Battle of Hangzhou, Meituan Happy Monkey vs. Jiang Fan Hema, a battle to determine the kingdom?

Regarding the current instant retail war, a person with 15 years of experience at Alibaba, now transitioning to private equity investment, told "Business Observer": "This will be an 'epic protracted battle.'"

"And in the end, only two companies may be left at the table, Meituan and Alibaba."

"Epic," "Business Observer" has no doubt about this. What "Business Observer" is uncertain about is whether this is a "protracted battle."

Typically, when large internet platforms make decisions, a core reference point is: can this business quickly expand nationwide?

If not, then this business may lack "strategic" significance for large platforms.

Large platforms have scale advantages. They have a large user base, a large talent pool, large capital, large data, large "dumping" capabilities, large fulfillment and delivery capabilities, and the marginal cost effect of scale when promoting new businesses.

Therefore, when they make decisions to bet on a certain field, they usually choose those tracks that can "enter and exit" on a large scale and can generate rapid "explosion" effects in the short term.

Is there such a track in the current instant retail market?

It may have already emerged.

The hard discount community supermarket track may be the fastest-growing order segment in the current instant retail field. It has a high proportion of instant retail orders, a very fast replication speed, a very high layout density, a young user base, and stronger market pricing power to cover delivery costs.

These may be the reasons why Meituan is launching the hard discount community supermarket—Happy Monkey.

Happy Monkey supermarket will officially open its first store at the end of August, starting in Hangzhou and then expanding to Beijing. Currently, its recruitment in Hangzhou has fully launched, and by mid-July, Happy Monkey will hold a recruitment conference in Beijing.

In response, Alibaba's hard discount community supermarket—Hema NB—has already shifted resources to Hangzhou, and its current focus is on large-scale store openings in Hangzhou to launch a "sniper battle."

Thus, the battle in Hangzhou is likely to showcase Meituan's "strength" and the future market direction of the instant retail market.

Instant Retail

The rapid growth of the instant retail market is hindered by three main factors that prevent it from generating larger scale effects.

1. Fulfillment Costs.

Due to the addition of the "last mile" home delivery segment for hourly delivery, while enhancing the value of shopping convenience, the fulfillment costs of instant retail are also very high (rider wages + costs for sorting at front warehouses).

In this field, so far, there has not yet emerged a socialized logistics system like "three links and one reach" or SF Express that can be readily used, as seen in express e-commerce. Players entering the market need to build their own fulfillment systems to scale up instant retail.

Therefore, in this field, the optimization level of fulfillment cost rates is the primary factor determining the success of the track.

2. Traffic Costs.

To acquire customers, instant retail needs to attract new users, issue coupons, and provide subsidies to cultivate and solidify users' instant retail consumption habits If instant retail is done purely through "front warehouses" without offline stores or other traffic sources, the costs of issuing coupons and subsidies for instant retail are very high. The cost of issuing coupons alone, when expanded nationwide, amounts to hundreds of billions.

3. Gross Profit.

A major pain point in instant retail currently lies in: high frequency and low gross profit, low frequency and lack of orders.

Instant retail requires inventory to be placed close to consumers (in communities) to achieve delivery within half an hour. The resulting problem is that you cannot place all categories of products in the community, as the community cannot accommodate them. You also cannot infinitely increase your order volume; there is a limit to the population and order volume in each community. Each community has a limited number of people, and the total population in that community will not experience explosive growth just because you are doing instant retail.

So, under the limited "time and space," how can we optimize fulfillment costs?

By focusing on high-frequency products, allowing each household in the community to purchase three or four times a week, you can increase order volume and make the daily order volume of each front warehouse more "saturated." Furthermore, by increasing order density, fulfillment costs can be optimized; for example, a delivery person can deliver 4 or 5 orders in one trip, saving on fulfillment costs.

However, high frequency and low gross profit—when people buy high-frequency products, they are very confident and familiar with the prices, making it difficult to sell at high gross margins. At the same time, if you break down a consumer's weekly purchase into 3 or 4 times, the average transaction value per purchase will not be high.

Therefore, if the gross profit on each high-frequency product is too low, it cannot cover the delivery costs of the delivery person.

Low-frequency products have higher gross margins and profits.

However, if the focus is on low-frequency products, there will be insufficient order volume, and lacking order density means that the delivery person can only deliver one order at a time, or there will be a situation where delivery persons are largely "idle" waiting for orders. Thus, the fulfillment costs arising from insufficient order density are also high.

Hard Discount Community Supermarkets

The above outlines the core challenges currently faced by instant retail.

Hard discount community supermarkets, however, have addressed these three constraints to varying degrees, or "broken through" some bottlenecks of instant retail, making hard discount community supermarkets one of the fastest-growing fields in instant retail order volume.

How do they "optimize"?

First, on the traffic side, hard discount community supermarkets adopt a "store-warehouse integration" model, where the store serves as a front warehouse. Therefore, hard discount community supermarkets benefit from the natural traffic brought by offline stores, optimizing traffic costs for instant retail.

Currently, online traffic costs are higher than offline, and offline has the value of immediate product experience, which theoretically leads to lower costs in solidifying consumption habits, educating consumers, and developing private labels.

Second, on the gross profit side, the hard discount community supermarket format has the highest proportion of private labels among all retail formats today (the reasons for the high proportion of private labels in hard discount are too extensive to discuss in this article). In foreign hard discount supermarkets, the sales proportion of private labels can exceed 50%, while domestically it is moving towards over 80%, which signifies what? This means that by connecting directly to factories through their own brands in the distribution link, they can decentralize and "optimize" the gross profit space. Therefore, although hard discount supermarkets still focus on high-frequency products, they have a larger gross profit margin and market pricing power, which increases the likelihood of covering the delivery costs of instant retail's hourly delivery, thus supporting a faster growth in instant retail order volume.

The logic is quite simple: if the gross profit space of the existing high-frequency product distribution system cannot cover the delivery costs of instant retail, then instant retail can be achieved by reducing the layers.

This is one of the reasons why leading hard discount supermarket retailers like Aldi can achieve an instant retail order ratio of over 30%. Aldi's instant retail order ratio is more than 10 percentage points higher than that of most supermarket retailers in China.

Currently, this is just the "ramping up" period for the retailers' own brand business. In the future, as the own brand business matures, the proportion of instant retail orders is likely to continue to increase.

Third, on the fulfillment side, hard discount community supermarkets can achieve faster replication and higher channel coverage density.

Hard discount community supermarkets, like the mainstream front warehouse fresh e-commerce, operate stores (front warehouses) with an area of about 500-1000 square meters.

What is the difference? Hard discount community supermarkets can quickly replicate due to their management of both online and offline traffic orders, and their store layout density is higher.

For example, in the Chengdu market, purely front warehouses like Pupu Supermarket have been operating for many years and currently have about 55 front warehouses. However, if hard discount community supermarkets were to expand, a single brand could open more than a hundred stores.

The higher the channel coverage density, the shorter the delivery radius for instant retail. It can reduce the previous delivery radius from 3 kilometers to 1.5 kilometers or even 1 kilometer, which significantly changes the fulfillment costs.

Hard discount community supermarkets can replicate faster as well; abroad, it takes 2-3 years to open a thousand stores. With China's infrastructure, population density, and the influx of internet resources, once the model is established, it could happen even faster. Additionally, through an integrated online and offline approach, it has a stronger penetration rate in communities, making it easier to achieve economies of scale in instant retail.

Finally, on the investment side, the previous "store-warehouse integration" model, such as Hema Fresh, is a "store-warehouse integration" model for large stores of 3000-5000 square meters, managing around 5000-10000 SKUs, which incurs higher costs for transforming stores into front warehouses. Opening a new store costs around 30 million yuan.

Now, hard discount community supermarkets operating in 500-1000 square meters with 1000-3000 SKUs require much lower investment costs to transform stores into front warehouses for "store-warehouse integration," resulting in significantly lower operational costs.

On one hand, this supports their better replication capability. On the other hand, it allows them to penetrate deeper. Currently, hard discount community supermarkets, such as Hema NB, have even penetrated towns in the East China market, which other chain formats have not yet achieved

In terms of operating costs and efficiency, stores like Aldi have very compact shelves with high shelf efficiency. However, the aisles are very wide, resembling a "warehouse" aisle width, which facilitates the "large in and out" of goods and can accommodate the scale fulfillment of online instant retail orders. Clearly, the layout of Aldi stores is designed to balance the growth of instant retail business.

This may be one of the reasons why Meituan and Alibaba have encountered each other in the hard discount community supermarket sector and are "confronting" each other.

Meituan Happy Monkey

From the current business progress, Meituan's Happy Monkey supermarket has already started comprehensive recruitment in Hangzhou. A recruitment conference in Beijing is also scheduled for mid-July. This means that Happy Monkey has gradually entered the "decryption" phase from its previous C4-level confidential project.

Hangzhou will be the first stop for Happy Monkey, and some market participants say that the first store will open in Hangzhou before expanding to Beijing. Overall, this is a nationwide strategic business that will be fully rolled out once the model is established.

Thus, Hangzhou will become the "first battle" for Happy Monkey, and this first battle may directly relate to a series of subsequent developments and layouts for Happy Monkey—starting is the hardest part, whether it will be "momentum like a rainbow" or "not suited to the local conditions" will depend on this battle.

Currently, in the Hangzhou market, hard discount community supermarkets are also "going to war," with Hema NB, focusing on the East China market, having entered the Hangzhou market very strongly and establishing a significant number of stores. Subsequently, the local retailer—Lianhua Huashang had to follow suit and launch its own hard discount community supermarket brand—Lianhua Fude, planning to open 50 stores by 2025.

Both companies are competing for position and market share.

Now, another heavyweight player—Happy Monkey is set to join this competition.

In response, Hema NB seems determined to show Happy Monkey "what's what," with market participants telling "Business Observer": "Hema NB's current focus is on large-scale store openings in Hangzhou, with resource allocation."

From "Business Observer's" previous interview and understanding of Hema NB's head Li Guo, it appears that Li Guo has strong "store opening capabilities."

What advantages does Happy Monkey have?

Meituan's platform resource advantages: a large user base—many people from the post-90s and post-00s generations (the new generation is no longer obsessed with "big brands" and is more accepting of retailers' private labels), Meituan knows where these groups are distributed and where they gather; a large operational network—first in the industry for scale cost-effectiveness; a certain capability for low-price product operation—the Happy Monkey project integrates the purchasing teams of Little Elephant Supermarket and Meituan Preferred; as well as financial capabilities Does Meituan have the determination to create Happy Monkey? Or, can it survive without Happy Monkey?

Currently, Meituan's instant retail business mainly consists of three parts: one is self-operated front warehouses like Little Elephant Supermarket, which is difficult to penetrate into lower-tier markets and can only operate in high-tier markets with high expansion costs. The second is the platform business—Meituan Flash Purchase, which mainly uses Meituan Lightning Warehouses to capture the market. The third is the instant retail business targeting professional formats and categories, such as Yima Wine Delivery (self-operated) and Squirrel Convenience (strongly controlled franchise with inventory management).

The main carrier of Meituan's trillion-level market "ideal" in instant retail is still Meituan's instant retail platform business. According to an interview by "Business Observer" with Meituan Lightning Warehouse, there is a common "anxiety" issue among the franchise merchants currently operating in Meituan Lightning Warehouse.

In many lower-tier county markets, individual franchise merchants of Meituan Lightning Warehouse may open more than ten lightning warehouses locally, each corresponding to different categories such as general merchandise, medical supplies, beauty products, pet supplies, fresh produce, fruit cuts, flowers, and digital products. At the same time, some merchants, in addition to lightning warehouses, have also opened more than ten food delivery stores locally, and after Meituan launched Raccoon Canteen, they immediately joined in.

Some of their businesses are doing well, "I'm doing okay, and I'm gradually increasing my inventory."

However, even for these relatively successful merchants, there is still a widespread anxiety issue.

What are they anxious about?

"The product quality of lightning warehouses is too poor, and I don't see much of a future; fire safety issues are also a major hidden danger. I still think that lightning warehouses won't be as good as Little Elephant or Hema in the future."

They feel worried about the future. Therefore, they are looking for more attractive franchise projects.

"I want to franchise Hema, or Little Elephant; if that doesn't work, Hema NB, or Happy Monkey would be fine too."

Franchising Little Elephant Supermarket and Hema Fresh is currently very difficult, and it is also hard to penetrate lower-tier markets. Between Little Elephant and lightning warehouses, Meituan has created a "gap" in its product offerings—how does the market know about this gap? The emergence of hard-discount community supermarkets like Hema NB has highlighted it.

Thus, these franchise merchants of lightning warehouses are worried about being "eaten" by hard-discount community supermarkets. However, they lack the capability to create a hard-discount brand or are hesitant to "bet," "It should be unrealistic for us to develop similar online and offline integrated projects like Little Elephant and Hema locally."

As a result, they have been paying close attention to the emergence of "new formats" in instant retail—"We are keeping an eye on it and striving to get on board; if there are good projects, please recommend them to me."

Therefore, Meituan's establishment of Happy Monkey Supermarket is to fill the "gap" in its instant retail product line and to supplement its supply ecosystem.

When the market undergoes new changes, Meituan has no choice but to act.

The current product model of hard-discount community supermarkets is: achieving extreme value-for-money—selling medium-quality products at low prices. It is actually raising the quality level of the inventory in lightning warehouses.

Jiang Fan and Hema

On the other side of the arena—what Alibaba is currently doing is integrating all major e-commerce businesses in China, whether it is express e-commerce (Taobao, Tmall, etc.), service e-commerce (Ele.me, Fliggy, etc.), or instant retail e-commerce (Taobao Flash Purchase, Hema, etc.), into one large consumption platform Led by Jiang Fan, this wave of "integration."

The reason for this, according to some market participants, is that "Meituan and Pinduoduo are capturing the market through one or two apps, while Alibaba's e-commerce business is fragmented into several apps, 'fighting alone' in the market, which is not as effective in terms of scale cost effect, intensive effect, and traffic input-output ratio compared to Meituan, and needs to change."

Now, Alibaba is integrating its "dispersed" business lines into a large consumer platform. Based on Taobao, Alibaba has already integrated Ele.me (Ele.me has merged into Taobao's flash purchase) and has also given Hema a primary entry point on Taobao's flash purchase.

Therefore, many market participants, including Alibaba's current and former employees, believe in response to "Business Observer" that Hema's future will also be "led" by Jiang Fan.

But regardless of whether this will ultimately be realized or when it will happen, the current market changes have already begun to be "unforgiving."

In the current fastest-growing field of instant retail— the hard discount community supermarket track that integrates online and offline, a major battle is about to begin.

With Meituan's capabilities, as long as the model is established, opening thousands of stores in just two or three years should not be difficult.

Therefore, in the upcoming battle in Hangzhou, regardless of victory or defeat, the outcome will be: either wake up Meituan or wake up Alibaba.

Risk Warning and Disclaimer

The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial conditions, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investing based on this is at one's own risk