Spicy investment

Guoquan Shihui has 6,000 hotpot supermarkets in 104 cities

It is no secret that Chinese people love hotpot. Featuring a simmering pot of broth in which a vast selection of ingredients are dipped, it might be one of the easiest meals to cook. The preparation work, however, can be trickier than thought. It can take hours to wash the raw ingredients and concoct the soup base before a proper hotpot is served. A company that set out to solve this challenge in China has been on a roll – seeing its valuation surge over four times in the space of a year.

On May 20 Guoquan Shihui, a hotpot ingredients supplier and supermarket chain, received a capital injection of Rmb109 million from long-term backer Sanquan Food, China’s biggest frozen dumpling brand (see WiC441). The deal ups the Shenzhen-listed firm’s stake in Guoquan Shihui from 5.93% to 6.91%. Based in Shanghai, Guoquan Shihui has raised over $3 billion in four rounds of financing in the past two years, with an earlier round in March valuing the company at $2 billion.

What investors see in Guoquan Shihui is its ability to tap into China’s love for hotpot. That culinary sales opportunity has created at least four major listed firms. Haidilao, most notably, is still worth more than HK$200 billion as of this week although its Hong Kong shares have plunged more than 50% since February.

Guoquan Shihui has tapped into a boom in online grocery shopping (see WiC521) and the dine-at-home culture. Some analysts say that has cost Haidilao’s business dearly (the company logged an 87% decline in net profit last year) since the Covid-19 outbreak began in late 2019.

Founded in 2015, Guoquan Shihui spent its initial two years building up its extensive supply chain and logistic network. In 2017 it opened its first store in Zhengzhou, the capital of the hotpot-loving province of Henan. It has since turned its focus to smaller cities, and now sells nearly 500 items, ranging from fresh food to cooking utensils. The company is currently relying on over 500 ODM factories for the production of its eponymously branded products. It also operates 12 central warehouses and 1,000 cold chain distribution centres across China for quick delivery.

In the 12 months to April, Guoquan Shihui also saw its number of supermarkets rise from 2,400 to 6,000 across 104 cities, meaning that it opened at least 300 stores every month on average.

The rapid expansion has been underpinned by its model of franchising. Not having to pay an initial fee, Guoquan Shihui’s franchisees generally incur a minimum cost of Rmb250,000 to set up a store of 60-80 square metres. Some shops have achieved break-even in 10 months.

Enjoying same-store sales growth of 400% in 2019, Guoquan Shihui reported Rmb6.6 million in net profit last year on revenue of Rmb3.1 billion ($342.29 million). In the first quarter, it was in the red to the tune of Rmb45.5 million as revenue reached Rmb992 million, thanks to rising expenditures linked to the whirlwind pace of store openings as well, as seasonal factors. “Hotpot businesses tend to see half of their annual revenue coming from the last four months of the year [when the weather gets cooler],” Yang Mingchao, Guoquan Shihui’s founder, who holds a 19% stake in the company, told IPO Zao Zhidao, a zimeiti.

To smooth out seasonality, Guoquan Shihui has expanded into barbecue ingredients, as well as ready-to-eat categories this year. Its self-heating meal brand Hanhan, which targets singletons and urbanites, is expected to account for a fifth of the company’s revenue in the medium term.

Guoquan Shihui’s success is spawning a number of fast-followers. According to Linkshop, a database on China’s retail sector, there are 20 hotpot-themed supermarket chains in China at present, after a surge in private equity and venture capital investment last year. Seven of the 13 financing deals in the hotpot sector were directed towards ingredient marketplaces in the last 12 months.

Lazy Bear Hotpot, which in February raised over Rmb100 million from investors including Bytedance, for instance, has opened 1,100 outlets in six central provinces since last year. In Shanxi province, where the company is based, some of its outlets are distribution centres that double as warehouses (a model pioneered by online grocery delivery platform Missfresh, which we mentioned in our Top 50 China Unicorns ranking), while others also offer a dine-in experience. In an interview with Chinese Venture, a weekly magazine, Lazy Bear Hotpot founder Gao Fei revealed he is planning to go public, but not until 2025. To fend off rivals, the two-year-old start-up is also investing heavily in its supply chain. Beyond warehouses and cold chain logistics networks, it also owns farms, condiment factories and beverage production bases.

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