Liu Yu Once upon a time, Hema targeted the consumption upgrade business, aiming at wealthy urban middle-class consumers. Now everything has changed; who would have thought that today's Hema would become a "discount-oriented operation." The integration of online e-commerce and offline stores earned Hema the title of new retail. At that time, Hema typically chose locations in core areas of first-tier cities, with store opening costs as high as 30 million yuan, and even surrounding neighborhoods were nicknamed "Hema-zone houses." Hema's basic approach then was to use higher prices to bring better quality and service, which seemed reasonable, but it was quite different from Sam's Club and Costco's "high quality, low price, curated SKU" approach. In 2016 and 2017, Hema's style was very much like an internet premium supermarket, leaving the impression of expensive goods and sparse stores, with extremely slow store expansion. This was due to the strict requirements of the consumption upgrade store model on offline location selection, needing sufficient middle-class purchasing power around the store to support the single-store economics. Therefore, Hema following the consumption upgrade route would always be a slow business. However, the grand consumption upgrade movement was hit by the macroeconomic environment; mortgage pressure and securities shrinkage made the middle class's life difficult, and "value for money" once again became the main consumption theme. The strategic shifts of Taotian and JD.com, the calls from Ma Yun and Liu Qiangdong, and Pinduoduo's curve overtaking all signaled the return of the "value for money" era. Today's Hema has undergone numerous strategic positioning changes, completely different from Alibaba's original vision. It is lamentable that Hema has experienced too much strategic internal strife over the years and wasted too much time. From an industry perspective, offline retail is hellishly difficult. The industry often admires Costco, favored by Charlie Munger, but Costco's replication difficulty is immense, expansion is slow, and it is extremely meticulous about costs at every intermediate step. Hou Yi, during his time at JD.com, had thought about fresh food retail with half-hour delivery, a typical internet transformation of offline retail, but Liu Qiangdong disagreed. Coincidentally, Zhang Yong (Xiaoyaozi) supported him, so Hou Yi left JD.com for Alibaba. According to Hou Yi's statement on a program, Zhang Yong told him not to worry about money. Hema started with high-profile sales of hairy crabs and king crabs. As mentioned earlier, the high-profile consumption upgrade model requires massive offline middle-class users to support it, which has deviated from the basic consumption base of Chinese users. After all, what wealthy family can eat king crab every day? Middle-class families couldn't even save Daily Fresh, let alone support such a heavy offline model like Hema. Therefore, after the novelty wore off, Hema quickly fell into trouble. Due to the mismatch between Hema and user consumption needs, Hou Yi received Alibaba's internal "rotten strawberry award." Seeing the Hema store model disproven, Hou Yi decided to transform Hema. However, the problem was that after moving away from high-end positioning, Hema fell into years of strategic confusion, and it could be said that it hasn't fully recovered even now. In 2019, Hema began to classify its business formats, dividing stores into four types: F2 convenience stores, Hema mini, Hema vegetable market, and Hema small stations. Later, it tried various models such as front warehouses, community group buying, and discount supermarkets, and created multiple store types like Hema Market, Hema Neighborhood, and Hema Outlet. Now there are also Hema X membership stores, Hema Premier stores, and other formats. Roughly calculated, Hema has tried nearly 10 different business models over the years, with many strategic shifts during development. Hema's position within the Alibaba Group has also fluctuated with organizational and strategic changes, now being the "N" in "1+6+N," originally expected to independently list and raise funds, but recently announced the suspension of its Hong Kong listing plan, and last year there were rumors of a significant drop in corporate valuation. In summary, Hema has not established a clear direction in recent years and remains in a stage of business model exploration, which is an abnormal and strange phenomenon for a project that has been around for nearly nine years and burned a lot of cash. We believe that Hema has been engaging in strategic internal strife over the years, and the root cause of this internal strife may be a lack of strategic decisiveness. It can be seen that Hema's strategic transformations have shown obvious trend-chasing characteristics, influenced by market sentiment fluctuations, lacking long-term planning and strategic focus. In the second half of 2023, Hema launched the "Move Mountain Price" to play the low-price card. The so-called "Move Mountain Price" is generally considered to target Sam's Club. A durian thousand-layer cake that should cost a hundred yuan was slashed to 39.9 yuan by Hema. The launch of "Move Mountain Price" brought Hema significant user growth. But at the same time, "Hema Moves Mountain" caused dissatisfaction among both suppliers and member users. On one hand, suppliers were reported to be forced to lower prices, exacerbating friction in the supply-retail relationship. At that time, a female new consumer entrepreneur publicly "accused" Hema of unilaterally lowering prices, disrupting the brand suppliers' channel pricing system and causing refunds from e-commerce channel users. The entrepreneur also believed that Hema would transfer losses to suppliers by withholding unpaid payments. On the other hand, some member users felt that Hema's widespread price cuts diluted the value of Hema membership. With prices generally reduced by 20% and an 80% discount, it was equivalent to canceling the member 88% discount, which was unfair to paying members. The magic of "Move Mountain Price" is that Hema seemed to want to grab Sam's Club's middle-class users, but it left member users dissatisfied; it seemed to want to confront Sam's and Costco's model, but it was more like an upgraded version of Walmart or Carrefour. Finally, in October last year, Hema launched another "biggest transformation in history." The Hema Fresh Business Division fully initiated discount-oriented reform. Hou Yi, who once championed fresh food retail delivery, finally realized that "the decisive battle in future retail will be in stores." In December, Hema canceled the paid membership entrance in its online APP, meaning that Hema temporarily abandoned the membership model to advance the discount reform. It is worth noting that in Costco's business model, membership fees are an extremely important source of profit, and Hema's suspension of the membership model indeed signifies a parting of ways with Costco and Sam's Club. Perhaps Hou Yi has indeed once again understood the essence of retail, but Hema's discount reform still has a bit of trend-chasing flavor, which remains unsettling. As is well known, in the past two years, the discount trend has swept the retail industry, and discount chains like Haote Mai have risen with the wind. From Hou Yi's statements, Hema's so-called discount reform should still be about promoting the cost-effectiveness of quality goods. "Discount is not simply about low prices, nor is it a price war. Making good products not expensive, and bringing down the prices of the best and high-end products, is the real skill." To achieve "cost-effectiveness," Hema almost has to resort to vertical integration, achieving low prices through the supply chain. Therefore, Hema began to abandon the past KA procurement model and started to establish an OEM and self-produced procurement system. Based on existing information, we believe that Hema's "biggest transformation in history" still faces significant difficulty, and we hold a cautious attitude towards Hema's prospects. The main reason is that vertical supply chain integration sounds logically feasible but is extremely difficult to execute. At the scale of thousands of SKUs, it requires astonishing organizational execution and very refined operations to achieve "high quality at low prices." In fact, Costco's supply chain is vertically integrated in this way, but the problem is that Costco's profitability relies on membership fees, and Hema now seems to have abandoned its membership system operation. Therefore, we predict that Hema will experience significant and prolonged pain during the discount reform, starting with organizational restructuring and changes in supply-retail relations, but ultimately returning to the pain of profit model issues. Hema's discount operation story clearly still has a long way to go. Hou Yi attaches great importance to it, calling it "a life-and-death battle" and saying, "If we don't win, there's no future." It's good to have management with a determination to fight to the death, but from our perspective, Hema still hasn't clearly explained the business model and profit accounting of "discount operation" to the outside world, yet it is again making deep supply chain investments due to strategic transformation, which may undermine market confidence. Hema, established nine years ago, has grown by "embracing change" all the way, but Hema's real spring still seems not to have arrived.