Hema, part of the Alibaba Group, opened its first “new retail” grocery store in February 2015 and has been opening new stores at a rapid pace over the past few years. By the end of 2017, there were 25 Hema stores, mostly in Tier 1 and Tier 2 cities. Today, however, that number has already increased to 65 stores and expansion in the near future calls for 150 stores by the end of 2018. As of 2019, expansion will be accelerated to 2,000 stores in the near future.

Opening up stores in Tier 1 and Tier 2 cities in China makes sense from Hema’s perspective as it targets a younger group of customers. These consumers are better educated, have some money to spend and have an open mind for new technology and new experiences. Hema positions itself as the “one-stop shopping for food and beverages, with high quality and at an everyday fair price”.

Yesterday, we visited one of the Hema grocery stores in Shanghai and met with Hema representatives at their Shanghai headquarters. We arrived in Shanghai with our delegation of 45 C-level Dutch retailers, brands and retail influencers as part of our 2018 ShoppingTomorrow study trip.

Grocery, new retail beyond 2020

Hema’s physical grocery stores are part of “new retail” in China – a blend of online, offline, logistics and data across a single value chain. Alibaba has been one of the leading online companies with significant investments in physical retail, including electronics giant Suning and department stores Intime. It is Alibaba’s effort to bring online and data analysis in physical stores. At the same time, Alibaba reinvents retail by opening up new physical retail concepts, such as Hema grocery stores and Taobao cafés, and backing it up with Alipay advanced payment technology.

The Hema experience

Walking through the Hema store is an extraordinary experience and provides for a combination of catering and retailing. Surely you can pick out your fresh fish, clams or lobster, have it prepared for you while you do your shopping and have it dished up for you in the Hema restaurant after you receive a notification that your dinner is ready in your Hema app. And off course, you only place your order after you check the origin of all of the fresh fish, produce and other articles – with the help of a little blockchain technology. These instore restaurants are partly operated by Hema, but also include some concession restaurants, changing a visit to the Hema store into a family outing, especially in the weekends.

As we had our tour of Hema on a Wednesday, the store was especially crowded with dozens of Hema staff, helping out customers, stacking products and produce, and picking online orders instore. Hema’s business heavenly relies on online orders: in the past six months over 70% of all orders came from through the Internet. Backbone of the “new retail” experience is the order and delivery concept, which guarantees delivery – through an e-bike – within 30 minutes within a three-kilometer range. With no minimum order in value a heavy load of articles is as easily delivered as say an apple or a bottle of water. Crucially important for a timely delivery are the push notifications Hema customers receive when things do not go as anticipated. New timeslots are proactively offered if something goes wrong, for example in case of bad weather or an unexpected rush of orders. Managing customer expectations is key to happy and satisfied customers, who order at an average of two to three times a week.

Hema’s (profitable) business model

With an average market wage in China between €1.50 and € 4.50 an hour for order pickers and delivery people, it should come as no surprise that Hema’s business is – according to Hema itself – profitable. Other factors that (according to Hema) contribute to their profitable business model are the trust that is built between Hema and its shoppers: interactive communication, for example through reviews, helps Alibaba to, among other things, perform better and add products to categories. Push notifications, not only for delivery options but also to push the fresh produce of the day, help build customer loyalty. It also provides Hema with the much needed data to monitor Hema customers, who according to Hema spend 2,5 times more than in a regular supermarket. This leads to a revenue for Hema that is supposed to be four times as high as in regular stores.

And if you wander how Alibaba can compare its Hema grocery business to regular supermarkets? It has become a major shareholder of the Chinese supermarket chain RT Markt, once the China business of the French supermarket Auchan. For Alibaba, its new business as usual, as part of its “new retail” strategy bringing online and offline together from the perspective of “reinventing retail”.