Click to read the original article for details. Source: Retail Boss Insider (ID: lslb168)
Core Guide:
Besides free vegetables, what other new features does Hema X membership offer?
What strategic considerations does Hema have in promoting X membership at this stage?
Does Hema have the foundation to sustain continuous growth in membership numbers?
After a short test phase, Hema X membership is gradually getting on track. In addition to rapidly expanding to new cities, in-store promotion efforts have also intensified unprecedentedly.
Recently, the Retail Boss Insider app (WeChat ID: lslb168) visited a Hema Fresh store in Beijing and found that the daily free fresh vegetables for Hema X members had been moved to a large air-cooled display cabinet. Previously, these free vegetables were placed on a small independent shelf. Meanwhile, the store also had a dedicated X membership promotional stand, and promotional materials about "Hema X Membership" were visible throughout the store.
This is not an isolated case. It is understood that in addition to the above prominent displays, some Beijing stores even broadcast Hema X membership information over the loudspeaker for extended periods, showing the extent of promotional efforts.
In response, Hema Fresh stated that Hema is indeed intensifying the promotion of X membership, and membership numbers are growing rapidly. Hema X membership was first tested in Shanghai stores in October last year. In April this year, the Hema membership system was officially rolled out in Beijing, Shenzhen, and Xi'an, covering all stores in these four cities.
From April to now, in less than two months, the total number of Hema X members has grown by 180%.
Just as it pioneered new retail formats, Hema is now boldly testing paid membership beyond the traditional membership systems of domestic retail entities. The first move is "simple and crude": with just one benefit—members receiving free vegetables daily—the 218-yuan membership fee can be easily recouped.
At the same time, Hema has lowered the barrier to membership to the minimum. Because the membership fee can be paid via Alipay Huabei, with payment due after one year, and if the member does not save the full 218 yuan throughout the year, Huabei will directly refund the difference. This experience is very Alibaba-like; even when doing supermarket memberships, Hema can bring in partners from the Alibaba ecosystem. The model of "try first, pay later" is indeed refreshing.
So, what deeper strategic layout does Hema have in launching X membership at this point? Can the 218-yuan annual fee be sustained? Compared to Sam's Club's 260-yuan annual fee, if this move is successful, it could also open a new profit point for Hema.
Novel Features of Hema X Membership
In April this year, media reported on Hema's internal testing of X membership, but from the exposed content at that time, the benefits of Hema X membership had also undergone a round of adjustments.
From screenshots of Hema X membership circulating online in April, at that time Hema X membership covered nine major benefits, and opening it cost 188 yuan per year.
The specific categories shown in the "Benefits Calculator" included: free daily fresh vegetables, a 5-yuan discount on daily fresh meat and poultry products, two 5-yuan milk vouchers per week, a 100-yuan cashback for every 5,000 yuan spent on gift cards (capped at 600 yuan), and referral bonuses, with an annual value of 4,468 yuan.
Now, the annual fee for Hema X membership has changed to 218 yuan per year. Correspondingly, the membership benefits have been upgraded compared to April. New benefits include: 8.8折 discount on all items every Tuesday, and the gift card cashback rule has been adjusted to: 40 yuan cashback for every 1,000 yuan recharged, with a maximum annual cashback of 1,000 yuan per member. The annual value has also been increased to 5,928 yuan.
Compared to the April test version, the new membership benefits offer more discounts. Even if you just claim one free vegetable daily, priced at 3-5 yuan, it is easy to recoup the annual fee. Additionally, the 8.8折 discount every Tuesday makes Hema X membership even more attractive.
According to Hema staff, after Hema X membership was opened to all users, a noticeable change in stores is that the area for displaying free vegetables has gradually expanded. "We need to ensure that the increasing number of members can get fresh vegetables every day."
Hema is also sparing no effort in promoting X membership. At the Beijing Shilibao store, staff members were very proficient in introducing the rules of X membership to Retail Boss Insider. When nearby consumers expressed interest in applying for X membership, the staff member proactively asked the user to scan the QR code on their work badge.
In fact, users can complete this step on the Hema app. The reason for scanning the store staff's badge QR code is likely that such promotions are linked to staff performance.
What deeper strategic considerations lie behind Hema's innovative paid membership and vigorous promotion?
Strategic Intent of Hema's X Membership Promotion
In any case, Hema's paid membership is indeed eye-catching because it differs greatly from the membership models of general supermarkets.
For example, JD 7Fresh (formerly 7FRESH) and Yonghui Superstores (Super Species and Yonghui share the same membership system) currently mainly use points-based membership. JD 7Fresh mainly uses points to redeem discount coupons, such as 399 points for a "25 yuan off 3 yuan" coupon, 599 points for a "45 yuan off 5 yuan" coupon, etc. Yonghui Superstores has integrated its membership system with JD Daojia, allowing users to open membership online for free, with benefits including free shipping thresholds, member points, member day benefits, etc. The points redemption rule is: 2,500 points for a 5-yuan no-threshold discount coupon, and 1,000 points for a 2-yuan discount coupon.
In fact, most domestic supermarkets currently use points-based models, with differences only in specific consumption forms. For example, after Wumart Supermarket integrated its membership system with Duodian, points can be directly used as money, with the rule that 1 point equals 0.01 yuan, and users can choose whether to use points for deduction when placing orders online.
Of course, this traditional membership model has obvious drawbacks: it cannot effectively enhance user stickiness because the discounts are too limited, and for many users, they are almost negligible.
Free vegetables that Hema X members can claim
But Hema's paid membership is much more sincere in comparison. Members can claim a free daily fresh vegetable, get a 5-yuan discount on designated meat and poultry products daily, and enjoy an 8.8折 discount on all items every Tuesday. To a certain extent, Hema has once again innovated the paid membership model in the supermarket industry.
In the third year of Hema's establishment, why is it promoting the membership system at this point? What strategic considerations are behind it? In the view of Retail Boss Insider, Hema X membership has the following two major advantages:
First, retaining old users. A healthy development pattern for a platform is: on the basis of retaining old users, continuously expand new users. Hema's launch of a 218-yuan annual fee membership system is clearly aimed at old users who have a high awareness of the Hema brand.
For all merchants, the retention rate of old users directly reflects the platform's competitiveness. Through X membership, Hema directly improves the retention rate of old users. By charging a 218-yuan annual fee, Hema not only gives these users a special identity but also provides benefits and value far exceeding 218 yuan.
Hema staff also told Retail Boss Insider that Hema basically does not have promotions, because instead of burning money to subsidize price-sensitive users, it is better to spend the money on loyal users to enhance the stickiness between the platform and these users. In Hema's view, this is a very valuable thing.
Second, increasing store traffic. Interestingly, the benefit of claiming a free vegetable daily for Hema X members differs between online and offline: if you claim the vegetable in-store, you can take it and leave; but if you claim it online, you need to spend at least 99 yuan to get it free. The intention behind this is worth pondering.
Hema, which once emphasized a high proportion of online orders, now places increasing importance on in-store traffic. Since the beginning of this year, Hema has been making frequent moves to boost store traffic. Taking Hema's Beijing Shilibao store as an example, while continuing to expand the dining business, it also values the attractiveness of dining combinations to users. Fresh-cut meat, staple food kitchens, and internet-famous dining formats, following the big seafood, have brought a new wave of traffic dividends to Hema.
At the beginning of this year, Alibaba Group Vice President and Hema CEO Hou Yi stated in his speech "The Battle to Fill the Pit in 2019" at the Lianshang.com Conference that physical supermarkets need to consider covering the cost of online delivery, which requires healthy growth in both store traffic and average order value. Increasing the frequency of high-quality users visiting stores through the membership system will obviously greatly boost Hema's store traffic and daily sales.
"Good retail is not just about being strong online; it requires both online and offline to be strong and big." Hema staff admitted. This also shows that Hema has taken another step closer to becoming a mature physical supermarket, because the profit model of supermarkets determines that neither online nor offline can be neglected.
Can the 218-yuan Annual Fee Withstand the Test?
What level is Hema's 218-yuan annual membership fee? How many users are willing to pay for such a price? More importantly, can this membership system achieve good results and be sustained?
Domestic supermarkets rarely do paid memberships because getting Chinese consumers to prepay is not easy, which is related to users' consumption habits. Another core factor is that no retailer like Costco has yet emerged in China that can make users firmly believe that the membership fee will not be wasted.
In terms of pricing, 218 yuan is not low. This can be referenced to American membership-based supermarkets, such as Sam's Club and Costco, both of which require purchasing a membership card to shop in-store.
Sam's Club's membership is 260 yuan per year. Last November, on the basis of this membership, Sam's Shanghai store launched a higher-level "Executive Membership" priced at 680 yuan per year. Costco's membership in the U.S. is $60 per year, equivalent to about 380 yuan. In August this year, Costco will open its first store in Shanghai.
As a new retail supermarket where you don't have to have a membership card to shop in-store, Hema X membership is more about segmenting users, giving high-end consumer groups more discounts and a better experience through the 218-yuan annual fee, and enhancing the stickiness between high-quality users and the platform. So the 218-yuan price is not low.
But regardless of whether users have sufficient spending power, from a consumer psychology perspective, no one wants to spend 218 yuan for nothing. So the key issue that Hema's membership system needs to solve is how to make users willingly spend this 218 yuan.
From the benefits users enjoy, they receive far more than 218 yuan in value, which is a huge selling point of Hema X membership. But if Hema wants to maintain continuous growth in membership numbers, or even make membership fees a major source of profit, the success stories of Costco and Sam's Club are worth learning from.
In fact, the core element to get users to prepay is to achieve "high quality at low prices." Taking Costco as an example, to provide users with the most competitive products, Costco has two internal hard rules: first, all product gross margins must not exceed 14%; if they exceed this figure, it must be reported to the CEO and then approved by the board of directors, while general supermarkets have gross margins of 15%-25%. Second, for external suppliers, if a company prices its products lower in other channels than at Costco, then its products will never appear on Costco's shelves.
What does a gross margin of no more than 14% mean? According to Retail Observation, using Costco's 2018 financial report as an example, its profitability can be illustrated as follows: assume product revenue for the fiscal year is 100 yuan, then product cost is 89 yuan, meaning a gross profit of 11 yuan. Then administrative expenses are about 10 yuan, leaving 1 yuan. From a numerical perspective, this 1 yuan is exactly equal to the tax for the year, so it is equivalent to making no profit from products.
How does Costco make a profit? It is actually through membership fees, and the same applies to Sam's Club. In fiscal 2018, Costco's membership fee income was $3.14 billion, and its total corporate profit was $3.13 billion. In other words, Costco's membership numbers directly determine the company's profitability.
But what Costco can achieve is not only extremely low product gross margins, but also high-end products that users cannot buy in other channels. In addition, its private label Kirkland Signature is also a trump card. In 2018, its private label revenue was $39 billion, an increase of more than 10% from $35 billion in 2017. All these reflect Costco's strong supply chain capabilities.
Costco also has a killer feature: extremely efficient inventory turnover. Costco's inventory cycle is only 29.5 days, lower than Walmart's 42 days, which greatly improves Costco's capital efficiency. This means that Costco recovers all product payments long before paying suppliers. This cash flow is very strong among retailers.
So it is not hard to understand why Costco's membership renewal rate can be as high as 90%. Costco has no promotions, only genuinely high-quality, low-priced products, which makes users willing to pay membership fees because they believe that as long as they get a membership card, they will definitely get more benefits and can buy products without hesitation.
Compared with such international retail giants, domestic retailers still have a long way to go in supply chain capabilities. And the key to sustained growth in paid memberships is still a retailer's product capabilities.
Currently, Hema X members enjoy products that are not much different from non-members, mainly in terms of price discounts. But this obviously cannot be a long-term selling point to attract high-end consumers. Hema still needs to upgrade the membership experience comprehensively in terms of product strength, service, and experience. Because at present, at least for some products of the same quality, Hema has not achieved sufficient price advantages.
Hema-related personnel also revealed that Hema X members currently mainly enjoy price discounts on products. In the future, they will provide more targeted services, premium products, etc., to create a more attractive membership experience.
When the product quality and price at stores become unique, users will naturally pay for membership services that offer more benefits. At that time, X membership will grow naturally, and even without much promotion, users will spontaneously become Hema members.
In short, Hema X membership has taken the first step of bold experimentation, and its future growth will become an important measure of Hema's brand building.