Wednesday, 2024 April 24

China’s biggest hotpot chain Haidilao’s ambitious expansion plans land it in hot water

Over the past year, Chinese hotpot restaurant chain Haidilao has had a rough ride.

As of November 2021, Haidilao’s share price on the Hong Kong Stock Exchange had crashed by about 75% from its peak in the year, cutting its market value by HKD 350 billion (USD 45 billion). By the end of 2021, the company had shut down 20% of its restaurants due to low customer traffic and unsatisfactory results.

Haidilao’s problems came to a head this year. In February, the group warned that it could lose more than RMB 4.5 billion (USD 710 million) for 2021, largely due to the closure and suspension of its restaurants. Although revenue was expected to rise more than 40% to RMB 40 billion (USD 6.3 billion), this would mark the hotpot chain’s first annual loss, which was more than the combined net profits earned over the past three years.

In the face of an unprecedented crisis, the company announced a top management reshuffle in March. Haidilao’s founder Zhang Yong stepped down as CEO and handed over the reins to former chief operating officer, Yang Lijuan.

Yang will have to take on the arduous task of tackling the company’s myriad challenges, some of which were the result of questionable strategic decisions.

The rise and fall of the hotpot giant

The first Haidilao restaurant was set up by Zhang in 1994 in Sichuan, China. Over the next two decades, the chain grew and dominated the market for hotpot cuisine in China. The company stood out from its competitors, largely driven by its customer-centric approach. Haidilao is well known for going the extra mile for customers, even offering free massages and manicures to diners waiting in line.

The company became one of the most recognized restaurant brands in the country and quickly expanded overseas. It set up restaurants in countries such as Singapore, Japan, and Canada. In 2018, the company was listed on the Hong Kong Stock Exchange, raising almost USD 1 billion in its IPO.

When the COVID-19 pandemic hit, one of the hardest hit sectors in China was the food and beverage (F&B) industry. Due to the Chinese government’s zero-COVID policy, cities were locked down to contain the outbreaks. Restaurants were also forced to shut.

Despite the dining curbs, the company embarked on an aggressive expansion plan. This was the turning point for Haidilao. In 2020 alone, the company opened 544 new restaurants. By June 2021, the group operated 1,597 restaurants.

The chain’s rapid expansion was partly catalyzed by the standardized format of hotpot cuisine that made the business model highly scalable. Unlike other cuisines whose dining experience depended heavily on chefs, a hotpot meal could easily be prepared and replicated using standard ingredients such as pre-portioned food, raw ingredients, and soup stock.

As a result of the jump in the number of restaurants in the first half of 2021, Haidilao’s overall table turnover rate fell to 3.0, which refers to serving an average of three sets of customers per day. This marked a further decline from 3.5 in 2020 and 4.8 in 2019, according to a research report released last year by Fitch Ratings. The turnover rate is an important metric used in the F&B sector, measuring how fast restaurant revenue is generated. For a Haidilao restaurant to break even, its table turnover index must hit 3.0, based on a report by Guosen Securities.

In the wake of expansion, many newly set up Haidilao restaurants turned out to be unprofitable. At the same time, they cannibalized business at other Haidilao restaurants in older locations.

Operation Woodpecker

Amid weakening growth and soaring operating costs, which were largely driven by overexpansion, Haidilao did an about-turn. In the second half of 2021, Haidilao launched the “Woodpecker” plan, a raft of measures that involved halting new openings while shuttering 300 restaurants in China. At the same time, the group took active steps to control rent and other operating costs.

That said, the company is not out of the woods as more uncertainties loom on the horizon. In fact, the road to recovery could be protracted, according to a recent media report, citing a Haidilao spokesperson, who said a research survey conducted by the company found that consumers in China were now experiencing a “shortage of disposable income.”

Other external factors could also hamper the company’s recovery, including slowing economic growth and the continued impact of sporadic COVID-19 outbreaks, according to a report by Fitch earlier this year.

For now, it is uncertain if the company has turned the corner. In the coming months, how Haidilao responds and adapts to newer challenges will determine whether the company can make a full business turnaround.

This article first appeared on 20she. KrEurope is authorized to translate, adapt, and publish its contents. The original text was translated and adapted by Julianna Wu.

KrASIA Connection
KrASIA Connection
KrASIA Connection features translated and adapted high-quality insights published on 36Kr.com, the largest and most influential technology portal in Chinese language with over 150 million readers across the globe.
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