Costco has 99 million members globally, Sam's Club has 3 million in China, but Hema X membership numbers will soon surpass its predecessors. Last August, Costco opened its first mainland China store in Shanghai. With the 1499-yuan Feitian Maotai, overnight, everyone learned the term 'warehouse membership supermarket.' As a Chinese disciple of Costco, Ye Guofu of Miniso once said it 'understands human nature and captures the essence of retail.' Countless public media and self-media have analyzed Costco from angles such as membership, supply chain, product selection, and pricing. Some have also read a string of retail codes from this 'cheapest' store. After Costco opened, Hema CEO Hou Yi led his team on a multi-day store survey. Two months later, they decided to start customizing private-label products. In 13 months, Hema announced it would open its own membership store on October 1. Shanghai has now gathered two major membership store giants—Costco plans to open a new store in Pudong Kangqiao, while Sam's Club, which entered Shanghai earlier, already has two stores in Qingpu and Pudong Beicai, and plans to open a third in the Waigaoqiao New Development Park in the free trade zone. On September 28, three days before the official opening of the Hema X Membership Store, promotional images appeared on the Hema app, featuring the 1499-yuan Maotai as a hot item. Hou Yi directly stated in a public speech: 'We hope to go head-to-head with Costco and Sam's Club today.' Costco is the predecessor of extreme low prices. As a challenger, Hema, with only the title of 'China's own membership store,' does not have enough appeal to consumers. How can a retail newcomer born just four years ago challenge an international giant that has been operating for 37 years? Another question is that behind the rise and growth of Costco and its peers is the stable life and aesthetic taste of North American middle-class families over decades. But in China, where consumer goods are constantly innovating and lifestyles change rapidly, does this model still work? Although Costco offers low prices that everyone loves, it has been criticized since entering mainland China: The hardcore shopping model that requires a car has few advantages compared to the increasingly fast same-city retail; The shrinking young families in first-tier cities, and Shanghainese who pursue 'freshness,' do not like stocking up on packaged food that lasts a week. Hema claims to be a new retail membership store. It has become a benchmark for new retail over the past four years. Can new retail flourish on the soil of membership stores? We visited the Hema X Membership Store in Senlan Commercial City, Pudong, Shanghai, and also visited the Costco Minhang store, hoping to find answers from their differences and commonalities. **-01- **Shanghai, Home to Several Major Membership Stores If you start from People's Square, the recognized city center of Shanghai, it takes 33 minutes to reach Costco, 27 kilometers away. The Hema X Membership Store is slightly closer, but still 20 kilometers away. Both are far from the city center, but the two stores are quite different. There is no public transportation near Costco; you have to drive there. The Hema X Membership Store is right next to Zhouhai Road Station on Line 6. For consumers without a car who want to experience a membership store, Hema is more friendly. Compared to Costco, which has no residential areas within 2 kilometers, Hema has better surrounding infrastructure. Across the street are upscale residential communities, and nearby are several newly opened shopping malls still in the leasing phase, with a Yonghui supermarket across the street. Costco, like in its American hometown, acquired land and built a square box in the western suburbs of Shanghai. Hema used a lighter approach, renting an existing mall, Senlan Commercial City, in the northeastern suburbs of Shanghai. As long as you pass by, it's hard to ignore the Hema elements here. The main color of the mall's exterior is almost entirely occupied by Hema's dark blue, with a huge inflatable Hema in the plaza, and multiple signs telling you: the basement level is Hema. The 18,000-square-meter Hema membership store is slightly larger than the 14,000-square-meter Costco Minhang store. 'Such a large space is hard to find,' said Zhao Jiayu, national general manager of Hema's product procurement and sales. But with government support, it only took four months from site selection to completion for the Hema membership store. Earlier, Costco's Asia President Zhang Sihan explained why the first store was located in Shanghai—Costco had operated on Tmall for five years, with consumers concentrated in East China, and Shanghai had the most consumers, with Minhang and Pudong having similar order volumes. For overseas brands entering the Chinese market, Shanghai is indeed a city that loves to join in the shopping frenzy. For Hema, basing its headquarters in Shanghai involves policy considerations. Except for the Hema Li opened in Shenzhen last year, all of Hema's business formats have been first launched in Shanghai, then replicated nationwide after maturing. In 2016, Hema's first store was born in Jinqiao, Pudong. Shanghai piloted the 'two certificates in one' policy, opening a green channel for Hema, which integrates multiple models; in 2019, the breakfast format Hema Xiaoma was piloted, and Shanghai again allowed innovative catering models. The gathering of several commercial giants in Shanghai reflects recognition of the city's business environment and consumption power. **-02-******Extreme Cost Performance At Hema, we found Evian water at 3.29 yuan per bottle, coconut water at 49.8 yuan for about 4 liters, and Pinot Noir red wine at 99 yuan per bottle, all at half or even 30% of market prices. Such discounts have rarely been seen in domestic supermarkets before. Hou Yi once said that one of the problems in China's retail industry is that domestic retail enterprises do not have global supply chains like Walmart and Costco. After 37 years of operation, Costco has both 782 stores worldwide and suppliers around the globe. It directly sources from different origins, customizes exclusive packaging for brands, or labels them with its private label Kirkland. This model of reducing intermediate links and lowering costs has become an unparalleled example in the retail industry. Now, the Hema X Membership Store is using the same model. In the central area of the store, two rows of nearly 10-meter-long nuts are displayed. The mixed nuts come from different countries and regions: Vietnamese cashews, American almonds and pistachios, and Australian macadamias are flown directly from their origins to China, then packaged and put on shelves. Hema's location is only 3 kilometers from the Waigaoqiao Shanghai Free Trade Zone. Nearly 10% of the X membership store's products are directly sourced by Hema, going directly from foreign factories to the Shanghai Free Trade Zone, eliminating intermediate wholesalers, traders, and importers, and reducing logistics and procurement costs to the greatest extent. However, currently, the proportion of direct foreign sourcing is only 10%. Like the nut packaging, many products in the store have 'Hema MAX' on the outer packaging, with a line of small text below: bigger, more, better. This is the private label of the Hema X Membership Store, accounting for over 20%. More products in the store come from the supply chain Hema has already built. Hema buyers purchase goods from various cities, towns, and villages across China, and fresh produce, fruits, vegetables, pork, beef, and mutton from Alibaba's digital agriculture bases constitute over 50% of the store's exclusive products. **-03- **Membership Costco currently has 99 million members globally. Sam's Club, after 20 years in mainland China, has 3 million members. Building a membership base requires operation and time. But judging from the growth curve and benefits of Hema X members, its numbers will soon surpass its predecessors. After 2018, Hema began piloting the 'Hema X Membership' program in Shanghai, and in 2019 expanded it to Beijing, Xi'an, Chengdu, and other cities. In the eight cities where the X membership system is currently available, Shanghai has nearly 500,000 X members. This is the target group for the X membership store—they have high loyalty, ordering from Hema an average of 9 times per month. The annual Hema X membership fee of 258 yuan not only allows members to enjoy benefits such as free vegetables in stores, meat, poultry, egg, and milk coupons, and exchange offers, but also allows direct access to membership store consumption. In comparison, the 299-yuan annual Costco membership is more expensive and has limited use—in fact, many people find the membership expensive and troublesome, and it has even spawned businesses like Costco purchasing agents. 'The biggest difference between our membership system and traditional retail membership systems is that we have an entire membership ecosystem,' said Zhao Jiayu. **-04-**Online-Offline Integration First-time Costco shoppers might marvel at the size of its giant shopping carts. The purpose of the huge carts is obvious: large-portion products require large carts; large carts make you buy more. But the shopping carts at the Hema X Membership Store are only the size of ordinary supermarket carts, seemingly not intended to make people buy more in the store. This is likely because, at Hema, large shopping carts are not as necessary. Hema still operates an online-offline integrated business. 'Online-offline integration' has become a standard for supermarkets. While various supermarkets are seeking cooperation with internet companies, Costco indeed seems unconventional. 'Does Costco, which doesn't do e-commerce, still have a chance in China?' This is the reason many people are pessimistic about Costco's path in China. But we don't know if this is its persistence or just that it hasn't had time to expand its e-commerce business to China. Costco has a proprietary app in the US, offering same-day delivery to residents within a 20-minute drive of its stores. In its 2019 financial report, Costco planned to expand e-commerce to Australia and Japan in 2020. In contrast, the Hema X Membership Store is delivering farther and farther: it has expanded its 3-kilometer, 1-hour delivery range to cover about 20 kilometers from the store in Pudong and about 15 kilometers in Yangpu, with half-day delivery. Hema is moving beyond the 3-kilometer radius. In fact, Hema opened a flagship store on Tmall in May this year, also to go beyond the 'Hema zone' and cover more users. Although it seems like just a change in fulfillment methods and delivery range, for a store mainly dealing in fresh products, the biggest enemies are distance and time. Although the Hema Tmall store also focuses on fresh products, it has made significant adjustments to its category structure—online, it can only sell seasonal fruits, vegetables, grains, oils, and other items that are easier to transport; it cannot sell leafy greens, nor will it list live seafood. The Hema X Membership Store has upgraded its delivery vehicles and boxes, and also uses two delivery modes: one is refrigerated trucks delivering directly to homes, and the other is delivering from the membership store to nearby stores, then delivered by couriers. **-05-******Can Hema Better Understand Chinese People? Walmart has 20,000 SKUs, Costco has fewer than 4,000 SKUs. The latter is clearly not a business of being big and comprehensive, but rather selecting brands in each category to meet the life needs of middle-class families. In comparison, Hema has even fewer SKUs, only 1,500. Categories that Costco has, such as tires, glasses, and books, do not appear in the Hema X Membership Store. It still focuses on food, with some household cleaning and personal care products. Broader categories represent greater difficulty in product selection and supply chain, and it's hard for Hema to catch up with a player that has been deeply cultivating for years in just a few years. But Costco, which is not familiar with the Chinese market, has opened some windows for it. For a multinational company, localization is difficult. Costco's financial report lists 'misjudging consumer demand' as one of its major operational risks, so it constantly tests and adjusts in its stores. If you are a long-term observer of Costco, you will notice it continuously adjusts the products on its shelves, removing categories that Chinese people are not interested in and replacing them with more attractive local brands. During our visit to Costco, 'E-commerce Online' found that it has made many localization attempts over the past year: selling Dongkui bayberries and Guiwei lychees in summer, and displaying Yangcheng Lake hairy crabs and Taiwan pineapple cakes before the Mid-Autumn Festival. In the refrigerated section, it also places 'hot' wild matsutake mushrooms during the mushroom season. (Details observed during the Costco visit) This kind of operational adjustment has taken Costco considerable time. Hema, which has always prided itself on 'better understanding the Chinese palate,' has made its categories more detailed and catered to Shanghainese psychology in subtle ways. In summary, it's three keywords: localization, small packaging, and leading lifestyle. Costco's star products are croissants and roast chicken, and Hema has them too. But items like hairy crab and fresh meat mooncakes, butterfly crisps, and bamboo shoot and pork dumplings, which are very 'Shanghai,' can only be found at Hema. At Costco, king crabs and Boston lobsters are pre-packaged and sold at uniform prices. Consumers don't need to weigh them; they can just put them in their carts, saving a few steps in the purchase process, and the supermarket can also reduce labor costs. (Details observed during the Costco visit) But in Hema's seafood section, the previous 'live seafood culture' continues, with king crabs and lobsters kept in aquaculture tanks. Besides having developed a methodology for operating live seafood, Zhao Jiayu explained that it's because 'Chinese people love the market culture; everyone likes to buy fresh things. When serving consumers, Hema hopes our stores can best understand Chinese consumers and their tastes.' Although Hema, like Costco, uses large packaging, its large packages contain individually packaged small bags. In first-tier cities like Shanghai, the trend of single young people and small families is increasingly evident. Many consumers who have visited Costco leave empty-handed because, although large packages are cheap, they are also wasteful for small families that can't consume them all. The Hema membership store has not yet officially opened, and many organic fresh products are not yet on the shelves. But you will find that the proportion of 'organic' products in the entire membership store is still considerable. Elsewhere in the store, you will also find new lifestyles sprouting. Traditional household cleaning products mostly innovate on laundry powder, developing products like laundry powder, liquid detergent, or laundry pods. But when more people move into upscale residences and use dryers, Hema has launched dryer fragrance sheets. 'What Hema does is not the width of SKUs, but a kind of depth,' Zhao Jiayu explained. Players on the same track are inevitably compared when it comes to interpreting a city's consumer market. Hou Yi said in a previous public speech, 'In the next one or two years, at least 50% of Hema's products will be unavailable elsewhere.' But in reality, it is already difficult to find truly scarce products in the retail industry. Supply chain is the secret to Costco's success, and polishing it takes time. However, when retailers cross the threshold of time, a product easily becomes 'you have it, I have it too.' What is truly scarce is actually products that meet the needs of local consumers. Source: E-commerce Online (ID: dianshangmj) Author: Wu Lingwei Tips will be paid 400-2000 yuan upon adoption.