China Consumer

The lure of Lanzhou

Why private equity investors are lining up to invest in noodle chains


A hot and spicy investment

When you mention Lanzhou to most Chinese people, the first thing that comes to mind is often the word “lamian” rather than the capital of Gansu province, which used to be a stop on the ancient Silk Road.

Lanzhou lamian (which we featured in our book China in 50 Dishes; see our website to download it) are hand-pulled noodles that are served in clear beef broth. The chewy noodle, cooked to order, is topped with beef slices, chopped spring onions and fresh coriander. Those who crave something stronger can add a generous helping of spicy chilli oil too.

In recent years, Lanzhou lamian has attracted a flurry of investment from venture capital firms. One chain that specialises in the iconic dish is Zhang Lala, which has 16 outlets in Shanghai and is planning to open 30 more. The noodle chain is reportedly planning a new round of financing that would value the company at Rmb390 million ($60 million). Two other lamian chains Mayongji and Chen Xianggui, which have 14 and 22 stores in Shanghai respectively, have also concluded recent fundraisings that put their valuations at over Rmb1 billion.

Given the dish appears to have originated in Lanzhou, why are all three chains based in Shanghai? “People in Shanghai love noodles, especially thin noodles. Moreover, a lot of people from Anhui, Henan province [where noodles are a staple], have opened shops in Shanghai over the years, which serve Lanzhou lamian and other noodles dishes. These have since become a blueprint for many new restaurant chains today,” one industry insider told CateringO2O, a food service news portal.

The emergence of these noodle chains in major cities suggest that investors have identified Lanzhou lamian’s potential brand power.

“Like new-style milk tea [see last week’s story], Lanzhou beef noodles as a category has been advancing in first-tier cities, steadily building brand equity and standardisation. There are already 1,990 Lanzhou beef noodle shops in Beijing, Shanghai, Guangzhou, and Shenzhen. That number easily surpasses Haidilao [a Sichuan hotpot chain], which has nearly 1,300 stores around the world. However, when it comes to brand recognition, it is still far from Haidilao, which goes to say there’s ample room for growth,” commented 36Kr.

Mayongji, which boasts a list of investors that includes Sequoia China, is positioned as a mid-to-high-end brand, imitating a Japanese-style ramen restaurant. Its outlets are usually located inside brightly-lit shopping malls. In addition to the classic beef noodles (which sell for Rmb26 a bowl), Mayongji added other northwestern specialties such as lamb skewers and cold dishes like cucumber salad.

These lamian chains have appealed to investors because they are businesses with strong cashflow. “As Chinese fast-food, the production line of Lanzhou beef noodles is very efficient and each meal can usually be served within five minutes. The time to finish a bowl of noodles is also not long, no more than 20 minutes, so the turnover rate is high at these restaurants,” says 36Kr. “Restaurant chains like Mayongji, Chen Xianggui and Zhang Lala can usually achieve a monthly turnover of around Rmb500,000 to 600,000 per outlet.”

‘Fast-casual’ restaurant operators have become the latest battlefield amongst Chinese VC firms. Hefu Mian, another chain that offers hand-pulled noodles, has secured Rmb450 million in financing recently. Meanwhile, Sichuan-style noodle chain Xiao-Mian and Changsha-based Wenheyou have also attracted interest from private equity investors.

Part of the reason for the deal frenzy is that the penetration of restaurant ‘chains’ in China is still low. Statistics show that in 2020, only 10% of all the restaurants in the country were chain businesses while in the US and Japan that figure is as high as 50%.

“The China market, too, has a lot of room for growth. Lanzhou lamian is a new category, offering great opportunity for building brand recognition,” one investor explained. That means among the aforementioned names one or two could grow into a popular brand with a nationwide network of at least 10,000 outlets. Of course it will take some time before a Lanzhou lamian chain could topple fast-food giants like KFC and McDonald’s.

For a start, the lamian industry is fragmented. In the city of Lanzhou, there are over a thousand restaurant brands that serve the iconic dish. Chains also have to work on standardising the process. The chewiness of the hand-pulled noodles is highly dependent on the chef’s skills, for instance.

It’s reckoned there are over 50,000 Lanzhou lamian stores across China, which already proves that the dish has mass appeal. “People choose it because it is delicious, nutritious and inexpensive,” noted 36Kr.

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