The 146th day of Hema’s “turning over the table”

Hema has been plagued by negative news recently. First, the membership card could not be used, then the supplier, and the store closure problem a few days ago. Many people thought that Hema could not survive. In this article, we will sort out the situation.

Have you been to Hema?

I often have work lunches downstairs, which cost about 25 yuan for 3 dishes, and the taste is very good. I didn’t have time to go there when work started this year, but I found that Hema has become popular.

Why? You must have seen the message.

To put it simply: There are reports that Hema is withdrawing counters and closing stores in various places. Hema said that some property contracts have expired and some shopping malls are not doing well, so it will close 6-7 stores in the first half of the year and find better places to serve customers, and it will also open another 70 stores.

Well, if it wasn’t for the response on Weibo, I wouldn’t have known about the store closure news, and my friends around me asked why after seeing the information.

for example:

Some said that there have been constant negative events since last year, membership cards cannot be used, suppliers are complaining about price issues, and why are they doing discount business again?

Could it be that the former class representative of new retail has lost his way in the industry? What happened behind the scenes?

01

Today, I want to talk about some of my thoughts on retail. Where do I start?

Let’s recall a timeline:

Looking back over the past nine years, China's retail industry has undergone tremendous changes.

Starting from 2015, the economy was booming and the consumer market was thriving, and various new retail formats were springing up like mushrooms after a rain. At that time, everyone was still holding an iPhone 6s, Nayuki's Tea, a rising star in the tea industry, was just getting started, Heytea was only 3 years old, and Luckin Coffee had not even started its entrepreneurial dream.

During this period, Hema Fresh came into being and reached its peak right from the start. It quickly became the representative of new retail by combining online shopping, physical stores and modern logistics.

Well, Jack Ma is optimistic about Hema and directly invested 150 million US dollars in 2016.

Time flies, and Hema has grown from an ordinary small store to a mini store, Hema Li, a vegetable market, and finally a neighborhood store and a membership store. It can be said that it has become stronger and stronger.

But behind the speed, Hema discovered some common-sense problems. The retail industry has low gross profit margins, and relying solely on sales models can outperform the online market, but this is not so smooth in physical stores.

After the black swan event, capital enthusiasm faded, consumption sobered up, and neighborhood stores began to have difficulties in operation. Lao Cai (Hou Yi's nickname) realized that if retail stores wanted to continue operating, they had to work hard on the supply chain.

If we regard the past nine years as a development cycle of the retail industry, then there is a question worth pondering: Why did Hema start its transformation and discount reform in October 2023? I think this is not only Hema's calculation, but also reflects that China's retail industry urgently needs to find a breakthrough in the new round of development.

Why?

From the perspective of the industry, the retail industry is like the capillaries of the human body, spreading across every network. From large shopping malls to small street shops, to online shopping and community group buying, it can be seen almost everywhere.

This means that no matter what you want to buy, you can get it at your fingertips when you go out, which greatly meets your daily needs and choices, but the disadvantages are also obvious.

Let’s take a look at how many competitors Hema has:

Traditional supermarkets such as Walmart, Carrefour, and Yonghui, new retail brands such as Suning and JD.com, membership warehouses such as Sam's Club and Costco, as well as Dingdong Maicai, community convenience stores and small retail stores can all be regarded as marginal competitors.

These small retail formats are either cheaper or closer to people, and are almost impossible to enter, especially in areas that HEMA has not yet covered. What do you think we should do?

I'm afraid there is only one reason:

Involution maintains industry competition and retains consumers, which is the only way to stabilize the market position. However, in the face of competition, should we roll up the quality or roll down the price? Wait, you think too much, now the industry has rolled up all formats, all categories, and all channels.

What's the meaning?

Imagine this:

You live in a card city. The 52 cards represent different business models and technological services. In the past, people just tinkered with them and combined them together to make the city more beautiful.

As time goes by, simple stacking becomes increasingly difficult, and everyone wants to occupy more territory. If more drastic actions are not taken, they may lose their foothold.

The problem now is that the stacking has reached an extreme state, and there is no way to ensure safety and development through the old methods. So, what to do? You can only break up and reorganize, dismantle the unstable cards, and introduce new card types and new structures.

In other words: times have changed, and repairing the roof on sunny days was something that could be done in the past, but it is no longer possible today.

02‍

If you don’t believe it, take a look at the entire retail industry.

In the past, American analysts rarely talked about "new retail". They preferred to say "Omnichannel (omni-channel retail) and multi-channel retail. We also saw that Amazon, Nordstrom, and Macy's invested a lot of energy in this regard.

Simply put, these changes are: the perfect combination of online shopping, physical stores and logistics.

Domestic retail 1.0 mainly tells the story of "market". What is the domestic market? Where to sell, how to buy, and through what channels to sell?

It has become a basic requirement for Chinese retail giants to have omni-channel capabilities, so using an outdated model from seven years ago to tell a new story cannot meet the needs of today's users, who need diversity and customization and are more sensitive to price.

Think about this:

There are 50,000 coffee shops in China. If the average customer spending per cup remains at 40 yuan, will you go there often? Of course, rarely. But what do these 50,000 shops value? It is the efficiency of fulfillment and the efficiency of goods.

This means that if the product itself is not competitive, it is useless to open more outlets; for example: there are many restaurants near my home, why do I always go to Nanchengxiang? Because it is cheap and has good service.

Therefore, in an era where commodities are king, companies must not only make their products different, but also minimize procurement costs, while achieving the lowest operating costs in all sales scenarios across the country.

Therefore, in the New Retail 2.0 era, it is a buyer's market, which is about the ability to satisfy different customer groups. There are two real problems to be solved:

1. All categories
2. Super low price

It is not difficult to provide a full range of product categories, but the difficulty lies in achieving "low price but unique" at the same time; even if it is not a full range of product categories, as long as the price issues of certain products that consumers are concerned about are solved, it is enough to form strong competitiveness.

So, the question is: Why is low price the core?

Did you know? If you want to mention a name associated with low-price strategy, Walmart founder Sam Walton is undoubtedly the most famous representative, and he mentioned that the "Everyday Low Prices" (EDLP) strategy made it one of the largest retailers in the world.

If this is not impressive, let me just say that this strategy has been implemented since the store opened in 1962. Well, the real curl starts from the root.

In addition, low price is one of the key factors that influence consumers' purchasing decisions. Think about it, when you buy something, are you willing to look for products that are more cost-effective?

Therefore, from a corporate perspective, low prices have a direct impact on sales growth, market share, and consumer loyalty; China has not yet fully established a sustainable and successful low-price retail strategy.

If you really don’t believe it, take a look at the macro background.

You may have noticed that people's shopping habits have also undergone new changes.

One type is more inclined to buy cheap and affordable goods. For example, I used to go to offline flagship stores and buy a few pairs of socks for dozens of yuan without caring at all. Now, aren’t Tmall and Duoduo more popular? On the other hand, some people only buy those expensive and high-quality things.

This situation is like an "M" shape, with fewer and fewer mid-range products, and people either buy the cheapest or the most expensive.

Japanese business strategist Ken Ohmae described this phenomenon as an "M-shaped Society". Simply put, social wealth is polarized, the middle class has become smaller, the rich have become richer, and the poor have become poorer.

You might be thinking, what does this have to do with me?

People with high incomes will naturally pursue higher quality goods; however, some people will reduce consumption due to unemployment, mortgage, and car loan pressures and lower incomes.

As a result, the gap between the rich and the poor in society will become increasingly larger, the retail industry will also usher in new changes, and companies will begin to differentiate, forming the so-called K-type distribution.

What is K-type distribution?

In terms of economy and consumption, good companies are getting better and better, while poorly performing companies are getting worse and worse. In the past, when the economy was bad, companies would not go bankrupt, at most they would make less money; but now, if the product is not competitive, it is easy to be passed by the market.

For small and medium-sized enterprises, going up or down has become a life-and-death decision.

Large enterprises are different in that they can stratify users and products. Therefore, in the past, Hema was thriving and growing rapidly, and it had all kinds of small stores. Now it has to readjust its new strategy to cope with the pressure from changes in the industry, retail formats, and the macro background.

03‍

If you understand this, you will also understand:

Why does Hema want to reduce product costs through discounting changes and improve the supply chain to make products cheaper and use product quality as its core competitiveness?

Because now in China, even consumers in first-tier cities are beginning to prefer discount stores such as Haotemai and Wanjiehenmang, and the consumption trend is also moving in a more affordable direction.

If you don’t believe it, take a look at another set of financial reports:

In 2023 , the annual revenue of First Outlets, a subsidiary of the clothing industry, was approximately RMB 2.124 billion , a year-on-year increase of 127%; the net profit was approximately RMB 13.761 million , turning losses into profits for the year, and the index of outlet stores/discount stores as the preferred channel increased by 68%.

Vipshop, an e-commerce discount shopping site, saw its women's clothing sales increase by nearly 30% year-on-year in 2023 , while its men's clothing, maternal and child shoes and clothing, etc. grew by more than 20% year-on-year.

In the discount retail format, Haotemai, as a near-expiry discount supermarket chain, was established 3 years and 2 months ago. It now has more than 500 stores across the country, and its revenue scale doubles every year.

…

Moreover, Lao Cai (Hou Yi) discovered that discount retail in China was still a new thing. He believed that discounts were not simply cheap, but should be achieved through "providing different products, optimizing the supply chain, and minimizing operating costs."

He even personally visited Germany's Aldi, Japan's largest food exhibition Foodex Japan, and the discount hypermarket Trial to see the mature discount retail models in foreign countries.

This also makes Hema try to find a new retail 2.0 in the Chinese market.

So, I understand:

Whether online or offline, Hema wants to open up the entire supply chain, make products better and cheaper, and reduce costs; no matter where in the country or what store, operational efficiency must be improved.

To put it bluntly, Hema’s goal is to create a low-price but unique Chinese label by offering discounts, improving supplier relationships, and establishing a supply chain directly from production to consumption.

Therefore, we have seen the "scraping the bone to heal the wound" that has been going on for a long time.

for example:

On September 20, 2022, Hou Yi issued an internal letter saying that the organizational structure would be upgraded, a digital multi-format matrix would be established, and a wider range of consumers would be served; the company's business structure would be adjusted into three major sectors plus three major supporting platforms. This layout is designed to allow Hema to run more smoothly in different businesses.

The second incident happened on October 13 last year.

It was announced that the prices of more than 5,000 products in offline stores would be reduced by at least 20% across the board; this was mainly to make the prices of products more competitive, and the plan was named the "Mountain Moving Price" strategy.

The third section is after the Spring Festival.

Hema has started to test the discount policy in 81 stores in Beijing, Nanjing and Changsha. Specifically, the threshold for free shipping is raised to 99 yuan. If the order is less than 99 yuan, a shipping fee of 6 yuan will be charged for each order. The purpose of this is to make delivery more economical and efficient.

There was news yesterday that they plan to open another 70 stores of different types this year.

According to my estimation, if the target market is a high-density residential area, MINI stores may be given priority, and if it is a bustling commercial area, membership stores may be opened, which just happens to meet Hema's strategic stratification of users.

Although the move has caused some negative reactions in the market, it is a difficult but right thing to do for consumers and China's retail landscape.

04‍

In my opinion, Hema cannot completely imitate Costco and Sam's.

Why?

The Costco model did not emerge out of thin air, but was closely related to the background at the time. In 1976, Costco served small and medium-sized enterprises, and it was not until seven years later that it opened its first large warehouse for ordinary consumers in Seattle.

In 1983, there were two key moments:

1. Large chain stores are popular in the United States. They rely on large-scale operations to reduce costs and attract a lot of customers with low prices.
2. As shopping malls increase in number, small shops are hit hard, which in turn provides market space for membership warehouses like Costco because everyone wants to buy good things at a cheap price.

Therefore, Costco's membership system caters to people's needs, and their success is due to their step-by-step adjustment of the relationship between the supply chain.

Let’s talk about 2019, when Costco came to China and opened its first store in Shanghai. I posted on WeChat Moments. At that time, the Chinese market was also in a high-development stage, with a large middle-class population, the rise of social e-commerce, and people’s pursuit of high-quality life.

Faced with China's unique market, Costco has made many adjustments, such as product selection and membership promotion, so that it can take root completely.

Look at Sam again.

It has a similar "life experience" to Costco. In addition to establishing a membership system in 1983, it also built a supply chain management system that year. It opened its first membership warehouse in Shenzhen 13 years later.

How was the Chinese market in 1996?

Against the backdrop of economic reform, a number of foreign retail giants, such as Walmart and Carrefour, brought in some fresh retail concepts and management methods, and at this time, supermarkets, chain stores, and shopping malls gradually became popular.

Therefore, both companies seized the opportunity when the economy improved and there was a large gap in the market. However, the current market situation in China is different from before, and Hema will definitely not be able to reach new places by following the old path.

It seems that Hema wants to lower prices and follow the example of Costco and Sam's by purchasing goods directly from suppliers and establishing a procurement system centered on "own brand manufacturing/self-production"; but the problem is that the previous model of large chain stores relied on population growth and consumption growth to make profits, which the domestic market does not have.

Therefore, Hema’s current challenge is how to find a new path that combines the membership system and the discount store model targeting the sinking market in the current environment. This is quite important.

Roll up Sam's, Costco, roll down discount stores, how difficult is it? But it is necessary to change. From October 13 last year to now, it has been 146 days since Hema "turned the table", and retail has started again. The 60-year-old "old dish" has taken on the mission again with the confidence to create a new route for local retail in China.

Reform is often accompanied by pain and sacrifice, and requires tremendous courage and determination to overturn outdated rules and systems. It is these difficult challenges that have allowed the industry to reach new heights.

In summary:

The old era fades away and a new era begins.

Hema, the industry rule-breaker, has this time burned the supply chain. With the intention of providing consumers with affordable prices, I wish Hema a win in this battle.

Author: Wang Zhiyuan; Official account: Wang Zhiyuan