Supermarket is the modern-day synonym for the sick man of business. To many people, brick and mortar retail is a rapidly declining industry, and its shift to insignificance is only a matter of time. When people think about retail today, they point to online platforms like Amazon, and Taobao (China’s Amazon equivalent and part of Alibaba). Almost anything in this world – from electronics to fresh groceries – can be purchased online without the customers having to visit a physical store. Brick and mortar businesses are following suit and transforming themselves to become more digital and increase their online presence. Those companies that failed to read the trends or adjusted to industry changes too slowly such as Toys “R” Us have faced significant decrease in business and even bankruptcy. So, anyone opening a supermarket business nowadays would be crazy, right? Jack Ma – the founder of Alibaba – doesn’t think so.
Hema – a prime proponent of New Retail
In 2015, Jack Ma launched Hema Xiansheng – a model of New Retail in China. Hema’s unique value proposition is the integration of offline brick-and-mortar stores with e-commerce to enable the supply of high-quality fresh food. Inside a Hema store, customers can buy live seafood products, get it cooked, and then eat it in the designated dining zone. This is a new concept that did not previously exist in China, and it fits right into the lifestyle of the changing Chinese demographic: fast-paced, middle-class, and high willingness-to-pay. According to the Economist Intelligence Unit, it is projected that the middle-income group in China will increase from 63% in 2015 to more than 89% by 2030. In the past, most Chinese consumers were price-sensitive, and would choose cheap products over quality. However, as their spending power increases, the younger generation of Chinese consumers has started to shift their focus toward higher quality products, and better services.
What New Retail is all about
Hema’s business model is more commonly known in the industry as “New Retail”. The emphasis of New Retail is on trying to integrate online and offline experience into a single platform. This New Retail model accommodates the changing consumer behaviors of tech-savvy younger generations, while still providing traditional grocery shopping experience for the older generations. Additionally, New Retail provides powerful insights about customers through its implementation of big data and artificial intelligence applications. Traditionally, retail businesses view their goal as to simply provide products based on mass market research. However, this approach lacks the mechanism to sufficiently and comprehensively understand the consumers. With New Retail, businesses now see the customers as ‘co-creators’ of the products. Real-time customer input, along with big data analysis capabilities, allow the companies to tailor their products and services to a specific customer segment. Not every business, however, has the technical capability or the network required to implement the New Retail business model. Hema benefitted partly from the large Alibaba ecosystem (including Taobao, Alipay, Alibaba) that endowed them with the necessary tools to lay solid a foundation for their business.
Outlook on Hema's business potential
As for its online feature, customers can purchase their products in-app, and the product will be delivered to their door from the nearest Hema store. An option to get the products cooked before delivery is also available. The integration of both online and offline stores into one business model gives Hema flexibility and agility in a world that is becoming increasingly online. As shown in the graph below, the market size of China’s fresh e-commerce product is growing exponentially. The market size more than doubled from 91 billion RMB in 2016 to over 229 billion in 2018. As China is moving away from an export-oriented economy to focus on domestic consumption, there is a huge potential for Hema to capture a substantial amount of market share in the grocery e-commerce industry. Now, some people might ask why Hema wouldn’t go completely online? Despite the tendency that shopping behavior is shifting, there are still customers who prefer to take a stroll around the physical store to make their own purchases. The ability to handpick products themselves is still valued by many consumers, especially for fresh produce like vegetables, fruits and seafood.
At the moment, Hema is still considered a new and growing enterprise. There are 46 stores around China, with over 15 in Shanghai. The main focus for Hema is currently in the metropolitan area, where consumers have a higher willingness-to-pay. It still faces fierce competition from traditional well-known supermarket giants like Walmart and RT-Mart. However, as Chinese demographics continue to change, there is a high possibility that Hema will become a dominant player in both food retail and e-commerce. Is Hema’s business model replicable? Absolutely, but as a first-mover into this domain, Hema is able to solidify its brand image as THE shop for fresh e-commerce. In addition, Hema also benefits from economies of scale and large network of Jack Ma’s various enterprises, and thus, making it a formidable competitor in this new domain.