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Can China’s Dining Giants Solve Things with a Hotpot Amid Coronavirus?
COVID-19 and China
Beijing style hotpot. Image credit: Dear Datu /Instagram: datuk.doggo_haolin

Hotpot is a traditional communal dining experience where everyone shares one pot of cooking broth and takes turns adding ingredients. The dish reflects a dining custom that dates back thousands of years in China, where families and strangers alike eat together and socialize as they dine. According to an article in the South China Morning Post, hotpot’s origins aren’t clear, but it developed differently in different regions – from the spicy, numbing broth of Sichuan to the mild, fragrant tastes from Anhui.

Traditional hotpot restaurants have seen a surge in popularity in China in recent years. Hotpots account for 22 percent of the dishes sold at restaurants across the country, according to a 2017 report from the food industry giant Meituan-Dianping. Haidilao (海底捞 6862:HKEX) and Xiabu Xiabu (呷哺呷哺 0520:HKEX) are taking the highest share from the pie as Chinese customers favor these hot pot restaurant chains.

The name Haidilao originates from a mahjong term, literally meaning ‘deep sea dredging.’ It is analogous to the act of completing a winning hand in mahjong by picking up the last available tile in the game – this is very rare and considered very lucky.

The company was founded in 1994. At first, it was a small shop selling malatang – another traditional spicy Chinese dish mixed with vegetables, meat and noodles. Later it developed and expanded its menu. Now the company runs more than 400 restaurants all over the world, including in the US and Canada. Zhang Yong, who came from a small village in Sichuan, is the co-founder and the CEO of the company.

In 2018, the Beijing-based restaurant chain reported USD 1.6 billion in revenue and, last year, in September, Haidilao raised nearly USD 1 billion in an IPO that valued the company at roughly USD 12 billion.

The company owns this success to its vision of offering customers an engaging and memorable restaurant experience. Haidilao restaurants are known for providing customers services such as free manicures and shoe-polishing while they wait for a table.

Moreover, if you order a noodle dish, Haidilao employees might perform an entertaining ‘noodle dance,’ which involves waiters dancing with long noodle strands like rhythmic gymnasts twirling a starchy ribbon with Michael Jackson’s songs on in the background.

Zhang has said that he believes in the importance of superior customer service. “I’m from the countryside, where rural people believe that if you take money from other people and you don’t bring benefit to them, then you are a liar,” he told The Wall Street Journal in 2013.

Haidilao’s biggest competitor in mainland China is Xiabu Xiabu. Unlike Haidilao, Xiabu Xiabu focuses on the fast food sector. One hotpot meal price starts at USD 4.

The company has become the largest individual, bar-style hotpot restaurant chain in China. It has over 300 restaurants covering major metropolitan markets and cities, including Beijing, Shanghai, Tianjin, Hebei, Jiangsu and Liaoning. Xiabu Xiabu has been expanding rapidly over the years.

The company’s management team has been focusing on delivering quality food and following industry trends while standardizing management controls and driving higher customer loyalty.

Consequently, its financials over the last few years have been impressive. Revenue in 2017, 2018 and the first half of 2019 increased by 33%, 29%, and 27%, respectively.

However, both of these companies’ shares dropped by as much as 7% in the last weeks. It came after the South China Morning Post reported 2 weeks ago that nine members of the same Hong Kong family contracted the coronavirus, now formally known as covid-19, after sharing a hotpot and barbecue meal at a restaurant called the Lento Party Room.

This fall is a general trend in the restaurant business as other Hong Kong-listed restaurant operators also saw declines. Tsui Wah Holdings fell 2.44% while Cafe De Coral dropped 1.82% and Fairwood Holdings shed 0.73%.

“In general, the restaurant business suffers during a virus outbreak,” Hao Hong, head of research at BOCOM International, told CNBC. “In Guangdong province, 97% of restaurant businesses reported a greater than 50% drop in revenue and 1/3 reported zero revenue.”

“The situation is grave,” he continued. “Haidilao, despite being a strong company in the sector, is suffering alongside the others.”

Although most of the restaurants have signs on the windows announcing that the interior and its surfaces are disinfected daily, in an attempt to reassure worried diners, unfortunately, the staff are the only ones seated at the tables, playing cards and waiting listlessly for customers.

Therefore, lots of restaurant owners are looking for solutions to help their business finance itself through the outbreak.

Haidilao has already found financial help to survive in China’s suffering restaurant business.

China’s CITIC Bank and AIBank will lend USD 298.77 million (2.1 billion yuan) to Haidilao International to help it manage the plunge in demand during the coronavirus outbreak, according to a statement on AIBank’s official WeChat account on Friday, February 21.

AIBank is a digital bank jointly owned by CITIC Bank Corp Ltd and search engine company Baidu. The banks have already issued 810 million yuan to the restaurant chain, said the statement.

To sum up, it is a critical time for companies in China’s restaurant business. The fear of the coronavirus will likely keep customers away from restaurants in the coming months. Some have already started searching for financial help to solve the revenue problems. However, it is uncertain how much longer they can rely on loans. Time will show if everything can be solved by the blessing of the hotpot in China’s restaurant business.

 
Editor: Luke Sheehan
ANALYST
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