Hema is hoping that a premium model relying on higher average order value and greater margins can lead to long-term success in China’s online grocery market.

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On July 7, Alibaba’s “new retail” initiative, Hema, launched a local grocery pick-up business called Hema Neighborhood. Hema has struggled to establish new avenues for growth beyond its core supermarket operations, with Hema Neighborhood being the ninth retail initiative since the company was founded in 2015. Other than its Hema Fresh supermarkets, none of the verticals have scaled up significantly.

Recognizing the unsustainability of community-group buying for groceries, which relies on subsidies to acquire and retain users, Hema is looking to find a sweep spot for its retail grocery operations that moves beyond competing on price points, president Hou Yi said. Hema Neighborhood will offer better quality products than other online grocery platforms, Hou said, but will also charge higher prices.

Orders on Hema Neighborhood have an average value of RMB 30 (USD 4.63) compared to the sector’s average order value of around RMB 10 (USD 1.54), according to Hou. Hema Neighborhood’s customers have access to the same catalog of 20,000 SKUs found in the company’s supermarkets, available for next-day pickup at local service stations. So far, Hema Neighborhood has opened 400 service stations in residential neighborhoods in 10 cities, including Beijing, Shanghai, Guangzhou, Wuhan, and Xi’an. Each station covers around 3,000 households, Hou said.

Hema Neighborhood represents the most important business for Hema in the next ten years, Hou said, wary that he made a similar comment about Hema Mini last year. Hema Mini was introduced as a major objective for the company in early 2020, but ended up in failure. Only 14 Hema Mini stores were opened by the end of 2020, well short of the company’s target of 100 locations.

Hou admitted that he has been learning from these experiences in the secor, and explained how it has better prepared him for Hema Neighborhood. Going forward, Hema Neighborhood will be judged on three metrics—user growth, the rate of repeat business, and the three-month retention rate, Hou explained. As this new business line matures, Hema will look to scale this service into lower-tier cities.

KrASIA Connection features translated and adapted content published by 36Kr. This article was originally written by Peng Qian for 36Kr.


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