From Taobao.com to Hema Supermarket, Alibaba’s Digitalized Food Supply Chain

This essay talks about how digitalization affects Alibaba's supply chain design and introduces the challenges and opportunities of its new Hema Supermarket.

Taobao.com is an online retail platform operated by Alibaba [1], a Chinese e-commerce conglomerate in China. Taobao.com sells a diversified range of products, including grocery food. Taobao.com doesn’t hold any inventory. Once a customer makes an order online, the seller ships it to the customer directly. Therefore, the delivery time highly depends on the distance between the customer and the seller, ranging from less than a day to more than a week. Unexpected supply chain disruptions may even further delay the shipment. In addition, perishable food requires temperature-controlled transportation, which many food sellers can hardly afford.

One the one hand, the digitalization of supply chain enables customers to track the movement of their orders online. Frustration increases as customers watch their orders get stuck on its way. As customers become more and more concerned about food safety and quality, they demand faster shipping and more convenient grocery shopping experiences.

On the other hand, the digitally-enabled supply chain makes information simultaneously available to all food sellers, forming a more integrated information flow. However, because the existing food supply chain of Taobao.com is dispersed among thousands of small and large food sellers, it is almost impossible for Taobao.com to implement these technologies for each individual seller. Taobao.com is unable to leverage digitalization to improve the efficiency and quality of its food supply chain, and thus cannot respond to customers’ new demand.

To address the efficiency and quality concerns, a new type of stores named Hema Supermarket was created. Hema Supermarket acts as both a centralized smart warehouse to eliminate the deliver time, and an advanced supermarket for customers to come shop, eat, and experience. Customers can either order online and get orders delivered to their home, or physically go to the supermarket to shop.

The centralized customer demand forecasting and inventory planning processes decrease the inventory in the supply chain system to a minimum level. The integrated supply chain makes it possible to skip the distributers in the middle and ship directly from food suppliers to Hema supermarket. The digitalization enables food suppliers to have real-time visibility of customers’ orders and to plan their inventory instantly. The inventory turnover is reduced to less than a day, and thus much less food is perished and wasted during the transportation and storing process. Furthermore, lower inventory level requires less space in the store. The extra space is refurbished into a small kitchen with dining tables. Customers can ask the chef to cook customized dishes using the groceries they bought, and enjoy a family dinner in the store. In addition, Truck drivers use real-time data to group order deliveries and to optimize their routes. Orders can be delivered to places within 2 miles from the store within 30 min.

Due to higher efficiency and lower labor requirements, products sold in Hema supermarket are 10% [2] cheaper than average grocery stores. There are currently about 20 Hema supermarket open in Beijing, Shanghai, Hangzhou, and Shenzhen. More stores will be opened in the next few years and will renovate customers’ groceries shopping habits.

In order to further improve its supply chain system, Hema Supermarket should address the following three items. First of all, as prodigious amount of data is collected in the digitalized supply chain system, data mining tools will be used to manage, analyze and utilize these data to understand customers’ preferences and predict their needs in the future. Secondly, the picking, packing, replenishing and checking out processes in the supermarket are still very labor intensive. In order to realize the vision of industry 4.0, advanced automations and technologies are to be developed to help workers perform these tasks and further improve the quality and efficiency of the system. Hema Supermarket needs to hire more talents in robotics engineering, software development, and machine learning areas. Finally, many of the traditional food suppliers and distributors should be educated to implement digitalization infrastructure in their warehousing and logistics operations, or even integrate information technology into their product packaging.

Nowadays we can buy almost everything online. It is very interesting to see how digitalized supply chain has driven online stores to move to an integrated online-and-offline system. Since Hema supermarkets are located very close to customers, the real estate in densely populated areas is very expensive. One open question is, should the offline stores such as Hema supermarket sell everything, or just the fast-moving products?

(word count: 726)

Endnote:

[1] From Wikipedia, see: https://en.wikipedia.org/wiki/Alibaba_Group.

[2] From China Business, see: http://business.china.com.cn/news/info-5725.html.

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7 thoughts on “From Taobao.com to Hema Supermarket, Alibaba’s Digitalized Food Supply Chain

  1. Really interesting look into how Alibaba is completely transforming the grocery space in CN through the digitization of the supply chain. While I personally am saddened to see smaller, local players obliterated by emerging, high-tech competitors like Hema, I appreciate the cost savings, efficiency, and experience offered by this alternative world. Like with Amazon acquiring Whole Foods, I wonder how the physical and capital intensive grocery business will continue to evolve in coming years– will shopper step foot in the grocery themselves? Or will bots roam aisles, picking up goods and dropping them in a drone destined for final destinations?

  2. Interesting read. The one thing that I do not fully grasp is how the Hema supermarket differs from other (non-Chinese) supermarket retailers leveraging scale, such as Wal-Mart in the US. These stores also provide the convenience of experiencing the merchandise in person whilst online orders are possible. Wal-Mart also uses sophisticated digital tracking systems to optimize its inventory planning and is also available in rural neighborhoods through its Express markets.

    On another note, since Taobao.com can track all customer ordrs as they are routed through its system, it should be able to aggregate this data and optimize demand/inventory on a grand scale already, without the use of the Hema supermarket system. For example, it could simply optimize demand by showing vendors first whose projected inventories have not been exhausted yet, based on Taobao.com’s forecast/planning. This way, vendors are incentivized to follow Taobao.com’s forecasts, resulting in minimal inventory and an even, fair distribution of orders.

  3. Thank you for an interesting article! The Hema supermarket highlights the transition of online retailers to offline brick and mortar stores. These new offline supermarkets serves as physical ecommerce distribution centers for the online retailers. I think that this is a very essential move and allows Alibaba to capture both the online and offline market especially in groceries which are highly perishable.

    To you question about whether Hema should sell everything? I think this will play out as more information is collected regarding customer behavior. However I think that groceries and households good serves as great start to the platform. In terms of data collection and integrated advance technology, they can introduce mobile payments which allows the company to track customer behaviour and preferences. This will also allow for customized experiences for each customer.

  4. How does this approach change the order received by a supplier? In a traditional grocery store model, the supplier receives a bulk order from a distributor, who then breaks down larger shipments into smaller tailored shipments that fit the broader but smaller inventory size needs of individual grocery stores. It allows for shipping by the large suppliers to be done most cost effectively because they do large bulk shipments of full truckloads. To now have the grocery store request directly from the supplier would imply the supplier is receiving many smaller orders, which they can either choose to deliver on in less-than-truckload shipments that are more costly, or sit on until they receive enough small orders to fill a full truck, which would leave a grocery store without inventory for a longer period than the traditional method. How is this phenomenon being corrected for?

  5. Thanks for the interesting article! I was previously unaware that Taobao.com owned physical supermarket locations to handle online grocery deliveries. Alibaba seems to be ahead of Amazon in reimagining the grocery shopping experience, given that Taobao has been expanding Hema locations since 2015 whereas Amazon’s Wholefoods acquisition was fairly recent.

    On your question around whether Hema Supermarkets should sell everything, I think it really depends on what Taobao is trying to solve with these physical stores. If Taobao’s strategy is to provide a different retail experience to customers in the grocery space through not only more convenient and faster online deliveries but also the in-store experience and the variety of perishable products that it can offer through the more efficient supply chain, I believe it makes more sense to focus on groceries. If Taobao’s plan is to simply use Hema supermarkets as warehouses for last mile delivery, then I could see Hema expanding its product categories. Personally, the latter strategy is less appealing in that these supermarkets are located in prime real estate and using shelf space for other non-perishable inventory that could be easily bought through other online channels does not seem like a cost-effective use of these locations.

  6. Interesting topic. I feel that online and offline services are eventually converging. To maximize profits, Taobao.com must create more value for customers and stakeholders by integrating the entire supply chain. Similarly, in America, Amazon did the same thing by acquiring Wholefoods.
    But one question I have is that isn’t distribution system the key issue? As long as the distribution channel is well-developed (refer to the super efficient and sophisticated distribution in Japan), most problems mentioned in the essay could be naturally addressed.

  7. Interesting article. While Taobao.com is doing all these great things and enable its suppliers to view data timely, my question would also be how this Hema Supermarket different from existing supermarket and technology. With Taobao.com plant form, suppliers are able to view demand timely as well, how would this be changed with the creation of Hema? TO your last question, if the data transparency could be truly done. Selling everything or the fast moving products would not be an issue, since we could control the logistics and inventory accordingly.

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