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 from 2017 to 2019 and how most of these failed. In the third part, we explored how Hema launched two formats for the ‘sinking market’ in 2021. In this final part, we look at Hema X Membership stores, how the still existing formats are organised and what other related and future concepts Hema offers.
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.
When we discussed Hema Outlet and Hema Neighbourhood, which were launched in 2021 in the previous article, we skipped over one concept. Let’s look at that first to finish our exploration of the major Hema concepts.
Hema X Membership Store (a.k.a. ‘Store X’)
While none of the new 2019 formats have been a success, and most have completely disappeared, Hema X is a concept that is still expanding. These membership warehouse stores are larger than a regular Hema Xiansheng (about twice the size) and comparable to Metro, Costco, Sam’s Club, or cash & carry stores. Alibaba claims that members of the store receive wholesale prices.
In 2018 Hema had already launched its X Membership Plan for Hema Xiansheng customers at an annual fee of RMB 258, expanding it from Shanghai to Beijing, Xi’an and Chengdu the next year. Hema X continues that membership fee, which offers peripheral services, such as free deliveries, VIP customer support, a car wash, pet grooming, car repair, and optician services.
The first Hema X store opened in Shanghai in September 2020. According to Hema, the 18,000 square meter Shanghai store turned profitable within two months of opening, and members spend an average of RMB 1,000, outpacing purchases at a conventional store. [1]
In this video from 2021, Alibaba explained the Hema X format, which is targeted at highly affluent young shoppers. Note, though, that when we visit the Shanghai store in June 2023, there were hardly any people there. It seemingly is busier during the evenings and weekends. Hema X also offers half-day delivery in a radius of 20 kilometres.
Understandably, Hema invests in these stores as, according to Euromonitor, they are the only mainstream offline store formats in China that maintain a healthy growth of almost 20%. Sales of the format more than doubled to $3.7 billion last year from $1.8 billion four years earlier. [2] In November 2022, Hema said the Hema X Membership Stores’ year-on-year growth was 247%.
Meanwhile, according to incomplete statistics from the Retail Research Centre of Lianshop.com, 34 supermarket companies, including Lianhua Supermarket, Hongqi Chain Store, Yonghui Supermarket, Zhongbai Group, Greenland Best, and Jingdong Qixian closed more than 680 stores in 2022. Among them, Wal-Mart closed 27 stores. [3]
A report by Bain & Company and Kantar Worldpanel predicted that the number of Chinese consumers in warehouse-style member stores will increase by 30.3% year-on-year, and the purchase frequency will increase by 12.8%. Walmart’s Sam’s Club opened six stores in 2022 and planned 4 more this year, bringing their total to 44 in 5 cities, servicing 4 million members. [2]
At Hema X, you will find large-volume packages of products, many of which are presented under Hema’s private label MAX. At the time of its launch, 40% of the Hema X assortment consisted of private labels, including MAX. 10% of these came from foreign factories. Hema uses a strategy of ‘go outward, go upward’, meaning that it sources the best products from abroad and then tries to source them locally, lowering consumer prices and improving the quality.
A Hema X Membership Store in Shanghai, June 2023. (click pictures to enlarge)
While there are some temporary promotions – we were able to visit the store by using a one yuan ice cream deal on Douyin – you don’t get access to Hema X without a membership. We witnessed the chagrin of many non-members who tried to get in. In 2022, a thriving business was renting out Hema X memberships on Taobao. You could rent someone’s QR code to enter the store for one yuan. You were charged a RMB 5 handling fee if you needed to buy something. One merchant had rented his QR code out 90,000 times in total and 700 times in one month. [4]
On an average day, a Hema X store sees RMB 1.2 – 1.5 million in sales. But during holidays, weekends or special promotions, this can reach RMB 3 – 4 million. Impressive, but not quite the RMB 10 million that Costco reaches during peak weekends. The difference is said to be caused by Hema’s limited experience in product selection and procurement. Sam’s Club has been active in China for 20 years and while Costco only opened its first China store in 2019, the company itself was founded in 1983. [5]
In 2021 Alibaba wrote [1]: “The future of the stores looks bright, given China’s adjustment to its strict family planning policy. Last month, China officially loosened its reinforcement of the two-child policy following a nationwide population census, allowing Chinese couples to have up to three children.” That might have been the case, but all the loosening has had no impact so far and birth rates continue to decline. And marriage rates are down as well. As such, I hope Hema X’s future doesn’t depend too much on large families.
There is also a ceiling to how much Hema X can expand. Because of its size and target group of mid to high-income consumers, it only makes sense to open them in the large first-tier cities. On average, Hema X members visit the store 1 to 2 times per week and no more than 8 times per month. [4]
In 2021, Hou Yi said that Hema planned to open 10 Hema X stores that year. [6] But, as we’ve seen before, Hou YI’s ambition tends to be ‘a bit’ overblown. By the end of 2021, there were three Hema X stores, and at the time of writing in 2023, there were nine. Nevertheless, in interviews, the management of popular competitor Sam’s Club has named Hema X the ‘only real competitor they are facing’ in China because of Hema’s strong supply chain. [2]
Hema business units
Hema’s organisation follows three vertical units. Hema Fresh and Hema MAX focus on first and second-tier cities, while Hema NB targets the ‘sinking market’. [i] Hou Yi is personally in charge of Hema NB, showing his determination to break into the ‘sinking market’, claiming Hema Outlets would be the most important strategic project for 2023.
Not so long ago, Hema reorganized its organisation into three business units according to the structure below.
This new structure tells us a lot about how Hema sees its future.
The main business, Hema Xiansheng (see part 1), is combined with Hema Mini (see part 2) to form one business unit aimed at the middle-class Chinese in first- and second-tier cities. Although they largely target the same audience, the megastores of Hema X are operated by a separate division. And finally, there’s the Hema NB division that targets the ‘sinking market’ (see part 3) with community store Hema Neighbourhood and discount store Hema Outlet.
Hema Mini is seen as an extension of Hema Xiansheng for areas where establishing a Xiansheng is not an option. And while the company tries to rebuild its Hema Neighbourhood network from Shanghai, Hema Outlet has become one of the three main concepts (together with Hema X and Hema Fresh). [7]
Source: [5]
It’s interesting to see how some of the main concepts differ in characteristics:
Source [5]. (3R = Ready to Cook, Ready to Heat, Ready to Eat)
Hema X plans to increase the share of standardized products to 45% because of their higher average sales price than fresh produce.
The three concepts, Hema Outlets, Hema Xiansheng and Hema X, grew 555%, 25% and 247%, respectively, in 2022. Hou Yi has said that Hema Outlet currently even outperforms Hema Fresh stores. Considering how Outlets were just launched in October 2022, that high growth is not such a big surprise, though.
In a recent press release [8], Alibaba mentioned that in “2022 China’s Top 100 Chain Stores,” published by the China Chain Store & Franchise Association, Hema ranked eighth among the top 100 chain stores, entering the top 10 for the first time and sixth among the top 100 supermarkets in Mainland China.
Related Hema concepts
Besides all the concepts we have discussed so far, we should mention a few related concepts to complete the picture.
Robot.He Restaurants (Robot.He 机器人餐厅, Jiqiren canting)
In 2018, when robot restaurants were all the hype, Hema introduced Robot.He. At these restaurants, customers would scan a QR code and order food on their phones, which would then arrive at their table in robots that are a lot like logistical AGV robots (Automated Ground Vehicles).
Hema opened the first Robot.He in 2018 at Nanxiang Oriental Weiye Plaza in Shanghai. While Hema claimed it broke even in 4 months, it only ever opened one more Robot.He (at Shanghai’s National Convention and Exhibition Centre). There were a lot of complaints about the unclean dishes and tableware, poor sanitation, slow serving and very average tasting dishes. Many visitors were attracted by the gimmick but left disappointed. [9]
Robot.He restaurant in Nanxing, Shanghai, March 2019. (click pictures to enlarge)
I visited the concept a few times in 2019 and found it underwhelming. The menu was quite limited, and while the robots worked, stopping at your table and opening their covers, it did feel a bit like eating in one of those highly automated warehouses.
The Robot.He in the National Convention and Exhibition Centre has been closed. Two thirds of the Robot.He at Nanxiang Oriental Weiye Plaza (seen in the pictures above) was converted into a Hema Outlet …
Hema Yunchao (盒马云超) a.k.a. Freshippo B2C
Hema has built a reputation in a large part of China, even if no Hema store is nearby. This has led to Hema Shopping Service (盒马代购, Hema Daigou). ‘Daigou’ is a common concept in China that involves somebody buying goods on behalf of another person in exchange for a service fee. It has been one of the main ways that the Chinese got their hands on foreign luxury goods and products like baby formula in the past decennium until the government started to crack down on the practice.
A similar service has evolved for Hema with ‘agents’ buying on behalf of consumers and sending it to them. Hema Daigou, not a service offered by Hema, became popular across cities and provinces. Many consumers across the country willingly pay for the extra shipping costs to have these products, mostly Hema’s private label or joint-brand products, send to them. [10] The service fee of Hema Shopping agents normally is 5-10%. Hema most have seen this development, which often resulted in many complaints about the quality of the goods that arrived and have thought they would be able to do a better job themselves.
In April 2020, Hema launched a flagship store on Alibaba’s B2C webshop Tmall as part of its key development goals. [11] For cities with no Hema Xiansheng, Hema offered ‘Hema Yunchao’, which can be translated to ‘Hema cloud supermarket’. Hema Yunchao offered 20,000 SKUs, and in 2020 it was said to have 100,000 daily orders in 14 cities.
In April 2023, Hema Yunchao expanded its services from cities with Hema stores to the whole country. In the next step, Yunchao is also planning to expand its offering of Hema’s imported goods assortment, including flowers, across the whole country. [10] With Yunchao, Hema targets consumers looking for a ‘quality way of’ life but don’t have Hema stores near them (yet).
Offering e-commerce delivery without using the store+warehouse model within a 3-5 km radius will require the company’s high level of cold chain capabilities. This will be accomplished by the multi-temperature supply chain system Hema has invested tens of billions of yuan into in the past years. This includes operational logistics centres in Wuhan and Chengdu and eight more the company plans to build around the country. Since grocery retailers are highly fragmented and regional in China, Hema may become the only retailer with such nationwide coverage. Hema also built five fruit processing centres close to major wholesale markets in Beijing, Guangzhou, Zhengzhou, Chengdu, and Jiaxing. [10]
Hema also reverse-customizes products, taking only 30 – 45 days to adjust them according to market trends. Combined with Yunchao, it can offer localized versions of products. [10]
On November 27, 2022, at the CCFA New Consumption Forum – 2022 Supermarket Development Strategy Summit Forum, Hema CEO Hou Yi said that starting 2023, “Hema will serve one billion consumers with one trillion sales as the goal in the next ten years”. Considering how the Hema Xiansheng stores will have a limited reach and the Hema NB division will also have its limitations, it seems that the only feasible way to reach one billion consumers in China is by counting the potential reach of Hema Yunchao.
Towards the future
We have discussed no less than 12 different formats of Hema’s business over these four articles. But this doesn’t seem to be the end of it. Hema has announced plans to open two new formats in 2023: [12]
- Freshippo Best: a boutique Hema supermarket targeting the high-end elite.
- FOD, Food Operation Delivery: a warehouse-style shopping mall comparable to Metro’s self-service wholesale model (cash & carry for small and medium enterprises) for business customers.
To me it sounds a bit like a Hema Mini upgrade, while FOD looks like a Hema X for businesses.
Hema is also working on plans to open a supply chain for canteens of companies and institutions under the name Hema To B (盒马To B), delivering processed ingredients produced by the central kitchen. Hema will co-develop the “weekly menu” with the canteen chef, plan the ingredients needed for a week in advance, and enhance the reliability of the canteen supply chain. Hema then plans to move part of the food processing work in the canteen to the central kitchen to improve the operational efficiency of the canteen and reduce management costs. [13]
This new project won’t be simple because this sector requires support from political and business relations, comes with high qualification standards and is a segment where competitors like Yonghui, Caishixian, and Fuping Yunshang have already been active in. [13]
In October, Hema is also expected to open its first 5,000-square-meter experimental store with prefabricated dishes as the core offering in Shanghai’s Zhongshan Park. [14]
Conclusion
All in all, the story of Hema formats seems far from over. Without a doubt, we will be revisiting this subject in the future to share how the still-existing and new formats are doing. It is to be expected that the level of acceptance for failure, like we’ve seen with the 2019 concepts, is no longer acceptable as Hema prepares for an IPO.
In the near future, we will revisit Hema from a different perspective and analyse what has made the brand successful.
In 2022 Hou Yi said, “The profit of Hema is very close at hand, and I believe that Hema will definitely become the most profitable company in China’s retail industry in the future.” [15] Let’s hope for the investors in the company and those that will buy shares when Hema has its IPO that he can deliver on his promise this time.
Sources:
[1] Alizilla 2021-06-18, [2] 36Kr, 2023-07-27, [3] 新零售 2023-03-10, [4] 36Kr 2022-08-16, [5] Tech Buzz China 2023-06-09, [6] LatePost, 2021-07-20, [7] Techplanet, 2023-05-29, [8] Alizilla 2023-07-03, [9] Sina Finance 2023-06-14, [10] 36Kr, 2023-04-03, [11] FBICGroup 2020-04-23, [12] Latepost, 2023-05-19, [13] 第三只眼看零售 2023-06-30, [14] Linkshop 2023-05-14, [15] 新消费日报 2022-10-31
