HOW ALIBABA’S HEMA SUPERMARKETS COPIED SAM’S CLUB (AGAIN)

Recently, I reported that Alibaba’s Hema Supermarket is experiencing 40% growth this year. There are multiple reasons for this success. After the founder, Hou Yi, resigned, Alibaba discontinued many unsuccessful formats and refocused on the high-end supermarket (Hema Xiansheng) and the community discount supermarket (Chaohesuan NB, formerly Hema NB).

But there is more: Hema adjusted its business model. Hema always ran stores that integrated home delivery. This ‘store + warehouse’ model is characterised by order-picking staff and a transport system located beneath the store’s ceiling.

But while it offered both a physical store - helping build a new brand and offering retail experiences - and home delivery, fulfilment is less efficient than with front-end warehouses (FEWs) that companies like Meituan, Dingdong and Pupu use.

Hema previously operated front-end warehouses in 2019 but closed them, with Hoy Yi claiming they were unsustainable ("low average order value, high loss and insufficient gross profit"). Hema’s competitors have proven him wrong.

Walmart’s Sam’s Club employed a mixed model: a physical store in the suburbs that also offers next-day delivery, combined with ‘cloud warehouses’, a variation on the FEW, in residential areas near consumers. There, Sam’s Club stores about 25% of its full assortment for fast 30-minute delivery.

Hema has never shied away from copying Sam’s Club. Its Hema X copy was discontinued this year due to limited success. Now Hema is copying Sam’s Club’s cloud warehouse idea. It currently has approximately 200 FEWs, half of which are located in Beijing and Shanghai, where instant retail penetration is approximately 18%. Every warehouse handles an average of 2.600 daily orders.

If goods a consumer orders are available in a FEW, they will be delivered within 30 minutes (72% of all orders). Otherwise, the store will replenish the goods, and delivery will occur within an hour.

After integrating with Taobao Instant Commerce, Hema now has a daily order volume of 2 million, with an AOV of RMB 55-65 (~€6.5-€8). Fresh produce loss rate has been limited to 3.8%.

Hema can now expand its service area without opening additional stores; FEWs help increase its delivery density (it previously had less success with expanding the store delivery range to 10 km).

Hema’s FEWs still face challenges:

▶️ Reduce costs and improve gross margin: Fulfilment costs (including rent, operation and spoilage) is 21%. Hema’s gross margin on fresh produce is 12.7%. If fresh produce accounts for >60% of sales, costs can’t be covered.

▶️ External competition (Meituan, Pupu, Dingdong) and internal cannibalisation (stores).

▶️ Quality control and efficiency differences across cities. In 2024, 35% of customers in the overall instant retail market were lost due to products failing to meet expectations. Efficiency in some FEWs in Xi’an is 20% lower than in Shanghai.

Source: Liangshang.

-Ed