Alibaba’s Hema supermarkets present the model for the future of retail

Alibaba has introduced the “new retail” concept in China through its Hema supermarkets. At this initial stage of development, Alibaba seems to benefit more than its consumers.

By Tay Xiaohan

A quick check on Alibaba’s Hema mobile application shows that Alibaba has opened 25 Hema supermarkets. The key concept of Hema supermarket is to provide consumers with a “new retail” experience. Customers can either use the Hema app from the comfort of their homes or physically shop and scan the product barcodes. After selecting the items on the app, customers can link their Alipay account to make payment. Finally, the staff will deliver the purchased items to their houses within 30 minutes. However, Hema’s novel concept only works on customers living within the supermarket’s 3km radius. If the customer does not live within the stipulated 3km radius, the shopping experience will be like any other supermarket.

Screenshots of Hema app: List of Hema supermarkets (left)
One of the grocery item available for purchase (right)

The shopping process is rather manual for the average consumer living outside the 3km radius

Most customers may end up walking around the supermarket, pick out items and carry them along. At the checkout counters, customers can pay using their linked Alipay account or through facial recognition. That is perhaps the only differentiating factor from the existing supermarkets. In a “new retail” supermarket, one would think that he or she will be able to pick out items using an app and collect them directly at the cashier later.

The Hema supermarket also offers consumers the option of having their seafood cooked immediately. But, its five-step process proves to be extremely cumbersome – physically selecting the seafood, weighing the seafood, getting a number to queue up, pay and later collect the cooked food. If consumers can have the flexibility to purchase live seafood through the Hema app, the whole process will be more efficient. By cutting down the first four steps, consumers will only have to head to the counter to collect the cooked food. In the future, the final step of food collection could be replaced by robots or conveyor systems.

Image of a Hema employee passing consumer a packet of crabs (left)

Image of the five-step process to purchase the live seafood to get it cooked (right)

Alibaba’s futuristic “New Retail” strategy

Essentially, the key aim of Alibaba’s “new retail” strategy is to combine the strengths of online and offline retail presence. The strategy is increasingly crucial as offline sales and online sales’ growth decline. Alibaba hopes to use a more efficient way to drive sales on both platforms. Arete research analyst Li Muzhi noted that overall growth rate of China’s e-commerce markets has normalised at 20% compared to 40% a few years ago.

In January 2017, Alibaba also announced a bid to privatise InTime Retail, which is a leading Chinese department store and mall operator. It also later announced its strategic partnership with Chinese retail group Bailian. According to Hema’s founder Hou Yi, “Hema aims to open 2,000 stores in the country”.  It is clear that this is the future direction of Alibaba. During Singles’ Day this year, Alibaba also experimented with this “New Retail” concept by converting 100,000 stores throughout China into “smart stores”. The “smart stores” brings about a range of new retail experiences to consumers such as facial recognition payments. There is definitely much to expect in the future as Hema offers a glimpse into what consumers can expect in the future.

Statistics cited by Alibaba seem impressive at first glance. Customers make 4.5 purchases a month on average and 50 times a year. Among those who open the Hema app, the conversion rate for making a purchase is as high as 35%.  However, Hema continues to incur high operating costs due to the prime locations of its supermarkets. The exorbitant cost of expansion may be a deterrence to its growth in the market. Hema could either expand its delivery network or open up more supermarkets around the urban areas. Both ways would incur further cost, and Alibaba has to find its balance to provide benefits for a bigger group of consumers.

It may be more profitable for Alibaba to collaborate with existing partner brands.  Greater efforts to encourage the adoption of “new retail” concept amongst brands with existing online stores will minimise the need to invest in more supermarkets. This change in focus will help reduce its capital outlay. Alibaba can also continue to increase its customer data collection and the efficiency in Hema supermarkets.

Hou Yi has also said that “when the model is more established, it can be shared with other traditional retailers to help them transform in the digital age.” Alibaba’s success will send a positive signal to more retailers and encourage them to join the bandwagon. That way, the supermarket industry can ensure prosperity in the changing times.

The Hema supermarket concept ultimately helps Alibaba to increase its base of users

The main benefits of Hema supermarkets are the fresh seafood offerings and the prompt delivery service. It is not easy to find fresh seafood in supermarkets in cities such as Beijing. Neither is it easy to promise fresh food deliveries within 30 minutes.

With the forced usage of Hema App and Alipay as the only accepted payment at these supermarkets, Alibaba successfully forces consumers into its ecosystem. Alibaba stands to benefit from an increase in users. These additional users join the steady stream of offline store shoppers in providing customer insights. The database of customers insights will ultimately enable Alibaba to market its products to consumers better.

With current dynamics, “new retail” is the way forward. However, it may take time for this model to be take off with optimal efficiency. Till Alibaba further boost its data and smart logistics technology to bring about greater consumer benefits, Alibaba will appear to benefit more than its customers.