This series of articles looks at the different retail concepts that Alibaba launched under its Hema retail brand. We explore how they fared and which ones are still operational. Many of them come with their own fascinating background stories. But overall, the story of Hema’s formats is one of hit and miss…
In the first part of this series, we discussed the concept that started it all, Hema Xiansheng (Freshippo). In the second part, we discussed seven formats that Hema launched in 2017 to 2019 and how most of these failed. In this third part, we will explore how Hema launched two formats for the ‘sinking market’ in 2021.
Note: Alibaba calls Freshippo (yes, with one ‘h’) in English, but in this series, we’ll continue to use Hema because it is easier to differentiate the different concepts using this name
As we have seen in part 2, of all the concepts Hema launched in the 2017-2019 period in the table above, only Hema Mini has been a partial success. While it has been scaled down from its initial expansion, it continues to play a significant role in Hema’s strategy. Of all the other concepts from this period, Hema Mall is the only other format still around, but anecdotal evidence has shown that it is not remarkably successful.
When Hema became a separate entity in the Alibaba conglomerate, responsible for its own profitability, the time of throwing things at the wall and seeing what sticks were over. And with this year’s May announcement that Hema plans to go public in 6 to 8 months, presenting a mix of formats that can survive has become even more important.
Hou Yi, the founder and CEO of Hema, is convinced that there are still two ‘blue ocean’ markets in China’s supermarket sector. One concerns ‘going up’ and creating brands like Sam’s Club, Costco and Hema. This has been represented by the Hema X Membership Stores that were launched in 2020 and target mid to high-end consumers. The other blue ocean is ‘going down’ and concerns inexpensive options for ‘ordinary people’. Hou Yi had been studying ALDI and other inexpensive European supermarkets as a benchmark. [1] Hema Outlet and Hema Neighbourhood target this market segment.
We will skip over Hema X momentarily and return to that format in the next part of this series. In this article, we will explore how Hema is ‘going down’ to what China calls ‘the sinking market’; lower-tier cities and suburban towns of large cities.
From Hema ‘Country Fair’ (盒马集市, Hema Jishi) to Hema Neighbourhood (盒马邻里, Hema Linli)
From the biggest Hema format, we move on to the smallest one, Hema Neighbourhood. While there isn’t much to see at the physical locations of these stores, they have one of the most interesting background stories.
When the community group buying (hereafter ‘CGB’, read more about this concept here) craze started, Hema launched Hema Select (盒马优选, Hema Youxuan) at the end of 2020, later renamed to Hema Jishi (盒马集市, Hema ‘Country Fair’). Besides Hema, Lingshoutong (Alibaba’s cooperation with convenience stores), Cainiao and Ele.me were all dabbling in community group buying at the time. After half a year, Hema Jishi couldn’t keep up with the CGB initiatives of Meituan and Pinduoduo and was only active in 4 provinces, while its competitors operated in 20.
A community group buying leader still using the old Hema Jishi sign, Xi’an, August 2013. (click pictures to enlarge)
In March 2021, Alibaba changed course and set up the MMC Business Group, which included Hema Jishi, Lingshoutong and CGB initiatives by Cainiao and Ele.me. As such, Hou Yi had to hand over the operation of Hema Jishi. Half a year later, in September 2021, MMC merged with Taobao Maicai to form Taocaicai.
Shortly after handing over Hema Jishi, on April 28th, 2021, Hema Neighbourhood (Hema NB) opened its first store in Shanghai. Unlike the Hema Xiansheng stores focusing on first- and second-tier cities and its affluent consumers looking for convenience, Hema Neighbourhood was a strategic approach to penetrate the so-called ‘sinking market’ of lower-tier cities and suburban towns of high-tier cities.
According to sources [2], Hou Yi wasn’t happy with the handover of Hema Jishi and tried to prove its potential for community e-commerce. Hema NB integrated the CGB model of consumers placing an order (mainly for fresh products) online and picking it up the next day after 8 AM. Still, Hou Yi repeatedly emphasized that Hema Neighbourhood was not a community group buying platform. “The model is different, the operation method is different, and the way of playing is also different.” [3]
There was indeed a difference with other CGB platforms. Whereas most other CGB initiatives used community leaders and pop-and-mom shops as pick-up points, Hema NB implemented CGB in combination with self-operated physical stores that could offer more products than pure community group buying platforms. Hema NB initially relied on the Hema supply chain and could thereby offer 20,000-30,000 SKUs, including live fresh seafood. CGB competitors Meituan Select (美团优选, Meituan Youxuan) and Duoduo Maicai (多多买菜) only offered 1,000 – 3,000 SKUs, among which very few fresh meat products. Hema NBs average order value of RMB 50 was also five times higher than that of other CGB platforms.
Initially, Hema Neighbourhood only had a pick-up service, and there are no direct sales of goods in the store.
A Hema Neighbourhood in Shanghai, July 2023. (click pictures to enlarge)
In an interview around the time, Hou Yi stated that the other CGB models were unsustainable. He criticized how CGB startups got billions of funding but were not doing a decent job at logistics, using ‘20-year-old paperwork systems’ and ‘showed low efficiency and high costs’. He called Hema NB the ‘most important strategy in the next ten years’. [4]
Unlike other CGB platforms, Hema NB did not offer any subsidies. In Hou Yi’s view, ‘the low prices brought about by market subsidies are unsustainable.’ Hema NB had to compete in retail efficiency and service experience. [3] Unlike other CGB platforms, Hema NB does not use three-level distribution (central warehouse – grid warehouse – self-pick-up point).
But the costs of Hema Neighbourhood were much higher than that of its competitors, who mainly used CGB group leaders as drop-off points, while Hema NB (mostly) runs its self-operated pick-up points. Setting up a Hema NB store costs at least RMB 50,000, and Hema pays rent, staff, water, electricity, etc, while its competitors only pay 5-8% commission to CGB leaders. [3] Moreover, while Meituan and Pinduoduo could quickly eliminate underperforming CGB group leaders, setting up and closing underperforming self-operated stores was more costly for Hema.
Hema also gave customers that did not pick up orders a refund, while other CGB platforms only gave refunds in case of quality disputes and did not allow order cancellation after sorting in the main warehouse had started.
Daily sales at a Hema NB in Shanghai are RMB 8,000 – 20,000 yuan. But in suburbs of second-tier cities, daily sales are only RMB 3,000-6,000 yuan, making it difficult to cover the costs. Even Shanghai stores with RMB 10,000 daily sales and two staff members only break even. Hema also found that when daily sales exceeded RMB 15,000, staff at a Hema NB needed to spend too much time sorting the goods that arrived from the central warehouse, negatively impacting the customer experience.
A comparison of different grocery delivery models. Source: LatePost July 2021 [4]
When selecting locations, Hema Neighbourhood would avoid being too close to a Hema Xiansheng, despite the quite different positioning of the two sub-brands. Hema NB stores service about 3,000 nearby households. [4]
Hema NB wasn’t the success Hou Yi had hoped it to be. In July 2021, Hema said it would open 5,000 stores by the end of that year. It only reached 2,000. Because of high operating costs, Hema NB could not give the same subsidies as other community group buying players, and goods weren’t cheap enough. [5]
In November 2021, only half a year after the format’s launch, Hema NB stores in three cities (Guangzhou, Shenzhen, and Suzhou) were closed. In April 2022, Hema withdrew from four more cities (Beijing, Xi’an, Chengdu, and Wuhan). Finally, in October 2022, Hema NBs in Hangzhou and Nanjing were closed after a one-day notice. After that, only Shanghai was left. [3]
Considering how the format had been pulled from Beijing, we were surprised to see a courier wearing a purple Hema NB shirt when visiting different Hema formats in the capital in June 2023. When we approached him and asked him about it, he laughed and said: ’Oh, I don’t know. A friend gave me this shirt’.
Since then, Hema has made some drastic changes to the NB concept. In March 2022, it started offering home delivery. In July 2022, it opened its first franchise for a fee of RMB 10,000 per 3 years and a deposit of RMB 30,000.
The number of SKUs was drastically reduced to 2,000, thereby decreasing the sorting pressure on staff, and more focus was put on Hema’s private brands like ‘Hema NB’. Free delivery, when spending more than RMB 39, was changed into a standard delivery fee of 3 yuan, saving hundreds of thousands of yuan in delivery costs each month. The delivery radius was also reduced from 3 km to 800 meters. These changes initially led to a 50% drop in orders, but many customers would return and pick up their orders instead.
Management of the division was also changed.
Alibaba CEO Daniel Zhang had questioned the concept many times, but Hema CEO Hou Yi convinced him not to shut it down completely and keep the Shanghai stores, of which there are still 400, 30 of which are franchisees. Not counting HQ overhead, the operating result of Hema Neighbourhood is -10%, and it aims to break even this year.
Hema Outlet (盒马奥莱, Hema Aulai)
Hema opened its first Hema Outlet in Shanghai in October 2021, transforming it from a previous Hema Mini store. The Outlet stores were initially launched to offload vegetables and fruits that Hema Fresh could not sell the previous two days as well as remains from Hema’s processing centres. Hema Outlet is purely offline, and its stores are extremely simple. Many products are not even put on shelves but stacked in crates on the floor in the 500 square meter space.
Hema Outlet is almost the opposite of a Hema Xiansheng: a messy and crowded supermarket with narrow lanes where elderly customers and low-income youngsters gather between 9 and 10 AM; the main customers of Hema Outlets are retired workers and young white-collar workers. [6]
Discount stores have been a growing market segment in China, and at the end of 2022, Hou Yi led a team to Europe to study ALDI and other discounters. Ironically, ALDI is positioned as an up-market supermarket in China.
A Hema Outlet in Shanghai, July 2023. (click pictures to enlarge)
While the first Hema Outlet stores were opened to sell leftovers from 5-6 Hema Xiansheng and Hema X stores and thereby help to decrease losses of those stores, it ran into limitations of this approach. Dependency on redundant products from Hema Xiansheng would limit the expansion of Hema Outlet. The 300+ Hema Xiansheng stores could supply 60 Hema Outlets, and there are already close to 70 Outlets in China at the time of writing. On days when Hema Xiansheng has exceptionally good sales, Hema Outlets had less to sell a few days later.
What’s more, when the operating capabilities of Hema Xiansheng improved, resulting in fewer unsold products, their supply to Hema Outlets started to dwindle, while at the same time, demand at the Outlets were growing. Hema Outlet had to set up its own procurement system. [6]
Selling the offloaded products has also created dissatisfaction with some Hema Xiansheng customers that saw the evening discounts at their stores disappear as the expiring products were wheeled off to Outlets. [7]
To solve these issues, Hema Outlets were upgraded to real discount stores in September 2022, not only second-rate stores selling redundant Hema Xiansheng and Hema X products but also self-purchased products and private labels. As a result, two distinct types of Outlets have emerged: Hema Fresh Outlet (盒马生鲜奥莱), the original ‘offload’ stores, and Hema Outlet (盒马奥莱). The Hema Xiansheng Outlets will eventually be phased out. [6]
Whereas a Hema Xiansheng has 20,000-30,000 SKUs, a Hema Outlet only has 3,000, among which a maximum of 1,000 private label products, ‘Hema Neighbourhood Selection’, and some products at regular market prices. While the Hema NB business unit independently develops the private labels, they are often sourced from the same suppliers as Hema X and Hema Xiansheng. Hema claims that, thanks to the Hema supply chain, Outlets can offer better quality than regular vegetable markets.
A Hema Outlet in Xi’an, August 2023. (click pictures to enlarge)
According to figures disclosed by Hema, Hema Outlet’s private label products currently account for about 15%-20% of sales. Hou Yi once said that Hema’s target for private labels’ eventual share of sales is 50%. [8]
Regarding product pricing, Hema Outlet hopes that its private label products are about half the price of competing products, while branded products are 20-30% lower than competing products. [6] The price level lies below that of community group buying, which is supposed to be the cheapest form of fresh food e-commerce. Hema Outlet also attracts middle-aged price-conscious consumers previously targeted by Hema Farmers’ Market (Hema Cai Shi).
Products in Hema’s Everyday Fresh range are sold 40-60% cheaper than at Hema Fresh. Some prepared food is sold for 2-4 RMB the day before expiry. The closer to the expiry date, the lower the price will be. Of any specific product Hema Outlet often only sells the most popular brand and the private label as choices.
Price differences: Today’s (7) silken tofu at Hema Xiansheng, yesterday’s (6) silken tofu at Hema Outlet. (click pictures to enlarge)
An average Hema Outlet store is 600-700 square meters large and only needs RMB 1 million budget to open, 1/20th of a small Hema Xiansheng, while the average staffing of a Hema Outlet store is 25 shop assistants, which is higher than the industry average. [6] Many Hema Outlets were Hema Mini stores before they were given a second life.
A Hema Outlet in Beijing, August 2023. (click pictures to enlarge)
Each Outlet should achieve RMB 150,000 in daily sales and 15% gross profit. Hou Yi said that despite the low gross profit, the ‘small profits but quick turnover’ model makes the efficiency of the outlet stores more than seven times that of ordinary hypermarkets. [9] Judging from the foot traffic in a few Hema Outlets I visited, that does not seem to be an exaggeration (for a change).
There were fears of cannibalisation since Hema Outlets are often close to Hema Xiansheng (sometimes even next door). But after the experiences with Hema Neighbourhood, there are no more restrictions on locations since October 2022, and only the overall brand result counts.
The Outlets don’t offer home delivery as it is less relevant to the main target group of elderly people who have a lot of time. Hema Outlets, therefore, has not yet opened an online business. It is, however, said that Hou Yi believes that the online operation of the Hema system is very mature and that Hema Outlets can be connected if the offline stores are also mature. At that time, Hema Outlets will be connected to the Hema app, but the delivery radius will be shorter than the 3-5 kilometres that Hema Xiansheng offers. [6]
A Hema Outlet in Hangzhou, August 2023. (click pictures to enlarge)
Hema planned to open 100 Hema Outlets by the end of 2022. [9] In the now familiar over-ambition or underperformance of Hema, there were 68 Outlet stores across 14 cities in China in early July 2023. [11]
An Outlet store must be in a community with at least 40,000 residents. After the limited success of Hema Mini and Neighbourhood, Hema Outlets are the new hope for the ‘sinking market’.Hema wants to open many new Outlet and Neighbourhood stores in Shanghai’s suburban towns and aims to have ‘full coverage’ of Shanghai by the end of 2023. [12]
In his typical bravura, Huo Yi has announced that Hema Outlets will open 20,000 to 30,000 stores nationwide. ‘This is the future of Hema.’ [13]
In this series’s fourth and final part, we will explore several remaining and expected Hema formats that are not primary stores. Stay tuned!
[1] 36Kr 2022-08-16, [2] Latepost 2023-01-17, [3] 钛媒体 2022-10-20, [4] LatePost, 2021-07-20, [5] Techplanet 2023-05-29, [6] 第三只眼看零售 2023-02-06, [7] 银杏科技 2023-04-21, [8] 金角财经 2023-07-11, [9] 新消费日报 2022-10-31, [10] 生鲜榜, 2023-03-29, [11] Alizilla 2023-07-03, [12] Technode 2023-01-04, [13] 牛刀财经 2023-06-06
