The company plans to expand its new store footprint by about 20% a year.
Haidilao's plans to rapidly expand could come with some risks, as the China-based hot pot restaurant chain could face cannibalization of existing stores and lack of disciplined execution, said a report by S&P Global Ratings.
The company expressed plans to expand its new store footprint by about 20% annually over the next two years. It is looking to ramp up store density in higher-tier cities, where long waiting times have hurt customer experience, and expand into more lower-tier cities.
The company is also looking to expand internationally. However, Haidilao's service culture and management process may not translate as well internationally, especially in new markets, the report said.
Haidilao's brand and geographic concentration could also temper its business strengths. The company generates more than 90% of its revenue from Haidilao branded restaurants, and 90% from mainland China.
“Whilst Haidilao is opening restaurants with new brands and cuisines, such as U-Ding Maocai, revenue contributions from these restaurants are not yet meaningful. The company's international expansion could also help reduce the geographic concentration,” the report noted.
Further, the company will remain exposed to high competition and changing customer tastes.The top five players in China account for less than 10% of market share, and customers will change how and what they want in their hot pots at some point.
“Haidilao will need to stay abreast of fluctuating consumer taste and adapt appropriately. The hot pot market also attracts numerous new entrants with different concepts and service style and quality. Haidilao will need to execute well to continue to fend off these newcomers,” S&P said.
Still, Haidilao is expected to maintain its lead in China's hot pot market, with its strong brand equity and good control over its table turnover. S&P believes that its good dining experience and personalized services underpin its high brand awareness and customer loyalty.
“The company had an average table turnover rate of 4.8x in 2019; a rate of above 3x is healthy, in our view. Another contributing factor is that many of Haidilao's restaurants are open 24 hours. Moreover, given the company's popularity, it can often obtain less-than-market rent, adding to its profit margin,” the report stated.
The company is also likely to maintain its service levels, which S&P noted to be particularly important in a fast-growing market like China where food and service consistency can be difficult to maintain.
In particular, store managers are assessed on operating metrics—including customer satisfaction, employee efforts, and food safety—and employees with high potential are then identified and incentivized to help initiate new store expansions.
“This apprentice process helps the company to maintain its service quality despite rapid expansion,” the report added.
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