The road to the sinking of Freshippo: a larger market, less room for trial and error

Go to places that Hema fresh food stores can't reach.

Wen 丨 Chen Jing

Editor丨Guan Yiwen Huang Junjie

A debate lasted for half a year between Hema CEO Hou Yi and Alibaba's chairman and CEO Daniel Zhang - should I give up the Hema neighborhood?

The Hema neighborhood is in line with Hou Yi's vision of a "high-end version" of community group buying – relying on stores, there are more than ten times more product choices than competitors. There are even freshwater tanks in the store, so users can pick up live fresh.

Hou Yi said a year and a half ago that this was the first time he saw the opportunity for Hema to expand from serving urban consumers to serving consumers across the country, and was "the most important strategic project in the next 10 years."

And like most of Freshippo's attempts at new formats, neighborhood goods are better but not cheap enough, and there are not enough customers in most cities, and they continue to lose money. Stores in 7 cities, including Shenzhen, Guangzhou, Suzhou and Beijing, have been closed one after another.

In April 2022, a year after the launch of Neighborhood, Daniel Zhang proposed to close all stores in Hangzhou and Nanjing, leaving only Shanghai. Hou resisted the pressure, and eventually the three cities closed only some of their outlets.

Six months later, during the National Day holiday, Daniel Zhang once again questioned the existence value of the Hema neighborhood, believing that it should be "done after running through (the model)", while Hou Yi believed that "there is still a chance". The two sides discussed for a long time, and finally, at Hou Yi's insistence, they kept the Shanghai business and closed the rest.

After that, Hou Yi repeatedly stressed internally that the Hema neighborhood would no longer close its Shanghai store, leaving a "flame of hope".

The flame has been held, but the overall profitability pressure on Hema has increased over the past year. In 2021, Alibaba began to implement the "management responsibility system" throughout the group, and Hema was classified as a "ring company" and was required to bear its own profits and losses.

Since the opening of the first Hema fresh food store in 2016, Hema has become a sample and pioneer of new retail, taking the lead in breaking the boundaries between online and offline, and driving a number of companies to jointly transform China's fresh supermarkets. Hema is Freshippo's earliest and most core business format, with a total of 300 stores in 27 cities across the country.

Today, people are no longer as sure that consumption upgrades will continue indefinitely as they were in 2016. According to data from China's National Bureau of Statistics, in 2022, Chinese average daily consumption of all catering food (including tobacco and alcohol) was 20.5 yuan. There are not too many areas where you can regularly consume Hema fresh, and the speed of its store opening continues to slow. Even in time for the increase in fresh consumer demand generated by the pandemic in 2022, Hema Fresh's sales increased by only 25%.

"LatePost" exclusively learned that Freshippo's overall GMV (turnover) in 2022 is around 45 billion yuan, and the figure in 2021 is 34 billion yuan. This year, Freshippo's GMV target is quite aggressive, with a growth rate of more than 100% of 100 billion yuan.

100 billion yuan is a symbolic figure for offline supermarkets. China's largest supermarkets, Yonghui and Gaoxin Retail, have annual sales of only about 100 billion yuan, and these two companies have been established for about 20 years, and Hema has been established for only 7 years.

When the companions either gave up or contracted, Hema continued to try new models, and despite the bumps along the way, never gave up. Counting the discount store Hema Ole, which began in the second half of 2021, the company has already tried ten formats.

Today's environment of trial and error at Hema is different than it used to be. At the beginning of 2022, Hou Yi said that the company's goal was to improve from single-store profit to full profitability, and some of the employees who had previously been compiled for Ali were uniformly replaced by Hema preparation, and a year later, Hou Yi pointed out in an internal letter that in 2023, Hema should "continue to be ruthless and continue to suffer", and all expenses should be fully refined and managed to achieve "single product level".

A number of Hema sources said that there is an internal consensus that Hema will not go public until it has reached full profitability. This means that Freshippo, which is still losing money, needs to seek financing from the primary market. According to foreign media reports, Hema reduced its valuation from $10 billion to $6 billion in early 2022 to seek financing, but there is still no new progress.

In the absence of external blood transfusions, Hema can only rely on itself. The current situation facing Hema is that it has a larger market to enter and less room for trial and error. Over the past year or so, the exploration of two new business formats, Hema Neighborhood and Hema Outlet, directly reflects the transformation of this company.

Hema Neighborhood: A massive attempt to sink the market

In mid-2021, Hema Neighborhood set a goal of opening 5,000 stores by the end of the year, with a budget of nearly 1 billion yuan, but in fact only about 2,000 stores were opened that year, less than half of the target.

Freshippo's earliest attempts at the low-price market can be traced back to the Hema MINI in 2019. Compared with the 20 million yuan investment of Hema fresh store, the cost of opening a store of Hema MINI only needs 2 million yuan, and the location is concentrated in the suburbs and towns of first- and second-tier cities.

Just when Hema MINI gradually opened stores, the community group buying war began. In February 2020, before the epidemic in Wuhan ended, Didi began to investigate community group buying, shouting "unlimited investment". In the middle of the year, Meituan and Pinduoduo officially joined, relying on joining to quickly open thousands of grid stations. The original plan of the Hema MINI was to be completely self-operated, opening 100 stores a year, and only 14 by the end of the year. Hou Yi reflected afterwards, "Because it is not open to joining, the implementation is difficult, the investment is large, and the expansion is really slow."

In mid-September 2020, at the Alibaba Group President's Meeting, Daniel Zhang announced that the Hema Business Group would establish the Hema Preferred Business Unit (renamed "Hema Market" in December 2020) from the Hema Business Group, officially entering the community group buying track, directly responsible by Hou Yi, President of Hema and reporting to Dai Shan, then President of the B2B Business Group.

At that time, there were a total of 4 teams in the whole of Alibaba doing community group buying related exploration, namely Ele.me, RetailPass, Cainiao and Hema Market. Half a year later, competitors Duoduo Buy Vegetables and Meituan Youxuan have covered 20 provinces across the country, and Hema Market is still stuck in 4 provinces, far behind its competitors in terms of unit volume.

On the afternoon of March 1, 2021, more than 100 employees of the headquarters of Hema Bazaar were summoned to a large conference room in King 88, Freshippo's office building in Shanghai, and Dai Shan first took the stage to talk about Hou Yi's contribution to Hema Bazaar, "The old cuisine (Hou Yi's flower name) is doing well, but we need to integrate it from the perspective of the group. ”

Then, she announced that Alibaba Group would set up an MMC business group to integrate the community group buying business of Hema Market and RetailPass, and said that there would be no upper limit on investment. This means that Hou Yi will return to the group that he has been responsible for the Hema Market for most of the year, and return to Hema Fresh and member stores.

At the end of the meeting, Hou Yi took the stage and said, "I think the Hema Market has done a good job, but the group has not given us enough resources and time. ”

Just over a month later, Hema Neighborhood, another community e-commerce project of Freshippo, opened its first store in Shanghai. It is almost a replica of Hema Market, and has a lot in common with the community group buying model: users place orders online one day in advance, pick them up in store the next day, and the goods are mainly fresh.

A Hema person analyzed that Hema started this business with a bit of a "gambling" mentality, and also hoped to prove its business ability in the community e-commerce model again.

Hema sees neighborhoods as an important opportunity to reach a wider range of people. In our August 2021 interview, Hou Yi said that Hema had explored the right store model troika: Hema Xiansheng, Hema X Member Store, and Hema Neighborhood. In his plan, the first two mainly serve consumers in first- and second-tier cities, and the main position of the Hema neighborhood is in the sinking market.

The impossible triangle under the pursuit of profitability: high quality, rich choice and ultra-low price

In August 2021, Alibaba Group made another adjustment, Dai Shan was no longer in charge of the Hema business group, and Hou Yi reported directly to Daniel Zhang. This may mean that Hema is valued again.

An employee of the Hema neighborhood said that when the new business was first launched, Hou Yi would report to the Daniel Zhang once a week, and Daniel Zhang often asked about the progress of the Hema neighborhood, "I didn't expect that Xiaoyaozi (Daniel Zhang Hua Name) managed a group with hundreds of billions of revenues, and came to ask us about such a small business." ”

Hou Yi believes that the community group buying model that the giants are doing lacks patience to deepen the industry, do a good job in systems and logistics, "will only burn money, which is a retrogression of e-commerce innovation ability."

At the beginning of the launch of Hema Neighborhood, Hema officials specially emphasized the difference between the three modes of "community e-commerce", "community group buying" and "front warehouse", which were distinguished from ten dimensions such as products, commodity sources, and supply chains. The Hema neighborhood also maintains differentiation from community group buying in several ways:

In terms of the number of goods, the Hema neighborhood relied on the supply of Hema in the early days, and could achieve 20,000-30,000 SKUs; In addition to the general pick-up racks and freezers in the store, there are also freshwater aquatic product tanks, and users can pick up live and fresh food; There are only 1,000-2,000 SKUs selected by Duoduo and Meituan, not to mention the aquatic tank, even cold and fresh meat is very little, mainly frozen products with a long shelf life.

Higher quality goods have made the unit price of Hema neighborhood customers reach about 50 yuan, which is almost 5 times that of various community group buying platforms. But it also limits the groups it can reach.

The Hema neighborhood costs higher than competitors in all aspects.

The self-pickup points of platforms such as Duoduo Grocery and Meituan Preferred are small street shops, and the platform does not need to pay the store rent, but only needs to pay a commission of 5% - 8% of the price of the goods to the owner. In order to provide live fresh and other goods, most stores in the Hema neighborhood are still directly operated, not counting operating costs such as personnel salaries and utility bills, and the initial investment is 50,000 yuan a piece.

In order to quickly expand stores and seize the market, the location of community group buying stores on each platform will not be too fine. Meituan preferred, Duoduo grocery shopping is a franchise model, which can quickly eliminate the group points that do not perform well, while the directly operated stores in the Hema neighborhood are not so easy to change, and many stores in the early days were opened in the community, street corners and other points with low traffic, and were operated until the first round of contraction in early 2022.

In order to ensure the quality of service, early customers who did not pick up the goods in time in the Hema neighborhood can be fully refunded, while the practice of other community group buying platforms is that the store owner calls to urge, and does not provide refunds for non-product quality reasons; After customers place an order in the Hema neighborhood, even if Okura has already started sorting and shipping, they can get a full refund, while other group buying platforms cannot refund after the sorting starts.

In a city with strong spending power like Shanghai, Hema neighborhood stores have daily sales of 8,000 yuan - 20,000 yuan, but Freshippo's internal calculation shows that the average daily sales of more than 15,000 yuan will affect the customer experience. Instead of adopting the three-level distribution mode of community group buying (central warehouse - grid warehouse - self-pickup point), Hema neighborhood directly distributes from the central warehouse to the self-pickup point, and the self-pickup point needs to undertake the work of sorting and packaging. If the sales are too good, the two store staff have to spend too much time on sorting, and have little time to take care of distribution, user pick-up and other work.

In order to avoid internal competition, the early location of the Hema neighborhood will also avoid the Hema fresh store, mainly in the suburbs of the city, where the influence of the Hema brand is not high, and the consumption power of residents is not strong. Hema neighborhood only sells 3,000 yuan to 6,000 yuan per day in second-tier cities, making it difficult to cover the cost of store rent, employees and so on. Even some stores on the outskirts of Shanghai have daily sales of 8,000 yuan to 10,000 yuan, and deducting the cost of two people, utilities and rent is only a breakeven.

By October 2022, Hangzhou and Nanjing were still far from profitability and grew slowly, and were eventually shut down. A month later, Hu Dalei, the head of Hema neighborhood, left and Shou Yongqiang took office, after which he was responsible for the certification of Hema production system. Insiders commented that Hu Dalei had a radical style and was suitable for exploring new businesses; Shouyongqiang's style is stable and suitable for execution.

The Hema neighborhood has now reduced the number of SKUs from the original 20,000-30,000 to about 2,000, slightly more than Meituan Preferred. Fewer SKUs reduce sorting pressure in stores. In terms of product selection, Hema Neighborhood will also promote more Hema self-operated brands and emphasize more cost-effectiveness.

To save costs, the Hema neighborhood has also eliminated free delivery. Before November 2022, users could free a delivery fee of 6 yuan as long as they purchased 39 yuan or more in the Hema neighborhood, and orders within 3 kilometers could be shipped, but now regardless of the price of the product, they will have to pay a delivery fee of 3 yuan, and can only deliver orders within 800 meters, and overweight will also be subject to delivery fees.

An employee of Hema neighborhood said that after canceling the "full reduction of delivery fee" policy, it saved hundreds of thousands of yuan in delivery costs a month; Although online orders fell by more than 50% when they were first canceled, some of them returned to offline pickup. Freshippo's internal judgment is more conducive to the long-term healthy development of the business in the future.

Hema Fresh was the first to start the new fresh model of offline experience and online consumption, and has maintained free delivery fees for the first order every day. In a public speech at the end of 2022, Hou Yi said that in Beijing and Shanghai, Freshippo's overall online orders accounted for more than 80%, and the national online orders accounted for 70%. Hema Neighborhood verifies the feasibility of increasing delivery fees to promote offline consumption and reduce delivery costs.

At present, Hema Neighborhood still has more than 400 stores in Shanghai, and since the opening of franchises in July 2022, there have been more than 30 franchised stores, and the new stores will be mainly franchised stores. Excluding headquarters labor costs, the operating margin of the Hema Neighborhood Shanghai store is about -10%, and the goal for 2023 is to break even.

The contraction of the Hema neighborhood proves once again that prices are not low enough to leverage the most popular market.

Hema Outlet: Find hope for the future from the clearance channel

In an interview with us in 2021, Hou Yi said, "There is no model in the world that is made at low prices and is not sustainable. If you can't solve the problem of commodity abundance, you can't solve the problem that ordinary people come to you every day. ”

The tenth format of Freshippo's Hema Outlet is currently pursuing a minimalist SKU and the ultimate cost performance.

Walking into the Hema Outlet store, you will see a slightly cluttered and crowded hypermarket: from 9 to 10 a.m., elderly people who go out for a walk will pour into Hema Outlet to grab the vegetables and fruits that have just been delivered from the Hema Fresh Store in the first round, which are all products that have not been sold out the day or two before.

After 7 p.m., young people from work crowded into the outlet store, in the past they could push the shopping cart side by side in the Hema fresh store, but only a narrow single passage was left between the goods in the outlet store, and the frozen products in the freezer were not arranged regularly, and the ears were the shouts of the clerks hard, the 2 yuan a handful of oil wheat has been wilted, and the 10 yuan grapes are also a few bad, but by 9 or 10 p.m., they will be robbed.

Hema outlet store, image source: reporter shot on the spot

Hema Outlet is the 10th format tried by Hema and the latest format of Hema at present. When the first Hema outlet store opened in Shanghai in October 2021, it was only used as a channel to handle the redundant goods of the Hema store, and the redundant fresh food from 5-6 Hema stores would be centrally shipped to one Hema outlet store.

Hema CMO Zhao Jiayu told LatePost that he soon realized internally, "The customer's demand is there, just selling fresh food is no longer enough, but also do one-stop supply." That is, to provide most of the goods needed for daily life. Soon, Hema Outlet put on the shelves a lot of large-scale brand standards and Hema self-operated brand standards.

When Hema Outlet was first launched, an internal controversy was: Will it rob Hema Xiansheng's business? —— Some Hema outlets are located close to Hema Fresh Store, or even next door, and customers who were waiting to go to Hema Fresh after 8pm to buy discounted goods now go directly to Hema Outlet.

However, in order to increase sales, Hema no longer cares about internal competition. Previously, the Hema neighborhood would have avoided Hema fresh stores, and from October 2022, this location restriction has also been lifted.

Zhao Jiayu believes that most successful retail platforms sell everything, and it cannot be said that the opening of Tmall's flagship store has affected consumers' minds on Taobao. Hema Outlet is a pure offline store, there is no online delivery service, the crowd will be automatically divided, "You should put all formats at the level of the entire big Hema level, today we do not do this format, competitors will also do." ”

Hema Outlet quickly became the fastest growing of all Hema businesses. In his speech last November, Zhao Jiayu said that in 2022, Hema fresh sales increased by more than 25% year-on-year, Hema X member stores increased by more than 247%, and outlet and neighborhood growth increased by 555% – considering that the Hema neighborhood closed multiple cities in 2022, the main growth here was contributed by Hema Outlet.

One employee summed up Hema Ole's growth as "a sewer where daddy doesn't hurt his mother" to "hope for the whole village."

The emergence of Hema Ole is a big change for Hou Yi. In 2019, Hou Yi said in a public speech that when Hema Fresh cut in from the first day, it was aimed at the consumer groups that would become rich after the 80s and 90s in the future, and the commodity categories and structure of Hema Fresh were essentially different from the original hypermarkets.

Hema also wants to serve less affluent consumers, who are the majority in China. But for a long time, Hema was unwilling to sacrifice the richness and quality of its goods for the lowest price.

Compared with the iconic configurations such as Hema Xiansheng's "hanging chain" and "seafood tank", the store design of Hema Outlet is extremely simple, there are no aquatic tanks, dining areas, and many goods do not even have shelves, directly piled on the ground and piled; Most of the fresh area of Hema is between 2500 square meters and 5000 square meters, while Hema Outlet is only about 500 square meters, and many stores are directly transformed from Hema MINI stores. The investment in opening a store of Hema Outlet is only one million yuan, which is 1/30 of the large store.

Compared to Hema Fresh Food's 20,000-30,000 SKUs, Hema Outlet only has about 3,000 SKUs. Zhao Jiayu said that Hema Outlet will provide "the most extreme single products", of which the number of self-operated brand standards will be within 1,000. A Hema source said that taking laundry detergent as an example, Hema Outlet will only sell the most popular brands such as Aomiao (39.9 yuan / 3 kg) and self-operated brands (9.9 yuan / 3 kg).

Self-operated goods, channeling goods, reorganizing the procurement team, and using all means to lower prices

Developing your own brand is the most direct and effective way to achieve the ultimate cost performance.

The reason why brand goods are more expensive, in addition to their huge investment in marketing, also includes inventory fees and shelf fees handed over to supermarkets, which will eventually be passed on to consumers. In addition to eliminating the above costs and driving down prices, supermarkets selling self-operated brand goods will also save part of the circulation costs by controlling prices and turnover more flexibly.

The biggest feature of the German supermarket brand ALDI benchmarked by Hema Ole is that there are many self-operated brands, with global net sales of US$133.9 billion in 2021, of which 90% are self-operated brands, and ALDI has more than 12,000 stores around the world.

ALDI stores, image source: ALDI official website

At the end of 2022, Hou Yi led the team to the European market to study the local discount store format. Discount stores began to develop in Europe after the end of World War II, especially in the past two years, European inflation has led to faster development of discount stores, Hou Yi said, "The core of European discount stores is mainly private brands, complete retail production integration, the price is basically less than half of the brand goods." ”

According to a 2021 survey by the American Marketing Association, self-operated products with similar quality to branded products can reduce the cost of supermarkets by 40%-50% and increase profit margins by 8%-10%.

An employee of Hema Outlet said that in the standard products other than fresh and cooked food, the proportion of Hema Outlet Ele's own brands has exceeded the average of 35% of all Hema formats, reaching 40%, and the future goal is to achieve 70%.

Zhao Jiayu said that Hema no longer regards trying new formats as the most critical point, and the next thing is to improve commodity supply and service capabilities, of which self-operated brand research and development is an important part of commodity supply innovation.

Hema self-operated brands will have substandard products eliminated every month, and the elimination rate is within 5%. She said, "Many of today's niche classifications are Hema driving the trend of the entire industry. ”

Taking craft beer as an example, Hema launched 4 room temperature craft brews to accompany meals in 2018, and in 2021 Hema launched short-term refrigerated craft beer, at the end of 2021, Hema Procurement Research Women Why Women Don't Like to Drink Beer, and found that they felt that the malt taste was bitter and preferred sweet, slightly drunk wine, so Hema developed fruity fresh beer. In 2022, craft beer basically occupied the top 10 of the beer category in the entire sales market of Freshippo.

In addition to its own brands, in order to make brand goods and fresh products also achieve the ultimate cost performance, Hema is also trying to change the procurement method.

The first way is "channeling". In 2022, Hema set up a circulation wholesale purchasing department, which Hou Yi called the "channeling department". Brands often have different pricing for distributors in different regions. In the past, Hema purchased from regional distributors, and the price received was often not the lowest. Now Hema encourages procurement staff to purchase nationwide, take goods for cash wherever there are bargains, and break through regional price restrictions.

The second way is to do national procurement. The advantage of headquarters centralized procurement is that it can expand the scale of procurement and obtain lower procurement prices; It can also be "underwritten" directly in the fresh production area, with the best specifications given to X member stores, the next best to Hema fresh stores, and the rest to Hema Neighborhood and Hema Outlet.

Originally, more than half of Freshippo's products were purchased by each region - local procurement was more familiar with local specialty products and consumer preferences. In May 2022, Freshippo began to lay off local operations and procurement staff, and transferred many local procurement management personnel to its Shanghai headquarters. A Hema source said that at present, the proportion of centralized procurement at the headquarters has reached 60%, and only some local specialty goods are left for local procurement.

Hema Outlet will be Freshippo's most important strategic project in 2023, Hou Yi said "there is no one". Hema Ole's store area is only 1/6 of the Hema fresh store, fresh goods are mainly from the store's reduced-price processed products, and most of the standard products are Hema NB self-operated brands, which can only be purchased offline, but the popularity is quite high, Hou Yi said that the ping effect of Hema Outlet has reached 7 times that of ordinary hypermarkets.

For the past three years, Hou Yi has made bold statements almost every year, anchoring a "most important" strategic project, and then changing a new direction the following year, each time without hesitation, seems to be desperate.

In 2019, the Hema MINI in the form of a community supermarket opened, and Hou Yi said that there would be no more perfect business model than it. In 2021, the Hema neighborhood replaced the Hema MINI as "the most important strategic project for the next 10 years".

Hema Outlet is already the 10th format that Hema has tried. So many attempts at formats are just to solve a problem: how to use the most suitable format to get to places that Hema fresh stores can't reach. "No one is satisfied with the current market and always wants to see the wider market." Zhao Jiayu said.

As the most important strategic project of Hema in the future, Hema Outlet still has some difficulties that must be considered in terms of expansion.

If fresh goods still rely on the redundant products of Hema fresh stores, the expansion of outlets will be limited, and the total of more than 300 fresh food stores can only supply up to 60 outlet stores, compared to more than 50 outlets nationwide.

An employee of Hema Outlet said that as the downstream of Hema Fresh, Hema Outlet is not small affected by the upstream, and there have been many cases where Hema Outlet sold well the day before and Hema Outlet had no goods to sell. At present, the solution can only be adjusted from the original one delivery to multiple distributions to alleviate the shortage of fresh food in outlet stores.

In order to prevent restrictions on expansion, in September 2022, Hema Outlet upgraded its business format and opened the first hard discount store in Shanghai, which previously mainly sold redundant and temporary protection products that could not be sold in Hema Fresh Standard Store, and now it will purchase fresh products separately, in addition to low-priced goods purchased from temporary products and cross-regional procurement, the proportion of self-operated brand goods will be increased in the future.

An employee of Hema Outlet said that the outlet store is not a temporary commodity store like a good sale, because as the commodity supply chain of the whole society becomes more and more efficient, the temporary products will definitely become less and less, and the supply will shrink day by day.

According to Hou Yi's plan, by the end of 2022, Shanghai will open 100 Hema outlet stores, each of which will achieve daily sales of 150,000 yuan and 15% sales gross profit. The above-mentioned Hema outlet employee said that after the release of online channels in 2023, it will not be difficult to achieve this goal.

The two payment methods of Hema App and Alipay, which Hema has always insisted on, may also change, and as outlet stores enter more townships, the coverage of these payment methods is not high, so the introduction of WeChat Pay is also being considered internally.

In the 7 years since the establishment of Freshippo, Alibaba has also changed from a group battle to a separate battle, and Hou Yi's Hema no longer needs to prove its innovative value through "30-minute delivery" and "online and offline digitalization", nor can it expect customers to flock to customers with fresh concepts such as "hanging chain" and "seafood tank". What it has to do is more intrinsically and harder – to prove that it can grow and be profitable as a retail business.