Is Hema new retail or old retail? To control costs, Hema is undergoing a round of organizational streamlining. A Hema insider told Zimu Bang that this year Hema has undergone significant changes in its organizational structure, including disbanding and integrating some departments, such as merging regional operations heads directly into regional general managers. Of course, layoffs are unavoidable. According to 36Kr, Hema is conducting layoffs with an overall reduction of 20%, with marketing and operations being the main positions cut. The layoff evaluation will be completed by the end of March. Employees above P8 level will see salary cuts of up to 30%. However, a source close to Hema said that the 30% salary reduction might be replaced with Hema stock options. Hema did not respond to requests for comment on the layoffs. In fact, signs of Hema's salary adjustments had appeared earlier. In early January, Hema Fresh CEO Hou Yi sent an internal letter stating that Hema's goal is to move from current single-store profitability to overall profitability. Additionally, he said Hema would adjust its internal organizational and compensation mechanisms accordingly, temporarily "tightening its belt," but by expanding the scope of stock option issuance, more frontline employees would share in Hema's growth results. Many Hema employees interpreted this adjustment as Hema replacing cash compensation with options of unknown vesting time. A few days ago, Hou Yi posted on his social media, saying that Dingdong Maicai's investors are also anxious and might soon face a margin call. "Relying on investors' capital for disorderly expansion and price subsidies to win the market is not sustainable. Winter is coming; who is swimming naked?" Hema's own situation is not easy. At the end of 2021, Hema was still sprinting toward its goal of 300 stores nationwide, but just two months later, it began closing stores. Recently, Hema's Nanjing Xinjiekou store announced in-store that it would cease operations at 22:00 on February 28, and on the same day, four other Hema Fresh stores in Nanjing, Qingdao, Chengdu, and Guangzhou also closed. Behind the store closures is Hema's strategic theme of "self-financing." In early January, Bloomberg cited sources saying that Alibaba's Hema Fresh would consider raising funds at a valuation of $10 billion, with the fundraising possibly starting in February. Hema officially did not respond to this news. According to Zimu Bang, Alibaba's business is currently divided into core companies, loop companies, ecosystem companies, and brother companies. Cainiao, Local Life, Alibaba Pictures, Alibaba Health, Lazada, and Hema belong to the loop companies. Self-financing is one of the important characteristics of loop companies. Alibaba's move is driven by circumstances. The latest quarterly report showed Alibaba's revenue grew only 10% year-on-year, the slowest since its listing, while net profit declined 25% year-on-year. The slowdown in Taobao's e-commerce business growth makes it difficult for profit growth to easily cover the losses of non-mature businesses as before. In short, once Alibaba decides to cut costs, Hema and others can no longer exchange losses for scale as before. This is followed by the end of the "iteration" strategy. In 2019, when asked by Lianshang.com "What is Hema's core capability?", Hema CEO Hou Yi replied, "Hema's biggest capability now is continuous iteration. We can see what peers are doing, and if they do well, we can learn from them." Indeed, as Hou Yi said, over the past few years, Hema has been constantly trying new business forms. From the earliest Hema Fresh stores to Hema MINI, Hema Neighborhood, and Hema X Membership Store, Hema has tried nearly 10 formats, following every trend in the industry. Being changeable, on one hand, shows Hema still has the vitality of a startup, but it also reveals Hema's strategic indecisiveness, rooted in the fact that the business model dilemma has never been thoroughly resolved. In 2016, Hema burst onto the scene, claiming to be Alibaba's No. 1 project for new retail. From RT-Mart to Yonghui, from JD.com to Meituan, retail giants all followed Hema's lead, innovating according to its model. But over time, the Hema imitation show has faded. Hema, which has been slow to achieve overall profitability, has long become a "student" of supermarkets, not only learning from new business forms emerging in the industry but also "cramming" the old traditions of refined retail operations. Hou Yi Currently, Hema has completely changed its previous development route that focused on online. In the internal letter in early January, Hou Yi pointed out that Hema Fresh should change from "online development as the main, offline development as supplementary" to a dual-wheel strategy of "online and offline development together." Hema told Zimu Bang that the current online and offline sales ratio is about 6:4, and in Beijing it can reach 7:3. Hema now hopes to increase the offline share from 30% to 50%. In quantum mechanics, the debate over "is light a wave or a particle?" has lasted for centuries. The logic of the problem Hema faces now is similar: Is Hema new retail or old retail? If it's new retail, as Hou Yi said, Hema's online revenue share will continue to shrink. If it's aiming for profitability, the contraction may far exceed 50%, which would undoubtedly greatly diminish the "newness" of new retail. If Hema is defined as a traditional supermarket, can Hema, which has always touted its internet genes, achieve the same level of supply chain completeness and refined operational efficiency as RT-Mart or Yonghui? Moreover, if it retreats to traditional supermarkets, wouldn't Hema's new retail experiment be declared a failure? Undoubtedly, it is still too early to declare Hema a failure or a success. As we already know, light is both a wave and a particle; Hema's attributes may not be either/or but both/and—both new retail and old retail; online and offline are not primary and secondary but complement each other. Perhaps retail, like light, also has duality? But Hou Yi must prove this. Physicists took centuries to prove wave-particle duality. Hema's time is clearly not that abundant. Hema's change from an online-focused business strategy is not surprising. "If the online revenue share is very high, there's no need to rent a store; just make it a warehouse," said a source close to Hema. For Hema, which uses a front-store model rather than a front-warehouse model, a cold offline business is also a waste of resources. "Online orders require additional delivery fees, which are higher cost; and store location, decoration, and store staff, which occupy significant capital, cannot play their role, making it difficult to differentiate from companies like Dingdong Maicai and Miss Fresh." The higher cost of online business means that once the online share is too high, long-term losses are inevitable. The difficulty of fresh food e-commerce companies like Dingdong Maicai and Miss Fresh in achieving profitability is proof. Even traditional supermarkets with refined operations face the risk of losses after increasing their online share. Yonghui Superstores expects its 2021 net profit (after deducting non-recurring gains and losses) to decrease by 4.47 billion yuan year-on-year, with a net loss of 3.89 billion yuan. This is Yonghui's first annual loss since its listing in 2010. Yonghui pointed out that one of the reasons for the loss is that, around the core strategy of omni-channel digital retail, it invested 670 million yuan in technology throughout the year, and its online business lost 840 million yuan. This loss is based on Yonghui's online share not exceeding 15% (in the first half of 2021, Yonghui's online sales accounted for 14.1%, and in Q3 2021, 13.9%). In April last year, in a dialogue with Huang Mingduan, then Executive Chairman and CEO of Gaoxin Retail, RT-Mart China CEO Lin Xiaohai clearly stated that if the online share reaches 70%, the business would not be viable. "(The business) can be profitable because it is based on the fact that offline still accounts for 76% of performance." Coincidentally, at its inception, Hema used its high online share as one of its selling points. In July 2018, Hema announced that its online share exceeded 60%, far ahead of peers; in September 2020, Hou Yi announced that Hema's online share in Beijing and Shanghai had exceeded 75%, and it was expected to reach 90% in 2021. But when Alibaba stopped providing fuel to Hema, the strategy of exchanging losses for growth became unsustainable. In the organizational adjustment in August last year, Dai Shan, then president of the B2B business group and MMC business group, no longer managed Hema, and Hema business group president Hou Yi began reporting directly to Zhang Yong. Hou Yi later described this change as "running from the inner ring to the first ring," giving Hema more autonomy, but correspondingly, Hema also had to independently bear operational responsibilities. In the same interview with Lianshang.com, Hou Yi was asked, "How does Alibaba internally view the losses?" Hou Yi replied: We never use the word loss; we consider it investment. Innovation requires investment; without investment, how can it work? "Investment, the bigger it gets, the bigger the investment." The other side of this statement is that when Alibaba reduces investment and requires Hema to be self-financing, Hema has to shrink its scale, and the engine of this commercial experiment will shift from innovation at all costs to learning from traditional experience. Hema once defined itself as an internet company, focusing on network coverage and the population around each store when opening stores. But the common problem with these stores was that physical (offline) business was poor because transportation was inconvenient and foot traffic was insufficient. At the end of last year, Hou Yi admitted in an interview with China Business Journal that the company-wide network layout at that time was wrong from today's perspective. "Today, returning to the essence of retail, we need to open stores that retail needs, not the stores with balanced network layout that e-commerce originally required. This is the lesson of the past five years." After all the twists and turns, Hema has returned to the path of learning from traditional supermarkets. But Hema, having returned to supermarkets, is not pure either. We can easily judge Dingdong Maicai and Miss Fresh as online e-commerce, and Yonghui Superstores and Walmart as traditional supermarkets, but Hema, which hopes to achieve a 50-50 online-offline split, is ambiguous. Even without considering the philosophical question of "what is Hema," a 50% online share, while keeping Hema ahead of the times, still cannot help Hema solve the break-even problem in the short term. Learning from supermarkets brings new problems: Can Hema, which comes from an internet background and is eager to profit, accept the potentially long and costly time required for the refined management methods that traditional supermarkets have built over decades? In early January, Hou Yi sent an internal letter stating that Hema's goal is to move from current single-store profitability to overall profitability. Additionally, he said Hema would adjust its internal organizational and compensation mechanisms accordingly, temporarily "tightening its belt." A source close to Hema told Zimu Bang that since the end of last year, there has been a noticeable increase in the company's requirements for cost and gross margin. "Previously, Hema was more like a money-burning internet company, focusing on traffic and revenue, but when Hema changed from Alibaba's inner ring business to a first-ring business and had to be self-financing, the previous pure traffic business strategy would definitely be abandoned," the source said. "Hema is now more like an operation-oriented enterprise, focusing on cost and profit." In March 2020, Hema established the 3R business unit (3R = Ready to cook, Ready to heat, Ready to eat), aiming to differentiate from traditional hypermarkets through differentiated products. Large supermarkets have successful experience in attracting customers through bakery products. Sam's Club's Swiss rolls and mochi have become the traffic password for stores, even supporting a group of daigou (purchasing agents). Compared to standard products, processed products like bakery and catering have the advantage of less transparent pricing and higher premiums and gross margins. Zimu Bang learned that in this year's business plan, Hema plans to increase the revenue share of the 3R business to improve profits. Another Hema insider said that Hema still has room to improve operational efficiency in many areas, and this year it will mainly focus on lean management and loss control. But truly achieving refined management is not easy. Wu Jingqing, former CFO of Gaoxin Retail Group, said, "RT-Mart is an enterprise strategically positioned as low-cost, which is also the key to the success of hypermarkets." For the retail industry, cost control is second to none. Whether Hema can transition from a traffic-based management model to refined management remains a question. As Hou Yi said, "In retail, it's about copying and learning from each other. Why not learn from others' good practices?" Not only at the channel level, but also in business models and formats, Hema, which once led the industry, has long begun to learn from other commercial entities. The mini store is the best example. At the end of 2018, Yonghui began piloting Yonghui mini, turning large stores into small ones, with mini stores being close to home. According to Yonghui's later statement, Yonghui Superstores operates a business model of "large stores + small stores," "to store + to home," meaning mini stores and Bravo stores complement each other and organically fill existing regional gaps. Hema, which initially focused on Hema Fresh standard stores, also began to increase store density and lower the threshold for opening stores in 2019, starting to try the front-warehouse model of Hema Xiaozhan and the small-store model of Hema mini. However, in March of the following year, Hou Yi called off Hema Xiaozhan, which was closer to the e-commerce model. "We believe Hema mini is the ultimate goal of fresh food e-commerce because it can be opened more widely and quickly." Hema mini was positioned as another new retail form after Hema Fresh stores. In the second half of 2020, Hema launched Hema X Membership Store, benchmarking against Costco and Sam's Club. Hema has drifted far from the Hema that burst onto the scene in 2016 and dared to lead the industry. Following peers and learning from them has also cost Hema a lot in trial and error. "Hema's style has always been to constantly launch new projects and abandon them if operations are poor. The impact of self-financing might be that launching new projects becomes more cautious, and shutting down problematic projects becomes more decisive," the source close to Hema speculated. Hema told Zimu Bang that its main business formats are currently "3+1": "3" refers to Hema Fresh, Hema X Membership Store, and Hema Neighborhood, with Hema Fresh Outlets mainly serving as a supplement to these three formats, reducing waste and strengthening supply chain efficiency. After nearly six years of wavering, Hema seems to have temporarily figured things out, but there is still a long way to go before overall profitability. With the task of self-financing, Hema, which is still struggling to profit, has to embark on the path of independent financing. According to Bloomberg, Hema will consider raising funds at a valuation of $10 billion. But in the current dark age of the internet industry, the difficulty of financing is imaginable. At the close on March 16, Yonghui Superstores had a market value of 38.297 billion yuan. In the first three quarters of last year, Yonghui's revenue was 69.835 billion yuan, with a net loss attributable to parent company shareholders of 2.179 billion yuan. Gaoxin Retail had a market value of 28.715 billion Hong Kong dollars, with total revenue of 41.534 billion yuan in the second and third quarters of last year and a net profit of 112 million yuan. Additionally, according to Qianzhan Economist statistics, Yonghui Superstores has a total of 1,066 stores including large stores and mini stores, with a total operating area exceeding 8 million square meters; Gaoxin Retail has 565 stores with a total operating area of 13.68 million square meters. Hema previously stated that it would see a wave of store openings in December, and by the end of 2021, the number of Hema Fresh stores would exceed 300. Even counting other formats, Hema's store count and operating area are probably not larger than Yonghui's or Gaoxin's, at least not by much. In comparison, a $10 billion valuation is not too cheap for the current capital market and for Hema at this time. In 2019, Hou Yi was asked by the media whether the new retail trend was declining. "No, why would it decline? As long as Hema can succeed, new retail will be successful." Now, what Hou Yi needs to do is prove that Hema can succeed. Source: Zimu Bang (ID: wujicaijing) Author: Tan Xiaohan References: 1. "Hema First Discloses Profit Data: Online Orders Exceed 60%," September 2018, Restaurant Boss Internal Reference. 2. "Hema Hou Yi's 5-Year 'Reflection': From Alibaba's Inner Ring to First Ring, Still Not Optimistic About Front Warehouses," December 2021, China Business Journal. 3. "Hema Accelerates Development, Hema mini May Become the Second New Retail Model," March 2020, Global Tech. 4. "Hema Closes First Store Three Years After Opening," April 2019, Lianshang.com. 5. "Hema Continues to Run, but Hou Yi Says the Protagonist Is Not 'Hema Fresh'," March 2020, Huxiu. Are you "watching" me?