Source | Business Review Jiang Yue

Nine years after its founding, Hema has achieved full-year profitability for the first time in a complete fiscal year (April 2024 to March 2025).

Notably, this profitable fiscal year coincides with the first full year under new CEO Yan Xiaolei.

Since the leadership change, Hema has initiated a series of business adjustments and strategic focus. For example, in the new fiscal year, Hema Fresh plans to open 100 new large stores and enter dozens of new cities.

Additionally, Hema X membership stores, which have paused offline expansion, are moving their products online.

Recently, Hema announced that its e-commerce delivery business "Hema Yunchao" has been upgraded to "Yunxiang Hui," which uses JD Logistics, with over 80% of orders achieving next-day delivery. Furthermore, Yunxiang Hui will add 800 MAX private-label products previously available at X membership stores, including bestsellers like sea salt toffee and triple-protein shrimp crackers.

It is understood that Hema MAX brand has been the product line with the most daigou (proxy purchasing) orders. Therefore, Hema's membership store's shift from offline heavy-asset model to online e-commerce may amplify its product innovation advantages.

Most critically, Hema X membership stores had to transform.

In its five years, Hema X membership stores have shrunk from a peak of 10 stores to just five remaining. Due to intense competition from foreign membership stores and Hema's need to be self-financing, its ambitious strategy has been put on hold.

A project that was highly anticipated and endorsed by the founder, but quickly deemed unprofitable and lacking consumer recognition, was then rapidly abandoned or transformed. Similar stories seem to frequently occur within Hema.

X membership stores are not the first new business format Hema has "tinkered with," but from an overall strategic positioning and pace perspective, Hema, now nine years old, may not tinker with new formats in the short term. It is also setting aside its "obsession" with new retail, trying to become more like a healthily operating "supermarket."

Membership Stores: A "Clean Break"

As the first true membership store in the domestic (Chinese) market, Hema X membership stores were born with a "halo."

Internally, the Hema MAX division, which manages membership stores, was once a strategic parallel to the Hema Fresh division (large store business) and was one of the three key business formats Hema focused on.

In 2021, Hema announced that its first X membership store in Shanghai achieved profitability, internally defined as "initially validating the single-store model," with plans to open 50 stores by 2023, surpassing Sam's Club in China at that time, and with GMV exceeding Hema Fresh.

Confidence in new formats and aggressive expansion are familiar "Hema traits," but the real data is "heartbreaking": throughout 2023, X membership stores contributed less than 10% of Hema's total sales.

Perhaps Hema cannot forget: a store that requires users to pay a membership fee must have excellent product capabilities.

Compared to domestic retail leaders, Hema's product innovation is already quite deep, and it is considered by Sam's Club as the "only" competitor in China. However, compared to foreign membership stores, Hema still has significant gaps in scale procurement, years of operation, and strategic supplier reserves.

Hema's former CEO Hou Yi said in an interview that most retail supermarkets today adopt a "look-and-buy" procurement model, where brand suppliers bring products and every supermarket picks. The main products promoted by brand owners are sold in almost every city, resulting in homogeneous competition.

In contrast, Sam's Club and Costco's category procurement heads have ten years of experience, work with top suppliers in the industry, and are deeply involved in product development. For example, they can make Swiss roll suppliers choose animal cream and croissant suppliers choose butter from the Bordeaux region of France. They also have procurement service companies to help retailers find quality suppliers globally.

Ultimately, Sam's Club and Costco have reserved hundreds of strategic suppliers globally, with top suppliers' single-product sales exceeding one billion yuan. Suppliers are also willing to research markets, improve technology, and update equipment for large customers.

Moreover, Sam's Club ensures that single-store products can "sell out," and its scale effect makes suppliers more willing to concede on price. According to data disclosed by Walmart China President Zhu Xiaojing at a Walmart investment conference, eight Sam's Club stores in China have annual sales exceeding 3.67 billion yuan each.

But for Hema, which was founded nine years ago and its membership stores five years ago, product innovation and strategic supplier reserves can only be built step by step; being aggressive is not advisable.

Hou Yi once said in an interview with Lianshang.com that compared to Sam's Club and Costco, Hema is still a "primary school student." He believes domestic retailers should learn from Sam's Club and Costco's global supply chain integration and product differentiation capabilities.

Humility is the right attitude, but actions must also change.

Now, Hema's membership store exploration of an online model is actually one of the transformation directions for most membership stores. In April this year, Costco announced full coverage of same-city delivery in cities where its stores are located in mainland China, with delivery within 90 minutes for orders placed in the main urban area.

A more successful case is Sam's Club's cloud warehouses. Normally, a Sam's store is matched with 6-15 front warehouses, with about 2,000 SKUs, covering a radius of about 6 kilometers, with delivery within one hour, and city-wide delivery almost achieving next-day delivery.

According to Zhu Xiaojing, Sam's online sales now exceed 50% of total sales, with over 80% of orders delivered within one hour and an average delivery time of less than 40 minutes. According to Walmart China's Q4 financial report last year, Sam's Club e-commerce business grew 34% year-on-year.

Compared to Sam's Club and Costco, Hema's membership store has another advantage: delivery convenience under the internet model. Currently, Yunxiang Hui's next-day delivery relies on Hema Yunchao's regional warehouses. For example, the Hema Yunchao North China warehouse, which went into operation in September 2024, can store 200,000 items and achieve next-day delivery in Beijing, Tianjin, Hebei, and Shandong.

By transitioning to a light online model, Hema is truly making a "clean break" from the heavy-asset offline model of membership stores, while preserving the "spark" of product innovation to continue online, avoiding direct competition with Sam's Club and Costco, and focusing on profitability.

Similarly, the "clean break" from membership stores is just one facet of Hema's nine years of "tinkering" with new formats.

Nine Years of Tinkering, Back to the Starting Point

According to incomplete statistics, over the past nine years, Hema has attempted at least twelve new business formats, including "Hema Linli" (a modified community group buying), "Hema Mini" (derived from front warehouses), "Hema Li" (a commercial center format with heavier asset model), as well as Hema Cai Shi, Hema F2 convenience stores, and other new formats that made a lot of noise but had little impact.

Notably, many of these new formats were highly publicized but ultimately became mediocre.

For example, Hema Mini, considered the "best business model," once planned to open 100 stores but only opened 14 in two years. Hema Linli, considered the "most important strategy for the next decade," began contracting within a year of opening and eventually only maintained operations in Shanghai.

Because of this, Hou Yi once became the "most reflective" retail person in China. He admitted that his initial judgment that "Hema Mini is the best business model" was a mistake, and he also acknowledged that Hema Linli was indeed "a bit aggressive."

Why the frequent "tinkering" with new formats? Perhaps because Hema cannot let go of the "new" obsession in "new retail."

At its founding in 2016, Hema was considered the "No. 1 project" of Alibaba's new retail and also the "No. 1 project" on the agenda of former Alibaba CEO Daniel Zhang. In the early days of preparation, Zhang would meet with Hou Yi every two to three weeks to discuss business direction.

In January 2016, Hema Fresh's first store opened in Shanghai's Jinqiao area. The warm lighting similar to Starbucks, overhead automatic conveyor belts, a 99-yuan Boston lobster, and payment only through the Hema app were all retail innovation benchmarks at the time. Walmart and Carrefour even organized group visits to Hema stores to learn.

A year later, Jack Ma visited Hema, and a photo of him holding a king crab in front of a fish tank quickly spread in the media. The "Ma Yun effect" was formed, and the traditional retail industry set off a wave of digital transformation.

However, nine years later, Yonghui Superstores' retail transformation is "a mess," foreign membership stores are expanding aggressively in China, and Alibaba has begun selling offline retail assets. Hema's store micro-innovations from back then are no longer convincing.

The key is how retailers understand the "new" in "new retail." It is not just about changing store lighting or using instant home delivery models, because such operational innovations have no barriers and easily lead to homogeneous innovation in traditional retail transformation. The real "new" should be reflected in "product innovation."

In the past, traditional supermarkets' "look-and-buy" procurement was more like "following the crowd," lacking insight into consumers' real needs. Often, a product's packaging and quality would not be updated for twenty years, let alone deeply participating in the product supply chain, creating "novel" private-label products, or building a global procurement supply chain.

In recent years, Hema has made many product innovation moves, which are significantly better than some traditional supermarkets. However, the supply chain requires more professional procurement and time to accumulate supplier reputation.

Ensuring active product innovation to retain loyal consumers is the foundation of Hema's frequent format innovation, but supply chain actions should not be too aggressive.

In October 2023, Hema launched a discount transformation, streamlining SKUs, launching offline exclusive prices, and requiring suppliers to offer lower discounts, which led to the elimination of many KA brands and new consumer brands.

That month, Gu Guojian, a professor at Shanghai Business School, wrote that Hema's low-price strategy disrupted the market price system, and major brands had begun to stop supplying Hema. "Hema is now a disruptor of market prices; it's best if it doesn't succeed!"

The truth is that KA brands find it difficult to abandon the price system they have built over many years for one channel like Hema. This would not only break stable distribution relationships, but also, because Hema stores cover a limited number of consumers, lower prices may not attract enough incremental consumers, which is too costly for brand owners.

The overly aggressive discount transformation may have also led to Hou Yi's eventual departure from Hema.

After nine years of "tinkering," the concept of new retail is rarely mentioned. Hema has lost some momentum. Organizationally, Alibaba's "1+6+N" restructuring requires each business unit to be self-financing. Hema was once on the verge of being sold. Changes in the internal and external market environment also mean Hema will enter a new cycle.

Ultimately, former CFO Yan Xiaolei took over as CEO, and Hema began to "return to the essence of retail."

The Dream of 100 Billion GMV

After Yan Xiaolei took over, Hema abandoned aggressive reforms and focused on profitability.

In March last year, some Hema store employees were transferred to outsourcing and meal allowances were canceled. In April, the membership store business stopped expanding, and about 10% of staff were laid off. Additionally, Hema's financial assessment for business operations has become stricter; teams must first prove that opening new stores or doing new business can be profitable before investment is determined.

Managing Hema from a CFO perspective, its strategy has become more prudent and focused. The result is that Hema has achieved profitability. According to CEO Yan Xiaolei's internal letter, Hema has been profitable for nine consecutive months since March last year. Additionally, Hema's overall GMV for fiscal year 2024 exceeded 59 billion yuan, up from 55 billion yuan the previous fiscal year.

A more symbolic piece of good news is that Jack Ma visited Hema stores again, and Alibaba has made it clear it will "not sell Hema." In the future, the group may consider introducing strategic investors to think about how to make Hema reflect more value.

In specific business operations, Hema will focus more on Hema Fresh large stores and Hema NB, further penetrating lower-tier markets.

Throughout 2024, Hema opened a new store every five days on average, mostly in lower-tier cities and county markets, such as Qidong in Jiangsu, Tongxiang in Jiaxing, Weifang in Shandong, Cixi in Zhejiang, and Weinan in Shaanxi.

Another key format, Hema NB, targets price-sensitive lower-tier consumers. It currently has nearly 220 stores in Jiangsu, Zhejiang, and Shanghai. Besides 143 stores in Shanghai, the rest are in cities like Jiaxing, Huzhou, and Wuxi. This year, it will also enter Changzhou, Nantong, and other cities.

In fact, Hema noticed the opportunity in lower-tier markets early on. At the start, the founding team planned to cover most cities in China in the next decade, especially the broader county, township, and village markets. In 2019, Hou Yi publicly stated: "Can Hema open in rural areas? In third- and fourth-tier cities? It wasn't possible in the past, but that doesn't mean it won't be in the future."

Hema Linli, the pickup store format that was once highly anticipated, and Hema Fresh Outlets, which served as a "drain" for Hema Fresh's surplus and near-expiry products, both represented important formats for Hema's attack on lower-tier markets.

However, Hema's path to lower-tier markets once lost focus. Hema Fresh Outlets meant Hema had to abandon its insistence on high quality, which could affect the brand. Hema Linli provided services in areas not covered by Hema's large stores, focusing on expanding Hema Fresh's reach, but without distinctive product features.

Essentially, although consumption downgrading has become a prominent topic, China still has a broad base of middle-class families who insist on "not overpaying," meaning they want quality consumption while minimizing unnecessary brand premiums and distribution costs—what every retail supermarket calls "quality at a good price."

To hit the pain points of middle-class family consumption, the core change must be in products.

After all the tinkering, Hema is now on the right track. For example, at Hema NB stores, a 500ml bottle of sugar-free cola costs 2.2 yuan, and 1L of fresh milk costs 9.9 yuan, significantly lower than traditional supermarket channels. Additionally, about 30% of NB store products are private-label customized items, further solidifying its extreme value-for-money positioning.

Setting aside the obsession with format innovation, Hema will focus on serving consumers well and providing better value-for-money products, adhering to the strategy of "Low price but Unique." Hema no longer has high commercial imagination, and the model's ceiling is lower, but Hema has also become more like a healthily operating supermarket that can achieve a positive profit cycle.

Yan Xiaolei stated that Hema's GMV will reach 100 billion yuan in the next three years. According to the China Chain Store & Franchise Association, in 2023, the only retail enterprise in China with 100 billion GMV was Walmart China, with GMV of 120.2 billion yuan.

Hema still has a "big dream," but now the goal is more pragmatic and traceable.