Alibaba’s grocery chain Freshippo records first profitability in key segment, eyes expansion in 2023

Freshippo said it achieved profitability with its main grocery brand Hema Xiansheng for the first time in 2022, after seven years of investment,according to an internal letter to employees from Freshippo chief executive Hou Yi seen by local media outlet Jiemian. 

Why it matters: At a time when many other tech-funded grocery chains are still finding ways to break even, the Alibaba-owned chain’s news of partial profitability is a milestone in the ultra-competitive fresh grocery industry.

Details: Hou said that the company had realized “the profitability of Hema Xiansheng,” calling it “a big step for new retail” without revealing Freshippo’s current customers or sales figures. He added that Freshippo aims to serve one billion consumers and reach RMB 1 trillion ($145.2 billion) in sales nationwide in the next ten years.

• Freshippo will continue to expand in the new year Hou said, maintaining double-digit growth in store openings for Hema Xiansheng and its membership store Hema X. Its discount store Hema Outlets aims to complete “full coverage” of all suburban towns in Shanghai by the end of 2023. 
• Hema Neighborhood, the company’s local grocery pick-up business, will gradually shift from a direct to a franchise-based model.
• Hou also highlighted Freshippo’s focus on developing its own branded products in 2022, saying that Freshippo-owned brands already account for 35% of the goods it sells, and will soon exceed 50%. He said he sees those brands as a core strategy of differentiation for the chain. 
• Nevertheless, Hou has also pledged to continue bringing “the best products worldwide” to China, according to a report by local media outlet NBD on Dec. 17, following a European tour in which the executive looked to source beer, chocolate and cookies for the grocery chain.

Context: Freshippo was launched in 2015 as Alibaba looked to leverage its expansive logistics network and enter the fresh produce market. It runs on a model of using offline stores as warehousing, sorting, and distribution centers, in contrast to its competitors’ use of a front-end warehouse model, which often carries higher fulfillment costs. 

• Local life services giant Meituan, which operates an express delivery service for fresh groceries called Meituan Macai, adjusted its strategic focus to “retail plus technology” in 2021, but the new initiatives segment to which Meituan Maicai belongs continues to record huge losses. The segment lost RMB 22.6 billion in the first three quarters of 2022, and made a yearly loss of RMB 38.4 billion in 2021.
• Another Freshippo competitor, NYSE-listed Dingdong Maicai, achieved its first non-GAAP profit of RMB 20.6 million in the April-June period of 2022 but then reported a loss of RMB 345 million in the following quarter. The company’s ability to sustain profitability therefore remains in doubt.
• China’s Covid lockdowns helped drive sales growth for express grocery delivery retailers in 2022. According to a report conducted by consumer insights consultancy Kantar Worldpanel, express grocery sales improved 11.7% in the third quarter of 2022 compared to the same period in 2021, with the frequency of orders placed by users on integrated platforms including Meituan, Ele.me, and JD increasing significantly during this time.