December 21, 2017

China’s Revolutionary Hema Supermarkets: “New Retail’s” Real Deal

China’s commercial culture has long been unfriendly to mold-breaking innovation. Hierarchical regimentation reigns. “Reform” is incremental. The immaturity of markets encourages (an unsustainable) short-term speculative and tactical orientation.  And Chinese corporate governance dictates that CEOs, especially in large state-owned enterprises (SOEs), have one eye focused on the market and the other on political imperatives.

Although one swallow does not make a summer, the blistering success of Hema, a chain of supermarkets owned by e-commerce behemoth Alibaba, proves large Chinese corporations do have the capacity for extraordinary innovation. Questions remain, however, whether Hema will be an exception that proves the rule.

What’s Hema?

Upon first glance, Hema is a well-managed Chinese supermarket. There are currently 13 stores, mostly in Shanghai. They boast an impressive array of dry and wet goods. There are in-store restaurants so shoppers can select live seafood and eat on the spot. (The Chinese are obsessed about freshness. In fact, there are two Chinese words for freshness, one for “crisp” fruits and vegetables and another for fresh-from-the-slaughterhouse meats.) Hema’s delivery service is also first class. Online shoppers receive free delivery within thirty minutes.  And purchase with Alipay, Alibaba’s virtual payment system, is a leap towards China’s status as a wallet-free society.

Hema also offers state-of-the-art online-to-offline (O2O) brand experience. The combination of a user-friend app and barcodes on all items provides up-to-the-minute information on every piece of merchandise. This includes sourcing, brand heritage, price points and nutritional value.

China’s New Power Brand?

Until recently, China’s grocery retail scene was primeval. Customer service was an oxymoron. A walk down the aisles of locally-managed chains such as LianHua, HaiHang and Bubugao is a depressing experience. Ultra-bright lighting, wilted produce and scowling employees assault the senses. (Due to operational rigidity and cultural tone deafness, no international hypermarket — Carréfour, Walmart or Tesco — has achieved broad scale.)

Hema, on the other hand, oozes customer-centricity. In-store restaurants build a sense of community. Layouts are easy to navigate and address Chinese sensibilities –for example, live produce is placed near the entrance. Stores are bright and sturdily constructed.

As Prophet’s Brand Relevance Index findings reveal, the Chinese are amongst the most brand-friendly consumers in the world. They want brands to play a relentlessly relevant role in their lives. This can be achieved across a variety of dimensions:

  1. Customer obsession – How in touch a brand is with how consumers live and work
  2. Distinctive inspiration – Is a brand motivated by a clear purpose?
  3. Ruthless pragmatism – Does a brand make experiences reliable and widely available?
  4. Pervasive innovation – Does a brand push the status quo with novel solutions to life?

Hema promises to hit home runs on all four. (A personal bet: in 2018, Hema will rank amongst the BRI’s top ten brands.) Assuming expansion plans proceed smoothly, there will be more than 1,000 supermarkets across the country by the end of 2018.  As it achieves broad scale, the brand will project profound cultural resonance.

Consumer Lifestyle Liberation

First, Hema provides multi-level reassurance. China is the ultimate low-trust society. Economic, social and political interests remain unprotected by impartial institutions.  Food, specifically, is dangerous stuff.  The fear of contamination has been acute since 2008, when hundreds of thousands of babies developed kidney stones due to a supply chain compromised by corruption. (Parent pay 300% premiums for imported infant formula.) In this context, Hema’s transparency is manna from heaven. QR code displays reveal the origin of every product – where it was made, where it’s from – as a guarantee of quality. Shoppers breathe a collective sigh of relief.

Second, the Hema purchase process frees consumers from the tyranny of the check-out line while introducing new levels of “seamless product trial.”  Rather than piling all goods into a cart and handing over cash over to a surly worker at the cash register, shoppers can “graze and pay” as they go. Imagine a woman enticed by a tropical fruit she may serve at a dinner party. With Alipay, she can buy just one, take a bite, and buy ten more later if the product passes muster. Or she can order online for delivery just before the event.

Third, the supermarket opens new worlds of discovery. Until now, food shopping is notorious for repetitive monotony. But Hema’s multidimensional O2O experience turns shoppers to connoisseurs of the exotic. Buyers are instantly provided information about, say, a novel dessert’s provenance or recipe ideas for unusual seafood dishes. In China, a nation obsessed with sending pictures of food through cell phones, culinary adventurism is tantamount to lifestyle elevation. Given the ubiquity of social media platforms WeChat and Weibo, cuisine is translated into “face” – that is, currency of social advancement. “Showing you know” is a weapon on China’s competitive battlefield of life.

A New Wave of New Retail? 

Is Hema the shape of things to come? Time will tell.  Some traditional supermarkets such as YongHui and RT Mart have tried unsuccessfully to copy Hema’s model.  Entry barriers are high. They include the need to guarantee freshness and offer low prices, both of which depend on the resources and scale of Tmall, Alibaba’s business-to-consumer (B2C) online platform.  Furthermore, some benefits require operational innovation conventional stores are not ready to undertake – for example, standardized packaging weights to ensure identical on- and offline SKUs.

Still, Hema’s trailblazing triumph is a revelation for consumers, proof that the combination of corporate scale and inspiring O2O engagement can yield a breakthrough China can be proud of.

With thanks to Qi Si for his research and strategic thinking