E68 – The Impulso Podcast – Alibaba is giving up on new retail

Last week, Alibaba announced that Hou Yi, the founder of the Hema (or ‘Freshippo’) retail chain, will retire as CEO, to be replaced by CFO Yan Xiaolei. What does this mean for Hema

Hema, positioned as premium retail, reflected Alibaba’s anticipation that consumers would become more affluent and upgrade their consumption habits. However, Alibaba is now pivoting back to its core focus on Taobao and its users as it undergoes its biggest transformation in history.

Amidst this transformation (which prioritises core ecommerce and cloud/AI), the role of Hema and other offline retail stores becomes uncertain. Where do Hema (and Alibaba’s other offline retail stores) fit into this overall strategy? And what’s next for them?

Tune into the full episode here:

Also available on Apple Podcasts.

Featured materials:
Alibaba is giving up on Hema and offline retail?, TheLowDown

Alibaba’s Hema Supermarket – China’s new retail revolution, TheLowDown

Transforming Alibaba, Momentum Works

Why is Lazada CEO taking over Daraz?, The Impulso Podcast 

Why does Alibaba replace taobao CEO?, The Impulso Podcast

[AI-generated transcript]

[00:00:00] Sabrina: Hello everyone, and welcome to episode 68 of the Impulso podcast. So on today’s episode, Jianggan and I are going to be discussing the recent leadership changes at Hema, which is Alibaba’s premium grocery store, and what this actually means for Alibaba’s offline retail businesses. So to set a little bit of context, last week, Alibaba announced that Houyi The founder of Hema will retire as CEO and has been replaced by CFO Yan Xiaolei.

So Jianggan, maybe you want to tell our listeners what actually is Hema? 

[00:00:35] Jianggan: Sabrina, I thought you speak Chinese and every time you try to pronounce something, you always get the tone wrong. 

[00:00:41] Sabrina: There’s no Hanyu pinyin in the text. 

[00:00:43] Jianggan: But the name is exactly Hanyu Pinyin, Houyi, oh yeah, it doesn’t have the tones.

[00:00:47] Sabrina: It could be any tone. 

[00:00:49] Jianggan: Yeah, but that’s some tones, I mean, it would be weird. You can’t go in like Houyi. Anyway, so. 

[00:00:57] Sabrina: So what is Hema. 

[00:01:02] Jianggan: Hema is a premium sort of retail chain by Alibaba. It was started in 2015. I think that they call themselves Freshippo. So basically, it’s the English name for Hema which like people time is right.

And it started with quite a sensation in China because it had a few things that traditional offline grocers or retailers do not have. You would have a lot of fresh seafood. You have people processing a fresh seafood only for you in a store, and you can have that there. And also you can order things from the store and delivered within a 30, I think, three kilometers or 30 minutes radius.

So they guarantee like 30 minutes delivery. So and to facilitate that, they have the conveyor belt system in the store. So somebody would pick the goods ordered. From the shelf and place that in a basket, the basket would go through the convertible built on top of your head, then go to the sorting part, then get past to the delivery rider and who basically send this to your house.

So, it has been a sensation and over the years, it has diversified a little bit. So, in addition to the basic, like, fresh grocer, they also had a membership store, pretty much similar to Costco or Walmart Sam’s club. They also have some outlets. I’ve not been to an outlet. I don’t know what a fresh outlet looks like.

 They also experimented with a smaller concept, like convenience stores selling fresh. So yeah, so it’s basically one of the retail concepts of Alibaba. 

[00:02:35] Sabrina: And I think last week when we were in Shenzhen, you went to a few Hemas, right, and you also tried out their facial recognition checkout. 

[00:02:43] Jianggan: I didn’t try out it. I’ve been using that for years. Right. So basically, when you have the Hema membership. When you have the Hema app. So what it can do is that if you use Alipay at the checkout counter, so we just, I mean, of course you do the normal self checkout, you scan items and stuff. And after summary, you can choose pay by face.

 So they will scan your face and process, the payment. It’s actually pretty fast. 

[00:03:06] Sabrina: Sounds very convenient. 

[00:03:08] Jianggan: It is convenient because you don’t have to take anything out, right? You just need to stare at the screen for like half a second, then the payment is done. 

[00:03:18] Sabrina: So I think you mentioned Hema started with more of a premium positioning.

They started in about 2015, 2015, and they were targeted towards premium customers, right? Because Alibaba made a bet that consumers would become more affluent, eventually upgrade their consumption habits. 

[00:03:35] Jianggan: I think during Alibaba’s previous CEO, Daniel Zhang’s term, I think since 2016 or 2017, the whole concept that they were betting on is the urban middle class in China would improve their spending power, would improve their livelihood, and thus their spending patterns, right?

So, moving from Basic goods sold by Taobao or unbranded items to branded items. And of course people are willing to pay premium for everything in their lives because they expect the future to be better. So that’s why, I mean, the group focus a lot more resources on Tmall instead of Taobao.

And Hema was also an attempt by them to serve the, the sort of, Is there a word for premiumization, whatever, of 

[00:04:17] Sabrina: premium, premiumization 

[00:04:20] Jianggan: Of the urban consumers. So yeah. 

[00:04:22] Sabrina: But of course we’ve seen that since last year, Alibaba is going through one of its biggest transformation in history. If you guys are interested, we did release a report called transforming Alibaba, which would be linked in the show notes below and in our report and in several podcasts, as well as articles, we’ve mentioned that the group seems to be moving back to its core users and Taobao, right? So they are no longer going for this premium positioning. 

[00:04:47] Jianggan: I think the group faced a lot of threat. I mean, first is macro, right? So I mean, since the pandemic the middle class in China have been much more cautious with their wallet.

And the desire to compete against each other in, in terms of how premium their lifestyle is has diminished people are proud that they’re actually making more value out of their money. So this is, I think, a sign of a society becoming a little bit more mature because in developed countries, and people go for a value for money, especially the middle class.

 So there’s also the challenge that I think the likes of Pinduoduo is posing to Alibaba because they focus on extreme savings and people start wondering for the same products, why do I have to pay 30 percent extra? So that’s the big context. So last year when Alibaba first announced restructuring.

[00:05:37] Jianggan: Remember, that’s one plus six plus N structure. So the group will be divided into six major groups, plus a number of independent businesses. And the independent businesses will pursue their own IPO. I think Hema was classified as one of the independent businesses. I think the specifically mentioned that Hema will go and pursue his own listing.

If you search for the news archives. I remember like the last like the second or third quarter of last year, there were quite a number of articles about Hema expanding in pursuit of the IPO and they want to open more stores, etc. But that exactly. It’s a problem for Hema, because it has this premium positioning, right?

And premium consumers even in China are probably limited or it’s a relatively small subsegment of the total population base. I think that the previous prime minister the question I should have mentioned the previous year saying that, There are 600 million people in China who are living on probably about one to 2000 RMB per month income.

So this shocked lots of people around us. They said, okay, because I mean, people in tier one, tier two cities, they are earning salaries of like 15, 20, 000 or even more. And many of them can’t imagine that in a society that the majority of the population still are not that rich. So when Hema tries to expand inevitably they will want to serve the customers who are more stingy with their money, or who don’t have as much money to spend. So inevitably they have to start offering goods, which the premium customers would start wondering why offering this in a, you know, sort of premium supermarket.

[00:07:18] Sabrina: Would it make sense for Hama to open a Sort of spin off. So for example in Singapore, the grocery stores we have different tiers, right? So for Cold Storage, there’s Cold Storage, Cold Storage, 

[00:07:33] Jianggan: giant giant 

i think belongs to, 

[00:07:34] Sabrina: I think giant is under Cold Storage as well. It’s the 

same group.

What’s that premium Cold Storage, Cold Storage,

[00:07:39] Jianggan: CS fresh?

[00:07:40] Sabrina: CS fresh.

Yeah. 

[00:07:41] Jianggan: They used to be just as marketplace, but eventually I don’t see the difference between 

[00:07:45] Sabrina: CS fresh and CS marketplace. 

[00:07:47] Jianggan: No, CS is marketplace and a normal Cold Storage. 

[00:07:50] Sabrina: And then for NTUC, we also have like NTUC FairPrice, NTUC Finest, NTUC Extra. Do you think this is something Hema would explore so they could have a Hema that targets premium customers and then a sort of subsidiary for mass consumers?

[00:08:06] Jianggan: I think Sabrina is still coughing. She has been coughing since Shenzhen and we have been trying to figure out why she has been coughing from Shenzhen. We couldn’t figure out why because when we were there, the air quality was good. And the air was humid, nobody is smoking. 

[00:08:23] Sabrina: But if you come from Singapore, the air quality that actually isn’t that humid.

[00:08:27] Jianggan: Really? 

[00:08:28] Sabrina: Yeah. 

[00:08:29] Jianggan: Okay. 

[00:08:29] Sabrina: I felt it when I came back. I felt like, Oh, Singapore is so much more humid. 

[00:08:33] Jianggan: That’s interesting. Yeah. I think it’s relative once we’re used to a certain level of humidity and slight change would actually trigger some reaction in the body. But Are we deviating from our talk course? Yes.

Okay. What was the question? 

[00:08:47] Sabrina: What is the likelihood that Hema would open a, like, subsidiary or spin off targeted towards mass consumers? 

[00:08:54] Jianggan: Oh, I think I mean, to answer this question, you have to go back to Alibaba’s whole new retail strategy. I think Jack Ma talked about new retail in 2016, if I remember correctly he mentioned that so in future, there’ll be no eCommerce, there’ll be no, like, offline retail, there will only be new retail, which is embedding online and offline.

So to pursue this strategy, Alibaba has historically acquired or invested in, or incubated three different subsidiaries. One is Hema, which is premium retail, pioneering lots of new concepts. One is SunArt, which is the, which is the mainland Chinese arm of a Taiwanese retailer. So they’re famous for running like Walmart or Carrefour kind of like large hypermarket retail concepts.

So that’s under Alibaba. And they have another one called in time.

[00:09:48] Sabrina: In time retail. 

[00:09:50] Jianggan: Yes. Ross department stores. And I think they also operate some shopping malls as well. They also operate like fashion retail for brands. So Alibaba has this three. And I do remember that I have some friends who worked in both Hema and SunArt.

And that described to me that the cultures of two companies are very, very different. So some details, right? Hema is technical. You try new concepts. Everything’s built from scratch. Everything is digital. And I think more than half of the the orders or more than half of the transactions come from online.

So it’s a totally new retail concept, which has been built by Alibaba. Then you look at Sun Art, it’s a traditional retailer acquired by Alibaba and It’s going through a very painful digital transformation as well as we know. Right. So even I think until last year, it’s still nowhere as digital as Hema and a lot of knowledge, according to this friend of mine, still kept in sort of experienced employees head.

So he was saying that, okay, for this category, if this guy retires, I don’t know what to do. And also another thing is. For Sun Art. It is extremely difficult to recruit young tech and product professionals to work for them, because I mean, if I’ve had like, the best tech education, which you want to work for a traditional retailer.

 So here is the exact question, right? Back to your proposal question about, I mean, will Hema open a. Like, you know, traditional mass retailer. I think they can theoretically, but realistically it will be quite hard for them because first there are guys who have been doing this for decades and they might not have the most sophistication in terms of customer profiling, et cetera, but they probably have the sophistication in how to run this at scale and efficiently.

 So it would be very hard for them to compete effectively without requiring too much capital. And now if you look at whole of Alibaba, I mean. They want to make sure that the new businesses, including actually breaking even and eventually making a profit. So that goes against the mantra of the group.

And the 2nd is that, I mean how does the group have the attention for this? Because even now they’re finding it troublesome to manage the existing businesses. 

[00:12:05] Sabrina: And I think they also mentioned that they’ve identified core e commerce and cloud or AI as their focus for this year. Right?

Especially as we all know, competition is heating up, especially in the e commerce scene. So, yeah, the question is where do these offline retail or new retail stores actually lie in their priority? 

[00:12:23] Jianggan: True, because if Alibaba had, I mean, still has the sort of 80 percent market dominance as they had in 2017, they probably wouldn’t mind.

I can spare yourself the group to resources to try out new concepts, which you don’t know what they will succeed or not. But now with the, with the core battle, in e commerce and AI and cloud, they probably want to focus their resources. I think Joe Tsai the group chairman. He said specifically in the earnest call was it this month or last month?

Basically, the latest earning call, he said that, quote, we have a number of traditional physical retail businesses on our balance sheet, and these are not our core focus. 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. Unquote, so it’s very specific that they want to exit the physical retail businesses. 

[00:13:14] Sabrina: So it’s interesting that I guess they kind of started this when they were the market leaders, right. And now as competition intensifies, they’ve changed. I think one thing we’ve seen through this, Alibaba’s transformation is that for an organization of their size, they’re actually pretty agile when it comes to this transformation that they’re doing.

[00:13:33] Jianggan: Are they? 

[00:13:34] Sabrina: I think compared to other big organizations, if another big organization were to do a transformation on this scale, I don’t think they would be as agile. I feel Alibaba isn’t scared to exit markets where they know they are, they don’t have time or energy to spend. 

[00:13:50] Jianggan: True, true, true. I think with the current leadership. They’re not afraid to make drastic decisions fast. They’re not afraid of reversing some of the decisions they made barely a few months ago when they realized that things are not working out as they hoped. Which is good. I mean, but it also goes back to their core. They’ve started as a tech company.

 And they’re used to, like, you know, making quick decisions and making changes very fast. How well this will be conducted throughout organization, because now it’s almost a quarter million people with very complex layers of management. So it’s still quite challenging, But I would say that what you have just described the ability and willingness to make drastic and quick decisions is the prerequisite , for the success of the transformation.

[00:14:32] Sabrina: And I think maybe coming back a little bit, since we’re talking about leadership changes, right? I mean, this isn’t the first. Leadership change that we’ve seen. So in December last year, Alibaba announced that Eddie Wu, who is the CEO of the group, will also serve as the CEO of Taobao and Tmall. And of course, earlier this year we knew that Lazada had undergone some shuffling as well.

And Lazada, CEO, James Dong also took over as the acting CEO of Daraz. But I think this time round it’s a little different, right? 

[00:15:02] Jianggan: Well. I’ve heard lots of rumors about the management style and also the focus and also the conflicts within Hema itself. I will not talk about that on this podcast, but what I did find interesting is, you know, every time there is a leadership change the group would come in and acknowledge saying, okay, this guy has, I don’t know, been instrumental, be pivotal to this to whatever business he was leading until then.

But this time, I don’t think the group has made any such announcement. There are lots of speculations about why that’s the case, but clearly, I mean, some people are not happy with some people. Oh another thing which was interesting about Hema is their relationship with landlords, the shopping mall operators.

Yeah. So you usually know that the supermarkets are able to command preferential rent because they are supposed to be a key tenant, bringing customers to the mall, right? I mean, people go there regularly for grocery shopping and while they’re there, I mean, they might as well, I mean, go around the mall and buy other stuff.

So Hema when with this proposition, so they secured I think preferential rents with lots of landlords and now they’re facing challenges, renewing such good terms. The reason do, you know.

[00:16:16] Sabrina: Because most people buy online, right? Yeah. So they’re not actually coming to the mall. 

[00:16:20] Jianggan: I think between 55 to 65 of the Hema’s orders actually came from online.

And that made the malls wonder that, okay, does Hama actually bring me the customers? Or they actually keep driving away customer, customers away from the mall because it’s so convenient taking order from home. So there are lots of complex considerations here. But I don’t know, I mean, you do get a chance to go to Hema last week.

[00:16:43] Sabrina: No, I didn’t. 

[00:16:44] Jianggan: Sabrina had been working. 

[00:16:45] Sabrina: I went to two grocery stores, but none of them were herbal. 

[00:16:48] Jianggan: Oh, which ones did you go to? 

[00:16:50] Sabrina: I forgot the name. One of it was O L E. 

[00:16:52] Jianggan: Oh, Ole. Ole is owned by China Resources. It’s also, it’s also relatively premium, right? 

[00:16:56] Sabrina: It makes sense. I was in MixC. 

[00:16:58] Jianggan: Yeah, it’s large, it’s premium. And if you go around, you see them trying to tell stories about goods that they sell.

And there’s lots of like seasonal products and stuff. Aiya, you missed the whole point. 

[00:17:09] Sabrina: Yeah, I was there. I was in and out in less than 10 minutes. Because I just went in and grabbed snacks and then I left. 

[00:17:17] Jianggan: Okay, which is the other one you went to? 

[00:17:20] Sabrina: I can’t remember the name. Really .

[00:17:23] Jianggan: Big, small, premium. 

[00:17:24] Sabrina: It’s quite big as well, but I don’t know the name of the mall either.

 I don’t pay a lot of attention.

[00:17:31] Jianggan: Okay. Sabrina had been going around in Shenzhen shopping without knowing where she was shopping. Okay. Yeah. That’s all facilitated by the ability to make payments with Alipay and WeChat, right. Nowadays, yeah. As a foreigner. 

[00:17:42] Sabrina: Yeah. I don’t have to know where I’m going.

Yes, I just show up and pay. 

[00:17:46] Jianggan: As long as you can pay. 

[00:17:48] Sabrina: Okay, maybe one last question to close the episode. So, with this leadership change, and of course we know that now, Hema’s initial strategy as a premium grocery store doesn’t align much with what Alibaba group is going towards in its transformation.

What do you think is next for Hema? Do you think they’re just, you know, going to wait it out until they eventually exit, or do you think they’ll try to revamp it? 

[00:18:14] Jianggan: I think now a CFO is in charge. Right? So she will probably look into the options they have. Right? So, Hema had been doing some expansion.

I think as group is still losing money and she and team will probably need to figure out exactly how to turn this around. Whether it’s under Alibaba’s continuous leadership, or it’s been sort of divested or sold to somebody else. So I think this, this options are possible. So the question is that I mean, what will Hema be like, I mean, after whatever that has been decided or will be decided. Personally, I quite like their premium positioning.

I mean, it differentiates them from other supermarkets that you go to in Shenzhen and other tier one cities. I think if they have the right focus, if they manage to sort of make sure that from an organization point of view, it’s run like a professional organization rather than a family business they’ll probably get somewhere.

I really do hope that you’ll still be able to go there regularly and buy their like fresh seasonal produce. I mean, it’s pretty good stuff. 

[00:19:16] Sabrina: So thank you guys for tuning in to another episode of the Impulso podcast. We hope that you guys enjoyed today’s episode. And if you did do like our podcast and follow us on Spotify, Apple podcast, or your preferred podcast platform to stay up to date on the latest happenings and trends in tech, new retail and the broad digital economy.

[00:19:33] Jianggan: Bye bye.