Click to read the original text for details After the first half of new retail, characterized by breakneck expansion in exchange for scale, Hema seems to be intentionally changing course. Three years ago, when asked by the media "What is Hema's core capability?", Hema founder Hou Yi replied, "Hema's greatest capability right now is its ability to continuously iterate, learning from what peers do well." Indeed, adhering to the principle that "losses don't matter; what matters is getting the model right," Hema has frequently experimented with new business formats over the past few years, giving them only extremely short validation periods. The most evident examples are Hema Xiaozhan, Hema MINI, and Hema Linli. This is not a problem unique to Hema. Comparing with other fresh food players in the market, whether it's the front-warehouse model of Dingdong Maicai or Miss Fresh, or the community group buying model of Meituan Select and Duoduo Maicai, they all are well-versed in burning money to gain scale and traffic. But years of losses and no signs of profitability have caused the entire track to quiet down. Gradually, moving away from price wars and focusing on increasing revenue and reducing costs to achieve profitability has become a new industry consensus. Fresh food retail channel map (Source: Orient Securities) Hou Yi frankly admitted last year that the root of previous problems lay in using internet thinking to do retail. This was most evident in the site selection for Hema's initial expansion. "At that time, when entering a city, we focused more on the full coverage of the delivery network and the population around each store, but the common problem with these stores was poor business. The most important thing for a physical store is location." Relying on the internet's land-grabbing methodology, new retail trapped in the traffic cage was unable to allocate much resources to upgrading the industry and supply chain for a long time. In the view of many industry insiders: "Hema crosses the river by feeling the stones, and Chinese retail crosses the river by feeling Hema." In the context of the track's slowdown and transformation, Hema, as a benchmark of new retail, has had to return to the foundation of traditional retail, from front-end formats to back-end supply chain, embarking on a new path of troubleshooting and wading through rivers. 01 First, Support Itself In early interviews, Hou Yi said, "Alibaba's starting point for Hema was to create e-commerce with physical stores, operating everything around traffic." So from the very beginning, Hema laid out its store construction with e-commerce thinking, positioning itself more as a transfer warehouse in site selection, not focusing on foot traffic in the supermarket, but only on the number of people covered by regional delivery. In Hema's early design, 70% of store orders relied on online. At that time, Hema's thinking was simple: relying on Alibaba's digital middle platform resource scheduling capabilities, under refined operations, it could increase the added value of retail products while achieving growth in online user scale. To this end, Hema designed a hanging chain technology to help stores connect storage, sorting, and delivery distribution, achieving "30-minute delivery" efficiency. Whether fulfillment efficiency is truly Hema's moat remains unknown, but the industry's horse-racing mechanism has spawned a series of new e-commerce formats. Not only front-warehouse and community group buying competing for the last mile, but also third-party platforms with urban delivery capabilities like Meituan have entered the fray, making it difficult for Hema's warehouse-store integration delivery speed to form a competitive barrier. At the same time, although Hema's app DAU is indeed on the rise, reaching its peak during this year's pandemic outbreak, the increased sales per square meter from online business cannot translate into actual store profitability because, corresponding to fulfillment efficiency, is the high cost of online fulfillment. Hema app monthly average DAU and change rate According to Chen Feng, a regional store manager at Hema, the average order value at Hema Fresh stores is 120-150 yuan, with delivery costs reaching 10-11 yuan. Moreover, online fresh food purchases typically have low unit prices, and since these constitute the majority of Hema's orders, the unit price struggles to cover fulfillment costs. Hema's profit point is not online. At the beginning of this year, Hou Yi proposed a new strategy in an internal letter that "goes against" the past direction, upgrading from "online development as the main focus" to "multi-format online and offline coordinated development," specifically increasing the offline order share from 30% to 50%. In the new round of store expansion, the pace of closing old stores is accelerating, and the approach to opening new stores has shifted from full city coverage to focusing on core business districts and new areas. Meanwhile, improving lighting, shelves, and design are also ways to enhance the offline store experience. In the process of re-examining the value of offline space, Hema's in-store business formats are also frequently innovating. For example, activities like Hotpot Season and Hema Yesi (night market) are representative works of Hema's "supermarket + dining" model iteration. These activities are strongly tied to Hema's product capabilities, such as the crayfish and craft beer featured at Yesi, which come from Hema's private brand products with good sales performance and strong upstream supply chain synergy. More pragmatic new formats like Hema Outlets and X Membership Stores are also helping to improve store profitability. Outlet stores sell near-expiry products from Fresh stores, products with minor damage during transportation, and unsold daily fresh products at discounted prices while ensuring quality. X Membership Stores, with their floor space and SKU comparable to traditional shopping malls, are gradually penetrating the mid-to-high-end consumer segment under Hema's "moving up" strategic layout. In the internal letter, Hou Yi also mentioned that Hema's goal this year is to move from current single-store profitability to overall profitability. No longer relying on the deep pockets of Alibaba and seeking its own way, Hema's main theme for the next few years is likely to be consolidating its front and expanding profitability, which also means Hema is becoming more and more like traditional retail in its front-end format. 02 Seeking Efficiency from the Supply Chain There is an old saying in the retail industry: "Momentum comes from traffic, but life and death depend on the supply chain." This may also be an iron law for new retail. In recent years, Hema has been learning from traditional retail, and after gaining enough traffic in the first half of new retail, it has begun to quietly exert efforts in back-end supply chain layout, in addition to focusing on front-end stores. Recently, Hema's two supply chain operation centers in Wuhan and Chengdu were fully put into use. As the backbone network of Hema's own fresh food logistics system, this is the latest implementation of Hema's construction of fresh food and food processing supply chain. A few days ago, Xinmou visited Hema's supply chain operation center in Chengdu and the newly launched central kitchen factory "Hexian Zhizao." Unlike conventional warehouses and logistics parks, Hema's supply chain operation center is adapted to Hema's needs for different product lines such as fresh food and 3R (ready-to-eat, ready-to-heat, ready-to-cook), featuring multi-temperature cold chain warehouses, ambient warehouses, fresh food processing centers, and central kitchen factories. Hema's production-supply-sales system Returning to product strength and focusing on private brands, Hema's business strategy is to seek efficiency from the supply chain. "The biggest feature of Hema's supply chain operation center is the integration of fresh food processing, central kitchen functions, and product circulation functions, making the efficiency of such an integrated supply chain center far higher than distributed operations," said Hao Jingbin, investment director of Hema's supply chain center. Efficiency is not only reflected in the operation of the entire chain; when broken down into various links, it manifests as different forms of efficiency improvement. According to the relevant person in charge, in the production link, Hema has signed more than 550 agricultural direct procurement bases, including over 100 "Hema villages." In the supply link, Hema has 56 ambient and cold chain warehouses, 22 processing centers, and 10 live seafood temporary holding warehouses. In the sales link, Hema has opened more than 300 stores covering 27 cities nationwide. In Hema's Chengdu supply chain operation center, the central kitchen factory "Hexian Zhizao," which is highly characteristic of Hema, made its first public appearance. Fresh food products can be deeply processed through the intelligent central kitchen to make prepared dishes or fresh food. Based on this, the time for Hema's self-developed foods to go to market can be shortened from the previous half month to three days. Staff testing self-developed food Hema's private brand share is currently around 20%, while Hema X Membership Store is as high as around 50%. Although there is still a gap compared to the over 30% share of European retail giants, expanding the private brand share should be a long-term product strategy for Hema. "Hema Gongfang" is Hema's best-selling private brand product, and its department was upgraded to the 3R Business Unit the year before last, strategically elevating the importance of private brand building. Private brands not only create differentiated products but also have higher gross margins, and in the operation process, they can save intermediate costs such as multi-level distribution and advertising marketing. Once favored by consumers, retailers can use large purchase orders to demand suppliers cooperate at the lowest prices. Therefore, operating private label products is regarded as an important tool for retailers to regulate operating profits and deepen core competitiveness. From the Chengdu supply chain operation center, the central kitchen factory's first batch of 22 private brand products has already been supplied to 4 regions and 5 cities. "We have initially planned 160 products, striving to launch all of them by the end of this year." Chengdu supply chain operation center delivery timeline Huang Haifei, head of Hema's national central kitchen, revealed that as the central kitchen's capacity gradually releases, within one to one and a half years, they hope to process and supply 70% of Hema stores' cooked food products, 70-80% of pasta products, and 100% of semi-finished dishes and meat segmentation products. Seeking efficiency from the supply chain may be a path that new retail has to take. For fresh, frozen, and refrigerated products, supply chain efficiency is the "life" insurance rate of the products. Secondly, faster product updates and shorter new product launch times can stimulate consumers' desire for novelty. Moreover, a digitalized supply chain logistics system can not only improve labor efficiency but also achieve optimal benefits in the coordination of product circulation. As Xiang Minghui, head of supply chain business, said, "Consumer internet transforms the efficiency and cost of traffic distribution from quantitative to qualitative change, while industrial internet is the opposite: user experience improvement is just a ticket, and improving the efficiency of the entire industry chain will truly bring about a qualitative change." 03 Traffic Connecting Supply Chain In the past, a common problem in the industry was: those who are good at traffic don't understand the supply chain and can't get profits, while those who are good at the supply chain can't seize the ever-changing traffic opportunities at the front end. For new retail with internet genes, although they are familiar with traffic tactics, they lack the accumulation of supply chain construction experience. At the same time, when the industry has not yet achieved overall profitability, players often have no time to focus on asset-heavy supply chains. Therefore, we see that in the first half of new retail, almost no company truly achieved industry leadership through supply chain advantages. Yonghui Superstores, which competes on the same track as Hema and is known for supply chain management, is a typical player that does heavy supply chain from the upstream. From the source to processing centers, logistics centers, and even city warehouses, the entire process—including origin inspection, quality inspection, price negotiation with small farms/cooperatives, selection of logistics and packaging suppliers, and deep processing capabilities—is mostly handled in-house. With capital advantages, Yonghui invested in a large number of supply chain-related companies, such as Guolian Aquatic, Xingyuan Agriculture, and co-founded Youyi Shizhe with Moutai, and incubated Caishixian. However, after a huge loss of nearly 4 billion yuan last year, Yonghui continued to lose 120 million yuan in the first half of this year. The company had to plan to return from "new retail" to "traditional retail" this year. Despite its strong supply chain management, the banner of new retail fell. With Yonghui as a cautionary tale, under the constraints of internet thinking in the first half, the result of new retail doing heavy and deep supply chain can only be crushing itself. This makes one wonder: should future new retail invest too much in the supply chain, and what is the right way to do supply chain? "After capital comes in, relying solely on subsidies to compete for the market is not advisable." In an interview at the end of last year, Hou Yi revealed Hema's intention to deeply cultivate the supply chain. "Supply chain reengineering, process optimization, global procurement, and differentiated competition are the real skills." Clearly, Hema still chooses to go all-in on the supply chain, but it chooses a different supply chain approach from Yonghui, setting aside the supply chain source for now and instead focusing on the middle research and development, production, logistics, and distribution links. Of course, going all-in on the supply chain does not mean abandoning traffic. Seeking traffic from products is becoming a new breakthrough in new retail competition. In Hema's retail product structure, the importance of processed foods is increasing. Hou Yi once admitted, Hema cannot beat local retailers on ordinary livelihood brands because they have stronger local supply chains. Hema's only way out is to supply products from national and even global supply chains. The enterprise and organization level of processed food supply chain production entities is higher than that of fresh food supply chains. Around the needs of the younger generation of urban consumers, launching new product development plans and initiating integration demands upstream in the supply chain will ultimately be reflected in price advantages. Therefore, it can be seen that when traffic acquisition no longer relies solely on burning money to expand scale, but shifts to seeking traffic from products, the traffic entrance gradually forms a synergy with the back-end supply chain, and going all-in on the supply chain seems to be a natural and necessary thing to do. But despite the different supply chain management approach from Yonghui, some similar new details can still be glimpsed in Hema's business dynamics. "After more than three years of tinkering, our self-bred 'Hetian Shrimp' has finally hit the market." On July 5, Hou Yi posted this message on Toutiao, indicating that Hema has begun to try self-operation at the source. If it is true, as Hou Yi said, that "overall profitability" can be achieved in the future, facing the higher profit margins and lower food safety risks brought by controlling the source, Hema may not be able to refuse to retrace Yonghui's path. From increasing private brand product development to now personally farming shrimp, under the consolidation of the front, a clear signal is that Hema is drilling deeper along the supply chain management thinking. But whether it can find the right path still needs to be verified by the market. Source: Xinmou (ID: xinmouls) [Unified Zhongkong Dairy Beverage Circulation Group General Manager Deng Gang] Paying tribute to channel partners, meet in Chengdu, August 31-September 2, 2022 (7th) China FMCG Channel Innovation Conference. ****__**-END-**