Founded in 1994 and listed in 2018, Haidilao International Holding Ltd (“Haidilao”) (HKG:6862) is a global fast-growing Chinese cuisine restaurant brand focusing on hotpot cuisine. In Part 1 of this article, we will take a closer look at the industry and business model of the group to better understand if it is worth an investment.    

Leader in the hot pot restaurant market in China

According to an independent market research report by Frost & Sullivan presented in the IPO prospectus, the hot pot restaurant industry is a fragmented and highly competitive market. The top five players in the industry represent just 5.5% of the total market share. Haidilao has a 2.2% market share — which is more than double the second largest player who has a 0.9% market share.

https://fifthperson.com/wp-content/uploads/2018/10/haidilao-market-share-620x264.png

(Source: IPO prospectus)

Haidilao is considered a mid-to-high-end restaurant operator with average spending of around RMB100 per guest. The table below showcases Haidilao’s average spending per guest in 2018 and 2019. 

Average spending per guest (RMB)20192018
Tier 1 cities110.1106.1
Tier 2 cities99.494.8
Tier 3 cities and below94.992.1
Mainland China restaurants100.996.9
Outside Mainland China185.3199.3
Overall105.2101.1

(Source: 2019 annual report)

According to Frost & Sullivan, the price point of RM60-200 per guest is expected to generate the fastest growth at a compounded annual growth rate (CAGR) of 11.3% in 2017-2022, versus the ultra-premium category (>RMB200) at 10.3%, and mass-market category (<RMB60) at 9.7%.

Revenue composition

By revenue, Haidilao’s restaurant operations are the largest segment, accounting for 96.4% of total sales in 2019. This is followed by sales of condiment products and food ingredients at 1.9% and delivery business at 1.7%. 

The group has recorded growth in every customer segment within the past two financial years, but the rate of increase is particularly robust in the sales of condiment products and food ingredients segment, where sales have increased over 320% from 2018 to 2019. 

Revenue (RMB’000)2019%2018%
Haidilao restaurant operation25,588,52396.416,491,22397.2
Other restaurant operation21,154
Delivery business448,5431.7323,5851.9
Sales of condiment products and food ingredients494,4251.9154,2920.9
Others3,147
Total26,555,792100.016,969,100100.0

(Source: 2019 annual report)

As of December 2019, Haidilao operated a total of 190 outlets in Tier 1 cities (Beijing, Shanghai, Guangzhou and Shenzhen), 332 outlets in Tier 2 cities (all municipalities and provincial capitals excluding Tier 1 cities, plus Qingdao, Xiamen, Ningbo, Dalian, Zhuhai, Suzhou and Wuxi) and 194 in Tier 3 cities. In the overseas market, the group has around 44 outlets in Asia, 6 in North America and 1 each in Europe and Oceania. 

Haidilao began offering delivery services in 2010 and was the first hotpot restaurant brand in China to launch such a service, according to Frost & Sullivan. The group currently offers delivery services in most of its stores through delivery hotpot, WeChat, Haidilao app and major delivery platforms (Meituan, ele.me, etc.).  

Business model

Haidilao has a large flat structure with four key categories, namely headquarters, coaches, groups and restaurants as shown in the below picture:

TitleDescription
HeadquartersMaintain control over critical aspects of restaurant management, including food safety, supplier selection, management, legal, IT, finance, and restaurant expansion strategy
Coaches & coaching teamCoaches may have prior experience as restaurant managers. These coaching teams help to offer guidance on the following categories:
– Strategic expansion – site selection and lease negotiation
– Staff development and promotion
– Performance assessment
– Construction – coordinating decoration and renovation
– Product development of new menu items and improvement of existing menu items
– Performance enhancement – providing guidance to restaurants that are C-rated (poor)
– New restaurant support
– Human resources
GroupsRestaurants within a region are required to form a group with neighbouring restaurants, which typically consist of 5-18 restaurants. This is formed through mentor and mentee relationships. 
Restaurant-levelRestaurants are generally managed by restaurant managers who are responsible for:
– Staff assessment
– Promotion
– Development of talented mentees
– Management of bussers, janitors, dishwashing staff, food preparation, servers and food safety personnel 

(Source: IPO prospectus)

Bottom-up approach talent model

Haidilao adopts a bottom-up driven model, where it aligns the financial interest of restaurant managers with (i) existing restaurant profits, (ii) training of new restaurant managers (mentees), and expansion of new restaurants. Haidilao encourages restaurant managers to propose new restaurant manager candidates, staff team and potential sites for new restaurants. They are encouraged to find 1-2 new restaurant sites every two years. By empowering and giving ownership to employees, Haidilao can retain them more successfully. 

Site selection

Haidilao directly manages site selection at its headquarters and coach team level. To improve the quality of sites selected, the group has developed an AI platform with Alibaba-Cloud, which helps to screen for suitable locations that meet its criteria. These include:

– GDP per capita, and population density of the local community
– Presence of activity centres (offices, shopping complexes, schools and residential areas)
– Popularity of other restaurants in the vicinity
– Presence of nightlife (bars and KTVs)

Focus on client satisfaction

Haidilao differentiates itself from other hotpot brands by more attentive service, arising from the great autonomy given to employees (Haidilao encourages restaurant staff to execute their ideas on how to discover and satisfy customer needs), the use of technology, such as the automated ordering system, and the restaurant manager assessment system, which places client satisfaction as the primary criterion (above operational and financial performance).

Every quarter, Haidilao dispatches at least 15 mystery client reviewers (along with their guests) to each restaurant to dine and rate their experience, based on several criteria, including quality of service, the dedication of servers, quality of food, and restaurant environment.

Vertically integrated ecosystem

Haidilao has built a vertical ecosystem with several connected parties, such as Shuhai Group, Yihai Group, Shuyun Dongfang, Jarud Qi Haidilao and Weihai Consulting. All these companies are set up separately by the founders of Haidilao to provide services to Haidilao under an open market system. This framework allows Haidilao to focus primarily on its restaurant operation business. 

CompanyKey business function(s) related to Haidilao
Shuhai GroupProviding warehousing and storage services and logistic services and supplying food ingredients
Yihai GroupSupplying Haidilao Customised Products, Yihai retail products and instant hot pot products
Shuyun DongfangProviding decoration materials and renovation services and decoration
Jarud Qi HaidilaoSupplying lamb products
Weihai ConsultingProviding human resource management and consulting services

(Source: IPO prospectus)

Investors should also note that the group is licensed by Sichuan Haidilao, a company controlled by the controlling shareholders, to use the trademark of “海底捞” and the WeChat public account name “海底捞火锅” on an exclusive and royalty-free basis for a perpetual term. However, the group owns the proprietary rights to the formulas of Haidilao Customised Products (the “Condiments Formulae”) and licenses the Condiments Formulae to the Yihai Group and its contracted manufacturers to use for production on a royalty-free basis. 

Use of technology

Haidilao has been applying some of the latest technologies to secure food safety, improve clients’ dining experience, and standardise operations. It was one of the earliest companies in the industry to adopt tablets as the primary ordering tool for customers, back in 2012. The tablets have increased the speed and accuracy of the ordering process while serving as a platform for additional customised client services. 

In 2018, Haidilao launched its “Haidilao Super App”, which provides members with a better dining experience, including queuing for tables, making reservations, placing delivery orders, credit redemption, and community interactions. As of 31 December 2019, Haidilao has a member base of 54.73 million. The group also opened an intelligent restaurant in Beijing, equipped with automated food preparation equipment, which increased serving efficiency, reduced staff headcounts, and improved food safety. 

Further breakthroughs were also made in 2019. Haidilao opened 3 new-technology restaurants including the first overseas new-technology restaurant. Robotic arm automatic serving rooms and direct supply of dishes from central kitchens are under small-scale testing and promotion. Intelligent soup bases preparation machines have been applied in some restaurants, allowing guests to taste personalized hot pot soup based in Haidilao. The group has also introduced more than 1,000 robot waiters to enrich the dining experience of its guests. Kitchen cleaning equipment has been deployed in more than 500 Haidilao restaurants globally, making its employees’ work easier and enabling them to better serve guests.  

We trust the writing above provides some insights into the business environment and the operational aspects of Haidilao. In Part 2 of this article, we will take a closer look at management and financials of the Haidilao. 

To be continued …

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