Systems not sauces prove key to Chinese hot pot chain's global growth

Haidilao has a joint venture with Panasonic that has replaced chefs with robotic devices to prepare food

A Chinese face-changing artist performs at a Haidilao branch in Hong Kong. The company raised $963 million for international expansion when it floated on the Hong Kong stock exchange in 2018. Anthony Show more

On the streets of many Chinese cities you can find plenty of fast food chains, with western stalwarts like McDonald’s and KFCs a common sight. Burger Kings are fewer in number, and Pizza Hut is considered more of a premium experience than it is in the US. But it’s a home-grown restaurant chain that could be the hottest dining business in China right now, catering to the Chinese love of sitting down for a leisurely hot pot experience.

Haidilao is China’s biggest hot pot chain with 600 restaurants in 10 countries, including Singapore, the US, Japan and South Korea, with plans to expand further in countries such as the UK, Australia and Canada.

The brand has come a long way since starting out in 1994 in Jianying, Sichuan province with a restaurant with four tables. Its growth has been aided by a co-founder who has drawn attention for his unusually focused approach to the Chinese dining industry.

Chinese-style hot pot involves a continuously cooking flavoured soup or broth, which diners place thinly sliced pieces of beef or mutton and vegetables into, cooking for themselves. This “DIY” approach to dining is very popular in China, with hot pot, and especially the spicy Sichuan style in which Haidilao specialises, an increasingly ubiquitous feature of the Chinese restaurant scene. Haidilao has been at the forefront of this, battling rivals such as Xiabu Xiabu and Xiaolongkan, the second- and third-biggest competitors in the category.

In September 2018, Haidilao raised almost $1 billion (Dh3.67bn) via an initial public offering on the Hong Kong stock exchange, giving it a valuation of about $12bn. The shares were priced at the top of its expected range at HK$17.80 (Dh8.42) per share, showing optimism among investors about its growth prospects.

The company sought funds to continue its expansion, especially into international markets. In 2019, Haidilao opened 130 restaurants and increased its stock value by 80 per cent.

Michael Norris, a Shanghai-based researcher specialising in market trends in China, believes that Haidilao will likely target international cities with significant Chinese migration which are also education hubs. “I think the overseas Chinese diaspora gives Haidilao fertile ground for overseas expansion,” he says, adding that the company will look to capitalise on its domestic brand recognition.

Sitting in a restaurant in east Beijing in late December, with the temperatures outside in the low single-digits, families and friends crowded around the several dozen tables.

Katy Guo, 27, a marketing manager in Beijing, was eating at one with friends. Guo said she would dine at Haidilao every month if she could afford it. Asked why it was popular, she thought it was because of the taste and service: “The [hot pot] soup, vegetables, meat, and dishes are good. Service is good — I think service is the key to its success,” she said.

Lydia Jia, 35, a senior manager for an education company, was another diner who commented on the service: “I find the taste good and other value-added products — fruit, salad, drinks. If you need to compare it to other hot pot [restaurants], service is better, though service quality of other hot pots are catching up.”

Norris says there are three factors that have contributed to Haidilao’s success, the first of which is the scalability of the hotpot format: “That is to say, you’re not constrained by leading chef availability. Instead, you can focus on scaling the supply chain and customer experience.

The second factor is its corporate culture, with a staff incentivisation system that has been featured in the Harvard Business Review. This includes only hiring managers from within the company's ranks, attractive pay schemes and rewards for store managers that equate to roughly 3 per cent of a restaurant's profits. Rewards are based on how managers adhere to the company's core values, as opposed to revenue earned.

The third, and possibly the most important factor Norris attributes to the firm's success, is the customer experience.

People who have to wait in line for tables if restaurants are full are offered free snacks (fruit and crackers) and even a free manicure or shoeshine.

Other incentives include providing plastic bags and hair ties to make sure customers’ valuables and hair don’t get splashed by the hot pot soup. For solo diners, Haidilao provides a big teddy bear to sit with to make the experience less (or perhaps more) awkward. And its most famous speciality is a complex noodle dance that servers perform preparing noodles in front of customers who order Chinese ramen.

The company is also rolling out ”smart” restaurants, of which only three currently exist in Beijing, with robotic food preparers.

One of these in Shi Mao Tian Jie, a shopping mall known as The Place in downtown Beijing, is decorated with large screens featuring projections of changing scenes. It has multifunctional toilets, and a row of robotic arms, lit by blue light, that prepare food behind a glass that waiting customers can view while seated as if in a theatre.

“There are 600 plus Haidilao in China’s mainland, 50 plus in overseas market, and five in Japan. All are growing at rapid speed,” explains Jun Yamashita, the Japanese managing director of Ying Hai Holding — a joint venture company between Haidilao and Panasonic running the smart restaurants.

“Just two years ago there were only 200, now it’s growing at a rate of 60 Haidilaos per year. With robotics, it’s easier to avoid people touching food [and to] monitor food quality,” Yamashita said.

Asked whether robots will be entirely replacing human staff, Yamashita said not.

“Only the kitchen will see robots replacing human intervention. We still need people in the dining area to provide service, and better-quality service is the key to success.”

The hot pot giant came under fire for food safety scandals in two of its Beijing restaurants in 2017. An inspection of its restaurants discovered a rat-infested kitchen, a dishwasher caked in oil, and a worker trying to fix a blocked drain with a food ladle, in videos taken by hidden cameras, according to news agency Xinhua.

Haidilao's co-founder and chairman, Zhang Yong, then responded in an interview with Beijing-based publication Caixin a month after the incident came to light: "I can't stop rats from running into our place. So I was thinking, if there is nobody in the kitchen, will this also get rid of rats? I've been committed to automating the kitchen and the catering process."

Mr Zhang, a Sichuan-born former factory worker who didn’t even eat in a restaurant until he was 19, also emphasises employee responsibility.

"The catering industry is difficult to control," said Zhang in a 2011 interview with China's Economic Observer. "At that time, we had no information system and had to rely on individuals, mainly waiters and waitresses, to run the whole company. If you doubt them, then you will fail. You have to give them room to perform, then they will treat their job seriously. It's important to give them responsibility."

Mr Zhang, along with his wife and fellow Haidilao co-owner Shu Ping, became a naturalised Singaporean citizen and topped Forbes's Singapore Rich List with a net worth of $13.8 billion in 2019. The company he built, as China-focused analysts have pointed out, is one of China's most prominent home-grown success stories, but time will tell how much of a truly international success it can become.