Alibaba is giving up on Hema and offline retail?

Last week, Alibaba announced that Hou Yi, the founder of Hema (or “Freshippo”) retail chain, will retire as CEO, replaced by CFO Yan Xiaolei. 

The news came amid intense speculation earlier in the week that Hema and Sun Art Retail, two offline retail groups under Alibaba, would be sold to COFCO, a state owned food giant. Both Hema and Sun Art denied this. 

Hema, with its premium positioning, fresh seafood, facial recognition checkout, and own-branded seasonal produce, was once a sensation in China’s “new retail revolution”. What is happening now? 

Some thoughts:

1. Alibaba is going through its biggest transformation in history (we have published a dedicated report on this). Initially in the “1+6+N” structure, Hema was meant to be spun off and IPO. However, as Alibaba Chairman Joe Tsai mentioned in the most recent Alibaba earnings call: “…we specifically talked about spinning off companies and raising capital in business units like Hema and Cainiao so that we could put a valuation mark on these businesses. But the caveat when we made the announcement was that all these transactions were subject to market conditions, and market conditions currently are just not in a state where we believe we can really truly reflect the value — true intrinsic value of these businesses”;
2. Also as Alibaba goes deeper in this transformation, it has identified core ecommerce + cloud/AI as the group’s focus. The physical retail assets, including Hema, Sun Art, and Intime Retail, are not part of the core. Joe Tsai was very clear about this in the earnings call: “we have a number of traditional physical retail businesses on our balance sheet, and these are not our core focus. It would make us — it makes sense for us to exit these businesses, but this will take time given the challenging market conditions, but we’ll continue to work on it”;
3. Hema started in 2015 with a premium positioning. Under the leadership of previous CEO Daniel Zhang, Alibaba bet on continuous “consumption upgrade” as the urban middle class in China becomes more numerous and more affluent. However, after the pandemic, with the threat of Douyin and especially Pinduoduo (which focuses squarely on ‘savings’), Alibaba Group is moving back to its core of Taobao and users;
4. Running Hema therefore becomes a challenge – its premium positioning means even in China its scale would be limited; however, if Hema is to move down to serve mass consumers, it will find it hard to compete against other retailers who have been doing that for decades;
5. An important consideration here is again on Leadership, People and Organisation – did the retiring CEO Hou Yi have the same ambitions as the new Alibaba leadership run by group co-founders? How do you manage a core team and organisation in a different positioning compared to the core focus of the group? Who makes final decisions?
6. Hema has also faced challenges from their landlords, who initially gave preferential rents in hopes that Hema would draw in consumers to their malls. However, when more than half of Hema’s orders come from online, landlords start to realise Hema might have done the reverse – keeping the consumers away from malls. As such, they are less willing to give rent concessions;
7. It is not impossible to turn Hema around. The question is whether Alibaba Group has the willingness, leadership attention and right people to do it. Passing the baton to CFO might mean that exit planning is now high on the agenda. 

Our team are frequent visitors to Hema (including during the Live Commerce Immersion last week in Shenzhen), and we actually love the positioning, assortment and generally the refreshing (and constantly refreshed) retail concept. 

Hope it will find the right path to be profitable, and sustainable.