Houcheng, 59, needs an opportunity to prove the potential of Hema to Liu Qiangdong, Zhang Yong, and Jack Ma.
Recently, Hema’s unexpected postponement of its Hong Kong IPO has added another chill to the domestic retail market. En los últimos años, the offline supermarket market in China has been under a cloud, with news of non-renewals, store closures, and losses frequently hitting the media, leading to the impression that domestic consumers have no money to spend. Some even joke that supermarket owners who still open their doors are doing so out of love.
Sin embargo, community chain stores have found that foreign supermarket enterprises like ALDI, Sam’s Club, and Costco are still aggressively opening new stores. Por ejemplo, ALDI has opened more than 50 stores in Shanghai alone in just four years since entering China. Similarly, Sam’s Club is accelerating its plan to open 6-7 new stores annually, entering cities like Kunshan, Dongguan, Jiaxing, Shaoxing, Jinan, Wenzhou, and Jinjiang.
The active expansion of foreign supermarkets in various Chinese markets contrasts sharply with the continuous store closures of local supermarkets. Listed local supermarket enterprises like BBK, Yonghui, Lianhua, Wumart, CR Vanguard, RT-Mart, Jiajia Yue, Renrenle, Zhongbai, and Hongqi Chain urgently need to find a new model to emulate and continue their growth. Sin embargo, looking globally, innovative models suitable for the Chinese consumption environment are scarce, with Hema being one of the few exceptions.
Unlike Walmart, Carrefour, Sam’s Club, Costco, or ALDI, Hema’s “both in-store and home delivery” model may be more suitable for local supermarkets to emulate and innovate. After all, Walmart, which has been deeply rooted in China’s offline market for over 20 años, and ALDI, which has just entered the Chinese market, both regard “home delivery” as a strategic focus for the future.
01 Why is Hema Valued at $10 Billion?
From setting a listing timetable in May to its unexpected postponement in September, Hema has continued to aggressively open stores and accelerate the development of its product supply chain system. Hema’s listing is eagerly anticipated, but according to various sources, the postponement may be due to its valuation falling short of expectations. Alibaba’s initial discussions with potential investors estimated Hema’s value at around $4 mil millones, while Alibaba’s IPO valuation target for Hema was $10 mil millones.
The actual value of Hema is not the focus here, but its home delivery model is worth everyone’s attention. Community chain stores believe Hema now resembles a combination of Meituan, Dada, and Sam’s Club. In other words, Hema’s most valuable asset is not its 337 physical stores but the product system and data model behind its home delivery operations.
Hema not only has its own independent app but also official flagship stores on Taobao, Tmall, Alipay, and Ele.me, all part of the Alibaba ecosystem. Además, it has scene support from apps like Xiaohongshu and Amap, covering multiple high-frequency consumer scenarios.
Thanks to its presence on dozens of different apps, Hema enjoys unparalleled traffic and data advantages that outshine any supermarket competitor, including Walmart, Metro, and Costco. For instance, Taobao and Alipay each have over 800 million monthly active users (MAU), while Ele.me has over 70 millón.
As of March 2022, Hema’s own app had over 27 million MAU. Compared to Sam’s Club, Costco, and Yonghui, which still need to convert store visitors to app users, Hema’s existing traffic pool is already sufficient to support the opening of more than 300 additional stores.
Hema is not only abundant in traffic but also rich in data. It has access to massive amounts of product preference data and consumption data from Taobao and Ele.me, as well as extensive product review data from Xiaohongshu and Weibo, and comprehensive payment data from Alipay covering various offline scenarios.
Armed with these data, Hema can clearly understand the consumption capacity of each community. This data advantage gives Hema the confidence to lease storefronts in mature business districts at rents several times higher than the market price.
In addition to traffic and data advantages, Hema also boasts high user stickiness. Actualmente, Hema has over 60 million registered users, and with 27 million MAU, its user stickiness surpasses popular platforms like Xiaohongshu and Bilibili.
If traffic and data are Hema’s fundamentals, the technology behind these models is even more noteworthy. In 2019, Hema publicly introduced its ReX retail operating system, which can be seen as the integrated backbone of the Hema model, covering store operations, membership systems, logistics, and supply chain resources.
Hema’s consumer experience, including product quality, delivery timeliness, and after-sales service, is often praised, partly thanks to the ReX system. According to research by brokerage firms, Hema’s large stores can handle over 10,000 orders daily during major promotions, with peak hours exceeding 2,500 orders per hour. To meet the 30-60 minute delivery standard, Hema stores must complete picking and packing within 10-15 minutes and deliver within the remaining 15-30 minutes.
To maintain this efficiency, real-time inventory calculation, replenishment systems, city-wide route design, and coordination of store and third-party logistics require extensive modeling and complex algorithms, similar to those found in Meituan, Dada, and Dmall.
Community chain stores believe that in retail home delivery, besides traffic, data, and algorithms, the selection ability of merchants is crucial. Different stores cater to different consumer demographics, and periodic consumer demands vary by region. Por lo tanto, whether a merchant’s supply chain can support dynamic product selection is a key threshold for supermarkets aiming to excel in home delivery.
Sam’s Club and Costco have spent years honing their selection capabilities, and Hema has been refining its own for seven years. Hema pursues a buyer system similar to Sam’s Club and Costco, aiming to trace the supply chain back to its origin, from raw materials to the production process, creating unique product stories for brand differentiation.
Hema first identifies the core production areas for each product, compares suppliers, and selects the highest quality raw materials and a suitable OEM factory. Hema provides the factory with standard processes, packaging designs, and ingredient lists, ensuring products meet specified standards. After production, products undergo internal testing, pilot sales, and feedback before being distributed to stores nationwide.
Initially, Hema struggled with direct sourcing but eventually found its rhythm by directly contracting planting bases, establishing 185 “Hema Villages” across various locations, including Danba Bako Village in Sichuan, Xiachabu Village in Hubei, Dalinzhai Village in Hebei, and Gashora Village in Rwanda, offering 699 products.
Compared to Sam’s Club and Costco’s global procurement advantages, Hema’s “Hema Village” initiative creates strong local supply chains, providing significant cost advantages and differentiation.
Hema’s ReX retail operating system integrates multiple systems, including store operations, membership, logistics, and supply chain resources, enhancing overall efficiency. Por ejemplo, during major promotions, Hema’s large stores can handle over 10,000 daily orders, with peak hours exceeding 2,500 orders per hour. Meeting the 30-60 minute delivery standard requires precise real-time inventory management, replenishment systems, city-wide routing, and coordination with third-party logistics, supported by complex algorithms.
Hema’s 138 stores operate as integrated warehouse-store units, offering 6,000-8,000 SKUs per store, with 1,000 self-branded SKUs, comprising 20% of the total. Customers within a 3-kilometer radius can enjoy 30-minute free delivery. Mature stores, operational for over 1.5 años, average 1,200 daily online orders, with online sales contributing over 60% of total revenue. The average order value is nearly 100 RMB, with daily revenue exceeding 800,000 RMB, achieving a sales efficiency three times that of traditional supermarkets.
Walmart China’s president and CEO, Zhu Xiaojing, stated internally that Hema is the only competitor to Sam’s Club in China. In terms of physical store openings, Hema indeed lags behind Sam’s Club, which has been in operation for over 40 years with over 800 stores worldwide, including more than 40 in China. Hema, with 337 stores, including only 9 Hema X member stores, appears small in comparison.
Sin embargo, in home delivery, the gap between Sam’s Club and Hema is not as significant. Sam’s Club ventured into home delivery in 2010, four years after entering China, but due to immature consumer habits, the service was quietly discontinued after a few months. Since then, Sam’s Club has continuously evolved its home delivery model.
In 2017, leveraging its store network and front warehouses (cloud warehouses), Sam’s Club initiated the “Express Delivery Service” in Shenzhen, Beijing, and Shanghai, accelerating its home delivery growth. Actualmente, Sam’s Club operates a network of cloud warehouses, each supporting rapid delivery within its respective city, with an estimated 500 cloud warehouses nationwide, achieving significant order volumes and efficiency.
Sam’s Club’s business model, combining large stores with cloud warehouses, ensures quick delivery and integration, leading to impressive results: over 1,000 daily orders per warehouse, with Shanghai warehouses averaging over 3,000 daily orders and an average order value exceeding 200 RMB. This performance positions Sam’s Club as a leader in the industry.
Although Yonghui hasn’t caught the attention of Walmart’s executives, its proactive efforts in home delivery outshine its peers, making it a noteworthy example.
Representing the past of China’s traditional supermarkets, Yonghui is a prime example of a local supermarket enterprise that has thrived despite competition from foreign giants. Like foreign supermarket giants, Yonghui has proactively embraced online platforms and home delivery, becoming a leader among local supermarket enterprises.
Despite numerous challenges and continuous trial and error, Yonghui has become the domestic traditional supermarket leader in home delivery, with over 940 e-commerce warehouses and annual home delivery revenue exceeding 10 mil millones de yuanes.
As of August 2023, Yonghui operates 940 e-commerce warehouses, including 135 full warehouses (covering 15 cities), 131 half warehouses (covering 33 cities), 652 integrated store warehouses (covering 181 cities), and 22 satellite warehouses (covering Chongqing, Fuzhou, and Beijing). Among them, over 100 are large front warehouses of 800-1000 square meters.
In the first half of 2023, Yonghui’s online business revenue reached 7.92 mil millones de yuanes, contabilidad de 18.7% of its total revenue, with an estimated annual revenue surpassing 16 mil millones de yuanes. Yonghui’s self-operated home delivery business covers 946 stores, generating 4.06 billion RMB in sales, with an average of 295,000 daily orders and a monthly repurchase rate of 48.9%. Its third-party platform home delivery business covers 922 stores, generating 3.86 billion RMB in sales, a 10.9% year-on-year increase, with an average of 197,000 daily orders.
Despite its successes, Yonghui lacks the massive consumer data of Alibaba’s ecosystem or Walmart’s global direct sourcing supply chain, leading to numerous setbacks. Nevertheless, it has leveraged partnerships with JD Daojia and Meituan to achieve over 10 billion RMB in sales by 2020.
Yonghui’s journey in home delivery began in May 2013 with the launch of the “Half the Sky” shopping channel on its website, initially limited to Fuzhou and offering meal packages in sets. This early attempt failed due to poor user experience and limited delivery options.
In January 2014, Yonghui launched the “Yonghui Weidian App” for online ordering and offline pickup, initially available in eight stores in Fuzhou. In 2015, Yonghui launched the “Yonghui Life App,” offering a wide range of high-frequency fresh and fast-moving consumer goods with fast delivery services, fulfilled by JD Daojia.
In 2018, Yonghui received investments from JD and Tencent, forming deep partnerships in traffic, marketing, payment, and logistics. In May 2018, Yonghui launched its first “satellite warehouse” in Fuzhou, offering 30-minute delivery within a 3-kilometer radius.
In 2018, Yonghui’s internal restructuring split its online business into Yonghui Cloud Creation, focusing on innovative formats, and Yonghui Supermarket, focusing on traditional formats. Despite initial setbacks, Yonghui’s online sales grew significantly, reaching 7.3 billion RMB in 2017, 16.8 billion RMB in 2018, and 35.1 billion RMB in 2019.
By 2020, Yonghui’s online sales reached 10.45 mil millones de yuanes, a 198% year-on-year increase, contabilidad de 10% of its total revenue. In 2021, online sales reached 13.13 mil millones de yuanes, a 25.6% increase, contabilidad de 14.42% of total revenue. In 2022, online sales grew to 15.936 mil millones de yuanes, a 21.37% increase, with an average of 518,000 daily orders.
Despite these achievements, Yonghui faced significant losses due to high investments in front warehouses and the impact of the pandemic, resulting in losses of 3.944 billion RMB in 2021 and 2.763 billion RMB in 2022.
Although Yonghui faces more challenges than Hema and Sam’s Club, its efforts in home delivery have secured a foothold in the market. As instant retail continues to grow, Yonghui has the potential to benefit from this trend. New CEO Li Songfeng has already achieved his first KPI, turning Yonghui’s 2023 H1 losses into profits.
Like Hema CEO Hou Yi, former JD executive Li Songfeng aims to lead Yonghui in the instant retail market, potentially sparking a new story in the industry. Hou Yi can prove his judgment of China’s retail trends, and Li Songfeng can demonstrate the potential of local supermarket enterprises in the post-pandemic era.
