The Strategic Retreat
Alibaba’s grocery arm Hema has shuttered its entire X membership store network, marking a dramatic retreat from its ambition to challenge warehouse giants Sam’s Club and Costco. The last Shanghai outlet closed on August 31st, ending a five-year experiment that began with bold declarations about defeating foreign rivals. This retreat comes as Hema strategically repositions itself toward discount retail, explicitly modeling its new NB format after Walmart. The shift reveals fundamental miscalculations in China’s retail wars – where impatience with supply chain building and misreading middle-class preferences proved costly. Now, having been decisively boxed out by Sam’s, Hema aims to conquer territory where Walmart’s shadow looms largest: China’s value-seeking mass market.
Hema’s Membership Dream: Ambition vs. Reality
Launched in 2020 amid warehouse retail fever, Hema X membership stores initially showed explosive promise. Within two months of opening, flagship locations reported $200,000 daily revenue with average baskets hitting $140. By late 2022, membership rolls approached 3 million – alarmingly close to Sam’s Club’s 4 million in China. Former CEO Hou Yi (侯毅) had proclaimed: ‘X stores must defeat Sam’s and Costco – failure against them means total failure.’ Internal targets envisioned 50 stores by 2023.
The Peak and Unraveling
By 2023, reality diverged sharply from projections. Hema managed just 10 membership locations contributing under 10% of total revenue. Customer complaints crystallized around three failures:
– Lack of signature products: Unlike Sam’s viral Swiss rolls or Costco’s $1.50 hot dogs, no distinctive Hema item captured consumer imagination
– Perceived value deficit: 72% of surveyed members couldn’t identify exclusive benefits justifying $70-$100 annual fees
– Pricing scandals: Multiple incidents revealed identical products priced 10-15% higher for members
Operational Missteps
The membership model suffered from structural flaws:
– Erratic policy changes: Three major membership term revisions within 18 months
– Shared infrastructure: 89% procurement overlap with standard Hema Fresh stores
– Geographic misplacement: Stores concentrated in premium urban zones ignoring suburban family demand
Why Sam’s Club Prevailed
Sam’s 30-year China investment created insurmountable advantages that left Hema boxed out by Sam’s. Critical differences:
Supply Chain Mastery
Sam’s obsessive supply chain management delivered what Hema couldn’t:
– Direct farm relationships covering 70% of fresh produce
– Co-manufacturing partnerships with 200+ domestic suppliers
– Precision costing models guaranteeing suppliers 8-10% margins while slashing consumer prices
Case in point: Sam’s forced a laundry capsule supplier to reduce unit costs from $0.21 to $0.07 through packaging and logistics redesigns.
Patience and Focus
Unlike Hema’s scattered 12-format approach, Sam’s concentrated resources on perfecting one model. Results speak volumes:
– $367 million average annual revenue per China store
– 25% private label penetration versus Hema’s 15%
– 98% member renewal rate among diamond-tier shoppers
The Membership Model Trap
Hema’s fundamental error was applying supermarket logic to a membership ecosystem. Three critical miscalculations:
Misunderstanding Value Perception
Where Sam’s built cult products through rigorous quality control, Hema competed through reactive discounting. When product comparisons went viral in 2023 showing near-identical merchandise, Hema slashed prices rather than innovating – a tactic that cheapened its premium positioning.
Operational Confusion
Internal systems weren’t built for membership exclusivity:
– Single SKU could appear under different prices across ‘Fresh’, ‘Cloud Supermarket’ and ‘Direct Ship’ platforms
– Membership discounts couldn’t stack with promotional pricing
– Inventory systems didn’t prioritize member-exclusive items
Alibaba’s Strategic Retreat
Hema’s pivot reflects broader Alibaba recalibration under Chairman Joe Tsai (蔡崇信) and CEO Eddie Wu (吴泳铭). The ‘new retail’ vision championed by Jack Ma (马云) and former CEO Daniel Zhang (张勇) has been quietly dismantled:
– $4.6 billion divestment from Suning and Intime
– Sale of 50% stake in RT-Mart operator Sun Art
– Hema’s separation from Alibaba Group in 2023
Leadership Shakeup
The February 2024 retirement of founding CEO Hou Yi (侯毅) signaled commitment to change. New CEO Yan Xiaolei (严筱磊) immediately executed the membership shutdown while accelerating the NB discount format. The results? Hema’s first annual profit since inception.
The Walmart Gambit
With membership stores closed, Hema now deploys a two-pronged strategy:
Hema NB: The Discount Disruptor
Modeled explicitly after Walmart’s hypermarket approach, NB features:
– 40% private label penetration
– Bulk packaging for household essentials
– 15-20% price advantage versus competitors
– Smaller footprints optimized for tier 3-5 cities
Downmarket Expansion
While Sam’s dominates affluent coastal cities, Hema NB targets China’s interior:
– 150 stores opened in county-level cities since 2023
– 60% reduced SKU count versus traditional supermarkets
– Partnership with local distributors cutting logistics costs 30%
Lessons from the Membership Wars
Hema’s experience reveals crucial truths about China’s $38.8 billion warehouse club sector:
Patience Pays
Sam’s required 15 years to turn China profits. Current China CEO Zhu Xiaojing (朱晓静) credits their ‘decades-not-quarters’ perspective. Eight Chinese locations now generate over $367 million annually – outperforming luxury malls.
Specialization Trumps Scattergun
Hema’s simultaneous operation of 12 formats prevented mastery in any. As Sam’s Club China chief Andrew Miles observed: ‘Membership retail isn’t a format – it’s a covenant requiring singular focus.’
The Road Ahead
Hema’s abandonment of membership stores represents not category failure but corporate realignment. Sam’s and Costco continue expanding profitably, with China warehouse club sales growing 12% annually. For Hema, the Walmart-style pivot makes strategic sense: discount retail plays to Alibaba’s e-commerce logistics strengths while addressing mass-market inflation concerns. The company projects 500 NB stores by 2026, primarily in untapped lower-tier cities. Having been thoroughly boxed out by Sam’s in the premium segment, Hema now seeks dominance where volume trumps exclusivity – but must still solve the supply chain discipline that doomed its first format. Retailers should watch Hema’s discount experiment closely: its success or failure will reveal whether e-commerce giants can transition to sustainable physical retail without repeating past impatience.