► Haidilao’s restaurant operation occupies 96.36% of total revenues.
► Hot pot is the largest sector in the catering industry, with 13.70% of the market.

Hot pot leader Haidilao’s (6862:HKEX) actions have attracted analysts’ eyes since it emerged to speak for the restaurant industry in China. The uniform prices of dishes in Beijing stores increased by 6%, raising heated discussions among clients on April 7. Its noodle store Shi Ba Cuan (in Chinese) has been open for nearly half a year, providing good quality food at a lower price, with a rating of 4 out of 5 stars on Yelp-like platform Dianping.

Shi Ba Cuan is Haidilao’s step into the fast-food area; besides the hot pot firm, another famous restaurant, Xibei, has also shown strong interests, acting four years earlier than Haidilao. Fast food has the features of high frequency and demand, a low barrier and is easy to copy and expand; it’s no wonder that these two leaders are both bullish on this field.

A profitable secondary point

Starting in 2019, Haidilao opened its stores speedily, and the total number of stores increased from 466 at the end of 2018 to 768 at the end of 2019, nearly doubling the amount. But at the same time, sales and table turnover rate (table reuse rate, calculating formula: the number of times the table is the used – total number of tables/total number of tables × 100%) declined for the first time. According to the 2019 annual report, the growth rate of same-store sales revenue in first-tier cities for Haidilao decreased from 11.70% in 2018 to 3.30% in 2019. The table turnover rate of newly opened restaurants has dropped significantly, from 4.6 in 2017 to the current 3.9 while the highest record is 5. The industry average table turnover rate in 2019 is (in Chinese) at about 3.5.

Taking a look at its revenue source, in 2019, 96.30% total revenue from Haidilao stores, showing an absolute reliance on hot pot stores. Consequently, when this part indicates slower growth, Haidilao needs to find another way to stimulate its business. 

According to the 2019 China Fast Food Industry Report (in Chinese), the number of fast-food stores in the catering industry has reached 49.20%. The chain rate of Chinese fast food stores is 55.10%, and that of Western fast food is 78%. Compared to Western fast food, the Chinese variety has the feature of needing more cooking steps and many more ingredients, making large-scale replication more difficult. Although some good players exist, they mostly focus on one or two specific dishes such as chicken and Lanzhou noodles, which somehow avoid the potential problems mentioned above. For Shi Ba Cuan, it covers more plates than the traditional players, including noodles, milk tea, breakfast and desserts. If Haidilao wants to copy this new program, the firm needs higher-level process management and a different food supply chain. Compared to the hot pot supply chain, the cooking steps are greater, and seasonings and ingredients are different from those of hot pot. 

In this period, attracting clients with high-quality service at lower prices is a good idea, while problems remain for famous restaurants. Since the supply chain is an advantage of Haidilao, whether and how the firm will take action on it requires further digging. 

Supply chain moat

A reliable supply chain promises good food taste and fast expansion. The most famous one is Shuhai, which also supports Shi Ba Cuan. Besides supporting Haidilao and its brands, this firm also supports over 200 players in the restaurant industry, such as Xibei.

These firms are mostly Haidilao’s former various departments, such as Shuhai, its old supply chain department. The upstream consists of three firms that provide multiple category foods and storage and transportation services. The middle stream focuses on seasoning, needed to attract discerning palates. The downstream consists of decoration, human resources, and a cloud service platform.

Since food resources occupy the largest nearly 50% of the cost in the hot pot industry, a strong and stable upstream support become a moat of Haidilao, with almost 80% of total food are purchased through its supply chain network. Together with the well-known high-quality customer service and management system, promoting Haidilao to first place in the hot pot industry. Unlike other participants in the hot pot race, nearly 80% of them don’t have their supply chain system, relying on outside food, and most of them have less than five branches. Establishing a complete and high-efficiency chain is critical for players who wants to become a leader in this fiercely competitive place.

Hot pot and fast food races 

The entire restaurant industry has been increasing during the past years, hitting revenue of USD 99 billion by 2020. The whole industry can be divided into dinner food and fast food, and hot pot acts as the largest sector in dinner food, with a 13.70% market share. Fast food occupies 25% of the total market share. 

Although Haidilao is the leader in the hot pot race, it only occupies 2.20% of the total, followed by second-place player Xiabu Xiabu, with 0.80%. The remaining 94.50% of the market is scattered in the hands of some regional brands, specialty hot pot brands and small independent brands. The market growth space for Haidilao still exists, but the remaining parts have their strengths and cater to consumers’ specific tastes. 

Meanwhile, fast food has a similar situation in the hot pot area – firms and brands are scattered. Haidilao may face the same problems in the hot pot business. Xibei has tried several years in this area but hasn’t reached real success yet. With the epidemic factor, Haidilao’s efforts in the fast-food area are waiting to be tested by the market.