Hema wants stable traffic brought by its brand, not buying traffic everywhere. But after going omnichannel, Hema finds it hard to avoid 'exchanging price for volume'. Low prices not only bring traffic but are also the core factor in converting sales. To achieve true low prices, one must rely on the supply chain, a lesson validated by Walmart and Costco. Walmart has spent decades in a tug-of-war with its supply chain, while Hema, founded less than ten years ago, cannot easily replicate that success in the short term. Between membership and low prices, Hema CEO Hou Yi is slowly but firmly tilting the balance toward the latter. The business philosophy of 'low price but unique' is upheld by the world's advanced retailers. 2024 marks the ninth year since Hema's first store opened. Hou Yi self-assesses that Hema has achieved results in product uniqueness and distinctiveness, but has not done well enough on low prices. Pinduoduo has proven that low prices are the best traffic engine and almost the only path to larger sales scale. Initiating a price war may make partners suffer, but they will eventually succumb to the scale benefits brought by low prices. Because every cent circulating in transactions originates from consumers' wallets, and for them, affordability is the hard truth. Hou Yi realizes that without solving the price problem, Hema cannot truly build competitiveness. Based on this, 'no matter how much we stir things up in the future, it won't be excessive'. Hema, regarded as Alibaba's new retail sample since its birth, is standing at the crossroads of opening the next decade. A full-scale assault on low prices may be Hema's most daring leap. Full-scale assault on low prices When Sam's Club is labeled as the 'happy house for the middle class', Hema, which had been hesitating and wavering, chose to wield a sharp sword and charge into a broader market. During the intense phase of the 'Move the Mountain' price war, an employee from Hema's 3R department (Ready to cook, Ready to heat, Ready to eat) revealed at an event that when the durian mille crepe cake, a hit product, was reduced from 45 yuan to 42 yuan, sales volume increased eightfold thanks to the 3-yuan concession. Using price as a lever, Hema is aggressively restructuring the traffic distribution mechanism within its system. In October 2023, Hema Outlet Store No. 51 opened on Wanhangdu Road in Shanghai, offering stable low prices across almost all categories, including KA standard products and fresh produce. It was not only cheaper than competitor discount store ALDI nearby but also lower than the Hema Fresh store across the street. With this move, Hema Outlet siphoned traffic from surrounding malls and even wet markets. In the past year, Hema Outlet, under the 'NB Business Unit', opened over 60 new stores. This also marked the starting point of Hema's full transformation to discounting. In November, Hema introduced the 'offline exclusive price' strategy, where some products are priced lower in physical stores than online, even lower than the 'member day 20% off' price for a long time, and member discounts cannot be stacked. Having chosen low prices, Hema had to reduce the weight of the other side of the scale—membership. In December, Hema announced the closure of membership activation and renewal channels. A person close to Hema told Snow Leopard Finance that the company may suspend new member registrations for a long time, but existing members can still renew and retain their benefits. Hema did not respond to the above news. Although it did not cut off membership entirely, Hema's future renewal conditions are quite stringent. After old memberships expire, renewals can only be done at offline X Membership Stores, but currently there are only 10 X Membership Stores nationwide, concentrated in Shanghai, Suzhou, Nanjing, and Beijing. Beyond its own system, Hou Yi stated in April 2023 that Hema would enter all business formats, all categories, and all channels, 'to bring nationwide traffic to the future Hema App'. He further explained what kind of traffic Hema wants: 'stable traffic brought by the brand, not buying traffic everywhere'. Hema has opened flagship stores on JD.com and Douyin, selling its own MAX brand products. On JD.com, Hema participates in activities like the 10-billion subsidy, with many products priced lower than on the Hema App, and offers next-day delivery, including some items that are out of stock on the Hema App. On Douyin, Hema has integrated local life services, with each store launching flash sales, some products at 60% of the Hema App price. A Hema supply chain employee told Snow Leopard Finance, 'Burning money for market share is not what Hema should do at this stage', but from actual actions, after going omnichannel, Hema finds it hard to avoid 'exchanging price for volume'. After all, in the process of retaining old users and cultivating new ones, the most powerful weapon remains price. Sword 'slashing' the supply chain To achieve 'true low prices', one must rely on the supply chain—a lesson validated by Walmart and Costco. But prices lower than competitors or even industry averages can only be achieved through burning subsidies or challenging industry rules. Hema Outlet's large-scale discount strategy once left many industry insiders puzzled. A supply chain source from East China with five years of cooperation with Hema's 3R category told Snow Leopard Finance that many brands and distributors initially thought Hema Outlet's role was to 'clear inventory', and even inferred that 'Hema is on its last legs'. But the growth in Hema Outlet store numbers and rising revenue made him feel 'slapped in the face'. He told Snow Leopard Finance that Hou Yi not only sets company strategy but also gets involved in business development. 'For some big clients, he personally leads the team to the brand's factory to negotiate cooperation. A good local brand of ours was poached by Boss Hou.' With sales volume advantages, Hema can secure lower prices and larger profit margins from factories. Taking Hema's strong 3R category as an example, according to Snow Leopard Finance, Hema requires a gross margin of 45%-50% for 3R products. If intermediary service providers want to participate in supply, they must at least lower the industry average gross margin by about 5 percentage points. In early 2023, Hema began requiring supply chain partners to supply at prices set by Hema; suppliers who cannot meet this are eliminated. The aforementioned supply chain source said that Hema's direct engagement with factories allows it to obtain good products at low cost, 'providing ample ammunition for outlet stores', and also increased factory output by more than fivefold. In categories like daily chemicals and snack foods, Hema's approach is to challenge traditional retail KA rules. Hou Yi once bluntly stated: 'The traditional retailer-supplier relationship has led all of China's retail into a pit.' He believes that the current difference between retail prices and production costs in China is 5 to 10 times, stemming from channel, logistics, marketing, and even gray fees, which should not exist. At Hema Outlet stores, typical KA standard products like Telunsu milk are priced significantly lower than surrounding supermarkets, and such operations are challenging brand price control demands and the interests of the supply chain network formed over the years. Gu Guojian, a professor at Shanghai Business School, wrote in a WeChat article that some major brands have begun to 'encircle and suppress' Hema, stopping supply, and Hema responds with cross-regional transshipment or large-scale cash purchases. Hou Yi immediately reposted the article, saying that because Hema sold a certain milk product at a discount, it was 'blocked nationwide' by the dairy company. A Hema supply chain source told Snow Leopard Finance that the supply halt did happen, but Hema's sales scale cannot be ignored. Some brands resumed supply after two to three months. 'They also have performance pressure and find it hard to give up such a large channel as Hema.' Finding a gap to break through Andrew Miles, President of Sam's Club China, once said in a media interview that Sam's profits mainly come from membership fees, but the prerequisite for attracting members is that Sam's can compress its profit margin to half that of ordinary retail supermarkets, while sales volume is ten times that of the latter. In this business model, stable, huge sales volume is the prerequisite, and the core lies in supply chain management—the internal strength cultivated by Sam's parent company Walmart through over 60 years of global development and the scale of ten thousand stores. Attracting members to generate profit is the result and also the driving force for greater sales volume. But even Walmart has repeatedly wrestled with its supply chain over decades. In 2002, Walmart established over 20 procurement subsidiaries globally, achieving double-digit growth in procurement business and turnover within a year. Five years later, Walmart found this model led to sluggish growth and rising costs, so it began layoffs and reduced to four global procurement centers. A year later, Walmart signed a procurement agreement with Hong Kong's Li & Fung, leveraging supply chain agents to develop business, and about five years later narrowed their authority again. A beverage supplier once said that goods supplied to Walmart could not exceed 30% of the company's orders, otherwise profits would be too low and lead to losses. Hema, founded less than 10 years ago, not only cannot avoid the pitfalls Sam's and Walmart have stepped into but may face even greater challenges. Since the beginning of this year, sales of products supplied to Hema have been declining in other retail channels. Taking a prepared dish product as an example, Hema Outlet uses large packaging three times the volume of peers and lower-cost packaging materials when purchasing, causing the product to 'not sell at a good price' in other channels, leading many non-Hema channel distributors to abandon procurement. Some mid-level suppliers respond by increasing the frequency of product changes and restricting the categories supplied, 'not giving him (Hema) whatever he wants'. A fruit supplier who once cooperated with Hema in the 'direct from origin' model told Snow Leopard Finance that his origin, due to good fruit quality, had higher prices than other channels, but in the second half of this year, he gave up doing business with Hema because 'competition is too fierce and prices cannot be raised'. Hema is trying to find a gap to break through the encirclement with localized teams and operating methods. The live seafood like king crab that first made Hema famous is precisely a category Sam's explicitly abandoned because of the high risks in transportation and temporary keeping, making it difficult to guarantee nutritional value and flavor. In July 2023, Hema began piloting 'Baoxian Fish' in Shanghai, Shenzhen, Hangzhou and other cities, offering 'three-cleaned' chilled aquatic products (scaled, gilled, and gutted) with a shelf life extended to 4 days—more standardized and convenient for cooking, defined by Hema as a prepared dish category. This is Hema's latest case of reverse-engineering supply chain innovation and optimizing the fresh retail model, and such innovations are seen by the industry as opportunities for Hema to break through. New products purchased by Hema also easily get a 'green light' from other retail enterprises. Nearly a decade after its founding, Hema is slowly shedding the label of 'new retail species' and becoming more like a traditional businessman who haggles over every penny. 'After shearing the supply chain's wool, they will go pluck the brand's wool,' a Hema supplier described Hema's low-price process. But Walmart has proven that high pressure and ruthlessness toward suppliers will eventually translate into benefits for consumers. Walmart's first procurement chief, Claude Harris, tirelessly admonished his buyers: 'You are not negotiating for Walmart; you are negotiating for the customer, and the customer deserves the best price you can get. Never feel sorry for a supplier. He knows what his goods are worth, and we want the lowest price.' Walmart has crossed this hurdle; how much longer will Hema take? Cover image source | Hema official website