Going where Hema Fresh stores cannot reach. A debate between Hema CEO Hou Yi and Alibaba Chairman and CEO Daniel Zhang lasted six months: whether to abandon Hema Neighborhood? Hema Neighborhood is a "high-end" community group buying format as envisioned by Hou Yi – relying on stores, with more than ten times the product selection of competitors. The store even has freshwater aquatic tanks, allowing users to pick up live seafood. A year and a half ago, Hou Yi said this was the first time he saw an opportunity for Hema to expand from serving urban consumers to serving consumers nationwide, calling it "the most important strategic project for the next 10 years." Like most of Hema's new format attempts, Neighborhood had better products but was not cheap enough, lacked sufficient customers in most cities, and continued to lose money. Stores in seven cities including Shenzhen, Guangzhou, Suzhou, and Beijing were gradually closed. In April 2022, a year after Neighborhood launched, Zhang Yong proposed closing all stores in Hangzhou and Nanjing, retaining only Shanghai. Hou Yi resisted the pressure, and ultimately only some outlets in these three cities were closed. Six months later, during the National Day holiday, Zhang Yong again questioned the value of Hema Neighborhood, suggesting that they should "run through the model before doing it," while Hou Yi believed "there is still a chance." After lengthy discussions, Hou Yi's insistence preserved the Shanghai business and closed the rest. Since then, Hou Yi has repeatedly emphasized internally that Hema Neighborhood will not close Shanghai stores anymore, keeping a "spark of hope." The spark was preserved, but Hema's overall profitability pressure increased over the past year. Alibaba began implementing an "operating responsibility system" across the group in 2021, and Hema was designated as a "loop company," required to be responsible for its own profits and losses. Since Hema opened its first Hema Fresh store in 2016, it has become a model and pioneer of new retail, breaking the boundaries between online and offline, and driving a group of companies to jointly transform China's fresh food supermarkets. Hema Fresh is Hema's earliest and most core format, currently with 300 stores in 27 cities nationwide. Today, people no longer believe as confidently as in 2016 that consumption upgrading will continue indefinitely. According to data from China's National Bureau of Statistics, in 2022, the average daily food and beverage consumption (including alcohol and tobacco) per Chinese person was 20.5 yuan. There are not many areas where Hema Fresh can be frequently consumed, and its store opening pace has continued to slow. Even with the increased demand for fresh food consumption due to the pandemic in 2022, Hema Fresh's sales only grew by 25%. LatePost exclusively learned that Hema's overall GMV in 2022 was around 45 billion yuan, compared to 34 billion yuan in 2021. This year, Hema's GMV target is quite aggressive: 100 billion yuan, with a growth rate exceeding 100%. 100 billion yuan is a symbolic number for offline supermarkets. China's largest supermarket chains, Yonghui and Gaoxin Retail, have annual sales of only around 100 billion yuan, and these two companies have been established for about 20 years, while Hema has only been founded for 7 years. While peers have given up or contracted, Hema continues to try new models, despite setbacks, never giving up. Counting the discount store Hema Outlets, which began in the second half of 2021, the company has tried ten formats. Today, the environment for Hema's trial and error is different from before. In early 2022, Hou Yi stated that the company's goal should shift from single-store profitability to overall profitability. Some employees previously on Alibaba's payroll were uniformly switched to Hema's payroll. A year later, Hou Yi pointed out in an internal letter that in 2023, Hema should "continue to be tougher and continue to be bitter," implementing comprehensive refined management of all expenses, with granularity down to the "single product level." Multiple Hema insiders said there is internal consensus that Hema will not go public until it achieves overall profitability. This means that Hema, which is still losing money, needs to seek financing from the primary market. According to foreign media reports, Hema lowered its valuation from $10 billion to $6 billion in early 2022 to seek financing, but there has been no new progress so far. With no external blood transfusion at present, Hema can only rely on itself. The current situation Hema faces is that the market it wants to enter is larger, and the room for trial and error is smaller. Over the past year or more, the exploration of two new formats, Hema Neighborhood and Hema Outlets, directly reflects the company's transformation. Hema Neighborhood: A Large-Scale Attempt in Lower-Tier Markets Hema Neighborhood is Hema's largest attempt in lower-tier markets. In mid-2021, Hema Neighborhood set a goal of opening 5,000 stores by the end of the year, with a budget of nearly 1 billion yuan, but in reality, only about 2,000 stores were opened that year, less than half the target. Hema's earliest attempts at the low-price market can be traced back to Hema MINI in 2019. Compared to the 20 million yuan investment for a Hema Fresh large store, the cost of opening a Hema MINI store is only 2 million yuan, with locations concentrated in suburbs and towns of first- and second-tier cities. Just as Hema MINI was gradually opening stores, the community group buying war began. In February 2020, before the Wuhan pandemic had ended, Didi began researching community group buying, shouting "unlimited investment." By mid-year, Meituan and Pinduoduo officially joined, quickly establishing thousands of grid stations through franchising. Hema MINI's earliest plan was fully self-operated, opening 100 stores a year, but by the end of the year, only 14 had opened. Hou Yi later reflected, "Because we didn't open franchising, execution was difficult, investment was large, and expansion was really slow." In mid-September 2020, at an Alibaba group president's meeting, Zhang Yong announced that the Hema business group would form the Hema Preferred Business Unit (renamed "Hema Market" in December 2020), officially entering the community group buying track, with Hema President Hou Yi directly responsible, reporting to Dai Shan, then president of the B2B business group. At that time, Alibaba had four teams exploring community group buying: Ele.me, Retail Link, Cainiao, and Hema Market. Six months later, competitors Duoduo Maicai and Meituan Youxuan had covered 20 provinces nationwide, while Hema Market remained in only 4 provinces, with order volume far behind competitors. On the afternoon of March 1, 2021, over 100 Hema Market headquarters employees were summoned to a large conference room in Hema's Shanghai office building, King 88. Dai Shan first took the stage and spoke about Hou Yi's contributions to Hema Market, saying, "Old Cai (Hou Yi's nickname) did well, but we need to integrate from the group's perspective." Then she announced that Alibaba Group would establish the MMC Business Group, integrating the community group buying businesses of Hema Market and Retail Link, and stated that investment would have no upper limit. This meant that Hou Yi would have to return Hema Market, which he had been responsible for for over half a year, to the group and return to Hema Fresh and membership stores. At the end of the meeting, Hou Yi took the stage and said, "I think Hema Market has done well, but the group didn't give us enough resources and time." Just over a month later, Hema's other community e-commerce project, Hema Neighborhood, opened its first store in Shanghai. It was almost a replica of Hema Market, sharing many similarities with the community group buying model: users order online the day before, pick up at the store the next day, with products mainly fresh food. A Hema insider analyzed that Hema launched this business with a bit of a "sulking" mentality, hoping to once again prove its business capabilities in the community e-commerce model. The Impossible Triangle Under Profit Pursuit: High Quality, Rich Selection, and Ultra-Low Prices In August 2021, Alibaba Group made another adjustment: Dai Shan no longer oversaw the Hema business group, and Hou Yi began reporting directly to Zhang Yong. This may indicate that Hema was being valued again. A Hema Neighborhood employee said that when the new business first launched, Hou Yi reported to Zhang Yong weekly, and Zhang Yong often asked about Hema Neighborhood's progress. "Unexpectedly, Xiaoyaozi (Zhang Yong's nickname), who manages a group with hundreds of billions in revenue, still came to ask about our small business." Hou Yi believed that the community group buying model being pursued by giants lacked patience to deeply cultivate the industry, improve systems and logistics, and was "just burning money, a regression in e-commerce innovation capability." When Hema Neighborhood launched, Hema officially emphasized the differences between "community e-commerce," "community group buying," and "front warehouse" models, distinguishing them across ten dimensions including products, product sources, and supply chain. Hema Neighborhood also maintained differentiation from community group buying in several aspects: In terms of product quantity, Hema Neighborhood initially relied on Hema supply, achieving 20,000-30,000 SKUs; in addition to general pickup shelves and cold cabinets, the store also had freshwater aquatic tanks, allowing users to pick up live seafood; Duoduo Maicai and Meituan Youxuan had only 1,000-2,000 SKUs, and their pickup points, let alone aquatic tanks, rarely even had fresh meat, mainly long-shelf-life frozen products. Higher quality products brought Hema Neighborhood's average order value to around 50 yuan, almost five times that of various community group buying platforms. But this also limited the groups it could reach. Hema Neighborhood's costs were higher than competitors in all aspects. The pickup points for platforms like Duoduo Maicai and Meituan Youxuan are street-side shops; the platform does not pay rent, only paying the shop owner a commission of 5%-8% of the product price. To provide live seafood and other products, most Hema Neighborhood stores were still directly operated, with initial investment of 50,000 yuan per store, not counting labor, utilities, and other operating costs. To quickly expand stores and seize the market, community group buying store locations on various platforms were not too refined. Meituan Youxuan and Duoduo Maicai use a franchise model, allowing quick elimination of poorly performing group points, while Hema Neighborhood's directly operated stores were not so easy to change. Many early stores were opened in locations with low foot traffic, such as inside communities or street corners, and were not replaced until the first round of contraction in early 2022. To ensure service quality, early customers could get full refunds for items not picked up in time at Hema Neighborhood, while other community group buying platforms had store owners call to urge pickup and did not offer refunds unless there was a product quality issue; after customers placed orders at Hema Neighborhood, they could get full refunds even if the central warehouse had already started sorting and transporting, while other platforms did not allow refunds after sorting began. In a city with strong consumption like Shanghai, Hema Neighborhood stores had daily sales of 8,000-20,000 yuan, but Hema internally calculated that if average daily sales exceeded 15,000 yuan, it would affect customer experience. Hema Neighborhood did not adopt the three-tier distribution model of community group buying (central warehouse - grid warehouse - pickup point), but instead delivered directly from the central warehouse to the pickup point, where staff had to sort and package goods. If sales were too good, the two store staff would have to spend too much time sorting, leaving little time for delivery and customer pickup. To avoid internal competition, Hema Neighborhood's early site selection also avoided Hema Fresh large stores, mainly opening in suburbs where Hema's brand influence was low and residents' spending power was weak. In second-tier cities, Hema Neighborhood's daily sales were only 3,000-6,000 yuan, making it difficult to cover rent, staff, and other costs. Even some stores in Shanghai's suburbs, with daily sales of 8,000-10,000 yuan, only broke even after deducting the cost of two staff, utilities, and rent. By October 2022, Hangzhou and Nanjing were still far from profitability and growing slowly, so they were eventually closed. A month later, Hema Neighborhood's head Hu Dalei left, and Shou Yongqiang took over; he previously managed Hema's production system certification. Insiders evaluated that Hu Dalei was aggressive and suitable for exploring new businesses; Shou Yongqiang was steady and suitable for execution. Hema Neighborhood has now compressed its product SKU count from the original 20,000-30,000 to about 2,000, slightly more than Meituan Youxuan. Fewer SKUs reduce the sorting pressure on stores. In terms of product selection, Hema Neighborhood will also promote more Hema private label products, emphasizing cost-effectiveness. To save costs, Hema Neighborhood also canceled free delivery. Before November 2022, users only needed to spend 39 yuan at Hema Neighborhood to get free delivery worth 6 yuan, and orders within 3 kilometers could be delivered. Now, regardless of product price, a 3 yuan delivery fee is required, and only orders within 800 meters can be delivered; overweight orders incur additional delivery fees. A Hema Neighborhood employee said that after canceling the "free delivery with minimum spend" policy, monthly delivery costs were saved by several hundred thousand yuan; although online orders dropped by more than 50% immediately after the cancellation, some returned to offline pickup. Hema internally judged this was more conducive to the long-term healthy development of the business. Hema Fresh was the first to start the new fresh model of offline experience and online consumption, and still maintains free delivery for the first order every day. Hou Yi said in a public speech at the end of 2022 that in Beijing and Shanghai, Hema's overall online order ratio was above 80%, while nationwide it reached 70%. Hema Neighborhood validated the feasibility of increasing delivery fees to promote offline consumption and reduce delivery costs. Currently, Hema Neighborhood has more than 400 stores left in Shanghai. Since opening franchising in July 2022, more than 30 franchise stores have been added, and new stores will mainly be franchise stores. Excluding headquarters labor costs, Hema Neighborhood's Shanghai store operating profit margin is about -10%, with a goal of breaking even in 2023. The contraction of Hema Neighborhood once again proved that if prices are not low enough, it cannot leverage the most mass market. Hema Outlets: Finding Future Hope from Clearance Channels In an interview with us in 2021, Hou Yi said, "No model in the world is built on low prices; it's unsustainable. If you can't solve the problem of product richness, you can't solve the problem of people coming to you every day." What Hema's tenth format, Hema Outlets, currently pursues is minimal SKUs and ultimate cost-effectiveness. Walking into a Hema Outlets fresh store, you see a slightly messy, crowded hypermarket: from 9 to 10 in the morning, elderly people out for a stroll flood into Hema Outlets to grab the first round of vegetables and fruits just delivered from Hema Fresh large stores, which are products that didn't sell the previous day or two. After 7 pm, young people off work squeeze into the Outlets store. In the past, they could push shopping carts side by side in Hema Fresh large stores, but in Outlets stores, there are only narrow single-person aisles between goods. Frozen products in freezers have no particular arrangement, and the air is filled with staff's vigorous hawking. Lettuce at 2 yuan a bunch is already wilted, and grapes at 10 yuan a serving have a few bad ones, but by 9 or 10 pm, they are all snapped up. Hema Outlets store, image source: reporter's on-site photo Hema Outlets is the 10th format Hema has tried and is currently Hema's newest format. When the first Hema Outlets fresh store opened in Shanghai in October 2021, it was only seen as a channel to handle surplus goods from Hema Fresh stores. Surplus fresh products from 5-6 Hema Fresh stores would be centrally transported to one Hema Outlets store. Hema CMO Zhao Jiayu told LatePost that internally they quickly realized, "Customer demand is there; just selling fresh food is no longer enough; we need to provide one-stop supply." That is, providing most products needed for daily life. Soon, Hema Outlets stocked many large-pack branded standard products and Hema private label standard products. When Hema Outlets was first launched, an internal debate was whether it would steal business from Hema Fresh – some Hema Outlets stores were located close to Hema Fresh stores, even next door, and customers who used to wait until after 8 pm to buy discounted products at Hema Fresh now went directly to Hema Outlets. However, to increase sales, Hema no longer cared about internal competition. Previously, Hema Neighborhood avoided Hema Fresh stores, but from October 2022, this location restriction was also lifted. Zhao Jiayu believes that most successful retail platforms sell everything; you can't say that opening a Tmall flagship store affects consumers' perception of Taobao. Hema Outlets is a purely offline store with no online delivery service, so customers are naturally diverted. "You should view all formats at the overall Hema level. If we don't do this format today, competitors will." Hema Outlets quickly became the fastest-growing business among all Hema businesses. In a speech in November last year, Zhao Jiayu said that in 2022, Hema Fresh sales grew over 25% year-on-year, Hema X Membership Store grew over 247%, and Outlets and Neighborhood grew as much as 555% – considering that Hema Neighborhood closed multiple cities in 2022, the main growth here was contributed by Hema Outlets. An employee summarized Hema Outlets' growth process as going from "a sewer that no one loves" to "the hope of the whole village." The emergence of Hema Outlets is a major shift for Hou Yi. In 2019, Hou Yi said in a public speech that Hema Fresh, from the first day it entered, targeted the affluent consumer group of the post-80s and post-90s generations, and its product categories and structure were fundamentally different from traditional hypermarkets. Hema also wants to serve less affluent consumer groups, after all, they are the majority in China. But for a long time, Hema was unwilling to sacrifice product richness and quality for the lowest prices. Compared to Hema Fresh's iconic features like "hanging chains" and "seafood tanks," Hema Outlets' store design is extremely simple, with no aquatic tanks or dining areas, and many products are not even on shelves, piled directly on the floor. Hema Fresh stores are mostly between 2,500 and 5,000 square meters, while Hema Outlets is only about 500 square meters, with many stores directly converted from Hema MINI stores. The investment to open a Hema Outlets store is only about one million yuan, 1/30 of a large store. Compared to Hema Fresh's 20,000-30,000 SKUs, Hema Outlets has only about 3,000 SKUs. Zhao Jiayu said Hema Outlets aims to provide "the ultimate single product," with private label standard products numbering within 1,000. A Hema insider said, taking laundry detergent as an example, Hema Outlets only sells the most popular brands like Omo (39.9 yuan / 3 kg) and its own brand (9.9 yuan / 3 kg). Private Label Products, Cross-Regional Sourcing, Reorganizing Procurement Team Using Every Means to Lower Prices Developing private label products is the most direct and effective way to achieve ultimate cost-effectiveness. Branded products are more expensive not only because of their huge marketing investments but also because of inventory fees, shelf fees, etc. paid to supermarkets, which are ultimately passed on to consumers. Supermarkets selling private label products can avoid these costs and lower prices, and more flexible pricing and turnover also save some distribution costs. The German supermarket brand ALDI, which Hema Outlets benchmarks against, is characterized by a high proportion of private label products. In 2021, ALDI's global net sales were $133.9 billion, with 90% from private label products. Currently, ALDI has over 12,000 stores worldwide. ALDI store, image source: ALDI official website At the end of 2022, Hou Yi led a team to Europe to study local discount store formats. Discount stores began to develop significantly in Europe after World War II, especially in the last two years, with European inflation accelerating their growth. Hou Yi said, "The core of European discount stores is private label products, with complete integration of retail and production, and prices are basically less than half of branded products." According to a 2021 survey by the American Marketing Association, private label products of similar quality to branded products can reduce supermarket costs by 40%-50% and increase profit margins by 8-10 percentage points. A Hema Outlets employee said that among standard products other than fresh and cooked food, the proportion of Hema Outlets' private label products has exceeded the average of 35% across Hema's formats, reaching 40%, with a future goal of 70%. Zhao Jiayu said that Hema no longer considers trying new formats as the most critical point; the next more important thing is to improve product supply and service capabilities, with private label product development being an important part of product supply innovation. Hema's private label products have a monthly elimination rate of under 5% for underperforming products. She said, "Today, many niche categories are driven by Hema, leading the industry trend." Taking craft beer as an example, Hema launched four room-temperature craft beers for meals in 2018, and in 2021, Hema launched short-shelf-life refrigerated craft fresh beer. At the end of 2021, Hema procurement researched why women don't like beer, finding they thought malt was bitter and preferred sweet, slightly tipsy drinks, so Hema developed fruit-flavored fresh beer. In 2022, craft beer basically ranked in the top 10 of beer categories in Hema's overall sales. In addition to private label products, to achieve ultimate cost-effectiveness for branded and fresh products, Hema is also trying to change procurement methods. The first method is "cross-regional sourcing." In 2022, Hema established a dedicated circulation wholesale procurement department, which Hou Yi called the "cross-regional sourcing department." Brands often have different pricing for distributors in different regions. In the past, Hema stores in various regions sourced from regional distributors, often not getting the lowest prices. Now Hema encourages procurement staff to source nationwide, buying with cash wherever goods are cheap, breaking regional price limits. The second method is national centralized procurement. The advantage of headquarters centralized procurement is expanding procurement scale to get lower prices; it can also directly "monopolize sales" at fresh produce origins, with the best specifications going to X Membership Store, the next best to Hema Fresh stores, and the rest to Hema Neighborhood and Hema Outlets. Originally, over half of Hema's products were procured locally – local procurement is more familiar with local specialty products and consumer preferences. In May 2022, Hema began cutting local operations and procurement staff, transferring many local procurement managers to Shanghai headquarters. A Hema insider said that currently, the proportion of headquarters centralized procurement has reached 60%, leaving only some local specialty products to local procurement. Hema Outlets will be Hema's most important strategic project in 2023, Hou Yi said, "without exception." Hema Outlets' store area is only 1/6 of a Hema Fresh large store. Fresh products mainly come from discounted surplus from large stores, while standard products are mostly Hema NB private label products, available only offline, but with high popularity. Hou Yi said Hema Outlets' sales per square meter has reached 7 times that of ordinary hypermarkets. Over the past 3 years, Hou Yi has almost every year made bold statements, anchoring a "most important" strategic project, then changing direction the next year, never sparing praise, seemingly going all in. In 2019, when Hema MINI, a community supermarket format, opened, Hou Yi said there would be no more perfect business model. By 2021, Hema Neighborhood replaced Hema MINI as the "most important strategic project for the next 10 years." Hema Outlets is already the 10th format Hema has tried. So many format attempts are just to solve one problem: how to use the most suitable format to go where Hema Fresh large stores cannot reach. "No one is satisfied with the current market; they always want to see a broader market," Zhao Jiayu said. As Hema's most important strategic project for the future, Hema Outlets still faces some challenges in expansion that must be considered. If fresh products still rely on surplus from Hema Fresh large stores, Outlets' expansion will be limited. The total of over 300 Fresh large stores can supply at most 60 Outlets fresh stores, and there are already over 50 Outlets stores nationwide. A Hema Outlets employee said that Hema Outlets, as a downstream of Hema Fresh, is significantly affected by upstream, with multiple instances where Hema Fresh had good sales the previous day, leaving Hema Outlets with no goods to sell. The current solution is to adjust from one delivery to multiple deliveries to alleviate the shortage of fresh products in Outlets stores. To prevent expansion limitations, in September 2022, Hema Outlets upgraded its format, opening its first hard discount store in Shanghai. Previously, Hema Outlets mainly sold surplus and near-expiry products from Hema Fresh standard stores; now it will independently procure fresh products, and standard products will include not only near-expiry and cross-regional low-price goods but also an increased proportion of private label products. A Hema Outlets employee said that Outlets stores are not benchmarking against near-expiry product stores like HotMaxx, because as the efficiency of the entire social supply chain increases, near-expiry products will inevitably decrease, and supply sources will shrink. Hema Outlets hopes to learn from ALDI, focusing on private label low-price products and fresh food. According to Hou Yi's plan, by the end of 2022, 100 Hema Outlets discount stores would open in Shanghai, each achieving daily sales of 150,000 yuan and a sales gross margin of 15%. The above-mentioned Hema Outlets employee said that after Outlets opens online channels in 2023, achieving this goal will not be difficult. Hema's insistence on two payment methods, Hema App and Alipay, may also change. As Outlets stores enter more townships, the coverage of these payment methods is not high, so internally they are considering introducing WeChat Pay. During Hema's 7 years of entrepreneurship, Alibaba has also shifted from group warfare to individual battles. Hema under Hou Yi no longer needs to prove its innovation value through "30-minute delivery" or "online-offline digitalization," nor can it expect customers to flock to new concepts like "hanging chains" or "seafood tanks." What it needs to do is more essential and more difficult – prove that as a retail business, it can continue to grow and be profitable. Recommended Reading