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Hema Fresh: A Case Study in New Retail

Volume 3, 2017

By Yun Yang Zi

The model Hema Fresh adopted is currently the best case of New Retail as it conforms exactly to the three steps in retail’s evolutionary process: online and offline integration, experiential consumption and the industrial ecological chain. The Hema model is a challenge for both online and offline stores. It potentially has implications for the catering industry, fresh food supermarkets, hypermarkets, convenience stores, shopping centres and fresh food online stores, and more…

Alibaba’s Grand Plan

Alibaba has always been adept in planning. This is also true in its approach to New Retail. It has already placed three essential pieces on the chessboard: investing in Intime Retail Group in the general merchandise sector, investing in Suning Commerce Group in the [fiercely competitive white good market’s] ‘category killer’ sector, and opening Hema Fresh as a move in the food market.

The deployment of these three chess pieces is also very significant: the investment in Intime Retail was a strategic defensive move mainly aimed at delaying department stores’ O2O efforts; the investment in Suning was an effort at strategic containment mainly executed to thwart rival JD.com; and the investment in Hema is a strategic offensive, preparing for a holistic entry into the food market.

After Hema Fresh’s successful pilot in Shanghai’s Jinqiao neighbourhood, seven stores were opened within three months including a Hema Market. So far there are 13 stores in total.

In 2017, Alibaba’s New Retail strategy clearly entered a strategic phase of attacking on all fronts. I predict that Hema Fresh will be the number one project in Alibaba’s New Retail efforts.

What is the basis for my prediction? First, my definition of the Hema model is “Hema Catering + Hema Fresh + Hema Market + Hema Convenience Store”. It is already a massive entity. Second, Hema can be a driving force for Alipay. According to the current offline situation, it is very hard for Alipay to defeat WeChat Pay, and it must join forces with Hema Fresh to form a strong relationship.

Thus, in the future, Hema will be as important as Taobao and Tmall.

Heavy Model

The Hema model is heavy. This is evident in two aspects: horizontally, it consists of four main retail formats ranging from catering, fresh food, markets and convenience stores; vertically, it is a self-operated full-industry-chain that covers running the store, purchases, sales and delivery.

Why did Hema adopt such a heavy model?
First: in order to position itself at super entrances to offline consumption. Hema’s four retail formats respectively take restaurants, fresh food markets, hypermarkets and convenience stores as benchmarks. All of these are businesses of high-frequency consumption. Occupying these super entrances and realising online-offline integration will make a vital contribution to Alipay’s occupation in the offline application scenario.

Second: as a way to ensure user experience. Hema is focused on building its two core competitive forces – the so-called “29.5 minutes” ultimate delivery service, and products that are “fresh every minute”. In terms of catering and fresh food, this is indeed going to improve the user experience. In addition, its self-operated full-industry-chain approach is also a way to ensure a better user experience.

However, it is not easy to copy such a heavy model. Though it’s hard for rivals to follow suit, it is also difficulty for Hema itself to expand rapidly. However, given Alibaba’s strategic needs, Hema must expand quickly to occupy the offline market.

To solve this paradox, there is only one solution: collaborative management.

In November 2016, it was revealed that Sanjiang Shopping Club Co, Ltd and a subsidiary of Alibaba Hangzhou Zetai Information Technology Co Ltd planned to invest RMB50 million to set up Ningbo Zetai Network Technology Service Co, Ltd. This would be the platform responsible for services related to the opening of fresh food stores and daily online operations.

Obviously, the fresh food store being referenced is Hema Fresh. Alibaba exported the Hema model and collaborated with Sanjiang. This is the first attempt at such collaboration. Interestingly, right after the company’s investment in Sanjiang, Alibaba stock hit the upper limit more than ten times. This shows that both organisations and investors were bullish about the deal and Hema’s expansion relies on exporting its operational model and light asset operation. However, there lurks a hidden danger: reputation of services. This could be the biggest hidden risk for Hema Fresh in 2017.

Hema Catering: Cross-border Attack

Hema currently positions itself as the “new blood” of the New Retail format and the online retailer that is using technology to reconstruct the catering and retail industry chain. Taking the most frequently consumed categories – food and related products – as the point of penetration, Hema is on a quest for a brand new path of e-commerce that is based on the local, focuses on supply chain and logistics distribution as well as integrates online and offline businesses.
 
In light of Hema’s positioning, food is its most vital component, and I believe Hema catering will play the most important role within the entire model.

“Retail + catering” (experiential consumption) is a megatrend and now government is also promoting integration of the certification of food circulation and catering services. Hema catering has two kinds of operational models: self-run and joint operations. As opposed to conventional “retail + catering”, Hema catering also includes home delivery service which is supported by its self-made and crowdsourcing logistics systems. In contrast to the delivery service used by e-commerce, Hema catering has central kitchens and markets its own products. Its impact on the catering industry is considerable and can be viewed as a cross-border attack.

Reconstruction of Retail

According to some insiders, in October 2016 Hema Fresh’s Jinqiao store’s daily sales volume reached several hundred thousand yuan, and there were over 10,000 online and offline orders. That means a fresh food market that covers only 4,500 square metres may generate annual sales volume of RMB200 - 300 million.

To date, Hema Fresh has already opened 13 stores. Why has it expanded so rapidly? It’s because of the high anticipation brought about by the success of its Jinqiao store. Hema Fresh Founder Hou Yi said, “In the future… a new type of retail industry will emerge, one that meets modern consumers’ consumption and service needs. This can by no means be simply described as “chain markets + app” but a new generation of retail industry that will be born after the reconstruction of supply chains, categories and services. ”

There are several reasons why Hema Fresh is worth in-depth analysis:

First, it has given new shape to the previous operational model + internet approach. In Hou Yi’s words, “Hema O2O means 1+1>2”. At most, conventional hypermarkets can meet the needs of people living within 3 kilometres, and delivery service is rarely seen. For fresh food markets in neighbourhoods, their reach is 1 kilometre, and delivery service is also rare; but Hema Fresh can reach a maximum of 5 kilometres, half of the orders are delivered to stores and the rest to customers’ doorsteps. According to data from the Jinqiao store, sales per square foot reached several tens of thousands, plus online incremental orders. So 1+1>2 is feasible.

Second, it has changed the dynamic among the three conventional commercial elements: people, goods, and the marketplace. Hema Fresh owns Hema app – an online shopping environment which is absent in conventional fresh food markets – and it has also increased the amount of catering being done. This is the evolutionary path of “retail + experiential consumption”.

Hema does not support cash payment but proactively promotes payment with apps so as to keep its members’ consumption records. Customers can also use the Hema app to reserve a spot in the queue for payments, reducing wait time and improving the user experience.

Third, Hema has redefined the “home kitchen”. At Hema Fresh, consumers can not only buy raw material and other ingredients for cooking but also half-done food that they can have cooked right at the market or have delivered to their home within 30 minutes. This redefines “home kitchen” and will start a “liberation campaign for housewives”. This will boost Hema’s high reputation among women.

Fourth, it has redefined stores and warehouses. The store also serves as a warehouse to stockpile fresh food. Therefore, two things must be done: pre-packaging and electronic tagging, so that sorters can sort goods according to different sections by conveniently scanning codes. Hema Fresh’s speedy delivery service is worth learning. They used algorithms to solve problems concerning sorting time, binning, combining bills and logistics route. Their so-called “arrival within 30 minutes” is the superlative service achieved through the combined management of operations and IT technology.

Hema Market Experiment

Hema Market currently only has one pilot store, the Yaohan store opened in December 2016. Hema Market can be viewed as the upgraded version of Hema Fresh, on a larger scale and with more product categories. Yaohan pilot store covers an area of 10,000 square metres. It is said that catering covers half of the area and there are also high-end furniture stores and flower shops, and more. Hema Market’s most important slogan is “shop and eat” with “eat” referring to Hema Catering, while “shop” refers to all kinds of retailers. Hema Market has very big room for future improvement, and huge influence on commercial real estate.

Hema Convenience Store: Next Logical Step

The Hema Convenience Store seems the next logical step in the Hema business model.

It could benchmark itself against 7-Eleven and Lawson. According to experts in e-commerce and store retail, convenience stores represented by Japanese brands are already in need of upgrade. The Hema Convenience Store might take the format of bringing together convenience stores, high-end tea houses and fruit stores. That way, Hema could make the best use of its current resources. If the Hema Convenience Store provides delivery services to stores and customers’ doorsteps it will undoubtedly have an edge over conventional convenience stores.

This is just speculation on my part, but I am convinced that conventional convenience stores are bound to be redefined by new approaches in New Retail.

The author is Deputy Director of Linkshop China Retail Research Centre and Vice President of E-commerce at Wanling Group. The article was originally published in CEIBS Business Review, Volume 3, 2017.

 

Alibaba CEO Daniel  Zhang Speaks about New Retail

What does the “New Retail” strategy put forward by Alibaba in 2016 mean?

Daniel Zhang: I would say “in the beginning there was no road in the world. A road was trod because of more and more walkers”. There was no “New Retail” in the beginning; it was created by people. Today we are still making an effort to build the road by moving forward. Any seemingly simple qualitative description we can give now is not yet complete. The real significance of the strategy requires further exploration and discovery through practice. This is the reason why Alibaba needs to form a few partnerships and invest in some companies. Only in this way can a community be formed, essential changes and innovation be made and results seen.

Has Alibaba run into any barriers in carrying out its New Retail strategy?

Daniel Zhang: Actually there is no barrier. Now is the best age for innovation. First, all Chinese consumers may become internet users in 5 years; and of course the internet will have many changes in the next decade. But undoubtedly, the internet has become part of our social infrastructure – just like water, electricity and gas – to serve the entire business world. Second, whether it’s e-commerce as the “air force” or conventional retail as the “land force”, everyone has a strong impulse to reform. Nowadays conventional retailers are generally having a tough time. If there’s no reform, they are doomed to perish. Everyone wishes to change, but there are two huge hurdles:

First, how do you observe and innovate – with consumers at the core of your actions – and build a brand based on reshaping the relationship between “people, goods, and the marketplace”? People, goods, and the marketplace give rise to brand-new reactions driven by the internet; they also improve business efficiency and, in the end, may create a New Retail format.

Second, we need to reconstruct the entire production chain. New Retail not only embodies changes in the way consumers are exposed to the marketplace, but, more importantly, should provide new consumption experience and content. Thus, it is necessary to reconstruct the entire production chain. We see this as the reconstruction of the economic elements inside the entire mixed economic entity, and many new capabilities must be created – capabilities of the new-type supply chain, logistics, operation, financial payment, etc, so that consumers can enjoy new experiences in all of the multi-format marketplaces made up of New Retail stores created by both sides.

What are the directions and standards for Alibaba’s investment in terms of its New Retail strategy?

Daniel Zhang: We have noticed that since Alibaba came up with the idea of New Retail, the entire capital market has become really hot. Alibaba’s other strategic investments have always been centred on strategic services.

While assessing an investment opportunity, Alibaba focuses on the following aspects: first, whether it can attract new users, or presents opportunities to gain access to users, as well as entrances to reach incremental users. Second, whether it will improve user experience, especially the level of service. Third, it’s about the overall improvement and evolution of the innovative technology.

In addition to the three points above, there is still another, most important, point: when Alibaba chooses partners, the aim is never confined to the short-term market efficiency of the secondary market.