China Consumer

Melting pot

Hotpot leader downsizes after ill-timed expansion


Haidilao closed 300 restaurants

Last Sunday, Beijing experienced snowfall for the first time this winter and for many a steaming hotpot meal was just the thing for the cold weather. “What’s more soul satisfying than sitting around a hotpot on a snowy day, with a few friends, sharing a bite and enjoying the heat from the stove?” one netizen asked on social media.

But just as the capital’s city first cold snap arrived, China’s most famous hotpot chain paradoxically announced its closure of over 300 restaurants. Haidilao, which currently has almost 1,600 outlets, says the hotpot eateries were nonperforming, although it also maintained it wouldn’t lay off any staff.

Investors were pleased with the plan. Shares of Haidilao, which trade in Hong Kong, went up almost 5% to HK$22.05 at the close of trading on Friday, gaining about HK$5.5 billion ($700 million) of market value after the announcement. Nevertheless, the company still has a lot of ground to make up: the stock has lost almost 70% of its value so far this year following a 91% gain in 2020.

The hotpot chain – famous for customer service perks like complimentary massages and snacks – has been struggling for some time. Part of the reason is because of Haidilao’s overexpansion during the pandemic, which saw it double its store count in a year. The rapid expansion soon pushed down its ratio for turning tables. Over the past two years, Haidilao’s average table turnover rate shrank from 4.8 per day in 2019 to three times per day in 2021, with some new restaurants only achieving a pretty dismal 2.3 turns per day, according to the company’s financial statements.

In a meeting with analysts, Zhang Yong, founder of the chain, admitted that the company had been too aggressive. “I made a wrong judgement. In June last year, I made the further plan to expand the chain. Now it is clear that I was blindly confident. When I realised the problem it was already January of this year, and it wasn’t until March before I reacted,” he lamented.

The company also made a bet on focusing its growth on lower-tier cities. The number of eateries in third-tier cities went up from 194 in 2019 to 611 in the first half of this year, for instance. Stores in second-tier cities, too, went up from 257 to 593 during the same period.

That also turned out to be a bad bet. While spending in first- and second-tier cities has been robust, lower-tier cities have not enjoyed the same rebound from the worst of the pandemic lockdowns.

For Haidilao, the average table turnover rate for lower-tier cities fell worse than average (by about a sixth between 2020 and this year).

“The operating results of Haidilao’s restaurants in third-tier cities are simply not desirable. After two years of rapid expansion, it is clear that there are simply too many stores in third-tier cities, or that they have chosen the wrong locations, dragging down the overall market performance,” commented Jiemian.

News about Haidilao shuttering of so many of its restaurants has attracted over 260 million views on Sina Weibo, with many commentators agreeing that the company should scale back.

“The more stores you open, the less you focus on service, the surroundings of the newly opened stores are not up to par, while prices are only rising,” one business savvy patron pointed out.

That said, Haidilao is hardly the only hotpot chain that’s struggling. Its closest rival Xiabuxiabu, which is likewise listed in Hong Kong, also saw its stock plunge 70% this year. The Beijing-based company even attempted to diversify into grocery delivery in an effort to combat the slowdown in revenue.

The hotpot industry is always going to be competitive, thanks to the low barriers to entry, but a flood of venture capital has fuelled the growth of new entrants. Banu Hotpot, which focuses on the high-end segment, successfully raised Rmb500 million in its most recent fundraising round back in June. Meanwhile, Shrimp Hotpot, another new hotpot chain, has opened more than a thousand stores across the country in a short period of time.

Perhaps the other lesson to be absorbed from Haidilao’s experience: in China’s highly diverse, continental-style economy, a nationwide expansion strategy has pitfalls. Consumers in less developed provinces like Gansu cannot afford to pay the same as those in more affluent areas like Guangdong. Brand only goes so far…

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