Alibaba Group's grocery retail arm Hema, also known as Freshippo, has officially exited the membership store business, shuttering all Hema X locations as it pivots toward more profitable formats amid intensifying competition in China's retail market.

Hema said that its Shanghai Senlan store, the last remaining Hema X location, will cease operations on Aug 31. The closure follows the shutdown of stores in Beijing; Suzhou and Nanjing of Jiangsu province in late July. After the Senlan store closure, Hema will no longer operate any stores under the membership model.

Customers holding Hema X memberships — priced at 258 yuan ($35.9) annually for Gold and 658 yuan for Diamond — will be eligible for refunds or can transfer benefits to other Hema formats.

The move signals the end of Hema's experiment with membership stores, which the company once positioned as a "second growth curve" akin to US membership giants Costco and Sam's Club.

The first Hema X opened in Shanghai in October 2020. By October 2023, the format had expanded to 10 stores across key cities.

Hema management made a strategic call earlier this year to concentrate resources on Freshippo and Hema NB (neighbor business), both of which are showing stronger growth momentum.

In an internal letter at the end of 2024, Hema CEO Yan Xiaolei reaffirmed confidence in the company's Hema NB format, with a goal to expand to 300 stores in fiscal year 2025.

According to Alibaba's latest annual report, Hema plans to deepen its presence in emerging cities and counties, with a focus on value-driven formats. The company's gross merchandise value surpassed 75 billion yuan in fiscal year 2025, and its adjusted earnings before interest, taxation and amortization turned positive for the first time. Freshippo now operates over 420 stores, with online orders contributing more than 60 percent of sales.

Analysts said the collapse of Hema X highlights the challenges Chinese retailers face in replicating the US membership model.

"Hema X charged membership fees, but it never truly validated a mature model," said Jason Yu, general manager of CTR Market Research. "It faced pressure from both global competitors like Sam's Club and domestic players, but lacked strong differentiation in product assortment and customer experience."

While Sam's Club benefits from a global supply chain and robust local procurement, most Chinese entrants lack comparable sourcing and private-label development capabilities, said Yu.

"Costco has started to localize its assortment, but the offering still leans heavily toward an American lifestyle that doesn't fully align with Chinese consumer habits," Yu said. "Omnichannel capabilities also remain weak — there's no front-end warehouse system to support fast delivery expectations."

Hema's retreat from the warehouse format also reflects broader changes in Chinese consumer behavior, particularly among middle- and high-income shoppers.

"High-income households still value product quality and freshness, but they've become increasingly rational," said Laura Liu, senior research analyst at market observer Mintel China. "We're seeing more of them shift toward fresh-product discount stores, which offer a better price-to-value balance."

According to Mintel, shoppers are no longer loyal to a single retail format. Instead, they alternate between warehouse stores and discount channels depending on purchase scenarios. This crossover trend reflects a broad shift toward flexible, needs-based consumption.

Hema is doubling down on its discount Hema NB format to capture this evolving demand.

Consultancy Kantar Worldpanel data show that Hema NB boosted its penetration by 1.6 percentage points in eastern China during the first quarter of 2025, outpacing growth in traditional retail formats. Overall, Freshippo's reach grew 1.3 percentage points year-on-year in the first quarter.

The company has also accelerated store openings, averaging one new location every five days in 2024.

The NB format, focused on community-based stores offering aggressively priced fresh goods and snacks, has shown particular strength in town-level markets. In the first quarter, discount snack store penetration reached 18 percent, with southern and lower-tier regions seeing the fastest growth.

"Consumers are seeking more value without compromising on quality," Liu said. "Discount retailers that deliver on both fronts are well-positioned to capture share in this new retail landscape."