Hema to offer membership-only retail store — will it become the Costco of China?
On September 22, Alibaba’s Hema (Freshippo) announced that it would be unveiling the “Hema X Member Store” on October 1.
Located on the basement floor of a bustling business center in Shanghai’s Pudong district, the new brick and mortar store spans a massive 4.4 acres with a delivery radius of over 12.4 miles — the most impressive retail space of all the Hema locations.
In June, Hema CEO Hou Yi announced that the company would be rolling out with a new sales model that would seamlessly realize merging online and offline shopping, dubbing it the “retail experience 2.0.” The Hema X Store will be the first Chinese store to enter the global warehouse club arena and be the first fully O2O membership superstore in the world.
The membership fee will run customers 258 RMB (~ USD 37.85) per year, and members can opt into connecting their Huabei accounts (another smart pay company affiliated with the Alibaba group). If the savings accumulated after 365 days equate to less than the initial membership fee, that payment will be scaled accordingly and refunded.
Membership benefits include one daily produce coupon, one daily protein coupon, two weekly dairy coupons, two monthly restaurant coupons, and a 15% discount towards housekeeping and cleaning services.
In just five years, Hema had already established multiple sub-brands:
Hema Xiansheng (O2O fresh produce retailing), Hema F2 (convenience stores), as well as Hema Market, Hema Mini, and Hema Station — different grocery storefronts positioned to urban communities, suburban locations and everything in between, respectively.
With the addition of Hema X and an upcoming cross border e-commerce experience center in the works, the company has solidified ten different formats horizontally.
But with the introduction of foreign wholesale giants AIDI and Costco, on top of competitor Sam’s Club with its 24 years of experience in the Chinese market, will Hema X be able to emerge and carve out its presence into this ever-changing industry?
The Success of the Low-Cost Approach in the USA
On the surface, Costco’s success seems to be attributed to its paid membership model. The existence of a loyal customer base has helped secure its relevance, even in a time when the retail landscape is rapidly shifting towards e-commerce. But really, the cornerstone of Costco’s value on a consumer level is its wholesale pricing. In other words, the superstore is built on top of an efficient cost-control system.
- Curated SKU: Costco has roughly 4000 SKU codes — most merchandise categories have three alternative options at most. This helps save time on the customer’s end and is also effective in keeping warehouse management costs low.
- Warehouse Store: As a warehouse club, the warehouse functions both as storage and retail space, significantly reducing overhead costs. However, this model also requires a robust and orderly supply chain that can quickly meet inventory demands.
- Suburb location: Costco stores are largely located in inexpensive suburban areas. This specifically works in the American market because almost every American household owns a vehicle, and, as such, transportation does not pose a problem.
- Warehouse volume packaging: Wholesale packaging dramatically reduces the cost of individually packing and selling items. Another benefit of selling this way is that it increases the average transaction value — Costco’s ATV is around three times that of a traditional retail store.
The Challenges of a Low-Cost Approach in China
How does this system translate to mainstream consumers in first and second-tier cities in China, and what are the main differences between Chinese and US consumer patterns?
Firstly, China’s main cities have relatively high and dense populations, resulting in expensive real estate and smaller living spaces. The average residential home is 28 sqm in Shenzhen, 31 sqm in Beijing, and 33sqm in Shanghai, which is starkly contrasted by the US average of 68 sqm. This is also evident in housing structures, as 60% of American family residences are individually owned houses, whereas apartment units only make up 26%. In China, most people live in apartment buildings.
Cultural values also account for differences in consumer habits. Chinese people place great importance in cooking with the freshest produce possible, and as such most households have developed a shopping pattern of purchasing groceries daily or even multiple times per day.
Considering all of this, it’s no wonder that supermarkets were traditionally placed in more convenient (and consequently expensive) central business or residential districts with high foot traffic.
As such, warehouse club retail stores are destined to experience significant obstacles in terms of large-scale growth. For example, even after entering the Chinese market more than 20 years ago, Sam’s Club has only opened 19 locations, occupying very little of the total market shares.
Revolutionary Breakthrough: Hema Xiansheng
Hema Xiansheng was novel in both concept and practice. It took the idea of a warehouse club and implemented physical stores that both served as inventory storage for online shopping and retail space for offline shopping.
For residential communities within 1.8 miles of any given store, customers can either purchase groceries in person or have it delivered within 30 minutes. The product quality, processing time, and customer experience are guaranteed to be the same across all locations.
Under this efficient operational model, Hema Xiansheng was able to exceed the sales of traditional supermarkets of comparable sizes exponentially.
As such, Hema was able to transcend the barrier of costly brick and mortar stores and turn them into central revenue generators, truly realizing an O2O system.
The Hema Xiansheng sales data is a testament to this, as its sales-per-square-meter is 3–5 times that of retail competitors. On average, a traditional supermarket can generate 15k RMB (~ USD 2200) per square meter; Hema, on the other hand, is projected to create 100k RMB (~ USD 14.7K) in the same amount of space.
Will it become the Costco of China?
The offline retail landscape has had its fair share of changes in the past 4 to 5 years. Several key players in the superstore industry have attempted implementing their models of O2O marketing, but most were lacking in execution and consequently saw only short-lived successes.
No matter where these retailers fell short, it is imperative in the era of e-commerce upturn that old sales models are entirely broken down and built anew.
Tianhong’s app-based delivery service was stuck in an awkward middle ground between lowering prices on the app (which would reduce physical store sales), and keeping prices consistent (which would give online retail competitors the winning edge).
Limited in the changes it could make towards its operational and cost structures, Tianhong also failed to fully integrate its online and offline formats and now must juggle two completely different retail systems, a complex and difficult task on its own.
On the other hand, Hema Xiansheng has been acknowledged as the industry’s dark horse, separating itself from traditional competitors with its polished internet-mindset by injecting creativity and novelty into the retail layout, product upgrades, and customer experience.
In examining product categories, Costco’s house brand Kirkland accounts for 25% of total sales (approximately USD 31.5 billion) — in-house brands allow retailers to better control product quality, supply chain, pricing, and revenue.
Hema Xiansheng had followed suit and produced its brand Daily Fresh; Hou Yi’s goal is for Daily Fresh to ultimately constitute at least half of its sales.
In offering premium seafood such as king crabs and Boston lobsters to discounted designer goods, Hema Xiansheng is not unlike Costco in its product selection. By actively leading customers to adopt a new lifestyle, these retailers offer a rare surprise element and foster unyielding customer loyalty in exchange.
Will a paid membership work?
A membership-based grocery superstore’s ideal conditions comprise varied high-quality products and a steady group of return customers.
But paid memberships are incredibly high-threshold for retailers and, in practice, pans out more as a means of building friendship and trust. In other words, the execution is strenuous, and those hoping to make a quick buck should look elsewhere.
Often these models end up lacking in appeal to the consumer’s eye. Yonghui Superstores, for example, had recently rolled out its own paid membership program, but other than listing certain items with members-only pricing, there was no other unique element that added towards memorable customer experience.
As Hema ventures into a membership model, it must consider brand power, consumer demographics, and methods to foster loyalty. To this end, the Hema X Store is a great challenge as it must let go of many previous strengths (such as reliance on residential communities to drive business) and once again start from scratch.
In realizing that Chinese retailer brand recognition was lagging behind that of international superstore players, Hema is choosing to utilize this as an opportunity to turn things around. Under the media’s anticipation of a completely modernized retail approach, the Hema X Store may just mark a new chapter in the evolution of Chinese consumer culture.
