption levels, and meet growing demand. On the other hand, the cooperation between Hema and Fonterra is also a significant attempt at supply-side reform in response to the national call under the consumption upgrade environment.

5. One Hit Product to Conquer the World

Hema has completed the transformation of offline supermarkets by restructuring people, goods, and scenes. Various signs indicate that Hema's practice of new retail will go far beyond just making private-label milk. Hema aims to transform the upstream supply chain through OEM, and reconstruct the price system of goods through private labeling.

If Hema's fresh milk pilot in Shanghai succeeds, it can quickly replicate using Alibaba's massive offline resources, completing nationwide distribution in a short time. This is undoubtedly a significant impact on traditional milk and beverage manufacturers.

2 24 Hours, Pre-order Next-Day Delivery: The Value Chain Behind the 'Mega Product'

With the improvement of living standards, consumers' demand for fresh milk is also increasing. As a special consumer product, fresh milk has extremely high requirements for cold chain and storage.

Currently, the main buyers of fresh milk in China are households, with the common consumption scenario being before going to work in the morning. In this case, fresh milk needs to be pre-ordered, and then delivered to the downstairs by staff in the morning, which is the traditional corridor milk box model. This model cannot be covered by the current instant delivery system. Therefore, the corridor milk box is also known as the only home delivery service that e-commerce has not broken through.

Similarly, once Hema successfully runs the delivery model through the pre-order of the 19.9 yuan fresh milk hit product, it means other private-label products can also operate through this model. Once the cold chain delivery system is established, it will form a strong industry barrier with high entry thresholds. This is undoubtedly a significant blow to the food delivery industry, which also engages in short-distance delivery.

3 The First Shot of Factory Customization

This is Not OEM

'In the future, Hema will launch a series of strategic cooperation projects to promote the transformation of the entire FMCG industry. The future retail industry will definitely have products in the hands of retailers themselves. For us, the most important thing is whether consumers recognize the product itself and whether the taste needs adjustment,' Hou Yi told reporters.

It can be seen that what Hema wants to do is not simple OEM, but similar to 7-Eleven, which continuously selects products from bottom to top through survival of the fittest. Through small-scale pilots, continuously polishing and iterating product taste and packaging to produce products that consumers recognize and accept, this is Hema's true purpose.

'The milk production process is complex. But with such a large market volume supporting it, and the national call for supply-side reform, since consumption upgrading needs to be satisfied and supply-side needs reform, Hema might as well try to see if we can make a big reform on the supply side by uniting global enterprises. Making Daily Fresh milk is the first attempt to make an industrial product. If industrial products can succeed today, I believe a large number of leisure foods and other foods can be implemented in supply-side reform.'

Daily Fresh milk is just the first step. After the milk passes market testing, more products and categories will surely come to market.

4 The Ultimate Goal of Channel Control

It is not difficult to see that Hema's launch of its private-label fresh milk is just an experiment. Its purpose is to verify whether this business model can truly work under the existing infrastructure through the reconstruction and reengineering of the traditional supply chain.

If this business model succeeds, Hema will definitely replicate it on a large scale within Alibaba's existing system. Offline layout companies such as Intime, Sanjiang, and RT-Mart also give Hema enough imagination space. Once the scale effect of offline channels is achieved, Hema will have more say and bargaining space upstream.

Furthermore, it is not impossible for Alibaba to control upstream OEM enterprises through acquisitions or investments, thereby connecting the entire chain of production, distribution, and sales. The data value brought by such full industry chain integration is enormous. In today's context where online traffic is nearly peaking, the value that such offline full industry chain can bring to Alibaba becomes even more precious.

Therefore, Hema's internal push for private-label fresh milk is definitely unsparing and regardless of cost. Currently, Hema's private-label milk is only piloted in 13 stores in Shanghai, and by the end of March next year, the number of stores will exceed 20. As the number of stores expands, product prices will inevitably decrease, which to a certain extent can promote the sales of private-label products.

Hou Yi said: 'We will cooperate with famous foreign companies to launch Hema's Italian imported water, Hema's yogurt, and other private-label products. Launching these OEM customized products is to return prices to the true market.'

It is not difficult to see that Hema's private-label brands will inevitably involve richer products and categories in the future. In this process, Hema will inevitably face direct confrontation with traditional brand manufacturers.

For traditional brand manufacturers, whose business has declined severely in recent years, this is just the beginning!

Wang, a special author of New Distribution, a non-famous cross-border observer and practitioner of new retail, and a brand chief of staff in a Fortune 500 group. Author's signature: The world is a very small family.

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