Introduction: China's retail industry is facing increasingly fierce competition, especially with the growing trend of product homogenization. To differentiate, developing private brand products has become an important breakthrough. However, most companies are in a state of 'others do it, so I do it too.' Some retailers develop private brands blindly, following others without clear direction, leading to poor positioning, weak brand identity, and ineffective marketing, resulting in large amounts of unsold inventory and ultimately a 'dabble and quit' state. Many retailers console themselves with 'you have it, I have it too' and hastily wrap up.
According to public data, private brand penetration in North America, Europe, and Japan is 18%, 30%-40%, and 50%, respectively. In China, it is only about 1%. Foreign retailers like Walmart, Metro, and Costco have reached a mature stage in private brand development. Hema, a representative of China's new retail, differs from traditional retail in its approach, with private brand penetration exceeding 10%.
When Retail Circle visited Hema Fresh's Shanghai Convention Center store, we made more exciting discoveries about its 10% private brand strategy:
- Tackling the 'fresh food' category, being the first to try, leading the industry in freshness.
- Shifting from channel needs to consumer needs, focusing on high-quality living consumption demands.
- Centered on a buyer system, with category experts researching and developing rare global product categories.
- From label to brand, Hema combines its 'store' and 'product' brands for a dual-edge approach.
To better analyze Hema's private brand development strategy and its implications for traditional retail, we will analyze from the following four aspects:
- The pain points of homogenization in traditional retail and the new demands for differentiated competition.
- The current status and opportunities of global private brands.
- Hema Fresh's private brand strategy, driven by product strength.
- What can traditional retail enterprises learn from Hema?
-01- Traditional Retail Under Homogenized Competition
From foreign retail to local retail, traditional retail is facing unprecedented intense competition. High overlap in suppliers and product brands is causing the core product competitiveness of retail enterprises to disappear. 'You have it, I have it too' is the current state of retailers. 'Go to whoever is nearest, whoever has it, whoever is cheaper' has become one of the criteria for consumers choosing the same brand products.
Foreign retailers like Lotte Mart were acquired by Wumei and Liqun, Carrefour by Suning, Metro by Wumei, Renrenle by Xi'an Qujiang Culture, and China Resources Vanguard's hypermarket business withdrew from Shandong and Beijing markets.
The homogenization of the retail market has intensified industry reshuffling, but 'beside the sinking boat, a thousand sails pass; before the sick tree, ten thousand trees spring.' A large number of new retail enterprises are emerging. Hema Fresh, 7-FRESH, Su Fresh, Super Species, and other new retail companies are technology-driven, focusing on products, transforming supply chains, optimizing product structures, and enhancing consumer experiences. They are expanding aggressively and have become strong competitors to traditional retail, with the core being the reconstruction and upgrading of the three elements: people, goods, and places.
During the rise of hypermarkets, 'one-stop shopping' and 'everyday low prices' met consumers' basic needs of 'shopping in one place, comparing prices, and getting more for less.'
As domestic consumption levels rise and the younger generation becomes the main consumer force, these needs are shifting to 'shopping efficiency' demands like 'next-day delivery, same-day delivery, 30-minute delivery' and quality-of-life demands for 'fresh, safe, healthy' products. New retail enterprises are all striving to solve these consumer pain points.
Changes in Shopping Elements Between Traditional Retail and New Retail
| Element | Past | Present |
|---|---|---|
| People | Main consumers: post-50s, 60s, 70s | Main consumers: post-80s, 90s, 00s |
| Goods | 1. One-stop shopping (rich variety, compare prices) 2. In-store shopping (driving time, checkout queues) 3. More for less (collective procurement reduces costs, benefits consumers) 4. Meet channel needs (sell what is supplied) 5. Procurement logic, negotiation logic, gross margin logic, fee logic 6. Buy from whoever has it | 1. Borderless shopping (curated selection, trust one brand) 2. Home delivery (efficiency of obtaining goods) 3. Good quality and fair price (product quality: fresh, safe, organic) 4. Meet consumer needs (sell what is needed) 5. Buyer logic, cooperation logic, brand logic, category logic, quality logic 6. Buy from whoever sells it |
| Place | Connects people and goods | Reconstructs people and goods |
Table: Retail Circle
People are changing, consumer demands are changing. If products remain stagnant, they will inevitably fall behind competitors and the industry. Falling behind means 'being beaten'—either going bankrupt, closing down, or being acquired. Under homogenized competition, a 'product strength' transformation revolution is underway, and the path to achieve it is through private brand development.
-02- Current Status of Private Brands
Private Brand (PB), also known as store brand, refers to products where retail enterprises control the entire process from design, raw materials, production to distribution. They are produced by suppliers designated by the retailer, bear the retailer's brand, and are sold in their own stores.
Public data shows that private brand penetration in North America is 18%, in Europe 30%-40%, and in Japan as high as 50%. In China, the average is about 1%. Hema's private brand penetration has reached 10%.
Global Private Brand Penetration
| Europe | North America | Japan | China | Hema |
|---|---|---|---|---|
| 30-40% | 18% | 50% | 1% | 10% |
Table: Retail Circle
We all know Costco, Walmart, and Decathlon are pioneers in private brand development in the retail industry. Domestic companies like China Resources Vanguard, RT-Mart, Yonghui, and Wumei have been active in private brand development but with little effect. When shopping in these supermarkets, private brands are basically drowned in the ocean of tens of thousands of SKUs.
According to annual reports, in 2018, Walmart's Sam's Club private brand sales accounted for 16.89%, while Costco reached 28.17%. Hema, which had private brand awareness from its inception, now has a private brand penetration of 10%. Last year, its president Hou Yi stated at a conference that the goal is to exceed 50% within three years, showing Hema's dedication and determination.
Of course, a higher private brand share is not always better. If the share is too low, it cannot support the entire development team system, build the corresponding supply chain, or create advantages in display. If too high, there are risks such as the guest taking over the host, overly single brand richness, increased operating costs, and large inventory pressure from losses and slow sales.
Foreign retailers have already passed the exploration stage of private brands, but on the path of localization, they still seem inadequate. Domestic retail enterprises are still in the 'little horse crossing the river' stage of exploration and trial and error.
Some companies are still eager to try, while others have 'dabbled and quit.' Companies like Hema, which are driven by 'product strength' as their core business, treat private brands as a core strategy for product development. For Hema, which has already achieved 10% penetration, it may have a more solid foundation and experience to move toward the next 50% goal.
-03- Hema's Private Brand Strategy: Product Strength Driven, Fresh Food Leading
On August 8, 2018, at the 'New Retail & New Supply' conference, Hema announced: No longer charging suppliers any traditional retail channel fees such as entry fees, promotion fees, or new product fees, and building a 'new supply-retail relationship' centered on a buyer system.
This caused a stir in the traditional retail industry and gave upstream producers confidence to return to the 'essence of products,' no longer worrying about channel costs or the time and effort of channel development. The only thing to do was to return to the product and ensure quality.
At the same time, by returning to the 'supply-retail relationship,' Hema President Hou Yi stated that they would achieve over 50% private brand penetration within three years. Over the past year, Hema has been based on the buyer system, cultivating category expert teams, looking globally, going deep into origins, focusing on fresh food categories, and conducting meticulous research and development, quickly becoming a standout in the private brand arena.
On October 20, at the Hema private brand strategy upgrade conference, Zhao Jiayu, General Manager of National Standard Product Procurement at Hema, introduced that the share of 'Hema Brand' products had exceeded 10%, with over 1,000 'Hema Brand' SKUs. This is seen as Hema's further upgrade around 'product strength' to return to the essence of retail. Based on the buyer system and consumer-centric approach, Hema's exploration, research, and implementation of private brands are quietly underway.
Hema's Private Brand Path
Hema did not follow the old path of many traditional retail private brand developments but adopted a differentiated approach. For example, it 'gnaws' at the 'fresh food' category that traditional stores rarely touch, focusing on three meals a day. It can develop scarce products for high-quality consumption needs from a global perspective, and also achieve localization in regional cities, with one city one specialty, presenting brands co-developed with time-honored brands to consumers.
1. Gnawing at Fresh Food, Leading in Category Freshness
Daily Fresh, no overnight vegetables, no overnight meat, no overnight eggs—this has become a reality at Hema. In 2017, the 'Hema Daily Fresh' brand was launched, covering vegetables, meat, eggs, milk, and other categories. Products in the Hema Daily Fresh series use seven different colored packages for each day of the week, selling only on the day, with unsold items removed in the evening, ensuring no overnight products.
2. Three Meals a Day, Quality Excellence
Traditional retail follows channel logic, meeting channel needs, while new retail follows consumer logic, meeting consumer needs. Hema focuses on 'three meals a day,' meeting high-quality consumption needs through customized development. It has created series like Hema Blue Label, Hema Workshop, and Hema Daily Fresh, covering everything from vegetables, meat, eggs, and milk to cooked food and prepared dishes.
Products in the Hema Daily Fresh series use seven different colored packages for each day of the week, selling only on the day, with unsold items removed in the evening, ensuring no overnight products. The 'Hema Workshop' brand has developed handmade fresh wontons, dumplings, marinated foods, zongzi, and fresh meat mooncakes.
3. One City One Policy, Time-Honored Brands, Local Flavors
On September 23, at the Alibaba Investor Day, Hema Business Group President Hou Yi stated, 'Hema has built 33 multi-temperature warehouses, 11 processing centers, and 4 seafood and aquatic product temporary holding centers, and a low-cost fresh food cold chain logistics distribution network covering the country is basically formed.' As of August 31, 2019, Hema had opened 171 stores in 22 cities nationwide, initially completing its national layout.
For the 171 stores in 22 cities, Hema did not take a 'one-size-fits-all' approach in private brand development but implemented a 'one city one specialty' strategy based on 'national standard configuration.' Focusing on 'time-honored brands and local flavors,' such as Shanghai's Shao Wansheng, Qiao Jiazha, and Bright, Beijing's Yueshengzhai and Daoxiangcun, Guangzhou's Guangzhou Restaurant, and Xi'an's Bingfeng, it brings familiar local tastes to new retail while helping old brands regain a youthful feel.
Hema, as a new retail player, understands local sentiments better in terms of 'localization and regionalization.'
4. Crossing the Seas, Rare Products, Globalization
Hema has been committed to allowing consumers to enjoy fresh global products without leaving the country. A fearless Hema buyer team, tasting products worldwide and selecting quality goods, crosses the seas to bring the highest quality overseas products to domestic consumers.
For example, to develop a chili sauce, they flew 30,000 kilometers to Rwanda, Africa, just to create an African version of 'Lao Gan Ma' for domestic consumers. Similarly, the 'Emperor Fresh' brand has professional Hema buyers searching for quality bases overseas, bringing Norwegian salmon, Vietnamese black tiger shrimp, Argentine silver cod, and other specialty seafood to domestic consumers.
-04- What Can Traditional Retail Learn?
In September this year, Hema President Hou Yi stated on his personal Toutiao account that China's retail industry does not lack consumer demand or channel innovation; the main gap is product strength.
Retail Circle believes that under China's demographic dividend, consumer demand is strong and consumption quality is constantly upgrading. China's retail market has formed a multi-channel landscape including foreign retail, domestic retail, e-commerce platforms, social retail, and new retail. Consumer demand is becoming more quality-oriented, and product channels are diversified, but product homogenization is severe. Retailers' products are in a 'you have it, I have it too' state, with overlap rates mostly between 60-80%.
So, under the gap in 'product strength' and the influence of Hema's new retail 'private brand' model, what inspiration can traditional stores draw?
1. Shift from Product Procurement Logic to Category Expert Logic
What is the procurement logic of traditional retail? It is procurement behavior centered on 'fees, gross margin, and strength.' Whoever gives higher channel fees gets better display positions; whoever offers higher gross margin gets selected; whoever is willing to provide payment terms or joint operations gets chosen.
What is the category expert logic of new retail? It is returning to the essence of products, considering the most authentic aspects such as organic, green, process, quality, and safety. Through research and trials, discover the best products and form private brands through authorization or joint development, overseeing the entire production process.
2. Shift from Channel Needs to User Needs
In an era of material scarcity, retailers sold whatever suppliers supplied; in an era of diversified channels, suppliers supply whatever retailers want; in an era of diversified consumption, retailers and suppliers sell whatever users need. We are in an era of diversified consumption and quality-oriented needs.
In the new retail era, there is a need to shift from channel needs to user needs. Hema can capture user needs to develop customized private brands because it has the support of big data and cloud computing technology, and category experts' rigorous judgment of user needs. Only by truly understanding user needs can good products be created.
3. Don't Be Blind, Don't Follow Blindly; Suitability is Competitiveness
Building a private brand system has several hard requirements:
- A professional category expert team, based on user needs and product development experience. Many of Hema's category experts are high-level talents with degrees in food safety, marine science, agriculture, and forestry from universities.
- The retail scale must be large. Currently, retail enterprises with sales of about 1 billion yuan or more are generally trying private brands. Of course, smaller ones can also do it, but the cost may be higher.
- Don't have the mindset of 'others do it, so I do it too.' If the SKU share of private brands is too small, it won't make a splash, whether from the perspective of procurement costs or from aggregated display to sales. Moreover, private brands have a considerable 'adaptation period' and 'growing pains' when 'replacing' original brands or categories. Many companies kill private brands in the cradle before they even get going.
4. Those Who Get Fresh Food Lead the Industry in Freshness
Not every retail enterprise can do fresh food well, but if done well, it becomes a core competitive advantage. This is true in traditional retail and also in new retail. Hema itself started with 'fresh food' and 'dining.' Whether it's Daily Fresh or Emperor Fresh, these are major breakthroughs in the fresh food category.
Not only has it tackled the most difficult category in traditional retail, but it has also moved from 'traditional supply' and 'joint operations' to 'private brand development.' This is the category with the shortest shelf life and the highest loss rate. This momentum and determination to gnaw at the 'fresh food' hard bone will surely become its core competitiveness.
Of course, the path of private brands is a long journey of exploration and trial and error. I believe Hema has also come through a state of constantly paying tuition and making mistakes. Some small enterprises may lack the scale and size, having the will but not the means. It is suggested they consider joining alliances to jointly develop private brands.
There are many paths to private brand development; finding the one that suits you is the most important.
Source: Retail Circle (ID: retailmaster)
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