A debate raged for six months between Hema CEO Hou Yi and Alibaba Chairman and CEO Daniel Zhang over whether to abandon Hema Neighborhood. Hema Neighborhood was a "premium" community group-buying format that matched Hou's vision—relying on stores, it offered more than ten times the product selection of competitors. The stores even had freshwater aquatic tanks, allowing customers to pick up live seafood. A year and a half ago, Hou 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." But like most of Hema's new format experiments, Neighborhood had better products but wasn't 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 proposed closing all stores in Hangzhou and Nanjing, retaining only Shanghai. Hou resisted the pressure, and ultimately only some outlets in these three cities were closed. Six months later, during the National Day holiday, Zhang again questioned the value of Hema Neighborhood, arguing that they should "run through the model before scaling," while Hou believed "there's still a chance." After lengthy discussions, Hou's insistence preserved the Shanghai business while closing others. Subsequently, Hou repeatedly emphasized internally that Hema Neighborhood would not close Shanghai stores again, keeping a "spark of hope." The spark was preserved, but Hema's overall profitability pressure intensified over the past year. In 2021, Alibaba began implementing an "operating responsibility system" across the group, classifying Hema as a "loop company" responsible for its own profits and losses. Since Hema opened its first Hema Fresh store in 2016, it became a sample and pioneer of new retail, breaking the boundary between online and offline, and driving a wave of companies to transform China's fresh food supermarkets. Hema Fresh is Hema's earliest and core format, currently with 300 stores across 27 cities. Today, people no longer believe as firmly as in 2016 that consumption upgrades will continue indefinitely. According to data from China's National Bureau of Statistics, in 2022, the average daily spending on all food and beverage (including tobacco and alcohol) per Chinese person was 20.5 yuan. There aren't many regions where consumers can frequently shop at Hema Fresh, and its store opening pace has continued to slow. Even with increased fresh food demand due to the 2022 pandemic, 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, representing growth of over 100%. 100 billion yuan is a symbolic number for offline supermarkets. China's largest supermarkets, Yonghui and Gaoxin Retail, have annual sales of only around 100 billion yuan, and these companies have been established for about 20 years, while Hema has only been around for 7 years. While peers have given up or contracted, Hema continues to try new formats, despite a bumpy road, never giving up. Counting the discount store Hema Outlets, which began in the second half of 2021, the company has tried ten formats. ALDI store, image source: ALDI official website. At the end of 2022, Hou Yi led a team to the European market to study local discount store formats. Discount stores began to develop significantly in Europe after World War II, especially in the last two years, as European inflation accelerated their growth. Hou said, "The core of European discount stores is private label, 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%. A Hema Outlets employee said that among standard products (excluding fresh and cooked food), the proportion of Hema Outlets' private label has exceeded the average of 35% across Hema's formats, reaching 40%, with a future target of 70%. Zhao Jiayu said that Hema no longer considers trying new formats as the most critical point; the next priority is improving product supply and service capabilities, with private-label R&D being an important part of product supply innovation. Hema's private-label products have underperforming items eliminated monthly, with an elimination rate within 5%. She said, "Today, many niche categories have been driven by Hema to become industry trends." For example, in craft beer, Hema launched four room-temperature craft beers for dining in 2018, and in 2021, it launched short-shelf-life refrigerated craft fresh beer. At the end of 2021, Hema's procurement team researched why women don't like beer, finding they found malt bitter and preferred sweet, slightly intoxicating drinks, so Hema developed fruit-flavored fresh beer. In 2022, craft beer ranked in the top 10 of Hema's overall beer category. Beyond private label, to achieve extreme cost-effectiveness for branded and fresh products, Hema is also trying to change its procurement methods. The first method is "parallel importing." In 2022, Hema established a dedicated circulation wholesale procurement department, which Hou called the "parallel importing department." Brands often price differently for distributors in different regions. Previously, 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 cheaper, breaking regional price restrictions. The second method is national centralized procurement. The advantage of headquarters centralized procurement is expanding procurement scale to get lower prices; it also allows direct "exclusive sales" at production areas, with the best specifications going to X Membership stores, second-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 downsizing local operations and procurement staff, transferring many local procurement managers to the Shanghai headquarters. A Hema insider said that 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, as Hou said, "without exception." Hema Outlets stores are only one-sixth the size of Hema Fresh big stores, with fresh products mainly coming from discounted surplus from big stores, and standard products mostly being Hema NB private-label items, available only offline, but they are quite popular. Hou said Hema Outlets' sales per square meter has reached seven times that of ordinary hypermarkets. Over the past three years, Hou has made bold statements almost every year, anchoring a "most important" strategic project, then switching to a new direction the next year, always sparing no praise, seemingly going all-in. In 2019, when the community supermarket format Hema MINI opened, Hou 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. These numerous format attempts are all to solve one problem: how to use the most suitable format to reach places that Hema Fresh big stores cannot. "No one is satisfied with the current market; they always want to explore a broader market," said Zhao Jiayu. As Hema's most important future strategic project, Hema Outlets still faces some challenges in expansion. If fresh products still rely on surplus from Hema Fresh big stores, Outlets' expansion will be limited. The total of over 300 Fresh big stores can only supply at most 60 Outlets fresh food stores, and there are already over 50 Outlets stores nationwide. A Hema Outlets employee said that as a downstream of Hema Fresh, Outlets is significantly affected by upstream, with instances where Hema Fresh had good sales the previous day, leaving Outlets with no fresh products to sell. The current solution is to adjust from one delivery to multiple deliveries to alleviate the shortage. 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 for standard products, besides near-expiry items and low-priced goods from cross-regional procurement, it will increase the proportion of private-label products. A Hema Outlets employee said that Outlets is not targeting near-expiry product stores like HotMaxx, because as the efficiency of the entire supply chain improves, near-expiry products will inevitably decrease, and supply will shrink. Hema Outlets hopes to learn from ALDI, focusing on private-label low-priced products and fresh food. According to Hou's plan, by the end of 2022, Shanghai would have 100 Hema Outlets discount stores, each achieving daily sales of 150,000 yuan and a gross margin of 15%. The aforementioned Hema Outlets employee said that after Outlets opens online channels in 2023, achieving this goal is not difficult. Hema's insistence on the Hema App and Alipay as the two payment methods may also change. As Outlets stores enter more townships, the coverage of these payment methods is not high, so internal discussions are considering introducing WeChat Pay. During Hema's seven years of entrepreneurship, Alibaba has also shifted from group warfare to individual battles. Hou's Hema no longer needs to prove its innovative value through "30-minute delivery" or "online-offline digitalization," nor can it expect customers to flock to it with novel concepts like "hanging chains" or "seafood tanks." What it needs to do is more fundamental and harder—prove that as a retail business, it can continuously grow and be profitable.