New retail pioneer Hema is expected to go public within 6-12 months.
By Wang Ziwei @ Retail Observation
Recently, Alibaba has made some big moves.
On May 18th, Alibaba announced its financial results for the fourth quarter and full fiscal year of 2023, and also announced that the Alibaba Cloud Intelligence Group will be fully spun off from the Alibaba Group and listed independently. Cainiao and Hema will launch their own IPO plans, with Hema expected to go public within the next 6 to 12 months.
From its establishment in 2015 to the opening of its first store in Shanghai in January 2016, Hema has only been around for 8 years, but it has told a series of stories in its own way, which is worth reviewing.
[One] Successful business model + clear profit prospects#
From a corporate perspective, the primary requirement for going public is a successful business model and clear competitive advantages.
As the creator of the new retail format of fresh supermarket + catering, Hema mainly addresses consumers' scenario-based demands for "eating" while also covering daily high-frequency consumer goods.
Through the combination of offline stores and online apps, Hema not only provides integrated online and offline services, but its offline stores also achieve "store-warehouse integration" - they serve as fulfillment centers for consumer needs in-store and within a 3-kilometer radius of consumers' homes. This front-store-back-warehouse model fundamentally enhances the capabilities and value of the stores, which explains why Hema's store efficiency can be 3-5 times that of traditional retailers.
For the retail industry, the organic combination of people, goods, and space forms a growth engine.
Born out of Alibaba, Hema has had the ability to understand consumer demands from day one. It is a data-driven retailer. Hema empowers products and scenarios with this ability, which is its unique competitive advantage.
In terms of products, Hema selects SKUs and purchases globally through buyers, so consumers can see a large number of domestic and foreign products in its stores that they haven't seen in other retailers or e-commerce platforms.
In fact, this is just the first step in building product strength. Hema's stores have seen an increasing number of own-brand products.
For example, Hema has turned "daily" fresh fruits and vegetables into the "Daily Fresh" brand. It may seem like just adding packaging, but behind it is cooperation with the upstream supply chain, directly working with the original producers to establish "Hema Villages".
"Hema Villages" produce based on Hema's orders, integrating procurement and sales, and standardizing, digitizing, and branding agricultural products.
Currently, Hema has established over 150 "Hema Villages" upstream, and has set up supply chain centers in Wuhan and Chengdu, weaving a denser network of fresh stores and warehouses. This provides hardware support for the growth of Hema's own-brand fresh agricultural products such as "Hema Organic," "Tree-Ripened," and "Hema Field Shrimp."
Currently, Hema maintains an average speed of 30-45 days from product development to market, and has a 97% success rate in developing own-brand products. This demonstrates its product strength. Hema CEO Hou Yi also stated, "Product strength is the only core competitive advantage in today's retail industry."
Hema's exploration and practice in the scenario aspect are also worth mentioning. How to sell high-quality products well? Hema figured it out early on by combining catering and retail.
The early Alaskan king crab turned Hema into a popular online retail store, and later Hema further iterated on this:
In 2019, Hema launched the hot pot season, where customers can directly cook hot pot in the store after purchasing the ingredients. The innovation of the hot pot lies in the fact that most of the hot pot ingredients are Hema's own-brand products, which are perceived by consumers as high quality and affordable. In Hema's eyes, they are high-speed turnover, high gross profit, and high stickiness. Even if consumers don't cook hot pot in-store, they will directly purchase these hot pot own-brand products to make a hot pot feast at home.
In June last year, Hema also launched "Hema Night Market" to attract customers for late-night snacks. This model is closely tied to Hema's product capabilities because the main products of the "Night Market" are small lobsters and craft beer, which are among the best-selling products in Hema's own-brand product lineup and have strong synergy with the upstream supply chain.
By doing retail in the way of consumer goods, combining product strength with scenarios, turning stores into showcases, and turning products into models - this is the unique answer that Hema has presented in terms of "scenarios."
The "people, goods, and space" model helps us observe the process of establishing a business model in the retail industry. From the results, successful business models usually have two characteristics: others cannot replicate you, and you can replicate yourself.
Based on data empowerment, the "people, goods, and space" model has become Hema's unique competitive advantage and a competitive barrier. According to Warren Buffett's view, this is a "moat," or the so-called "others cannot replicate you."
As for "you can replicate yourself," we can see that over the past 8 years, the number of Hema stores has been consistently increasing: as of March 2022, there were a total of 273 self-operated stores nationwide. Currently, Hema has over 300 stores in 27 cities across the country.
Let's take a look at the financial data. Based on Alibaba's financial report, Hema's current EBITA should be positive. Hou Yi also confirmed this in an internal letter at the beginning of the year, saying, "Hema Xiansheng's main business format is already profitable."
In April, Hou Yi also mentioned in an interview that the first-stage goal of Hema's new retail has achieved three points. The first manifestation of the success of new retail is "comprehensive profitability of the business model" and "sustainable profitability." "New retail is not a money-burning model, but a sustainable profitable model."
In terms of scale, according to CCFA data, Hema Xiansheng's sales reached 40 billion yuan in 2019, ranking among the top ten retailers in China.
In 8 years, Hema has successfully run its business model, achieved a scale of over 40 billion yuan, and turned a profit. With product strength as its core and digital capabilities as support, Hema is indeed a pioneer in the transformation of the retail industry and a benchmark for the success of new retail.
[Two] Huge industry space and growth potential#
As we often say, only a large pond can breed big fish, and retail is an industry with a high ceiling:
In 2022, China's total retail sales of consumer goods reached 43.9733 trillion yuan, with retail sales of goods amounting to 39.5792 trillion yuan and catering revenue reaching 4.3941 trillion yuan. Even if we only look at the three major segments of grain and oil, beverages, and daily necessities, the market size is 2.9201 trillion yuan.
Currently, the retail industry is experiencing favorable policies and favorable changes in the market environment. Due to the impact of the pandemic, seizing the economy and people's livelihood has become the most important task at present.
The retail industry is one of the essential consumer sectors for the general public, not only providing daily necessities but also serving as a reservoir for employment. Hema's dual online and offline model innovation and exploration have not only brought new development opportunities to the retail industry but also become a signal for the recovery of the Chinese economy after the pandemic.
Firstly, the retail industry where Hema Xiansheng operates has received policy support. In terms of policies, the government encourages and supports the development of new retail enterprises, promoting the integration of traditional retail and e-commerce. With the emergence of the pandemic, the government has taken active regulatory measures to support the retail industry, introducing a series of supportive policies to encourage companies to expand domestic consumption and promote economic recovery and stable growth.
At the same time, with the advent of the digital age, the government has also increased support for online retail platforms, promoting policies such as smart retail and smart commerce, further reducing operating costs and enhancing the overall competitiveness of enterprises.
Secondly, seizing the economy and people's livelihood has become the most important task at present. As a consumer sector with essential needs, the retail industry is expected to become a key area for the country to promote consumption upgrading and economic recovery. Therefore, companies like Hema, which have technological innovation and new retail advantages, can more accurately meet consumer needs, meet national policy directions, adapt to changes in the market environment, and become powerful participants in promoting consumption innovation.
In Hou Yi's view, the key to the success of new retail lies in the comprehensive transformation and upgrading of the retail industry with internet technology.
In fact, Hema's success in new retail also tells the entire market that we can completely reconstruct traditional industries with technology and let the sunshine of the internet shine into every corner of the industry: while improving customer experience, reducing costs, improving efficiency, and strengthening turnover.
During Hema's 8 years of establishment, we often see Hou Yi sharing his thoughts and explorations on new retail in his circle of friends. With Hema's entry into the capital market, more information will be disclosed in the future, and we will see more of Hema's methodology, exploration, and thinking:
Just like the course notes of Meituan's Wang Huiwen and the 8-hour speech by WeChat's Zhang Xiaolong, these contents are treasures that the entire industry can learn from. Perhaps they will inspire a new wave of entrepreneurship in the future, and undoubtedly contribute to China's economic recovery.
[Three] Paying for uniqueness#
Within the entire Alibaba ecosystem, Hema is a unique presence because it is the only subsidiary that does not rely on Taobao's traffic, and even Hema can contribute to the entire ecosystem's pool of traffic.
Hema was originally a new retail project incubated by Alibaba. During the entrepreneurial process, Hema actually enjoyed support from the Alibaba ecosystem in terms of talent, funding, supply chain, and other "hidden assets." At the same time, it did not carry the "hidden liabilities" of the traditional retail industry, which is "difficult to transform because of being accustomed to being a second landlord." It is essentially a high-certainty, high-level innovative entrepreneurship that solves the problem of talent incentives in the process of transitioning to the new economy and the problem of second-curve innovation for giant companies.
Looking back now, when Hema insisted on guiding consumers to place orders and make payments through the Hema app, and to use the Hema app, it seemed unnecessary at the time, but now it is clear why.
Having its own app is equivalent to having a traffic base with significant commercial value. Online + offline, these are two valuable consumer operation fields with autonomy. Hema continues to attract and retain users with its strong product strength, forming a virtuous cycle of online and offline. This is also what makes Hema a unique presence in the Alibaba ecosystem and even the entire Chinese internet.
It is worth mentioning that in January this year, Hou Yi stated that Hema is actively exploring online sales and wholesale business, allowing competitive own-brand products from Hema to be sold outside of Hema and across the entire internet, and making Hema's supply chain company another development channel for Hema.
It is obvious that in the future, Hema will open up its accumulated capabilities to the outside world, collaborate with suppliers to incubate own-brand products that meet real consumer needs, and then open up these own-brand products to the outside world, seeking greater development.
From being incubated by Alibaba to being able to incubate new projects and brands on its own, it is believed that in the near future, there will also be listed companies among the brands incubated by Hema.
[Four] Conclusion#
Through these analyses, we can see that Hema has proven the correctness of the new retail business model through its own business success. In other words, if Hema can gain recognition from the capital market, it will prove that Alibaba does have the ability to tell a new story outside of the Taobao ecosystem. The story may not be big, but it is highly symbolic:
Hema's move to the capital market is not only its own success but also a boost for its parent company Alibaba in the capital market.
Therefore, the Alibaba board of directors' decision to approve Hema's listing is a clear understanding of the market.
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"Retail Observation" focuses on the latest strategies, tactics, and thoughts in the field of new retail and new consumption from a global perspective. The founder of the platform, Wang Ziwei, is an independent retail analyst.