Former CEO of Hema, Hou Yi: Learning from Pang Donglai is because there was no way out

Over sixty, Hou Yi is dressed in casual attire, with gray hair at his temples, but it cannot hide his entrepreneurial spirit. When he talks about his new project—an offline chain store for pet fresh food—he is beaming and his eyes are filled with excitement.

He mentioned that after stepping down from Hema, he felt low for two days, but quickly realized: if Hema could be better managed by someone else, it might not be a bad thing. For him, this is also a new beginning in life.

When asked why he doesn't return to his old profession and start another supermarket, Hou Yi stated that it is not a good time for startups to enter the retail sector: "You might be doing well in this industry, but one day Douyin could take you down."

Nine years ago, Hou Yi left JD Logistics with an idea about "new retail" and met with Alibaba's former CEO Daniel Zhang. The two hit it off immediately, leading to the birth of "Hema Fresh."

In the following eight years, Hema has been one of the representative companies of the "new retail movement." Hou Yi's bold and decisive character has made him an "opinion leader" in the retail industry, with every word and action highly scrutinized both inside and outside the industry.

He continuously innovated at Hema, almost trying every retail format, including community group buying, front warehouses, convenience stores, vegetable markets, shopping centers, membership stores, discount stores, etc.; he was one of the first to experiment with the integration of online and offline, achieving fresh food delivery within half an hour, which once gave rise to the concept of "Hema housing."

In terms of business model, Hou Yi has always attempted to challenge the KA (key account) model that is tightly controlled by brand owners and suppliers. He boldly promoted Hema's slogan of "no barcode fees, no entry fees," trying to redefine the industry rules of the retail supply chain.

These attempts have brought shocks to the industry, but many of them were not considered successful, leading to mixed reviews for Hou Yi in the industry.

"There are many people online who evaluate me, saying I follow trends," Hou Yi did not shy away from this question. He believes that Alibaba is a results-driven company, and at the beginning of their entrepreneurship, they envisioned what Hema would look like in ten years—covering most cities in China and serving three meals a day for one billion people. "If we only rely on the Hema Fresh model, we definitely won't reach the sinking market."

Hou Yi also candidly expressed his ambition: "We have a large flow of traffic, so why can't I create an app platform and become something like Meituan?"

Until a few months before leaving Hema, Hou Yi vigorously promoted another strategic reform, which was a comprehensive discount strategy. He attempted to reduce SKU and improve operational efficiency through direct procurement from the supply chain and self-operated products, aiming to lower product prices to gain more users and sales.

This intense reform also sparked significant controversy. During that time, discussions around "Hema harming member rights," "Hema banning major brands," and "Hema reducing employee salaries" were incessant.

Then came Hou Yi's resignation in March 2024. On his last day, he left a photo at Hema's Shanghai headquarters Before the interview, Hou Yi and we had an agreement to "not talk about Hema." However, the marks that Hou Yi and Hema have left on each other cannot fade in just nine months. On the conference room table, there were various fruits that he had his assistant buy from Hema Fresh. Among them, the fresh and standard-sized Hongyan strawberries have been shared multiple times as a case of Hema's supply chain integration. When discussing Hema, Hou Yi still uses "we" as the subject.

Hou Yi continues to pay attention to the dynamics of the retail industry. The current retail industry's hottest traffic star, Pang Donglai, naturally became one of the topics we discussed.

In 2004, the supermarket company Pang Donglai, which grew up in Xuchang, supported supermarkets like Bubugao and Yonghui, becoming a benchmark for the entire retail industry. The industry has been learning from Pang Donglai, studying his display, beautification, lighting, product selection, and even introducing Pang Donglai's popular products. The various statements made by its founder, Yu Donglai, have gone viral both inside and outside the industry, making him a kind of retail "godfather."

Hou Yi feels regretful; he believes that people have not pinpointed the key issues in the industry. He said, "I don't quite agree with the term 'adjustment.' Temporarily solving these problems is just treating the symptoms, not the root cause. Copying the business practices of some good companies only addresses short-term issues. I think this adjustment is not enough."

He further stated, "Today, I believe what Chinese retail entrepreneurs lack the most is cognitive level; many people do not know how to play the game."

Regarding the industry, Hou Yi gave a rather pessimistic view: "I believe that during difficult times, 80% should be eliminated, and the 20% that remain will gradually become world-class retail companies."

Below is a 整理 of the dialogue between Caijing and Hou Yi:

Farewell to Hema, Embracing a New Stage of Life

Q: Do you regret leaving Hema? After all, you worked there for so many years.

Hou Yi: It depends on how you view yourself; the eight years at Hema were a great learning process for me.

Originally, I was at JD.com following Qiang Ge, learning how to do e-commerce, how a startup can create real customer value to win the market, how to achieve extreme speed in logistics to form the core competitiveness of the enterprise, how to win customer trust and reliance through unconditional return services, and so on. Hema also had all these elements.

At Alibaba, I learned from Teacher Ma about establishing mission and vision—how to build an organization's culture and values, and how to manage a large company with 100,000 employees. Vision, pattern, dreams—these were taught to me by Teacher Ma. Joining Alibaba was a leap for me, transforming from a businessman into an entrepreneur. I never thought I would manage so many people.

Doing Hema was just a good idea; overcoming countless difficulties over eight years led to many innovations, and in the end, I didn't expect it to succeed.

As for whether it is a perfect ending only if it is listed under your name? Actually, we are just one breath away from going public; we fully meet the (listing conditions). Sometimes I feel quite regretful; there were two days when I couldn't figure it out, but after those two days, I realized that isn't it better to turn the page and embark on a new life? After retirement, just a few days later, I traveled around the world to see the outside world. There are still many things we can do, so overthinking is meaningless. It's better to leave it to the younger generation, who might do it better than I can.

I personally believe that I have gained a lot in these eight years. My personal vision, pattern, and abilities have improved significantly, and I have made many friends. I am quite happy recently because the new entrepreneurial financing went smoothly, and we basically wrapped it up over a meal. This shows that the character, professional ethics, industry reputation, and work ability I gained from my time at Hema have been widely recognized.

Q: You have been in the retail industry for so many years and have accumulated a lot. Why don't you start a supermarket again?

Hou Yi: I like innovation and do not enjoy doing repetitive things. Since I have left the fresh food industry, the world is so big that I can completely choose a new track to start a business. After leaving JD, I left the logistics industry, and similarly, after leaving Hema, I left the fresh new retail industry. As a professional manager, this is the most basic quality.

The fresh food track of "three meals a day" is the largest category and market, but this track is too crowded, with hypermarkets, supermarkets, community stores, vegetable markets, front warehouses, community group buying, including us in new retail, e-commerce, takeaway platforms, and various live broadcasts. You might be doing well in this industry, but one day Douyin could take you out.

Squeezing into a highly competitive track, for a startup, you do not have the time and capital to become a large enterprise. Investing a considerable amount of time and capital into this is not a good choice.

Image: Hou Yi

"Adjustment" Can Only Solve Short-term Problems

Q: This year, Pang Donglai has become a benchmark in the retail industry. What do you think of Pang Donglai?

Hou Yi: This year, everyone is talking more about Pang Donglai. It is a locally grown model with product innovation capabilities, excellent service, and good team building and employee benefits. He (Yu Donglai) is an entrepreneur I admire; he has great love and helps others. However, not everyone can solve problems just by learning his management philosophy.

Pang Donglai operates locally and does not go beyond Xuchang; it wouldn't work in Zhengzhou. He is a relatively monopolistic enterprise in his locality, with various stores in malls and shopping centers all belonging to him. He has a high profit margin locally, so the experience is quite good, the displays are well done, and the quality is good, all of which require significant human and material resources. His high profits allow him to provide employee benefits.

However, try it in another place? In a non-monopolistic, fully competitive market, where there are no high margins, how can there be money to pay such high employee wages? So, this cannot be learned from him.

If you compete with him fully, he cannot withstand it, and he cannot achieve such a good profit margin. Last year, I told our team that we should open a store in Xuchang and compete with him to see how it goes. If I go in, we can face off against each other in product innovation capabilities, trends in young people's demands, and the quality-price ratio of private brands (PB) Fat Donglai has not just become popular today; it was already popular 20 years ago, with countless people learning from it. When I was in the supermarket business in 2015, I also went to learn, but it was of no use. Why is it popular today? Because retail has no good path to follow now.

Q: Yonghui and Bubugao are both borrowing Fat Donglai's methodology for store adjustments. What do you think about this?

Hou Yi: Today, Fat Donglai has adjusted Yonghui and Bubugao, and there are some things that these supermarkets have not done well.

For example, baking. Of course, it’s not just Fat Donglai; Hema has also done very well. We (Hema) are now the largest baking chain in China. Fat Donglai helped them change this aspect; their baking was originally very low-quality, which is a significant gap in terms of current consumption upgrades. They also eliminated most of the (poor-quality products) and introduced a large number of self-operated brands, which have a certain freshness.

They used the term "adjustment," but I don't quite agree with the term "adjustment." It temporarily solves these problems, treating the headache for the head and the foot pain for the foot, copying some good companies' management methods, which only addresses short-term issues. I believe this adjustment is not enough.

Q: What do you think needs to change to adequately solve the current problems facing the retail industry? From your public statements over the years, you seem to be highly concerned about discount stores.

Hou Yi: Originally, everyone thought discount stores were a type of business model, but today this view is completely wrong.

Discount stores are a form of operation that requires you to directly cooperate deeply with industrial sources. You need to co-create processing with a large number of self-owned brands while maintaining the lowest operating costs to ensure the lowest prices. This is a complete product procurement system.

Selling products cheaply is relatively easy, but keeping operating costs low is very difficult. Only by keeping operating costs low can you recover your gross margin and achieve profitability. Ultimately, it comes down to who has better products, who has lower prices, and who has lower operating costs.

Thirdly, your product's continuous innovation capability must be strong, not only to meet demand but also to create and lead demand.

Discount stores provide a complete solution, and I believe this is the core of discount stores. Once this model is formed, the previously channel-centric model must change into a completely new operating form. Therefore, the transition is very difficult, and it requires some determination to transform.

Many companies originally relied on channel fees; the more products there were, the more channel fees they earned. About 80% of products will never sell, but earning channel fees is enough. However, today, running a discount store requires strong product selection capabilities, and each product must achieve significant sales to bring substantial profit income. If your products do not sell, and the channel fees disappear, it will immediately lead to failure. So today, it’s not that they don’t want to change, but they lack the ability to do so.

Learning from Fat Donglai is easy; learning from Sam's is difficult

Q: Over the years, you have frequently mentioned Sam's and have made some attempts to compete with Sam's. What has been the biggest impact of Sam's on you?

Hou Yi: Sam's and Costco have very strong market and product planning capabilities. For example, if it is March now, I have already planned what I will be selling at this time next year, and I can plan a year ahead After the Spring Festival, he will start production and launch in winter next year.

This requires studying consumer trends, researching which products will become mainstream in the future, and how to design packaging. There is ample time for you to research, design, and finalize. Therefore, there are many products you have never seen before that can suddenly explode in the market.

As long as you can lead development, your brand will become stronger, and a slightly higher price point is acceptable. Today, Sam's pricing is completely unaffected by the market; it represents industry standards, consumption upgrades, and product innovation.

Today, more than half of China's retail industry is what we call "product procurement"—brand suppliers' products come in, you pick a few, and another supermarket is also picking, with a high degree of homogeneity. The products promoted by those brands are definitely sold in all cities, leading to complete homogeneous competition. Many of our traditional retail enterprises lack product innovation capabilities.

If you can't compete with Sam's or Costco, it means you have two ceilings above you. Below, there are countless companies engaging in price wars, such as Meituan Xiaoxiang, Dingdong Maicai, Qixian, and Aoleqi. Therefore, you must break away from this price war zone and move to a higher level, positioning yourself with value competition at the core.

Q: Sam's and Costco have provided successful models in China. Why don't local Chinese companies learn from Sam's and Costco?

Hou Yi: It's not that simple. Organizations like Sam's and Costco have several characteristics.

First, their procurement teams are generally very experienced. The category leaders at Costco have been in the industry for about 30 years, and general category buyers have been in the field for over 10 years, making them very familiar with the industry.

Second, they have long-term strategic partnerships with the most advanced manufacturers in the industry, often spanning generations. For example, if they want to produce potato chips, Lay's is definitely a partner. If Lay's doesn't work out, the second-ranked brand in the industry will also be their partner. They collaborate on research and development and product launches.

Third, there are procurement service companies. Most of the best retail companies in the world have 5 to 10 procurement service companies. These companies help them source products globally. For example, if I am sourcing beef, there are good products from Australia, the United States, South America, and Russia, and consulting companies go global to compare prices.

The best retail companies in the world certainly source globally. Spain's largest retail company, Mercadona, has a procurement team of over 100 people in China, sourcing a large number of daily chemical products. The competition between Sam's and Costco is also global. Many products at Costco, such as pepper from India and pink salt from Pakistan, are both good and cheap. In any case, they are cheaper than what Chinese retail companies sell.

Therefore, "future competition is supply chain competition." However, the Chinese retail industry hasn't even mastered local procurement, let alone global sourcing. Currently, no company in China dares to compete with Sam's, except for us wanting to take on Sam's.

Q: Why do other companies not dare to compete with Sam's? There are many large chain supermarkets and retail entities in China that could also build a global supply chain. Hou Yi: I studied for a whole year last year, following the two top consulting firms in the world, asking them to work on projects and reform Hema Fresh. They took us around the world to see and had in-depth exchanges with some CEOs, listening to them talk about how to do it, why to do it this way, and what opportunities exist.

Today, I believe the biggest deficiency among entrepreneurs in China's retail industry is the level of awareness; many people do not know how to play the game.

Another major issue is the team. When Chinese retail started in 1993, Carrefour and Metro entered the Chinese market, and their salaries were very high. At that time, a large number of talents from prestigious universities went to Metro and Carrefour. But after 2000, with the rise of e-commerce, traditional retail basically had no talent. Today, many employees in companies are generally aging, with those born in the 1970s still working on the front lines. To carry out new organizational changes today, a group of young teams is needed.

First, procurement should be high-paying. When I went to the United States, I saw that a main product category buyer at Costco basically has an annual salary of 1 million USD, which is higher than that of most internet companies. In China, only the presidents of financial industries reach this level. A small category buyer earns an annual salary of 300,000 USD. This industry needs high salaries to keep these people deeply engaged for the long term.

For Chinese retail companies, offering a monthly salary of 30,000 or 40,000 is already considered high, but the procurement they are responsible for may involve billions. Any "rebate" can amount to hundreds of thousands or even millions. If you do not offer them a very high salary, they cannot be retained. Or they may just take some kickbacks, and procurement corruption is very easy to occur.

Another issue is how companies view short-term operational risks. If you want to change, you cannot say that you will only change part of it; you either make a big change or you do not change at all. If performance declines in the past six months, and if you are not a listed company, the boss can temporarily bear it, then it’s fine. But can you bear it if you are a listed company?

So, up to today, the only possibility for reform is that you cannot survive anymore, and you decide to make a complete change.

Question: Would learning from Pang Donglai be simpler?

Pang Donglai means that now "adjustments" are being made, which is what the Chinese retail industry is good at—copying advanced things. If baking is good, everyone copies baking; whichever is better, everyone copies that. But baking was first done by Sam's Club, such as durian mille-feuille and Swiss rolls. Everyone learned from Sam's, and everyone became popular; all these innovations originated from Sam's. Our supermarkets lack the ability to create new trends.

The traditional retail industry in China has been led into a pit by e-commerce

Question: Returning to the retail industry, from a global perspective, the development and growth of Chinese retail companies seem to follow an independent path?

Hou Yi: The development of China's retail industry has several key time nodes.

The first was in the 1990s when computers became capable of networking, solving the chain store issue for supermarkets. Originally, we had to teach stores how to restock, but later data transmission made this possible. The second time node was from 1999 to around 2006 when e-commerce emerged, which was a transformation brought about by the internet. From 2014 to the present, it has been the transformation brought about by mobile internet, such as Hema, Douyin, and Meituan, which solved the issue of real-time responsiveness However, in these three transformations, physical retail is all about connecting online malls, mini-programs, and O2O platforms, as well as comprehensive digitalization of enterprises, etc. I believe these are just embellishments and cannot solve the problems of product competitiveness and customer value innovation. From 2000 to today, over the past 25 years, the focus has been on e-commerce, traffic, and digitalization, but no company has actually improved the essence of its products.

Which Chinese company claims to be globally sourcing? None. Only after comparing prices globally and finding high-quality products at extremely low costs can your procurement be valuable. Finding product bases and places of origin, then turning procurement into long-term supply, forms your competitive edge in products.

This is what I mean: the traditional retail industry in China has been led into a pit by e-commerce over the past 25 years, forgetting the essence of retail.

Q: Why is the competitiveness of traditional retail enterprises insufficient?

Hou Yi: In the early days, retail was easy to operate, with insufficient competition and no challenges from several major economic crises abroad. For instance, during the 2008 financial crisis, China's retail industry was hardly affected. With consumption upgrades and a booming real estate market, everyone was quite wealthy.

I believe that in difficult times, 80% should be eliminated, and the 20% that remain will gradually become world-class retail enterprises. After several rounds of reshuffling, those retail enterprises understand what they need to survive.

World retail enterprises have also survived through intense competition, whether in the UK, the US, or across Europe. I have visited many of these century-old retail enterprises, and they have all gone through similar processes, with fundamentally similar models. Resources are shared globally, including procurement resources and operational capabilities, leading everyone to reach such a high level of enterprise.

Chinese companies are far behind them; if you don't align with them, you will never catch up. Today, Sam's Club, Costco, and Aldi have all entered the market. With such a large market in China, every company wants to come in. If they all enter, facing global enterprises, you won't be able to compete, and the market will surely once again favor foreign investments.

Q: If they all enter, will local retail enterprises definitely lose?

Hou Yi: The prices of retail goods in China are really too high. Japanese retail is unimaginably cheap. For example, at a Japanese OK supermarket or a business supermarket, a liter of olive oil that costs about 59 yuan here can be bought for 39 yuan there; I can't find this anywhere else in the world. Later, I found out that the factory is in Spain, and they acquired it. A box of frozen dumplings is basically around 100 yen (about 5 yuan).

Another example is a bottle of water. In Europe, the bottle cap is only half as thick as those in China, reducing the material by two-thirds. The bottle body uses very simple molds, and now they don't even need labels; their costs are very low. Consumers buy water just to drink it; the bottle is merely a transportation packaging tool. No one buys bottled water just because the bottle looks nice.

If today they engage in a price war, and you sell for 1.5 yuan while they sell for 1.3 yuan, you won't be able to compete with them Question: What advice do you have for retail companies facing reform today?

Hou Yi: You need to address the question of why consumers come here.

For example, consumers come here to solve the problem of three meals a day. Within the three meals a day issue, there are several pain points to address. The first is the desire for novelty, so your products need to be diverse enough to offer something different every day.

Second, changes need to be quick, with constant innovation. Since we deal with fresh produce, we need to focus on seasonal products being launched quickly, with different items coming out each season and a rapid turnover of products. When consumers come to the store and see many items they haven't encountered before, they will want to buy and try them.

Third, many current health trends also need to be followed, with a variety of health products being introduced.

You need to understand the purpose of consumers coming to this store, list out these purposes, break them down into 5 dimensions or 10 dimensions, and within each dimension, create a detailed product plan for 52 weeks, strengthening and deepening each sub-category.

The era of offline retail completely surpassing e-commerce will come

Question: After leaving Hema for half a year, what made you think about starting a pet project?

Hou Yi: I (initially) didn’t think about what to do, just went to take a look. There were many suppliers (factories) I hadn’t visited, so I took this opportunity to visit them one by one. Many factories are globalized, processing for the global market, with excellent products, raw material bases, and foundational equipment, and they also have factories overseas.

Hema started its pet business at the end of last year, and at that time, we were also highly focused on this emerging market. I looked at the overall performance of the industry. The pet food factories were bustling. Each factory was saying, “This year I expanded by 300 acres, 500 acres, and I added so many production lines.”

One still has to rely on fate; a friend told me: “God is quite favorable to you. When you want to start a business, the offline pet retail market is completely blank.” Currently, no (large enterprises) have entered; in the U.S., Europe, and Japan, it is mainly offline chains, and it is a youthful, high-growth market with less intense competition.

The downside is that the pet market is relatively smaller than the human market, but creating a small and beautiful company over 10 years can still yield a company with a market value of several hundred billion.

Question: What are your plans? There are many brands in the market; is there still space to enter?

Hou Yi: The pet sector has emerged in the last decade. Especially in recent years, pet ownership has become fashionable; young people who are not getting married or having children often have at least a cat and a dog at home, and many high school students also have pets. This sector is a high-growth area, with annual growth between 15%-20%.

However, the entire pet industry is relatively underdeveloped. Ten years ago, with the rapid development of e-commerce, pet food in China was mainly sold online, with no offline stores. But if you look globally, pet food is primarily based on offline chain stores; there are several publicly listed pet companies in the U.S.

The biggest advantage of internet brands today is that it’s easy to start because none of the public service platforms are yours, logistics aren’t yours, payments aren’t yours, factories aren’t yours… So the initial investment cost and startup threshold are very low. However, you will find that to scale up, the subsequent costs for traffic are something you simply cannot afford But if he doesn't invest money, there will be no business, and in the end, you realize that everything is just working for the e-commerce platform.

We operate physical stores, and the initial investment is significant. You need to manage a large team, including procurement, operations, logistics, as well as stores and systems. However, consumers and traffic are under your control, so future operating costs will be very low. If my store is located in this geographical area, whether it's one kilometer or two kilometers away, if there aren't any major competitors nearby, this business is yours. Even if offline competition is fierce, it still has geographical advantages. Therefore, the current operating costs of offline businesses are already much lower than those of e-commerce, and the era where offline retail completely surpasses e-commerce will come.

After the Spring Festival next year, we will open our first pet fresh store in the Changning District of Shanghai.

Author of this article: Hu Miao, Source: Caijing Magazine, Original Title: "Exclusive | Former Hema CEO Hou Yi: Learning from Pang Donglai is because there was no way out"

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