Hotpot giant Haidilao to close or suspend 300 restaurants by year end, admits over expansion

The Covid-19 pandemic discouraged indoor dining, food sharing, and close quarters. That was bad news for more restaurants, but it seemed to be a death sentence for hotpot shops, a Chinese “family-style” dining concept in which large parties dip meat and vegetables into communal vats of flavoured soup. 

Chinese hot pot chain, Haidilao International Holding Ltd (“Haidilao”) (HKG:6862) – known for its customer service – focused restaurants that offer free manicures, snacks for diners waiting in line, and even a giant teddy bear companion for those dining alone – didn’t see it that way. 

Instead of waiting out Covid lockdowns and capacity restrictions, the chain launched an expansion plan that would have been ambitious in a normal year, let alone in pandemic times, when takeout – alone on a couch – was all the rage. 

In 2020, Haidilao expanded at its fastest pace ever, opening 530 restaurants, nearly 1.5 outlets per day. In the first half of 2021, Haidilao opened another 299 restaurants, to reach 1,597 outlets worldwide.

Haidilao founder Zhang Yong was wagering that the food and beverage sector would rebound quickly in China, and that the pandemic offered the chain an opportune time to broaden its footprint. However, his bet went horribly wrong. Haidilao’s profits sank over 86% from RMB2.3 billion in 2019 to RMB309.3 million in 2020. 

The company’s performance improved in the first six months of this year. It recorded profits of RMB94.5 million, compared to a loss of RMB964.5 million a year ago. Even so, the company acknowledged that its business performance and table turnover rate didn’t meet management’s expectations. 

New store performance has been weaker than expected, while same-store table turnover recovery is only at 60-70% of 2019 levels. 

Furthermore, the period of time for the newly-opened restaurants to their first breakeven and returns on cash investment was longer than prior periods; and that the operations of restaurants were still suffering from the continued impact of Covid-19. 

Now, 18 months in, Haidilao is admitting that its aggressive expansion strategy was severely mistimed and mismanaged. 

The company has on November 5, 2021, announced it will be shutting down or suspending the operations of around 300 poorly performing restaurants with relatively low customer traffic and unsatisfying results of operations gradually by December 31, 2021, of which some restaurants will be temporarily closed for no more than two years, and resume operations “in an appropriate time”. 

That’s one-fifth of its total restaurant count. No employees will be laid off though, and affected employees will be redeployed within the group. The closures will reportedly affect outlets mainly in China, though some cuts will come in countries the restaurant has expanded into. 

In addition, the company said it has decided to launch a plan, which it has dubbed “Woodpecker”, to improve the operating performance of the company. The plan will be led by executive director and deputy chief executive officer Ms. Yang Lijuan. The main contents of the plan include:

• Continuing to pay attention to the restaurants with unsatisfying results of operations, including overseas restaurants, and taking improvement measures accordingly. 
• Rebuilding and strengthening part of the functional departments of the company and restoring the regional management system.
• Under the premise of scientifically assessing various departments, keep conveying to employees the corporate culture and values of “changing your future with your own hands”, and vigorously advocating the dedication spirit with love and trust as the core. 
• Slowing down the company’s business expansion plan timely. If the average table turnover rate of Haidilao restaurants of the company is less than 4 times/ day, no new Haidilao restaurants will be opened on a large scale in principle. 

Haidilao’s share price has tumbled over 68% year-to-date. Therefore, investors will certainly be relieved to hear that Haidilao’s new game plan is to improve its store operation and profitability, divert customers to the remaining outlets and improve its cash flows. 

Closing restaurants should increase productivity for the remaining stores. Still, Haidilao will face one-off costs from its store closures that will sink earnings in the near term. The company faces an uncertain recovery as China is still grappling with Covid-19 outbreaks. Time will tell if the new plan will work out. 

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