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Alibaba's 'New Retail' model HEMA in the spotlight

Jane Xu

Research Analyst

Retail 16.03.2017 / 11:00

HEMA logo 2 col

HEMA, a new online-to-offline retail format, is demonstrating what Jack Ma’s “New Retail” means in real life.

In 2017, the hottest buzzword in China’s retail industry is “New Retail”. It was introduced by Alibaba founder and chairman Jack Ma during the 2016 Yunqi Conference (Alibaba’s annual developer conference held at Yunqi County, Zhejiang Province) as part of his “Five New’s”: “New Retail, New Manufacturing, New Technology, New Finance, and New Resources”. He said that the “Five New’s” will reshape the world’s future.

Before we dive deeper into “New Retail”, let’s take a look at the big picture of Jack Ma’s “Fine New’s” based on a Xinhua News Agency report:

* New Retail: Offline companies have to move online, online companies have to move offline. Online, offline, and logistics will need to connect seamlessly;

* New manufacturing: In the past 20, 30 years, manufacturers were chasing scale and standardization. In the future 30 years, the trend of manufacturing will be smarter production, personalization and customization;

* New technology: In old times, technology meant machine production. In the future, it will be artificial intelligence. People fed old machines electricity. People will have to feed future machines data. Internet and big data will be the ultimate sources of new technologies;

* New finance: In the past 200 years, the finance industry was running on the 80/20 rule, which meant the industry was financing big companies (20% of all businesses) which ran 80% of the world’s economy. But in the future, new financial model would be the reverse 80/20 rule: financial industries need to think how to support small-and medium-sized companies, personalized companies, young generations, consumers who accounted for 80% of all businesses;

* New resource: Previous growth has been achieved through burning petroleum and coal. Future technologies will be powered by a new resource: data. The data that has been used by more people, the more valuable it becomes.

Since the beginning of 2017, China’s retail industry are paying more attention to the “New Retail” concept, partly because Alibaba has implemented this idea in the capital market and through strategic alliances:

1. On November 18, 2016, Alibaba spent 2.15 billion yuan to buy 32% of Sanjiang Shopping Club Co. Ltd, which is one of the largest supermarket operators in Zhejiang Province. Alibaba has the option to raise its stake further to 35%, and just a step away from its actual controller Chen Nianci’s 37%;

2. On January 10, 2017, Alibaba and Intime Retail (Group), one of China’s largest high-end department store operators, jointly announced that Alibaba will invest no more than HS$19.8 billion (about 17.6 billion yuan) to become Intime’s controlling shareholder and Intime will be privatized from Hong Kong stock market;

3. On February 20, 2017, after eight months of secret negotiations, Alibaba announced that it has established strategic partnership with Shanghai Bailian Group Co. Ltd, one of China’s largest retailers, if not the largest.

There is still little clue about the final outcomes of the abovementioned deals. But in Shanghai, the business format closest to Jack Ma’s “New Retail” concept has appeared: HEMA supermarkets, which already has seven shops in Shanghai, one in Ningbo City, Zhejiang Province, and one in Beijing. The pronunciation of HEMA supermarket’s Chinese name is “Mr Hippopotamus” so hence its logo. In fact, the Chinese name means “box horse fresh grocery”.

Why has Alibaba picked fresh grocery to experiment its “New Retail” concept?

According to Kantar Retail’s analysis, e-commerce’s expansion roadmap should follow this logic:

1. Start from categories of low degree of standardization and low proportion of fulfilment cost against total product sales (such as long tail products sold by massive numbers of small third-party online sellers). This was marked by the birth of Taobao.com, also now the expansion direction of JD.com;

2. Enter categories of high degree of standardization and preference for authentic products as well as low proportion of fulfilment cost against total product sales (such as digital gadgets, home appliances, cosmetics, parenting and infant products). This was marked by the birth of Tmall, JD.com and Suning.com;

3. Expand to categories of high degree of standardization as well as high proportion of fulfilment cost against total product sales (such as packaged foods, especially high frequency purchasing items like drinks, which require efficient logistics system). This was where Yihaodian began its business and where Tmall and JD.com are both fighting for;

4. The last categories are those of low degree of standardization as well as high proportion of fulfilment cost against total product sales, which means fresh groceries. At this phase, the logistics infrastructure and consumers’ demands are mature.

0316-EN-e -commerce Roadmap Full

Hou Yi, the founder of HEMA, recently gave a speech at a meeting of China Chain Store & Franchise Association in Shanghai to explain the business model of HEMA. Based on his speech, Kantar Retail would explain the mission and vision of HEMA as following:

The focus of HEMA is to serve the needs about “eat” of 80’s and 90’s generations (people born between 1980s and 1999), mostly through online channels.

He explained HEMA’s value in consumption as following:

1. Always fresh: Consumers can buy and receive delivery whenever they want. Consumers no longer need refrigerators at home. All products are in small packages that can last just one meal.

2. You see what you get: HEMA physical shops are its warehouses. Consumers can place orders through their mobile apps and what they get are exactly the same as what they’ve seen in the bright and clean shops. All vegetables have been cut and wrapped into standard packages. Free delivery covers a 3 – 5 kilometre radius within each shop. HEMA promises all goods will reach the buyer within about 30 minutes so nothing will go bad. (Though even 5 kilometre sounds a small area, in fact a traditional supermarket covers the population from within 3 kilometres. HEMA’s maximum coverage is already 178% larger than traditional formats.)

3. One-stop shopping for premium fresh grocery: Each shop offers about 3,000 SKUs from 103 countries, with a special emphasis on high-end dining. The seafood products, many of them sold live and can be processed before payment, make up a much higher proportion of SKUs compared with traditional supermarkets. Its target is to serve consumers looking for premium food and make HEMA a one-stop shop where they can buy everything they want.

4. Eating is the new entertainment: Key consumers, and 80% of actual customers, are 80’s and 90’s generations. They enjoy eating, but don’t like cooking themselves as much. They’d rather eat in restaurants or buy something “heat to eat” to simplify everything before eating.

HEMA has also redefined the roles of physical shops. Its shops usually occupy 4,500 square metres each and mostly in B1 basements. The second generation HEMA would take up 10,000 square metres.

1.  Supermarket sales;

2. Logistics base: They are forward positioned warehouses where 30-minute delivery begins;

3. Interacting with customers: Organize events during holidays, such as hosting riddle competitions with kids with discount coupons as prizes, teaching how to make dumplings and pizzas)

4. Venues to recruit fans;

5. Dining venue: All HEMA shops have designed 15% to 20% of space as sub-lease dining venues. Consumers can buy fresh grocery and seafood and ask the food booths in the shop to cook for them to dine in. In the second generation of HEMA, the dining venue could be as large as 50% of the whole shop. HEMA not only collect rents from food booths but also charge 20% of their revenues as commissions. Besides, seafood booths will buy raw material from HEMA as well.

In comparison, traditional supermarkets are just neighbours with food businesses in the same building and they are not suppliers to the food booths/restaurants. They also lack decent venues except a general purpose area for rest, if they have it.

To realize the innovative O2O idea, HEMA has deployed many technologies that ordinary shoppers might have overlooked. All price tags in offline shops are electronic shelf labels, which empowers the company to easily change prices and always keep every price same across both online and offline platforms. It is reported that it takes only 23 seconds to update 1,000 labels.

E -price Tag Full

To deliver the 30-minute promise, HEMA has optimized the layout design of its shops. Traditional supermarkets have designed their in-store displays and circulation plans to prolong customers’ stay in shops and expose them to as many SKUs as possible. In contrast, HEMA has wide aisles and full-time “item collectors”, who will literally run to collect all products on orders they receive on their handheld devices into a thermal bag with serial numbers. The bag will then be hooked onto an automatic conveyor belt, which will transport the goods into the product placement team. They are responsible of carefully placing products into delivery boxes to make sure the fresh groceries or hot foods won’t be damaged or affect each other during delivery, such as placing milk under strawberries or put hot soup separately in a fixed position from ice-creams.

If we review HEMA’s business model through the “New Retail” concept lens (online, offline, and logistics will need to connect seamlessly), we can see several things HEMA has brought into real life:

1. Online, offline and delivery together form a seamless experience. Consumers can pick up goods at the shops and pay at cashier through HEMA app. They can also scan the bar code of the goods to add them into the shopping cart in the app, pay at any time and wait for the goods delivered to them for free about 30 minutes after their purchasing. HEMA doesn’t care about value per order (a key KPI for many businesses), doesn’t encourage its consumers to stock up products, and doesn’t set the minimum purchasing value for free delivery. It is chasing penetration and footfalls or, to be more precise, “fingerfalls” at the moment.

2. HEMA accepts payment ONLY through HEMA app, even not Alipay, which is the most popular mobile payment app in China and also owned by Alibaba. Many customers abandoned their shopping after they were told they could not pay in other methods and refused to install HEMA app, even though the shops were all offering free WiFi. However, it could be the segment of consumers that HEMA is not recruiting, because it’s unlikely to happen among 80’s and 90’s generations. Forcing its customers to install HEMA app can help the company collect much clearer user profiles, capture their shopping behaviour preferences while push more precisely targeted marketing messages.

Pay Only Thru App

3. Choose and even design SKUs for 80’s and 90’s generations. HEMA has started to offer private label goods to these key consumer groups. For example, they invited a guest executive chief of a five-star hotel in a popular cooking TV show in Shanghai to design heat-to-eat foods, which is one of the key categories that differentiate HEMA from traditional supermarkets.

4. HEMA will be a cultural icon, draw traffic to itself and turn nearby consumers into its fans. Its sales growth will partly rely on Word-of-Mouth marketing by its fans.

HEMA could be this year’s hottest new retail format. With Alibaba bankrolling it, it doesn’t have to worry about profitability in the short term. But if more major retail players follow suit, such a format will definitely threat the businesses of all existing retail formats.

Source: Kantar Retail

Editor's notes

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