Hema dilemma: full warehouse consumption upgrade, or bet on the sinking market?

When Hema opened in Wuhan in 2018, Hou Yi tasted a local specialty called "lotus root", and immediately decided to purchase it urgently.

The life of the lotus root is only 72 hours, in order to allow the people of Shanghai to eat fresh lotus root, Hema purchases during the day, airlifts it to Shanghai at night, and sells it in the store early the next morning, in theory, this batch of lotus root can only be sold for 24 hours.

In later media interviews, this story was once regarded by Hou Yi as a symbol of Hema - since its birth, Hema has been a standard product of consumption upgrades, and in the early years of Alibaba, Hema was nicknamed "the second Tmall".

Hema chose a very difficult starting point, that is, a series of fresh products with supply chain difficulties such as high loss, scattered origin, and strong immediate demand.

A version of the answer, such as community group buying, has not fundamentally solved the profitability problem of fresh e-commerce, but has saved the country by streamlining SKUs, centralized distribution, and improving daily necessities.

In the past few years, the vigorous consumption upgrade movement has been the biggest opportunity in the eyes of Freshippo. Its initial goal is to start from the core middle class of first-tier cities, drive the comprehensive consumption upgrade inside and outside the Fifth Ring Road, and "let the people of the whole country live a good life".

This is an extremely difficult goal, which has only been achieved by house prices until now.

In the understanding of Hema and many new consumer brands, consumption upgrading is not simply a price increase, but a higher price to cover the cost of quality improvement. If you can rely on scale to continue to reduce costs, then you can achieve the effect of "high quality and low price", just like Sam's and Costco did.

This line of thinking reflects the expansion and contraction of Hema from scale to business format, as well as countless trial and error, adjustment and iteration in the past eight years.

The conundrum of expansion

At the beginning of 2016, the first Hema store opened in Jinqiao, Shanghai. In the first year of operation, the total turnover of the Jinqiao store was about 250 million, and the ping efficiency was 3.7 times that of traditional hypermarkets.

A year and a half later, Mr. Ma and Daniel Zhang appeared at the Jinqiao store to build momentum for Hema and left a group photo of Hou Yi and other executives catching king crab with their bare hands [1].

In 2017, Hema was a phenomenon, with observation groups from Carrefour and Walmart lining up to visit, and consumers from Hebei Province driving to Beijing to buy seafood [2]. Taking advantage of the new retail, Hema opened 13 stores in Beijing and Shanghai in one year.

The only fly in the ointment is that the expansion rate is too slow.

As a standard consumption upgrade product, Hema focuses on mid-to-high-end selection + standardized fresh food, and Mr. Ma's freshly made king crab is a typical representative. Therefore, the main business of Hema Fresh is concentrated in the core business districts of first-tier cities, and the store area is generally about 3,000-5,000 square meters.

This kind of big store + direct sales model, the cost of opening a store alone is as high as 30 million yuan [3], and it is necessary to build a capacity network to meet the needs of "30 minutes of delivery within three kilometers". In addition, fresh food is a highly regionalized consumer goods category, and every time you open a city or enter a business district, you must re-study the selection structure.

In Hou Yi's words, Hema Xiansheng has to "do it one by one, and wait until the right store[4]".

In 2018, after JD.com launched the 7FRESH supermarket and went offline to engage in a price war, Hou Yi, who boasted of his iron will, led Hema to 19 cities in one go, and the number of stores soared to hundreds within a year [4].

In Guiyang, Guizhou Province, Hema Fresh's star product, Big Seafood, was very popular, and in the first Spring Festival after its opening, the first store in Guiyang sold nearly 3 million yuan per day, ranking first among stores in the country [5].

But in the process of accelerating expansion, Hema began to expose its fresh weaknesses.

Hema Fresh focuses on instant delivery, but unlike Meituan, Meituan is "delivering to others", and Hema is "delivering to yourself", so it is more like Domino's. This brings up the problem: in order to ensure the efficiency of distribution, distribution capacity must be equipped according to peak standards, which brings high costs.

High operating costs require a high unit price to balance, and as the number of stores increases, so does the capacity – of course, this is also in line with Freshippo's mid-to-high-end supermarket positioning.

However, in the majority of second- and third-tier cities, Hema Xiansheng gradually realized a fact: although everyone can afford a house with a unit price of 30,000 yuan, they may not be able to afford 300 yuan of fresh food.

For example, the big seafood that Hema focuses on, after the freshness of consumers has passed, it has become a limited consumption during the New Year's Festival, and "no one usually eats it". Hema's countermeasure is to replace the cannon with a shotgun, as Hou Yi said: We found that the common people may not like the big seafood, so we will change. Now it no longer mainly sells large seafood, and has begun to sell crayfish, pike crabs, and Shanghai hairy crabs [6].

According to the plan of that year, Hema was supposed to open 13 Hema stores in Guiyang and 50 in Chengdu, but five years later, the number of Hema stores in the two places is 5 and 24 respectively.

Facts have proved that the model of high-quality goods + instant delivery must rely on the support of high customer unit price, and high customer unit price can only be digested by the purchasing power of first-tier cities.

In 2019, Hema suffered its first store closure after a year of hurricane, and Hou Yi himself won the "Rotten Strawberry Award" at the group's internal meeting at the beginning of the year.

At Alibaba, this award is often used to criticize business units that have failed to adhere to the ancestral teachings of the "customer first" group [7].

The paradox of price

After mentioning the "Rotten Strawberry Award", Hou Yi declared in a public speech called "The Battle of Filling the Pit": "Can (Hema) go to the countryside and drive in the third and fourth-tier cities? If you can't do it in the past, it doesn't mean that you won't work in the future[4]. ”

Hema's solution is simple: since Hema can't be opened freshly, let's change the business format.

In 2019, although Hema suspended the opening of new cities[8], it is still aggressive in its expansion, in the words of Hou Yi: open a store if it exists, change it while doing it, change it if it doesn't work, and see again when it changes[6].

This year, Hema opened four new formats in one go: F2 convenience store, Hema vegetable market, Hema mini, and Hema station.

Despite their differences in location and customer segmentation, they all have one thing in common: they are smaller, less expensive, and more likely to replicate quickly.

After 2020, Hema has made all the popular retail outlets in an almost enumerative way. For the suburbs of the city and the sinking market, Hema has tried three models: improved front warehouse, community group buying, and discount supermarket, corresponding to four store types: Hema Station, Hema Market, Hema Neighborhood, and Hema Outlet.

But after three years, there are few survivors of the new format:

Among the four small formats in 2019, only Hema mini still has a few stores, and in the attempt after 2020, Hema Neighborhood has shrunk twice, only retaining the business in Shanghai, and Hema Outlets, which has taken over as the main force of expansion, is still in the stage of running through the profit model.

The progress of subdivided formats may have their own difficulties, but in the end, they all point to the same problem - high supply chain costs.

Hou Yi once personally led a team to Costco to conduct research, but shouted "I don't understand", because the price of many goods is cheaper than the purchase price of Hema, and "there is no way to say which category is better, every category is good" [8].

To a certain extent, Costco and Sam's are the ideal form of Freshippo: to achieve real high quality and low price with the ultimate supply chain efficiency.

In the concept of Freshippo, as the scale of Hema expands, the supply chain cost will be greatly reduced. But Hema encountered two problems when copying homework:

(1) The supply chain management of fresh food is more difficult, and the scale effect is weaker.

The fresh category combines high loss, low gross profit and non-standard. Take fruits as an example, bananas are easy to turn black and rot in an environment below 12 °C, fresh lychees will change their flavor when stored at 0 °C, and tomatoes, cucumbers, and bell peppers need an environment of 10 °C. And that's not even counting the more root and leafy vegetables that SKU has to offer.

Coupled with the high cost of instant delivery, it is difficult for fresh e-commerce to form a scale effect.

(2) Hema also spares no effort to give itself strength. Traditional stores will consider supply chain factors to purchase semi-raw products, but Hema has to wait for the goods to be fully ripe before picking them into the store[4], watermelons from Xinjiang and lotus roots from Hubei are all transported to Beijing and Shanghai by air.

Higher quality means higher costs and prices. The cost of air freight is twice that of Hema [4], and you have to watch out for king crabs eating other colleagues in the fish tank - this is also a loss.

After Hema became a hit, it faced such a paradox:

The exploration of a series of business formats of Hema is actually to solve a problem: how to find a business format that balances cost and quality, and then expand rapidly, so as to reduce the cost of the supply chain.

As early as 2018, Hema proposed a "new zero-supply relationship", hoping to work with suppliers to eliminate intermediate links and shift from the KA model to a vertical supply chain [9], but until 2021, the results were not satisfactory, "on the one hand, the procurement is not resolute, the procurement fee is unwilling to give up, and on the other hand, many people are unwilling to change the status quo [10]. ”

Don't blame Hema for not working hard, this is actually a problem that the entire fresh e-commerce industry has not been able to solve.

Even community group buying is a compromise solution: reduce costs by turning instant delivery into centralized delivery, streamline fresh SKU to reduce supply chain costs, and increase profit margins with pre-made dishes and daily necessities.

Instead of solving the problem, community group buying evaded the problem, and eventually turned the fresh e-commerce into an e-commerce that sells everything but fresh food.

Hema did the opposite. Even if it is a community group buying business, the SKUs of Hema are ten times more complex than their peers, and they are selling live fish and shrimp.

As a result, as Hou Yi said, Hema has not yet solved the problem of "high price" [11].

Contradictory positioning

In 2019, due to the fact that the profitability and GMV growth rate of Hema did not meet expectations, the departmental level first rose and then fell within half a year [12]. By the time Hema was upgraded to an independent business group in 2021, the group had begun to implement an operational responsibility system, and Hema was also required to be self-financed and even listed independently.

At this time, Hema has taken the initiative to shrink the front, and has defined three growth curves internally: Hema Fresh, Hema Neighborhood, and X Membership Store.

In addition to the earliest Hema Xiansheng, Hema Neighborhood is the charge of Hema to attack the sinking market, which was once called "the most important strategy in the next ten years" by Hou Yi; X Club represents another way out - to continue to explore higher quality and average customer value.

This strategic shift also corresponds to two backgrounds.

At that time, the community group buying was flourishing, and under the backdrop of the huge losses in the front warehouse, the community group buying relied on "pre-sale + self-pickup + next-day delivery" to become the recognized optimal solution for fresh e-commerce. Hema Neighborhood is still online, and in less than three months, it has entered 10 cities and opened 400 stores.

At the same time, "it costs money to look at it" membership stores were popular, METRO started a C-end membership store, FUDI plans to open 20 stores in three years, Carrefour threatens to use the same time to transform 100 stores into membership stores, Yonghui has improved a version of the "0 membership fee" affordable warehousing format, and even Big Brother Sam and Costco are busy opening stores.

However, the development of these two formats is likely to fail to meet Freshippo's expectations.

As mentioned above, Hema's community group buying is an atypical community group buying: directly operated and self-built, SKU ten times that of peers, selling live fish and shrimp, and installing water tanks in the store for this purpose, this series of improvements and upgrades have made the cost of Hema Neighborhood high.

In 2022, Hema Neighborhood will retreat to Shanghai, and Hema Outlet will take over as the main force of sinking. The latter was a channel for Hema in the early days, but the expansion rate was also limited.

Hema Outlets then switched to hard discounts, and returned to the original problem: Pinduoduo sells standard products, and community chain stores and community group purchases sell fresh food, and Hema does not have an advantage in supply chain costs.

Middle-class business is also harder to do than you think. [13] The X Club was surrounded by wolves when it was first born, with more than 4.3 million paying members encircled by Sam's and Costco. Hema vigorously engaged in the price of moving mountains, and there was no choice but to find increments in the stock.

The supply chain is still a shortcoming of Freshippo. High-quality and even exclusive suppliers are a scarce resource for membership store competition, and games with scale for low price are always the strongest.

An example of this is the 2021 "either-or" incident, where Carrefour and Hema claimed that their suppliers had stopped supplying goods due to Sam's request for a "either-or" option, and some suppliers even went so far as to buy out the products already on the shelves by way of buybacks[14].

Hema seems to actively shrink and focus, but the background color is still swaying and confused. It still hasn't clearly chosen a strategic direction: is it to go all out and bet on consumption upgrades, or to put down its position and firmly devote itself to the sinking market?

A short-lived window

In October this year, Hema announced that the main business of Hema Fresh was fully transformed into a hard discount, and all standard products were reduced by 20% offline.

Overnight, the slogan "Every day is low, every piece is popular" hung up in the door, and not long ago, Hema just opened a high-end store in Shanghai, Premier, which was called a "lady supermarket" by Xiaohongshu users.

Hema finally figured out the answer, but by this time it had been a full eight years since its birth.

2018 is the high-spirited era of Hema, and Hou Yi once told the media[5]: "Today, the Chinese people are rich, and our Engel coefficient is quite low, so we are in a good era." ”

Standing at that point in time, no one would doubt Hou Yi's judgment.

In 2019, 155 million outbound tourists and US$133.8 billion were spent overseas, while domestic consumers are also living in a brave new world, with shopping carts filled with Malaysia's Musang King, Norway's salmon, Peru's green grapes and Alaska's king crab.

This year, the Chinese ate 1 million tons of domestic cherries and 200,000 tons of imported cherries, the latter alone feeding 500,000 employed people in Chile alone.

In the vigorous consumption upgrade movement, Hema is just one of many believers. This is a long list: there used to be 30 yuan a cup of Heytea Naixue, there are also Haidilao, which has raised prices head-on, there are domestic beauty products that are more expensive than overseas brands, and there are also new consumer brands that are burning VC money to beat drums and spread flowers in the live broadcast room of big anchors.

Until 2021, when Hou Yi reflected on the detours he had taken, he still believed that Hema was wrong for not insisting on consumption upgrades [8].

However, when the 5 yuan cup of Honey Snow Bingcheng became popular all over the Internet, the fresh e-commerce company sold prefabricated dishes under the banner of fresh food, and the low-price wind blew equally inside and outside the Fifth Ring Road, the market drew a stop to this movement with its unemotional cruelty, just like what was written in "Museum of Innocence":

When we point to the happiest moment, we also know that it has long passed and will not come again, so it brings us pain.

At the end of 2022, Zhao Jiayu, chief commodity officer of Freshippo, mentioned at the supplier conference that there are more and more users who pay attention to cost performance, and even young people who like the new and hate the old are no exception: "They are no longer willing to experience new and strange products at a high premium, but to experience new products at a low price." ”

Hema is often not a mistake in decision-making, but rather a reflection of a company's vulnerability to drastic changes in the market.

Objectively speaking, Hema has been trying to find a way for consumers to buy high-quality goods and services at relatively reasonable prices.

It's just that in an era of tens of billions of subsidies and 9.9 free shipping, its efforts and ideals are so out of place.

Resources

[1] Jack Ma took Daniel Zhang to Hema, and Ali admitted his relationship with him for the first time, Lianshang.com

[2] Hema Galloping: Seafood is delivered to you in half an hour, so vigorous that it can fight with you, look at Oriental Weekly

[3] Hema "became smaller" after three years of running wildly, and mini stores took a low-cost model to accelerate the sinking, China Times

[4] Hou Yi's speech: 2019, the battle of pit filling

[5] Setting a table and putting a king crab is new retail? There are some things that others can't learn, Chinese operators

[6] Dialogue with Hou Yi: The current Hema only has 70 points at most, Lianshang.com

[7] Alibaba CEO Daniel Zhang's internal speech: A good corporate culture should treat people as people, and PingWest should play with them

[8] Hema Hou Yi's 5-year "reflection": running from Ali's inner ring to the first ring, still not optimistic about the front position, China Business News

[9] Hema opened the "New Retail Supply Conference" for the first time, and put forward four requirements for suppliers

[10] Hema launched a discount reform, and Hou Yi wanted to establish a new retail supply system and connect with the business network

[11] Hema launched the biggest change in the past eight years, and Hou Yi wanted to establish a new retail supply system and connect business networks

[12] Ali's small step, Yu Yongfu's big step, late LatePost

[13] Why are Costco's refrigerators 7,000 pieces cheaper than JD.com?

[14] Sam's "either-or" turmoil: member supermarkets are competing for "uniqueness", Southern Weekly

Editor: Li Motian

Visual Design: Shu Rui

Editor in charge: Li Motian

Research Supported by: Zeyi Zhang