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In December 2014, the fresh e-commerce platform "Miss Fresh" (每日优鲜), founded by former Lenovo Joyvio executives Xu Zheng and Zeng Bin, received a $5 million angel investment from Guangxin Capital and Yuanjing Capital under Wu Yongming (also known as "Wu Ma", one of Alibaba's 18 founders). Five months later, it secured a $10 million Series A round led by Tencent with Guangxin following.

In August 2015, JD.com strategically invested $700 million in Yonghui Superstores.

In January 2016, Hema Fresh's first store quietly opened at Shanghai's Jinqiao International Commercial Center. Two months later, Hema Fresh received a $150 million strategic investment from Alibaba Group. Shortly after, Jack Ma officially announced Alibaba's new retail strategy at the Yunqi Conference.

On January 1, 2017, Yonghui's Super Species opened its first store, the Hot Spring store, in Fuzhou. Two days later, Today Capital and Yonghui Superstores strategically invested 460 million yuan in Super Species (Yonghui Yunchuang).

In March 2017, Miss Fresh raised another $330 million in a Series C round led by Huachuang, Lenovo, and Tencent, completing over 200 front warehouses nationwide.

On December 12, 2017, Tencent invested 4.68 billion yuan in Yonghui Superstores.

On December 27, 2017, Tmall changed its leadership, with former Tmall Supermarket head Jing Jie promoted to Tmall President.

On January 4, 2018, JD.com's borderless retail flagship project, 7Fresh, opened its first store.

On January 29, 2018, Super Species received another 187.5 million yuan strategic investment from Tencent.

On September 6, 2018, Miss Fresh completed a $450 million new round led by Poly Capital, Davis Selected Advisers, Tencent, Goldman Sachs, Times Capital, and Tiger Fund, bringing total funding to over $1 billion after seven rounds. Its front warehouse count exceeded 1,000, covering more than 20 cities.

On September 19, 2018, JD.com announced landing cooperation agreements with 16 real estate developers including Poly, Joy City, Vanke, Yuexiu, and Greenland, planning to complete 1,000 7Fresh stores within 3-5 years.

On September 30, 2018, Hema Fresh released its first official data report in 32 months, showing 64 stores across 14 cities as of September 30.

Hema Fresh is, through its actions, deviating from the original intent of new retail and the direction of the broader environment.

32 months ago, this fresh supermarket named "Hema Fresh" opened in prime downtown locations in first- and second-tier cities, packed with cutting-edge technology and touting seafood that even Jack Ma said he had "never tasted so delicious."

Initially, it was just an ordinary livelihood news story.

As external reports revealed its initial $150 million strategic investment from Alibaba, CEO Hou Yi's background from Alibaba's "enemy camp" (former head of JD Logistics & Home Delivery), the new retail flagship project personally endorsed by Zhang Yong (Jack Ma's successor), the concept of "Hema zones" packaged with complete commercial real estate site selection logic, and the industry's strongest delivery speed of 3 kilometers within half an hour, this supposedly cautious and low-profile "secret weapon" inadvertently exposed the entire strategic intent of the new retail strategy while generating buzz to attract C-end users:

Using fresh produce as an entry point to capture high-frequency consumption scenarios missing from Tmall, leveraging Alibaba's brand endorsement to gain user trust in large stores, and later harvesting all traffic within a 3KM radius around the stores.

The strangulation began immediately.

Yonghui Superstores and JD.com responded immediately by entering the battlefield together, but internal changes led them to launch their own Hema-imitating models, "Super Species" and "7Fresh," within two years, attempting to dilute Hema's seemingly one-trick technological advantage with a light-cavalry follow-up strategy. However, the cost was missing the window to kill Hema—by the time of writing, Hema had opened 64 stores in 14 central cities, more than double the combined number of JD 7Fresh and Yonghui Super Species stores. Additionally, Zhu Si Ma Ji learned that Hou Yi had dispatched Li Xichun, former CEO of Bubugao Yunhou.com who returned to Alibaba in mid-2017, as the lead, and Hema had already attacked Yonghui Superstores & Super Species' home base—Fujian Province.

Notably, even after Pinduoduo, a competitor with a market value of tens of billions of dollars and a low-price, high-volume model, appeared on Alibaba's competitor list, Alibaba could not abandon the achievements of Tmall's consumption upgrade over the past decade, and thus still has no effective way to counter this business form.

Therefore, Hema Fresh, born in 2016 with an average initial investment of nearly tens of millions of yuan per store, is unsurprisingly a product of Tmall's consumption upgrade thinking over the past decade. On the issue of new retail, competitors like Super Species and 7Fresh share Alibaba's view and imitate it.

But with sudden changes in domestic and international situations over the past six months, the stock prices of partners Sanjiang Shopping and Yonghui Superstores have fallen consecutively, while internet giants continue to make costly trial-and-error offline. This has brought China's offline retail industry, beset by internal and external difficulties, to an awkward juncture—continue to bet their lives following the giants, or dissolve the alliance and seek self-preservation before the storm hits?

While Super Species, 7Fresh, and Hema are locked in fierce offline battles, Tencent-invested strategic e-commerce project "Miss Fresh," which took four years to develop, is quietly building over 1,000 front warehouses around communities and office buildings in more than 20 cities through a low-price, high-volume fresh produce model. It has now stabbed Hema Fresh in the back in its home base—East China—and is beginning large-scale infiltration into South and Southwest China. Additionally, Zhu Si exclusively learned that Miss Fresh may later become the twelfth player to enter WeChat Wallet's "Nine Grid," replacing Pinduoduo, which was once highly anticipated.

As the saying goes, cattle and sheep flock together, but beasts walk alone.

The natural enemy of the strong is always the weak, but the natural enemy of the weak is not the strong, but those they perceive as even weaker.

1 Heavy Cavalry: Hema Fresh

On September 17, 2018, Hema Fresh CEO Hou Yi disclosed for the first time at Alibaba Investor Day a set of data never before revealed in the past 32 months: mature stores operating for over 1.5 years achieve a sales per square meter of 50,000 yuan, daily sales per store exceeding 800,000 yuan, online average order value of 75 yuan, and offline average order value of 113 yuan. A person close to Hema's senior management told Zhu Si Ma Ji an unreported piece of good news: two stores opened on January 15 and September 30, 2016, respectively, in Shanghai's inner ring—Jinqiao International Commercial Center and Daning Music Square—had successfully recovered their initial investment costs by mid-to-late this year and officially entered a long profit harvesting period.

As Alibaba's new retail flagship project, Hou Yi's report card can be seen as a shot in the arm for Alibaba's top management. After all, the "three high problems" of Hema stores—high loss risk, high initial investment, and high difficulty in fine-grained store operations—had long made Hema subject to doubt. This report card is clearly intended to give Alibaba capital confidence and secure continued investment at the end of this year and early next year.

Assuming Hema truly completes its planned 2,000 stores, it would require not only hundreds of billions of yuan in capital but also an experienced procurement and sales team and a full self-built cold chain logistics network. As of October 2018, Hema had not announced new investment for 31 months. For Alibaba, Hema is an unprecedented attempt because the heavy-asset model is not Alibaba's strength, and the offline model was previously unheard of.

Before Hema Fresh landed, Tmall's fresh produce channel relied on Alibaba's strategic investment in "Yiguo Fresh" to control operations. The procurement and sales model was closest to Tmall Supermarket's self-operated consignment model and Tmall Global's self-operated project launched around 2017. However, these two products did not achieve the traditional Alibaba-style overwhelming market share advantage; instead, they were long suppressed by JD Supermarket and NetEase Kaola.

The core reason traces back to Alibaba's early light model, which led to a general lack of awareness about talent reserves in supply chain functions, including traditional procurement and sales. It wasn't until around 2015 that the severity of this problem was recognized—executives like current Tmall President Jing Jie (from COFCO and P&G), current Alibaba Vice President Dr. Xiao Lihua (former Vice President of Xtep), and Zhang Yixing (former Vice President of Bestseller Group, now CEO Assistant of Alibaba Group) were brought in over the past three years as representatives of this talent need.

However, it is worth noting that Hema's official data showing mature stores' online order share at 60% deviates by about 20 percentage points from data obtained by Zhu Si Ma Ji from internal partners (all Hema joint venture subsidiaries) at several mature Hema stores in Shanghai a few weeks before the data release. In other words: Hema's delivery order share should be seen as between 60% and 80%.

Perhaps it is precisely because the surge in delivery orders has pushed the delivery cost under high store load close to the threshold that product gross margins can absorb, prompting Alibaba to recently promote Hema Xiaoma, a simplified and downsized version of Hema Fresh, in cooperation with RT-Mart. This adopts a distributed layout similar to JD Logistics, using Hema Xiaoma to further share the main warehouse's delivery pressure and radiate to broader areas, even second-, third-, and fourth-tier regions.

Whether the external data on delivery orders is biased can be avoided, but the fact that Hema Fresh's current delivery order share is higher than in-store consumption is officially acknowledged.

So what is the logic behind the high delivery order share?

"Lao Cai (Hou Yi) invested so heavily in automated sorting and logistics delivery from the start, which already shows that Hema's ultimate consumption form will still heavily rely on delivery. After all, the best way to improve restaurant table turnover and retail sales is currently delivery. But if this recent data has been adjusted to inflate in-store and deflate delivery, it must mean that Hema's half-hour delivery cost is now far higher than the cost of attracting customers to stores. The problem behind this is either that KPIs cannot meet ideal standards (in-store order value 113 yuan vs. delivery order value 75 yuan), or there is a strategic misjudgment."

A core supply chain partner of Hema Fresh told Zhu Si Ma Ji: The biggest feature of the Hema model is that large chain stores serve as the core consumption scenario while also acting as e-commerce front warehouses. However, the problem with the front-store-back-warehouse model is that it is difficult to reach down to lower-tier users. Because the radiation range is only three kilometers, Hema's site selection is basically in prime commercial real estate locations, which is why "Hema zones" exist and why initial investment is so high.

"If the online share is much higher than offline, it means orders still come mainly from digital natives. These people will be loyal Hema customers, no doubt, but they still belong to the existing market. If we build such a luxurious store only to attract people who originally planned to shop online but were drawn to offline experience by novel fresh products, then I think Hema has a strategic misjudgment risk."

So why is there a risk of strategic misjudgment?

First, Alibaba's e-commerce business has been around for 15 years since Taobao's birth. At a point when growth is about to slow, building a new business entity like Hema Fresh aims to harvest new customer groups that do not overlap much with Alibaba's existing platform consumers as growth increments. Delivery is a core indicator of this overlap: if Hema's actual users do not overlap much with target users, then external traffic sources like Ele.me, Taoxianda, and the Hema app should have poor conversion. After all, the target group for incremental markets should be Chinese middle-aged women who are costly to educate in e-commerce, lack delivery ordering habits, and prefer in-store shopping.

But the reality is that Hema's external traffic conversion is surprisingly good, and delivery consumption far exceeds in-store, possibly even showing a Pareto distribution. This anomaly indirectly suggests: Hema may not be capturing the customers it wants, but rather taking away existing users and orders from competitors like Meituan, as well as its own Ele.me, Tmall Supermarket, Tmall Xiaodian, 1-hour delivery convenience stores, and other partners. Hema, originally a hybrid retail format centered on offline experience, has ultimately become an expensive e-commerce front warehouse.

Alibaba has a history of such heavy punches hurting its own allies, as seen with Tmall: Tmall Supermarket diverts orders from Tmall flagship stores, Tmall Mall harvests Tmall Global orders, Tmall Global harvests Taobao Global merchants and orders, and Tmall Global Self-Operated harvests Tmall Mall and Tmall Global user orders.

Second, Hema's current strategy in merchant cooperation has changed from Alibaba's traditional model of merchants paying deposits and commissions to an unprecedented heavy model—investment cooperation. According to an internal partner in Hema Fresh's Shanghai region, Hema does not accept external merchants or suppliers. All internal partners are Hema subsidiaries or joint ventures in which Hema holds shares. Partners must sign confidentiality agreements, and all store dishes are provided and selected by Hema, with store data transmitted in real-time to Hema's backend. However, because they are joint ventures, Hema's support for partners is undoubtedly strong.

Clearly, this form of merchant cooperation largely eliminates the corruption issues that plagued traditional offline retail procurement and merchant recruitment in the past platform model. With Hema leading everything, the speed and efficiency of many tasks improve significantly. This is why the Hema team could open over 60 flagship stores across 14 cities in two years—the heavy model saved time, allowing them to seize locations before Yonghui Super Species and 7Fresh could react. But on the other hand, this heavy model also means Hema Fresh is a true data black hole, with initial investment costs far exceeding similar fresh supermarkets, even several times higher.

From the perspective of Hema's two Shanghai stores that have already recovered their investment:

Shanghai has a long retail history. It is almost the most perfect city for physical retail in China, with the healthiest consumption patterns and the highest acceptance of new retail formats, and there is no other like it. In the past 10 years when e-commerce wreaked havoc on physical retail, only Shanghai's offline retail remained strong, without the massive collapse seen elsewhere.

Therefore, to a large extent, the actual data from Hema's 20 stores in Shanghai, and even the 39 stores in the Yangtze River Delta (accounting for over 60% of current national stores), cannot fully represent the true state of China's offline physical retail. Perhaps it is also because Hou Yi, as a Shanghai native, understands Shanghai's retail well, which is why he decided to make Shanghai Hema's headquarters and a model city for new retail. But there may be another reason he cannot openly admit—from a strategic executor's risk-avoidance perspective, Hema Shanghai's data will look better than other places, and the probability of failure in Shanghai is likely the lowest in the country.

Hou Yi's Hema Fresh may temporarily belong to Shanghai, but Zhang Yong's new retail must face the world tomorrow.

For a long time, the main thread running through Alibaba's internal strategy has been what former Alibaba chief strategist Zeng Ming proposed: "Wherever it's easiest to bite, take a bite." But Hema, as a completely new business format with no reference experience and no dimensional strike capability, must clearly recognize the need to chew on hard bones and continuously trial and error. "Hard bones are hard to chew, but they help sharpen your teeth."

Just as the most lethal opponent of European heavy cavalry was not the equally fierce Mamluk of the Arab Empire, but the Mongol light cavalry from the Asian steppes, who grew up on horseback and used bows and arrows.

On April 9, 1241, Mongol cavalry decisively defeated the Teutonic Knights.

In the animal kingdom, a hippo without sharp teeth, even if heavily armored, is just a piece of meat in its natural enemy's mouth, only the enemy is not yet known.

2 Secretly Crossing: Miss Fresh

On September 19, 2018, JD's 7Fresh strategic cooperation press conference was held in Beijing. Sixteen well-known real estate developers and a plan for 1,000 stores gave JD's borderless retail new momentum after a six-month lull. Previously, 7Fresh had only two experimental stores in Beijing: one in Yizhuang, where JD's headquarters is located, and one in Wucai City outside the North Fifth Ring Road. The announced store plan covered Beijing comprehensively, as well as Shanghai, Guangzhou, Shenzhen, Chengdu, and other cities.

One important basis for believing that JD's understanding of future retail formats may predate Alibaba's is that Hema Fresh's chief designer and current CEO Hou Yi came from JD's former O2O business unit (now JD Daojia-Dada). On the other hand, in August 2015, when JD had just gone public and morale was at its peak, it chose to sign a $700 million strategic investment in Yonghui Superstores, largely signaling a shift toward the fresh produce industry after successively capturing three major categories: 3C, large appliances, and daily chemical FMCG.

However, borderless retail got up early but arrived late.

"Before new retail was proposed, Lao Liu (Liu Qiangdong) talked with Zhang Xuansong about cooperation in fresh cold chain. Our initial idea was that since Yonghui does well in fresh produce, they could help us do this category online and offline, because at that time there was no JD Fresh channel. Based on this cooperation point, the two sides quickly reached an intention. But after signing the cooperation agreement, problems immediately arose: when we signed, we didn't have a fresh team. After signing, we formed a team. Before signing, because we didn't have a team, we could let them do both e-commerce and offline. After signing, wouldn't we do it ourselves?"

A senior executive from JD's strategic investment department told Zhu Si Ma Ji that JD chose to enter fresh e-commerce rather than attack Tmall's strongest category, apparel, largely because it discovered the disadvantage of its core 3C and home appliance categories being mid-to-low frequency.

At that time, JD's mid-to-low frequency categories needed a high-frequency growth point. With a high-stickiness, high-repurchase category, it would be easy to achieve the so-called "high frequency driving low frequency" effect. Conversely, if JD failed to capture this category, Tmall, relying on fresh produce's high frequency plus its original mid-to-high frequency apparel, could potentially launch a rhythm that would take away JD's 3C digital and large appliances. For example, in the ride-hailing industry, Didi initially entered taxis, then moved to premium rides, express rides, and finally harvested the carpooling, car rental, and designated driver markets—a classic high-frequency-beats-low-frequency tactic.

In the end, JD and Yonghui's cooperation stopped at Hou Yi's JD Daojia business. The "JD-Yonghui alliance," which once put pressure on Alibaba during its new retail transformation, never materialized into a joint effort to create internet-based offline retail stores. After Hou Yi's proposal to open fresh stores was temporarily rejected by Liu Qiangdong, who was eager to first capture the fresh e-commerce category, Hou Yi soon left JD.

Subsequently, the plot took a sharp turn, and the balance in the fresh war began to tilt toward Alibaba.

On one hand, JD quickly discovered in category operations that online fresh cold chain losses and profits could not match—solutions were two: store O2O, or opening cold chain front warehouses based on existing logistics warehouses. On the other hand, the emergence of Hema Fresh and its 3-kilometer half-hour delivery threatened JD Logistics' long-recognized core competitiveness. JD and Yonghui then adopted defensive follow-up strategies:

  • Yonghui Super Species quickly brought in investments from Tencent and Today Capital, and opened its first store in Fuzhou on New Year's Day a year later. As of early August 2018, a large portion of its 51 stores were in Fujian Province, largely to defend against Hema's southward advance into Fujian, saving time that was already a year late.
  • For JD, since this new business model was still iterating, it couldn't immediately acquire land in Shanghai's inner ring commercial centers like Hema. With limited options, JD opened two 7Fresh stores in Beijing in 2018 as tests, and only in September 2018, after the model matured, did it take further action, officially launching the 1,000-store plan.

Thus, Hema Fresh enjoyed a happy 24-month period. Media and C-end users continued to pay attention to Alibaba's new retail format as more Hema stores appeared around them. During this period, even giants like JD and Yonghui could not effectively stop Alibaba's expansion on the ground, and the situation was one-sided.

But could the threat come from the air?

Oxpeckers are birds that have a symbiotic relationship with hippos. They are numerous and act collectively, often feeding on parasites and the host's blood. Most of the time, they coexist peacefully, but hippos are surrounded by oxpeckers for life because the birds weigh only a thousandth or ten-thousandth of a hippo, and are invisible, untouchable, uncatchable, and unavoidable.

In reality, Miss Fresh is the oxpecker on Hema's body.

While Hema, Super Species, 7Fresh, and others were busy with store expansion, model building, and offline chaos over 24 months, Miss Fresh quietly completed the third wave of warehouse construction in China's e-commerce history. According to Zhu Si Ma Ji's investigation: its first front warehouse was built in November 2015, nearly 300 by the end of 2016, 800 by August 2017, and as of October 2018, the latest data shows over 1,000 front warehouses—more than 10 times the total number of Hema + 7Fresh + Super Species stores combined. Moreover, most fresh supermarkets of the same type in all cities, including Hema, were already surrounded by Miss Fresh's dense front warehouses before their new stores even opened, a scene as terrifying as Hitchcock's 1963 thriller "The Birds." Looking back at the previous two such high-speed, large-scale, high-density warehouse logistics layouts in China's e-commerce history, one must go back 11 years to JD's self-built logistics and 5 years to the establishment of Cainiao Logistics.

Blue circle - Hema Fresh radiation range & Red circle - Miss Fresh radiation range

What is Miss Fresh?

From the current product model of the Miss Fresh platform, it is almost identical to "Pinduoduo's predecessor, "Pinghaohuo," founded by Huang Zheng. Coincidentally, both received strategic investments from Tencent around 2015, so they look like brothers secretly cultivated and supported by Tencent, but taught two completely different martial arts.

  • Huang Zheng, born in 1980, graduated from Zhejiang University's Chu Kochen Honors College, and came from Google. He first tried the self-operated model of Pinghaohuo in Hangzhou around 2014. After failing to outrun Miss Fresh in the same track, Huang Zheng had to quickly turn around and take a wild shortcut—the C2C model of Pinduoduo, based on Pinghaohuo's fruits and agricultural products, expanded to all categories, targeting incremental markets in third- and fourth-tier regions, and gradually penetrating after encircling first- and second-tier cities.
  • Xu Zheng, born in 1981, admitted to USTC at 15, former executive of Lenovo Joyvio, and Zeng Bin, former Joyvio executive with Alibaba employee number within 300, co-founded Miss Fresh in 2014. From the start, it was more favored by the capital market than "Pinghaohuo." During the most intense cat-and-dog war between 2016 and 2017, they built a complete fresh logistics and supply chain system including front warehouses. In 2018, when Pinduoduo challenged Taobao, they began strategic encirclement of central cities in South China, East China, and North China—using the S2B2C model, also starting with fruits and agricultural products, quickly expanding to over 10 high-frequency categories such as snacks, alcoholic drinks, water, daily chemicals, and grain and oil. After encircling residential communities and office buildings in central cities, they gradually built warehouses to penetrate third-, fourth-, and fifth-tier regions.

In 2017, the unmanned shelf war, which lasted over 200 days and consumed billions of yuan from more than ten investment institutions, was Miss Fresh's first battle since its birth. The result was an overwhelming victory—its convenience purchase team entered in June of that year and by June of the following year had captured over 55% of market share points and declared victory. This one-sided result was largely not due to inefficiency in competitors' ground promotion or outdated models, but because any point within the 3-kilometer radius covered by Miss Fresh's front warehouses was in a state of readiness to be harvested at any time, while other platforms had almost nothing except shelves.

"What the shelves truly rely on is the logistics network, but unmanned shelf platforms other than Miss Fresh did not have time to build warehouses and refine operations, nor the financial strength to build warehouses. Putting 300-400 yuan worth of shelf-stable snacks on the shelves was already their limit. I think choosing this track from the start was problematic because it was too unfair."

An executive from an unmanned shelf platform pointed out to Zhu Si Ma Ji that Alibaba's investment in unmanned shelves was largely hoping to connect them with Hema's stores and supply chain in the future, forming an air-ground integrated combination of unmanned shelves + Tmall convenience stores + Ele.me + Hema Fresh + Tmall Supermarket. This was because, to a large extent, only Alibaba's Hema supply chain could resist Tencent's dimensional strike. Therefore, the goal of this combination was not only the long-standing plan to "destroy half of Meituan's valuation," but also to counter Miss Fresh, which was launching air strikes with front warehouses in various emerging e-commerce formats.

Hema Fresh's highlights are its live aquatic products that attract customers, high-quality store experience under the dining + shopping hybrid format, and free half-hour express delivery. Horizontally, Miss Fresh, a pure e-commerce model, being singled out like Meituan, is clearly closely related to Hema's entry into the fresh e-commerce track after its delivery order share surged.

So what tactics does Miss Fresh use?

  • Its traffic system is completely independent, with no possibility of external blocking. Because it shares the same origin as Pinduoduo, it also has no intersection with Alibaba's e-commerce traffic system (except Ele.me). According to Zhu Si Ma Ji's investigation, 80% of its current traffic and orders come from WeChat and its app, which largely ensures the stability of its pricing system and overall operational rhythm. This is because external traffic is usually of lower quality, while traffic within private domains has higher stickiness and repurchase. Notably, as another e-commerce platform born from the pure WeChat ecosystem, Miss Fresh's dimensional strike range is higher than Pinduoduo's. The so-called "other formats" it has already surfaced and intervened in include unmanned shelves, mini-programs, mini-games, and the recently popular community e-commerce—all these tracks revolve around local life.
  • Product operation thinking + Costco model. The so-called "selection" is not the traditional supermarket procurement model—which prioritizes gross margin—but rather delicious, practical, fun, and sellable. The integration of procurement and sales ensures that all selected products meet the three benchmarks of high frequency, fast moving, and necessity, which is the so-called "whoever procures is responsible for selling." According to Zhu Si Ma Ji's investigation, Miss Fresh currently has 1,600 SKUs (for comparison: JD 7Fresh has 3,000+, Hema has 4,800+, Super Species has nearly 2,000). Less is more, resulting in extremely high overall sell-through rates. This small-granularity product operation thinking has already shown its power in Pinduoduo. Miss Fresh continues this operational model while supplementing Pinduoduo's missing quality control and logistics speed through self-operation and front warehouses. In contrast, Hema, at least in the delivery entrance that accounts for its main order source, does not seem to reflect this thinking at all, but is closer to a traditional delivery platform. In fact, the model of selling goods and the model of delivering meals are clearly two different business logics at the same latitude but different longitudes, even though both are based on one-hour delivery and even both originate from stores/front warehouses.

Top left - Miss Fresh app, top right - Pinduoduo app Bottom left - Hema app, bottom right - Ele.me app

  • Large-scale self-procurement can obtain low prices from suppliers. Because it is procurement and sales rather than brand entry, it is not threatened by the "three-choice-one" tactics that Pinduoduo recently faced from Tmall. At the same time, Miss Fresh's core agricultural and FMCG products are special: with an e-commerce platform having fewer SKUs than a convenience store, the highly centralized traffic impact gives it trial sales costs far lower than traditional convenience stores and any traditional e-commerce platform (except Pinduoduo). The selection model, once high-stickiness users reach a stable scale and order volume, can shift to a model similar to COSTCO, investing in large suppliers and OEM factories to build own brands for higher profits—such as its own brand Kirkland, which includes bestsellers like dried cranberries and mixed nuts.
  • Encountering technological innovation, time-based cold chain drastically reduces costs. Previously, fresh e-commerce faced two situations: the high cost of building cold storage in front warehouses/stores, or, if not building front warehouses, having to purchase dry ice with unstable prices. The market price of cold sources typically fluctuates between 7-10 yuan per order. Due to low technical difficulty, many small factories and workshops led to unstable market prices, but fresh platforms have huge demand. While self-built cold storage could be done at any cost, the time cost was too high, making it unsuitable for light-cavalry-style advancement. A supplier recalled:

"When Miss Fresh started building warehouses in 2016, it was exactly the point when commercial refrigerators became mature in technology and prices dropped. Using refrigerators instead of self-built cold storage allowed warehouse construction speed to keep pace with ground promotion. The 1-hour delivery efficiency within a 3-kilometer radius of front warehouses eliminated the need for cold sources, saving the cold source expenses that previously accounted for over 10% of average costs in fresh e-commerce. Currently, the annual construction and operation cost of a front warehouse is only 150,000 yuan, less than 1% of a Hema store's cost."

Commercial freezers greatly simplified and reduced the cold chain construction cost of front warehouses.

Additionally, a platform executive from Yiguo Fresh introduced that under the same conditions of cold source delivery and front warehouse delivery, the smaller the order volume, the greater the advantage of the dry ice model. But as order volume rapidly increases, the marginal cost of front warehouses becomes lower and lower. Conversely, if a fresh e-commerce platform does not have front warehouses during peaks like Double 11, the more it sells, the more it loses. Yiguo has paid this tuition in the past.

  • The current precise customer profile is almost identical to Hema's, and even Tmall's existing customers. JD's user profile is still mainly male customers in first- and second-tier cities; NetEase Kaola targets mothers; Pinduoduo's mainstream profile is third-, fourth-, and fifth-tier regions; and Tmall and Taobao's basic profile is dominated by urban women in central cities across China. Based on these three different mainstream user profiles, it is clear that Alibaba's advantage in e-commerce is overwhelming. But Miss Fresh's main customer base of professional women highly overlaps with Tmall and Taobao's female users. Frankly, it focuses on diverting existing user orders from Alibaba's platforms. Therefore, in the same self-operated model, its FMCG lethality is no less than JD, which started with 3C digital and large appliances, and NetEase Kaola, which started with mother and baby products. Although the high-frequency-driving-low-frequency operation thinking would not lead to the ridiculous situation of a fresh platform selling clothes, cutting into beauty and daily chemicals, snacks and fresh produce, alcoholic and soft drinks, oil, salt, soy sauce, vinegar, and even milk powder and diapers would affect Alibaba's overall market far more than just losing sales—it would change consumption habits. The logic is like Tmall users who betray the platform and adapt to JD's logistics and customer service will find it hard to readapt to Tmall's logistics and customer service experience. Interestingly, a former Miss Fresh employee said the old employer is a platform that actually hopes for customer complaints:

"Because with a loss rate of only 0.3% and an error rate of 1%, only when a customer complaint occurs and official compensation is received can users experience the platform's after-sales service quality. Between the cost of strict refined operations and high compensation, users actually prefer the latter."

Of course, every business model has its own problems, and Miss Fresh naturally inherits all the problems of fresh e-commerce platforms:

  • The construction and logistics costs of front warehouses need to be gradually diluted by huge order volumes to reduce marginal costs. Although this cost is lower than Hema's, unlike Alibaba's favored son who can ignore losses and initial investment, Miss Fresh will inevitably face the nickname "JD Second" in future challenges—that is, excessive initial investment, long profit cycle, and unstable capital chain. Perhaps this is also an important reason why Huang Zheng merged "Pinghaohuo" into Pinduoduo, choosing a lighter, sexier model over the heavy model.
  • The long-standing high loss problem in fresh cold chain has no better solution. The two founders come from Lenovo Joyvio, which was the earliest to adopt agricultural product traceability technology in China, but to this day, traceability technology still cannot identify the real-time status of fresh goods—if it cannot intervene in quality control, it means the final step can only rely on manual inspection. When losses cannot be avoided even through algorithms, the only solution is to expand categories to spread gross margins. The eventual result will be that the number of SKUs in front warehouses will inevitably increase, making management more difficult. After the latest app update on October 15, Miss Fresh changed the homepage slots from 3 per page to 4, hinting at another surge in SKU count.
  • The pure e-commerce model always lacks the charm of in-store experience. Just like oxpeckers and hippos, as long as hosts like Hema do not close down and die, Miss Fresh may remain in the position of a parasite diverting orders for a long time, but cannot turn the tables and completely harvest all traffic. In short, the only intersection of competition between the two is currently delivery. To affect offline, it would require a brutal subsidy war like Meituan and Ele.me, a war of attrition. Historically, Zeng Guofan's Hunan Army was able to defeat the Taiping Army, known for mobile warfare and field battles, precisely by exploiting the enemy's lack of powerful siege weapons and logistical difficulties, causing the Taiping Army to hit a wall under the siege of the Hunan Army's hard forts.

The Hunan Army used trenches and fortifications to implement a strategy of besieging points and attacking reinforcements.

We have reason to believe that in the future new retail gamble, Alibaba's all-in bet on the heavy model of offline stores as a flagship project surprised many, including JD and Yonghui. These competitors immediately rushed to imitate densely—just like when the iPhone was first released, most phone manufacturers saw it merely as a touchscreen phone without a keyboard. After several rounds of dense imitation, only Google's Android saw through iOS's grand conspiracy, ultimately establishing the two-part pattern of today.

Regarding the discussion of the ultimate form of retail, it is clearly not a one-time gamble. We see that in the Tencent camp, there are also roles like Miss Fresh that go against the grain, practicing Mr. Kenichi Ohmae's "Tenth Man Theory" from "The Professional": if the first nine people all choose to support the top-down transformation of stores through the internet, then someone must, like Xu Zheng and Zeng Bin, continue to quietly explore the possibilities and potential of fresh e-commerce, playing the "devil's advocate" and questioning even the premises of their discussion—such as the premise that consumption upgrade must be based on a booming national economic environment.

For gamblers, only when they gamble to the point of having nothing left might they quit gambling.

3 Betting on National Fortune: The Twilight of the Gods

While the news that Tencent's stock price fell more than 30% made most of China's internet community worry about Ma Huateng and Tencent's strategy, business, and external investments, few noticed the predicament of the big players who will determine the future form of China's offline retail.

Yonghui Superstores, invested in by JD and Tencent, saw its stock price quietly fall back to September 2017 levels as Super Species continued to open stores. Sanjiang Shopping, in which Alibaba became the second largest shareholder, saw its stock price plummet from a high of 54.56 yuan back to two years ago, now breaking below 12 yuan. The only exception is Sun Art Retail, which is over 70% controlled by Alibaba with Zhang Yong as chairman and almost completely bound to Alibaba, and its stock is still rising.

If the head-on battle between Toutiao and Tencent was the trigger for Tencent's stock decline, then the stock index declines of Alibaba and Tencent's physical retail partners are largely because these partners suddenly realized the stakes two years after the new retail strategy was launched, as well as the changing external environment.

Time as the stake, allies as the casino—this is the giants' game.

"This year, Yonghui and Sanjiang's financial reports are not good. The core is that these partners cannot bear the trial-and-error costs of Alibaba and Tencent in this field. For AT, the physical business is so small that even loss-making projects like Alibaba Cloud and Tencent Cloud do not affect their overall market, because future To B business will be the focus for both, and such losses are strategic. But for partners, new retail is 100% of their livelihood. If either Alibaba or Tencent cannot guarantee good results for allies in offline retail, it will inevitably affect the final promotion effect, and even the necessity of the alliance."

A senior executive from a Shanghai physical retail enterprise pointed out to Zhu Si Ma Ji that historically, all alliances collapsed due to internal contradictions, ultimately crumbling under external factors—the Zhou Dynasty and the Soviet Union both had internal problems first. In terms of external factors, it is clear that Sino-US relations and the decline of the Shanghai and Shenzhen stock indices have a contingent or inevitable relationship.

Who will be the most vicious enemy of offline retail like Hema, Super Species, and 7Fresh? The recent surge in sales of pickled vegetables, erguotou liquor, and instant noodles in recent quarters is their mortal enemy, because the lipstick effect is gradually fermenting.

"From Alibaba's perspective, online and offline need a combination point. Hema cannot lose as a sample, but Alibaba itself must follow consumption upgrade as a major premise. So if fortune reverses, and Hema's live seafood, high-end fruits, pollution-free meat, eggs, and vegetables are all removed, leaving a pile of oil, salt, soy sauce, vinegar, and mineral water, becoming an offline version of Tmall Supermarket, then what is the meaning? In fact, online and offline should be two different sets of goods, because gross margins are different and customer groups are different, so combining them is very difficult. But now there is not much room to turn back for everyone, because stores are opened and money is invested. Hema cannot and will not do consumption downgrade. Even if it sinks to third-, fourth-, and fifth-tier regions, it is still on the path of consumption upgrade, because if gross margins are spread across various expenses, it will not be able to recover store expenses. New retail is like a genius gambler who has won all his life, and in this last gamble of his life, he places his final bet. But precisely this time, he is ruthlessly informed—he cannot lose."

A senior executive from an offline retail group believes that if the economy continues to decline in the future, the first to be hit will be physical retail, and high-end physical retail formats led by Hema are a segment of physical retail. From the perspective of the entire Chinese retail industry's risk resistance, the order is: e-commerce > physical retail > high-end physical retail.

This also means that if the above situation occurs, these consumption upgrade players will not be able to turn around like light-model fresh e-commerce—even if they decide to demolish their proud live breeding pools, it will be useless, because the traffic model based on commercial real estate thinking has already been confirmed before store construction. Closing stores rashly would also bring a flood of negative public opinion. The relatively best bad outcome would be to return to the concept experience stores that were once popular and had beautiful stories four years ago after the O2O wind ended, but are now just vases.

After Walmart China's store closure wave, its old rival Sears declared bankruptcy on October 16, 2018.

On the other hand, a series of fresh e-commerce platforms, including Miss Fresh, have already launched live products through technical means that were previously only available in Hema stores and seafood markets. This seems to indicate that it is entirely feasible today to open breeding pools in front warehouses based on data algorithms to reduce losses—whether to pursue consumption upgrade or consumption stratification, fresh e-commerce players can adjust according to the environment.

For example, Taobao opened the B2C Tmall Mall ten years ago amid doubts. At that time, Zhang Yong, then general manager of the mall, chose a path of consumption upgrade that now seems absolutely correct. But in fact, there were many Taobao merchants who refused to switch from C to B, and those who were bearish on Tmall Mall when it only had Uniqlo, Jack & Jones, and a bunch of miscellaneous Taobao brands.

Since Huang Taiji Jianbing appeared in 2012, the Chinese people, known for their diligence and thrift, have been "corrupted" by certain monopolistic enterprises. In the early stage, the goal was to stimulate domestic demand; in the middle stage, they began to boast about consumerism; in the later stage, they prided themselves on buying, buying, buying; and today, they even use the term "downgrade" to mock competitors. The result of this propaganda is often that the lower class admires and looks up to the middle class, while the middle class overdraws the future through extravagance, but the real future is uncertain.

In the "Heisei Era" after the bubble economy burst, the "property owners" who were eating gold leaf sushi outside securities company buildings were laid off overnight and became "dispatched workers" without social security and housing funds. These consumption upgraders, accustomed to gold leaf and caviar, had to "rush to Yoshinoya," making Yoshinoya, a beef rice chain that had been lukewarm for nearly 100 years, popular in Japan and around the world, and also became the initial impression of Japanese cuisine for Chinese people who were once short of money. Coincidentally, ten years ago, Shandong native Yang Xiaolu opened a shop named "Yang Mingyu Braised Chicken Rice" after his son's name amid the financial crisis. After sweeping the nation, braised chicken became a rare commercial miracle during the economic crisis.

As the saying goes, among the dust and chaos, there are true characters; in troubled times, heroes emerge.

In a sense, Pinduoduo and Miss Fresh play the role of "reversing history" like Yoshinoya and braised chicken rice: when everyone believes the future belongs to the mainstream middle class in first- and second-tier cities, Pinduoduo goes to third-, fourth-, and fifth-tier regions, reigniting the C2C war that had not been fought for over a decade; when everyone believes that in the context of consumption upgrade, the time is ripe for physical stores and e-commerce to connect, Miss Fresh quietly sets up a bunch of front warehouses, doing nothing but e-commerce business.

On the evening of October 30, 2018, Jack Ma, about to retire, issued his last letter to shareholders as chairman of the board:

The temporary waves and setbacks in front of us are hard to hurt us, because we believe that as long as we innovate to solve problems and create real value, we will never lack markets or profits.

Just minutes before this letter was released, Jin Yong, the spiritual idol of tens of thousands of Alibaba people including Ma Yun, suddenly passed away. It is a disappointing coincidence.

Especially the unavoidable fact now is that Alibaba's stock price has fallen from a high of $211 per share on June 29, 2018, to around $130 per share now, with a fluctuation amplitude no less than Tencent's, which was widely criticized. While Alibaba is making efforts in new businesses like cloud computing and artificial intelligence, the war in China's e-commerce industry is not completely over, and the environment on which new retail must rely has suddenly changed.

Any answer is clearly time-sensitive. Even if it fits current logic, as time passes, the possibility of being overturned in the future is very real. Reference is clearly risky. Blindly borrowing without careful thought and timing judgment will inevitably pay a heavy price.

As WeChat founder Zhang Xiaolong said at the end of a WeChat product sharing session inside Tencent, he put eight characters on the PPT to quietly remind his colleagues: Everything I said is wrong.

The cruelest sentence in this world is not being told "you can't do it" before the rehearsal, but knowing after the curtain falls:

"We took some detours."

Source: Zhu Si Ma Ji (ID: zhusimaji88), Author: Fox An. This article is reproduced with permission. For reprint, please contact the original author.

10th B-end E-commerce Inspection--"From Product to Scene"

Activity time: December 10-13 Activity locations: Wuhu, Nanjing, Changsha Activity schedule:

Morning of Dec 10: Visit Three Squirrels headquarters + investment store

Afternoon of Dec 10: Visit Nanjing Squirrel Small Store

Evening of Dec 10: Visit Nanjing Master Gao Beer Workshop Store

All day Dec 11: Nanjing-Changsha, or free arrangement

Morning of Dec 12: Community group buying exchange salon

Afternoon of Dec 12: Kaola Select Heroes League launch event

Night of Dec 12 - early morning Dec 13: Field visit to Kaola Select logistics center—This time period is the peak of warehouse sorting, allowing direct observation and learning of the backend operation process of community group buying e-commerce

Distributor friends who are interested are welcome to join us to learn and inspect on-site:

Organization format

  1. Big shot exchange salon
  2. Company visit
  3. On-site explanation
  4. One-on-one communication
  5. Actual market case visit

Friends who want to participate If you are interested in the content of a particular day, you can register separately Long press this QR code or click "Read Original" to register in one click! Add friend and note your intention -END-