Introduction: 

Other than Taobao/Tmall, the more established business line, Alibaba has another three main business focuses which are Fresh Hema, Ant Financial, and Alibaba Cloud. This report will focus on Fresh Hema. 

Fresh Hema (Hema, 盒马鲜生) will help to bring Alibaba's new retail ambition into reality. Alibaba firstly creates the word "new retail" and define it as a data-driven way to integrate online and offline.

EqualOcean believes that Hema will be one of the most critical parts of Alibaba's future direction and also transform the tradition retail industry in China, or even make China as the future of global retail innovations.

PEST Analysis:

This part will look at the retail industry at the macro level from political, economic, social and technological perspectives.

Political: The 19th National Congress of the Communist Party of China Report pointed out that for now, the main contradiction is between unbalanced and inadequate development and the people’s ever-growing needs for a better life. Better retail experiences are certainly included in part of delivering a better life. Bring innovations to improve efficiencies and customer experiences will be encouraged. 

Economic: The average disposable income per capita is CNY 28,228 increased 8.7% from the last year, higher than the growth rate of GDP.  

Technology: The rapid growth of AI, IoT and big data in China and worldwide will change or even transform the retail industry. For example,  big data has been widely used to analyze customers' preferences.

Social: The existing online shopping habits among the Chinese consumer might contribute to the adoption of the new retail model. Global Consumer Insights 2018 ("GSIC") published by PwC found that 50% of Chinese consumers do online shopping on a weekly basis and 59% of them are likely to buy grocery online. The global figure for the two mentioned above were 22% and 24%. 

In addition, frequent online shopping habits will help to cultivate the habit of using mobile payment methods. For Fresh Hema, stores or app requires mobile payments. 86% of Chinese consumers have used mobile payments against 24% globally. 

Retail Industry：

Market Size Overview:

Fresh Hema is in the consumer retail industry.

According to PwC, China's offline retail market worths around USD 4.5 trillion implying opportunities. And 80% of the total retail transactions are still incurred offline, while 20% are the online transaction.

China has surpassed the US becoming the largest retail market in the world. According to China's National Bureau of Statistics, in the first quarter of 2018, the total retail sales of consumer goods reached USD 1,436.8 billion, up by 9.8 percent year-on-year, against the US whose figure was USD 1,306.7 billion up by 4.5% year-on-year.

China is the world's biggest e-commerce market. In Q1 2018, the online sales in China reached USD 307.4 billion with a 35.4% increase year-on-year, compared to the US reached 123.6 billion with a 16.4 % increase. Back to 2017, the GMV generating from Singles' Day is greater than the sum of that of Black Friday and Cyber Monday in the US.

According to JP Morgan, China has been shifting to a more consumption-driven economy. They have predicted the consumers' sales will grow by around 11% year-on-year with ROE (return on equity) around 18%. They attribute the growth to premiumization, increasing consumer credits, and “the new retail”. Premiumization means Chinese consumers are willing to pay more for quality and extra items such as design and good service. Credit cards and other online lending are boosting shoppers; spending. Alibaba also provided Huabei (花呗) and Jiebei (借呗), which serve credit card and short-term small amount loan functions repeatedly. The new retail is a trend happening in China blending online and offline, as online stores started to open offlines aiming at providing more user experiences and offline stores are embracing digitalization to improve its current operational efficiency.

Three forms of retails:

There are three major forms in the retail market which are old retail, digital retail, and new retail. These three phases are not exclusive from each other. 

Old retail mainly refers to offline stores. It is the oldest type of retailing starting around the 1850s and still exists today. Old retail can include small family owned stores and large ones like Walmart or Carrefour. 

Digital commerce started back in 1990. When is digital commerce is getting popular, there was a trend for those traditional retailers to get digitalized, however, to a limited extent. The biggest advantages that digital commerce has might much larger SKUs, no shutting period, and far-reaching distance (with the help from logistics). 

Till the coming of new retail, online and offline seem like separate parts against each other and not dynamic integrated. In 2016, Taobao has been highly criticized as the main cause for massive shutting downs of offline stores.

At the current stage, China is shifting from digital retail to new retail. The main difference between them is that digital retail is mostly focusing on the front office while the new retail will be focusing along the whole value chain. New retail blends online and offline dynamically and offer customers 

Features of new retail:

Here are the two 2 features of new retail, namely genuine consumer-centric operating models and faster, smart decisions made powered by data analytics.

The word "New Retail" was created by Alibaba in 2016 but other internet giants such as Tencent and JD.com are also following the same strategy and calling it "Smart and Bordless Retail".

It is more than a new shopping option, but a revolution which will transform the entire value chain. Under this new model, retailers can better manage inventory across online and offline channels and make better decisions from analyzing data.

What is Hema:

Hema, according to HOU Yi (侯毅)'s definition, is not a supermarket or restaurants/food courts, but a data and technology-driven new retail platform. 

Basically, Hema has both online and offline parts to experiment new retail idea. 

Online
For the online part, it allows users to make orders on its App. Users can choose either pick up at stores or delivery. For delivery, items are expected to arrive as soon as within 30 minutes. 

Offline
For the offline part, it now has 119 offline outlets by the end of February 2019. In 2019, Hema will expand at the constant rate as in 2018, says HOU. Each offline outline constitutes warehouse, supermarkets, and food court. 

According to iYiou, an estimated 60% of total sales at Hema is via eCommerce which is 10 times higher than the industry average. 

Leadership:

Hema will be led by HOU, the CEO and founder of Hema.

Hou's Resume:

Prior to joining Alibaba, HOU has worked for JD.com and in charge of JD logistics. He has rotated to the O2O (online to offline department) and was the founder of the predecessor of JD  Daojia (京东到家), JD's delivery team.

It has been rumored that firstly HOU proposed to Richard Liu, the CEO and founder of JD.com, about the idea of Hema; unfortunately, LIU did not approve that idea at that time. Later HOU approached ZHANG You (张勇), the CEO of Alibaba Group, and get offered to join Alibaba and try out his idea. So, in a sense that Hema is supported by the current leader of Alibaba.

Products & business model:

Fresh products + Food + Groceries (non-food) 
Hema firstly started with fresh grocery as it thinks this category has usually been repurchased and the demand is relatively inelastic. Moreover, in order to achieve better marketing result, Hema imported expensive and fancy seafood such as lobster from Australia and crab from Canada. Later one, Has expanded to more categories.

The distribution of each category:

Advantages of Heama:

Purchase:
Based on big data from Alibaba Group and its own data, each Hema store can accurately predict inventories needed for one specific store and come up with purchase plans. 

Comment: it significantly optimize the product mix and increase inventory, therefore more revenues could be made within the same time horizon.

Storage:
Hema has two parts of storages which are the central warehouse and the store warehouse (also the offlines) which E-pricetags are used. E-pricetag can not only show prices but also used to show the real-time inventory info which could complete the stock filling up automatically.

Comment: the most innovative part is the use of E-pricetags. It not only makes changing prices easier but also will help managers to know more about the inventory like which ones sell well and which ones are running out of stock and needs to be filled up.

Delivery:
It is the delivery system is not on a first come first basis. But will consider factors such as product categories, the location of delivery men and customers etc to optimize the delivery order.

Comment: 30 min delivery time significantly increase user satisfaction. Compared to traditional grocery shops where deliveries are not usually provided, it makes grocery shopping more convenient and therefore may encourage the spending as well. Compared Tmall Supermarket, a fully online supermarket operate by Alibaba, the delivery time ranges from 1-2 days, it aligns with customers' desire - buy now and receive now and its free shipping threshold is much lower.

Comparison 

In the comparison part, this article will compare Hema to its domestic peers and compare Alibaba to Walmart and Amazon. 

Domestic:

Domestically this article will compare Hema to Chaoji Wuzhong (超级物种), 7Fresh backed by JD.com and XiaoXiang ShengXian (小象生鲜) backed by Meituan Dianping. 

For the business model, all of them are asset heavy. Chaoji Wuzhong is widely considered as the No.1 enemy of Hema. The other two are relatively smaller compared to Hema in terms of the number of stores and users.

Valuation:

By looking at funding rounds of each, it can be easily concluded that Hema and Chaoji Wuzhong are the leading players. Thus in a sense, the competition is eventually between Alibaba versus Tencent. Note that Tencent also has invested in JD and Meituan Dianping. 

Extra info: Back in 2014 when the share price of JD is low, Tencent purchased 15% of the total JD shares. In 2016, Tencent has increased its stake to 21.25%. While Meituan, Tencent takes 7.13% of its total shares as if March 25, 2019, according to Choice, a financial service provider.

Operation:

By judging the founding time, the four started around the same time, however, the performance varies. Hema and Chaoji Wuzhong are among the first tier, while Xiaoxiang Shengxian is way behind.

By looking at the percentage of online orders, Xiaoxaing Shengxian performs better than peers, which might largely attribute to Meituan's online presence and offline logistics. 

The delivery range is the same among them and free of charge. The fastest delivery for them is usually within 30 minutes. However, the sorting system and delivery allocation system are more sophisticated in Hema.

Most of their revenues are coming from the food section, and fresh food (especially fresh imported seafood) has the largest profit margin.

For qualitative measures such as user experiences, by checking reviews left on Dazhong Dianping, the leading review App in China, all four have 4.5 stars+ ratings.

Global 
Globally, this article compares the Alibaba Group to Walmart and Amazon, the largest retailer in the world.

Walmart: started in 1962 as an offline retail store and opened the first Chinese store in Shenzhen in 1996. In China, for the online business, it has collaborated with JD.com. Jordan Berke, the vice-president of Walmart E-commerce China Divison, says in Shenzhen, more than 50% of sales at some Walmarts in Shenzhen are coming from online. The great majority all of its online orders will be delivered by JD DaoJia.

Amazon: started its e-commerce in 1995. It has taken up 50% of the total e-commerce transactions in the US. Back in 2017, it acquired Whole Food Market, an offline organic grocery store, for USD 13.7 billion. In 2018, its first Amazon Go launched in Seattle. 

Alibaba vs Walmart: Higher valuation but lower revenue means the market holds a more positive view on the future of Alibaba. Overall, Alibaba is more innovative and has more business lines compared to Walmart.

Alibaba vs Amazon: Higher revenue but lower valuation means the market holds a more positive view on the future of Amazon. The confidence for Amazon might be from its strong tech-driven culture. For example, its cloud services, AWS, is the largest in the cloud computing field generating USD 25.7 billion revenue and USD 7.3 billion profit in the year of 2018.

Thus, in order for Alibaba to further grow and become a world-class company, more innovation and tech-driven approach seem reasonable.