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The new CEO has said internally at least four times that “Hema will not be sold.”

Text丨Chen Jing
Editor: Guan Yiwen

Hema, which changed its leader four months ago, is rebuilding its morale. We learned that at the Hema staff meeting in June, the new CEO Yan Xiaolei clearly stated: "Hema will not be sold." She said similar things at the new employee training meeting and the "3-year" and "5-year" activities for old employees.

Yan Xiaolei also set a goal for Hema to achieve an annual GMV of 100 billion yuan in three years, a 69% increase from 2023. She said, "By then, Hema will have become one of the top retailers in China, and going public will be a natural thing."

Employees holding options originally expected Hema to go public as early as the end of 2023, but in November last year, Alibaba Group announced that Hema's listing was suspended. There have been many reports that Alibaba's offline retail businesses, including Hema, Gao Xin Retail, and Intime, will be sold.

In 2016, Alibaba proposed the “Five New” strategy, the most important of which was the new retail strategy. In the following four years, Alibaba invested more than 75 billion yuan in cash and stocks in multiple offline retail businesses, including Hema, Suning, Sanjiang Shopping, and Gao Xin Retail.

Hema was the number one project of Alibaba’s former CEO Zhang Yong for a long time. He invested a lot of energy in Hema: he participated in its preparation and establishment, and in the early stages he discussed the business direction with Hema founder Hou Yi every two or three weeks.

We learned that after Zhang Yong resigned as CEO of Alibaba and joined Morningside Venture Capital, which focuses on mergers and acquisitions, as a managing partner, he tried to push Morningside Venture Capital to negotiate with Alibaba to acquire Hema at a valuation of US$2 billion, but ultimately failed.

Two years ago in 2022, Hema considered raising funds at a valuation of US$10 billion. A year later, the valuation was cut in half. Later, Alibaba reorganized, and Hema was one of the three businesses originally planned to be listed first. However, it only received a valuation of US$4 billion during the roadshow. Ultimately, due to "bad market timing", Hema's listing was postponed.

After Hema founder Hou Yi announced his retirement in March this year, we learned that he has started a new business and currently opened a low-priced restaurant in Shanghai that serves seafood and costs 60 yuan per person. He is also preparing several new projects at the same time.

In the four months since taking office as the new CEO of HEMA, Yan Xiaolei has made adjustments in three directions: reorganizing morale, focusing on direction, and striving to achieve normalized profitability.

Originally, Hema mainly promoted three types of stores: membership stores, where customers have to pay to become members to shop, similar to Sam's Club; fresh food stores, which are the fresh food supermarkets where Hema started, located in big cities, near office buildings and residential areas with purchasing power; and NB discount stores (hereinafter referred to as "NB stores"), which have two business formats: hard discount stores and community group purchase pick-up points.

Hema has closed two membership stores at the beginning of this year and will not open new stores for the time being. Instead, it will focus its resources on fresh stores and NB stores: fresh stores will be responsible for developing the sinking market next, and 70 new stores will be opened this year; before the end of fiscal year 2025 (March 31, 2024), NB discount stores plan to open 300 stores.

From March to June this year, Hema achieved off-season profitability for the first time. The last time Hema achieved continuous and overall profitability was in the fourth quarter of 2022 and the first quarter of 2023. In the second half of 2023, Hema prepared for listing and carried out "discount reforms", which led to losses again. Profits in the off-season for four consecutive months mean that Hema has the hope of achieving long-term and stable profitability.

This is the result of Hema's shrinking scale, layoffs and cost reduction in the past two years - the number of Hema stores in 2023 decreased by 30% compared with 2021; in March this year, some Hema store employees were outsourced and meal subsidies were cancelled; starting in April this year, after the membership store business stopped expanding, about 10% of the staff were laid off.

In the past eight years, Hema has tried 12 business formats, and almost every year it tries to tell a new story to provide imagination about new retail and strive to obtain more resources from Alibaba Group. Now Alibaba is no longer expanding in all directions, but emphasizes "business awareness", which is consistent with Alibaba's overall tone - reducing losses, making profits, and being pragmatic, which have also become the keywords for Hema in the future.

An old employee of Hema said that at the end of last year, he didn't know when the company would be sold or when he would be optimized. Now he feels that the business is gradually becoming stable and "begins to accept the new normal without aggressive growth."

After the new CEO took office: Restore confidence and focus on fresh food and discount stores

After founder Hou Yi retired in March this year, the internal and external environment faced by CFO Yan Xiaolei when he took over as CEO was considered to be Hema's darkest moment: it was "blacklisted" by suppliers and shelves were out of stock; it closed 6 or 7 stores in a short period of time, and the industry questioned whether it was going to go bankrupt; there were frequent rumors that it was going to be sold, and its valuation fell all the way from US$10 billion; it continued to reduce staff and employee morale was low.

In 2016, when Hema was founded, Yan Xiaolei joined Alibaba as the head of UC Business Unit and Intime Group Finance. Two years later, she joined Hema as CFO, and now it has been six years. Alibaba Group CEO Wu Yongming commented that she has "keen business insight."

After taking over as CEO in 2024, the first thing she did was to restore confidence - first of all, restore the confidence of consumers.

In December 2023, Hema suspended the opening and renewal of X memberships in order to reduce costs. Although Hema has a membership revenue of 588 million yuan a year, it has to provide members with 12% off products twice a week, free products every day, and 365 free deliveries without any threshold. In the end, it is difficult to cover the cost with a membership fee of 258 yuan a year.

This caused dissatisfaction among more than 3 million Hema members. The inability to renew memberships means that the original rights and interests cannot be continued. After the "discount reform", all Hema offline products are 20% off, which means that other non-member consumers can enjoy cheaper prices than members for free as long as they walk into the store.

After Yan Xiaolei took office, membership renewals were resumed and new membership benefits such as rebates and birthday gifts were added. "Regaining consumer trust" was written into the goals of the membership business.

In February this year, Hema raised the free shipping threshold in Beijing, Nanjing and Changsha from 39 yuan and 49 yuan per order to 99 yuan, which is the same as Sam's Club and Aldi. Compared with the original plan to raise the threshold in 25 cities at the same time, this is a slower move, but it still caused many complaints from customers.

An employee of Hema did some calculations for us. The gross profit margin of Hema Fresh is about 30%. The gross profit of an online order of 49 yuan is only 14.7 yuan, and the delivery cost is nearly 10 yuan. After deducting the cost of picking in the store, it is a loss for every order delivered. Online orders account for 70% of Hema.

As the free shipping threshold increased, the daily active users of the Hema app in March fell by 7.2% compared with the previous month. After Yan Xiaolei took office, he immediately lowered the free shipping threshold to 49 yuan, and the daily active users of the Hema app began to slowly recover.

In addition to consumers, Hema also needs to regain the confidence of its employees. In 2023, in order to control costs, Hema only promoted employees at the P7 level and below, and suspended promotions at the P8 level and above. This year, the number of promotions for all levels has been expanded, and promotions for P8 and above have also been resumed.

In terms of business direction, Hema has become more focused.

In 2022, Hema will focus on three directions at the same time: Hema MAX Division (Hema Member Store), Hema Fresh Division (Hema Fresh, Hema MINI), and Outlet Division (Hema Fresh Outlet, Hema NB Store, Hema NB Pickup Point). Now the operation and procurement personnel of Hema Member Store have also been merged into the Hema Fresh Division.

Hou Yi's original plan for membership stores was to open 50 stores by 2023, with GMV exceeding that of Hema Fresh. However, by the end of 2023, membership stores contributed less than 10% of Hema's sales. After the closure of two membership stores at the beginning of this year, there are only 8 stores left in the country. In contrast, Sam's Club already has 47 membership stores in the country, and its sales exceed that of the entire Hema.

There is also a conflict between the business logic of Hema Membership Store and Fresh Store. Hema Fresh Store hopes to provide users with instant fresh food delivery in as fast as half an hour, without the need to stock up or use refrigerators. X Membership Store hopes that consumers will go shopping and try food on site, enjoy the various services provided by the membership store, and use large refrigerators to stock up. Under the same system, the two businesses grow and decline.

Hema Fresh and Hema NB will become the main focus in the future.

The products in Hema NB's discount stores and community group purchase pick-up points are mainly purchased from outside and self-operated products. Fresh food stores are expensive, and it takes about 30 million yuan to open one, and the area they can cover is limited. Hou Yi hopes to cover a larger market with Hema NB's discount stores and pick-up points - the cost of opening a NB discount store is less than 3 million yuan, and the pick-up points are also open for franchising.

Now, Hema Fresh stores have also taken on part of the goal of sinking. At an internal meeting in June this year, Yan Xiaolei said that Hema Fresh stores are profitable as a whole, and after going through multiple rounds of model iterations, they are more likely to be quickly rolled out in the sinking market, because users still have the strongest perception of Hema in fresh stores.

Sanjiang Shopping's Hema Fresh stores in Ningbo have been profitable for three consecutive years. This year, Hema Fresh plans to open 70 new stores across the country, about twice the number of last year.

NB discount stores have slowed down their store opening pace. Hou Yi's plan for 2024 is to open 500 NB discount stores in Beijing, Jiangsu, Zhejiang and other places. Now the target has been lowered to 300 stores, with an annual GMV target of 10 billion yuan and losses controlled within 100 million yuan. The opening of NB discount stores should not be limited to cities around Shanghai, because the Jiangsu, Zhejiang and Shanghai regions can use the same management team to save manpower.

A Hema NB person said that the current store opening target is more stable and "can be achieved if you reach a certain limit."

Under the key indicator of reducing losses and making profits, financial assessments have become more stringent. A Hema insider said that before, when doing new business, business came first, and finance controlled costs in the process; but now, finance comes first, and we must first prove that opening new stores and doing new business can make sense before investing.

The pace of “discount reform” slows down

Reorganizing morale, focusing on strategic direction, and striving to achieve normalized profitability are all still repairs at the operational level. What kind of retail company Hema will eventually become has not changed. The internal requirement is to achieve "Low price but Unique."

To achieve this goal, in October 2023, HEMA launched a "discount reform" and set an "exclusive offline price" that is 20% cheaper than the online price. It hopes to encourage consumers to shop in person and save on delivery costs. At the same time, it can also use low prices to eliminate a number of suppliers who are unwilling to make concessions.

This caused dissatisfaction among many suppliers. A Hema supplier said that while Hema asked suppliers to lower prices, it did not reduce the 25%-40% commission rate, which meant that if he agreed to lower prices for a single channel of Hema, it would undermine the price system of his own brand in other channels, and his own profit margin would also decline. So he decided to remove more than a dozen brands that he originally supplied to Hema.

It is a common business practice for retail platforms to force suppliers to lower prices. However, when a platform's single product sales are far less than its competitors, forcibly lowering prices will only delete suppliers with good products and choices.

After Yan Xiaolei took office, Hema began to slow down the pace of "discount reform". Starting from April this year, the "offline exclusive price" promotional posters in Hema stores were removed. Some suppliers received demand for high-quality products from Hema again. The buyers still asked the merchants to reduce prices, but their attitude was not as tough as before. A price reduction of less than 20% was acceptable.

"Now we can finally take a breath," said a Hema supplier.

In January this year, Hema reduced the original 5,000 SKUs to about 1,800, hoping to leverage lower prices with a larger unit product scale, but the withdrawal of a large number of goods in a short period of time caused the store shelves to be out of stock. Starting in April, the SKUs rose back to about 3,000.

Using a larger scale to leverage the lowest prices from brands, and then using the lowest prices to attract more consumers and form a growth flywheel, this is the path that almost all comprehensive retail channels such as Amazon and Walmart have taken to grow. There is nothing wrong with Hema's starting point of using scale as a bargaining chip to ask suppliers to lower prices, but this step is a bit hasty.

9 years of supply chain reform, but not thorough enough

"Low price but unique" is the goal that all offline supermarket giants hope to achieve. Representatives of the mature route are Sam's Club, Costco, and European and Japanese discount supermarkets. They all do the same thing - building a vertical supply chain, going deep into the supply chain to purchase goods to avoid dealers' markups, and signing exclusive supply agreements to customize goods. Hema is also doing these two things, but neither is thorough enough.

To build a vertical supply chain, it took 20 years for supermarkets in Japan to reach scale, Sam's Club took 28 years in China, and Hema was established only 9 years ago.

In order to bind suppliers, Japanese supermarkets choose direct mergers and acquisitions. Its parent company Kobe Bussan has acquired 25 food factories since the 2008 financial crisis, achieving production and sales integration in high-frequency consumer goods such as bread, eggs, and frozen products. Its own brands account for 11% of SKUs and contribute about 30% of sales.

HEMA also tried to invest in suppliers and recruited 25 companies to jointly develop and create new products, but there was no second phase after the first phase.

Sam's Club does not acquire factories, but it can achieve an annual revenue of 66 billion yuan with only 4,000 SKUs. This is because the scale of its single SKU is large enough to give Sam's Club the bargaining chips to buy out the suppliers' goods and ensure the unique supply of goods. In contrast, Hema sold more than 6,000 SKUs last year and achieved 59 billion yuan.

As a sales channel, Hema's own brands bring sales of hundreds of millions of yuan to the top suppliers, while Sam's top suppliers bring sales of more than 1 billion yuan. Suppliers are more willing to research the market, improve technology, update equipment, and make more special and cost-effective products for major customers.

When building a vertical supply chain, Hema will face exclusive agreements from other retailers. Sam's high-quality suppliers will not give Hema the formula of Sam's best-selling products, and even packaging material suppliers will not provide Hema with exactly the same product packaging.

Unlike the KA model of Yonghui and RT-Mart, Hema and Sam's Club do not charge intermediary fees such as barcode fees.

Sam's Club buys out strictly screened goods directly from suppliers and generally does not return goods to suppliers unless there are quality issues with the goods. This is equivalent to helping suppliers bear part of the inventory risk. Although it increases the difficulty of inventory management, it also results in lower product prices. Hema requires unconditional returns from suppliers and does not bear the inventory itself. Suppliers will ultimately add the inventory risk to the supply price to Hema.

At the first retail-supply conference in 2018, Hou Yi explicitly expressed his hope that Hema would achieve 50% of its own brands in the next three years. Three years later, he summed up the difficulties of the reform: internal procurement had inertia and was unwilling to give up procurement costs, external partners were unwilling to change the status quo, and there was not enough motivation to create a dedicated "Hema system."

At the end of 2023, Hou Yi promoted the separation of procurement and sales internally, setting up "prescriptionists" to lead the purchase of new products. After a six-month trial, he switched back to "prescriptionists" and local procurement to jointly decide on product selection. A Hema person said that local procurement is more familiar with the local supply chain, and the communication between them and the headquarters "prescriptionists" is not smooth.

It is also difficult for brands to give up KA prices for Hema alone. A brand owner said that Pinduoduo was able to achieve price cuts for multiple brands because there were too many distributors, making it difficult to manage brands, and some inventory items were willing to be sold at a reduced price; but if prices were cut at Hema, the offline physical space would only cover a limited number of consumers, and lower prices would not attract many incremental consumers, which would reduce overall profits for brands.

Stores and suppliers can only take one step at a time. Once the pace is radical, retailers may be squeezed by both suppliers and consumers. Today's Hema may no longer have too much room for imagination, but it is possible to become a healthy retail enterprise with normal profitability.

Title image source: Visual China