Haidilao International Holding, who braved the wind and waves in the past, has had a bad time this year.

At the beginning of the game, COVID-19 encountered the epidemic, and the store closed down, resulting in heavy losses. The restaurant reopened in April and wanted to raise the price to recover the loss, only to be exposed by netizens that "half a portion of potato chips is 13 yuan and rice is 7 yuan a bowl". Public opinion has criticized that "retaliatory consumption did not come, but retaliatory price increases came first." In desperation, we can only issue a letter of apology and stop the price increase.

In May, just after borrowing 2.1 billion yuan from the bank to tide over the difficulties, the founders Zhang Yong and Shi Yonghong sold their shares and cashed out 1.56 billion Hong Kong dollars, sparking another debate.

In July, Haidilao International Holding first issued a forecast for the first half of the year, with an estimated loss of 9-1 billion yuan, and then the branches of Jinan and Hangzhou successively exposed food safety problems with hard plastic sheets in black chicken rolls and coliform bacteria detected with chopsticks.

Under a series of disturbances, Haidilao International Holding's public relations team's apology ability was fully exercised in the first half of the year. But it also makes people wonder what happened to Haidilao International Holding, who has always been famous for his quality and service. Is it a temporary crisis or the beginning of a decline?

01. Growth slows down

Generally speaking, there are three ways for enterprises to grow: increment, price increase, and increase market share.

(1) Crazy opening of stores and a decline in the turnover rate

Increment, that is, the number of stores opened, operating time. Considering that Haidilao International Holding is open almost 24 hours a day, the growth in volume can only depend on the number of stores opened. Haidilao International Holding has accelerated the pace of opening stores in recent years, with the total number of stores increasing from 146in 2015 to 768 in 2019.

In terms of all-tier cities, the number of stores in first-tier cities increased from 50 to 190 between 2015 and 2019, from 71 to 332 in second-tier cities and from 18 to 194 in third-tier cities.

Under the epidemic, Haidilao International Holding seized the opportunity of clearing a large number of catering shops and quickly laid out third-and fourth-tier cities. Haidilao International Holding operated 927 stores by the end of July, with 159 more this year (according to Haidilao International Holding APP). Even with the impact of the epidemic in the past six months, Haidilao International Holding's stores have expanded even more than last year.

This rapid advance has brought Haidilao International Holding more operating costs such as rent, water, electricity, and manpower, and the recent frequent food safety incidents may also be related to the fact that it is difficult for management personnel and management ability to keep up with the expansion of stores.

In addition, a large number of stores were opened in the short term, which also led to a decline in Haidilao International Holding's turnaround rate. The overall turnaround rate in 2019 was 4.8times per day, down 4 per cent from the same period last year. The turnover rates in cities of first, second, third and below were 4.7times per day, 4.9times per day and 4.7times per day, respectively, while those of restaurants other than Chinese mainland were 4.1times per day, and only those of overseas restaurants increased.

(2) it is difficult to keep rising prices.

In terms of price, Haidilao International Holding's overall customer unit price continues to rise, but the growth rate slows down. In 2019, the overall unit price was 105.2 yuan per person, an increase of 4.06% over the same period last year. The unit price of passengers in first-tier cities and second-tier cities continued to rise, and the per capita consumption levels of first-tier, second-tier, third-tier and below cities in 2019 were 110.1 yuan per person, 99.4 yuan per person and 94.9 yuan per person respectively.

The bigger problem is that the room for price increases is limited. Although Haidilao International Holding explained that the price increase in April was affected by the epidemic and rising costs, the overall food price adjustment was controlled at 6%, and differential pricing was implemented in various cities, but the unconvinced attitude of consumers made Haidilao International Holding's price increase extremely difficult. High staff costs and raw material costs make Haidilao International Holding's net interest rate decline year by year.

(3) Hot pot already accounts for 14% of the catering market.

In the competitive pattern, first look at the hot pot market scale, second look at the market share of salvage.

Haidilao International Holding's hot pot track can be said to be a golden track. Hot pot has many consumption scenes, strong repurchase and other characteristics, more importantly, hot pot is easy to achieve standardization, strong replicability, low dependence on chefs, and a broad space for chain expansion. As a result, hot pot accounts for 14% of the catering market with a scale of up to 4.27 trillion, ranking first.

But on the hot pot track, the competition is fierce. In 2018, the total market share of the top five enterprises in China's hot pot market was 7.2%, of which Haidilao International Holding ranked first with 3.4%.

Considering that the share of hot pot in catering has limited room to rise, and there is still room for market concentration within the hot pot field, taking advantage of the 32.8% year-on-year decline in national catering revenue and the withdrawal of small and medium-sized businesses hit by the epidemic in the first half of the year, Haidilao International Holding chose to expand rapidly, with income down only 20% from the same period last year, which is actually much better than many catering enterprises.

To sum up, in terms of the number of stores, customer unit price, and market concentration, Haidilao International Holding's single store growth space has touched the ceiling, and even declined when it is difficult to keep rising prices. If we still rely on opening stores, future growth will be achieved by crowding out other hot pot restaurants.

02. Haidilao International Holding recreates Haidilao International Holding

There is a common sense in the analysis of the industrial chain: washing, shearing and blowing is not big, but selling shampoo can have a market capitalization of hundreds of billions. It is difficult to reduce the marginal cost of making services, but the marginal cost of making products can be kept down, so it is better to sell services than to sell products.

Put on Haidilao International Holding, the net interest rate of the store business is declining year by year, so find another way: do the supply chain, do fast food.

(1) Hot Pot supply chain Company with a market capitalization of 100 billion

In 2011, Haidilao International Holding split all the businesses in the group's hot pot industry chain and set up a separate company, including Zalut Banner, Shuhai Group, Yihai Group, Shuyun Oriental, Weihai Consulting, etc., to realize the catering supply chain system from food supply, warehousing and logistics, processing of raw materials, decoration design, human resources recruitment and training, information management, and intelligent catering system development.

In this series of subsidiaries, the most worth mentioning is Yihai International.

As early as 2005, with the increase in the number of Haidilao International Holding stores, in order to solve the problem of standardizing hot pot ingredients and improving upstream efficiency, Zhang Yong set up a branch in Chengdu to produce hot pot ingredients and pre-processed ingredients for Haidilao International Holding. With the expansion of production capacity, Yihai International began to supply third parties, and the proportion of related transactions with Haidilao International Holding continued to decline to 38.9% in 2019.

Compared with "opening a restaurant", selling ingredients, ingredients and convenience food to restaurants and consumers is obviously a more stable and sustainable profit model. In 2019, Yihai International has a revenue of 4.28 billion yuan, a net profit of 720 million yuan and a market capitalization of more than 100 billion yuan. It is the second largest market capitalization company in the domestic condiment industry, second only to Haitian flavor industry, which sells soy sauce.

Among them, Yihai International's self-heating small hot pot is a star explosion, with sales of 450 million in 2018 and 1 billion in 2019, a growth rate of more than 122.3%. Previously, affected by the epidemic, the demand for meals at home increased, triggering a craze for small hot pot hoarding.

Moreover, because the self-heating small hot pot is resistant to storage, high performance-to-price ratio, rich taste, meat and vegetarian collocation can meet the needs of a meal, and easy to use, it is especially suitable for young office workers who are inexperienced in cooking, therefore, after the epidemic, the sales of convenient foods such as self-heating small hot pot are still on the rise steadily, and even led to the continuous hot sale of small household appliances.

(2) aim at the Chinese fast food track

Fast food accounts for 45% of China's catering market. But in this half of the country, McDonald's Corp, KFC, Burger King, Dexter accounted for nearly half, Chinese fast food alone.

In the face of this huge market, Haidilao International Holding has also opened a special fast food brand "Eighteen", which only provides pasta, tea, desserts and breakfast, almost all of which are finished and semi-finished products. For example, noodles can be served with a simple ironing and topping. After consumers pick up their own plate to choose snacks, tea, noodles and toppings, and then put the plate on the self-service checkout machine, it takes only about one minute to check out on average.

Haidilao International Holding's selection and positioning of fast food may not necessarily win the share of McDonald's Corp and KFC, but with the supply chain system in Haidilao International Holding's system, small workshops can be hit by dimensionality reduction.

03. Catering password

Haidilao International Holding's scenery and predicament reflect the industry password of the catering industry.

First of all, China's catering industry is a huge gold industry with a long-term annual growth rate of more than 10%. However, in this golden track, the strength of individual brands is very weak, the scale bottleneck is obvious, and it is difficult to improve individual store income and market concentration. Even for a giant like KFC, the average annual profit per store is just over 1 million. It is normal for Haidilao International Holding to encounter a decline in the rate of turning over the stage after opening a shop quickly.

Secondly, catering involves many links, meat, eggs, milk, fruits, vegetables, rice noodles, oil, salt, soy sauce and vinegar, and the quality of practitioners is uneven, and the procurement and cooking process is difficult to control, so almost all restaurants will encounter food safety incidents.

Finally, due to the rapid rise in labor costs and rental costs, consumers are becoming more and more "lazy". Clean and fast pre-processed ingredients and semi-finished dishes are welcomed by more and more stores and individual consumers. The hot sales of Yihai International, the hot sales of self-hot pots, and the high valuation given by the capital market are that consumers and investors vote with money and are optimistic about the future of food industrialization.

Of course, because everyone likes to drink and dip in soy sauce when eating hot pot, Haidilao International Holding opens so many shops that it is finally good for Haitian Flavor Industry and Guizhou Moutai.