Haidilao Expansion Worries

Haidilao is a great restaurant that IPO'd in Hong Kong on Wednesday. The company is popular in China and rapidly expanding, and the latter is the main source of concern. Can it expand this quickly? Hotpot involves serving raw food tossed into boiling water. Recently, rival chain Xiabu Xiabu saw its stock plummet after a rat was found in one of its hotpots.

Inquirer: Chinese restaurant shut down after pregnant woman finds rat in hotpot soup
One man, surnamed Ma, said it was his pregnant wife who discovered the rodent in their meal, as reported by Kankan News via South China Morning Post last Sept. 10. They were apparently eating in a branch of the restaurant chain Xiabu Xiabu in Weifang, Shandong province last Sept. 6, and had only taken a few bites when Ma’s wife made the discovery.

Authorities have since suspended the restaurant following the incident, the report said. Meanwhile, Ma’s wife is set to undergo a hospital check-up, with Ma sharing that the restaurant staff offered them money for an abortion if they were concerned about the baby.

“If you are worried about the baby, then we’ll give you 20,000 yuan (nearly $3,000) to abort it,” Ma said in the report, recounting what the restaurant staff told him.

The restaurant also offered them compensation in the amount of 5,000 yuan (around $700), though Ma has shared that he is ready to negotiate the amount.

Xiabu Xiabu meanwhile released a statement last Sept. 8, saying they’ve always “placed great emphasis on food security.” They vowed that they would make the required changes to improve their service.
The Economic Observer has an in-depth article on Haidilao, below is the relevant section on expansion.
EO: 海底捞上市的底气与隐忧
Expansion worry

“The more stores are added, the greater the management span.” Zhu Danpeng believes that there are serious problems in the operation mode and profit model of the Chinese catering industry, that is, to pursue profit maximization through low-cost labor, rather than putting food safety first. From a regulatory perspective, the country's laws and regulations and penalties need to be improved.

Haidilao's risk factors listed in the prospectus are 31 pages long. It believes that the risks mainly exist in three aspects: food safety and quality consistency, restaurant store manager talent pool and supply chain management.

In terms of supply chain management, the founders of Haidilao have successively set up specialized companies in various links of the hot pot supply chain, such as Bohai Group, Bohai Group, Yuyun Oriental, Weihai Consulting, etc., responsible for the production of bottom materials and processing of food materials in Haidilao. , warehousing logistics, store construction and manpower consulting. In addition to the above four, the main related parties of Haidilao include Zhalutqi Haidilao. In the past three years, the purchase amount of Haidilao to the above five companies has increased year by year, respectively 1.879 billion yuan, 2.553 billion yuan, 4.904 billion yuan, accounting for 61.7%, 68.8% and 81.3% of the total purchase of sea fishing. Bohai Group also provides food processing and distribution services for other catering companies.

The division of the Haidilao headquarters and the restaurant manager is clear: the restaurant manager has a high degree of autonomy in the day-to-day operations of the restaurants it manages, and the headquarters is responsible for food safety, procurement, growth strategies and other aspects of the restaurant. In this case, whether there are enough managers in the store has a significant significance for the success of Haidilao's expansion. "At present, the reserve of Haidilao is about 100 people per month." Li Jianfeng told the Economic Observer Online.

In addition, the method of cultivating the manager of Haidilao adopts the “apprenticeship system” to increase the enthusiasm of the store manager to bring out new people through rewards. The store manager can not only enjoy the performance of the store, but also obtain a higher percentage of performance in the stores managed by his apprentices and apprentices.

"For Haidilao, the biggest risk lies in food safety." Zhu Danpeng told the Economic Observer Online.

In terms of food quality and safety, Haidilao currently invests more than 500 full-time staff directly responsible for food quality and safety. Each restaurant has one or two employees dedicated to food safety. According to the Haidilao official website, more than 300 employees of the Haidilao suppliers such as Bohai Group, Bohai Group and Zalute Banner are responsible for food safety and quality control.

When the Economic Observer Online asked “How Haidilao ensured that the rules and regulations were in place”, Haidilao said, “In terms of safety, Haidilao is committed to providing consumers with a comprehensive and strict quality control management system through the development and implementation of a comprehensive and strict quality control management system. Healthy, safer and more assured products, including detailed and standardized quality control measures, frequent and extensive inspections, clear accountability, upgraded restaurant design and technology, and large-scale investment by food safety personnel, as much as possible Make sure the food is safe."

But obviously, Haidilao can't guarantee 100% without any problems.

In the Haidilao official website management announcement page, basically every month there are behaviors that do not strictly abide by the rules and regulations. Last year, after the Haidilao Beijing Jinsong store was exposed, there was a mouse in the kitchen. At the Sun Palace store, the staff used the colander used by the customer to eat the hot pot to clean up the clogged garbage.

Every exposure will have a major impact on sea fishing. Especially after the listing, if there is a problem in food safety, the damage to Haidilao is obviously not a level compared with before, and the more stores, the greater the lethality.

In early September, a shop in Weifang, Shandong Province, was blown out of a hot pot soup to remove a dead mouse. After the incident, the stock price fell on both the 10th and 11th of September. More than 6%.

The existence of food safety issues is a common problem faced by catering companies. At the end of May 2018, the famous hot pot brand Xiaolongkan was exposed to the media by recycling the use of saliva oil and the unhealthy hygiene of the kitchen. Soon, another chain of restaurants - Yang Guofu Mala Tang was exposed to a store staff in Guangzhou to put their feet on the cutting board to cut vegetables.

From the sea bottom to the Xiaolongkan, then to Yang Guofu Mala Tang, squatting and feeding, many chain catering companies have been planted, food safety is a risk that the catering industry cannot avoid. How to ensure the quality and safety of food while expanding rapidly is the key to the continued rapid growth of Haidilao.

"Haidilao can have two ways to die: one is to manage problems. If it happens, the death process may last for months or even the last year; the second is food safety problems. Once it happens, Haidilao may close tomorrow. Life and death are at stake. We understand that although the road to good food safety is tortuous and difficult, it will not go away." Haidilao wrote on his official website.

1 comment:

  1. Are there even good public companies to invest in China ? I have always had the feeling that going public (whether in Mainland or in HK or abroad) is just a way for the founders to exit scam and live off of the investors' capital.

    As for Haidilao, the market cap is 94B HKD !!! for around 360 restaurants which gives 261M HKD of market value per restaurant !!! With 260M HKD you can literally buy a dozen of privately owned restaurants.

    Regarding the metrics, Haidilao stocks are of course crazy expensive, meaning the market expects tremendous growth. I of course is highly skeptical. I reckon the management will count on the Chinese diaspora for that... and will it be enough to sustain the revenue ? Will natives in Western countries accept that kind of eating experience ?