On May 19, Laoxiangji submitted its prospectus to the Shanghai Stock Exchange. The prospectus shows that the company has 991 direct-operated stores and 82 franchise stores. During the more than two years of continuous pandemic, Laoxiangji's store count increased from 769 at the end of 2019 to 1,073 by the end of 2021. However, the operating conditions of newly established subsidiaries outside the province in the past two years have not been very satisfactory.
The issue of expanding profitability is facing Laoxiangji. Analyst Wang Zilun from Frost & Sullivan (hereinafter referred to as 'Frost & Sullivan') was interviewed by the Economic Observer to discuss how catering chain brands represented by Laoxiangji can make an impact in national expansion and how they can enhance their brand competitiveness.
Economic Observer
As the company was sprinting towards an IPO, Laoxiangji fell into a labor dispute over unpaid social insurance for its employees.
On May 30, media reports stated that in the past three years, Laoxiangji had a cumulative total of 16,000 employees who did not pay social insurance. On the afternoon of May 31, Su Congxuan, Chairman of Laoxiangji, posted on Weibo in response saying, 'As of the end of 2021, there were a total of 14,503 employees at Laoxiangji (1,033 of whom are rehired retirees), and 12,629 of them actually purchased social insurance. The actual participation rate of Laoxiangji employees has reached 93.75%. Although there are factors such as a high turnover rate among catering workers and some employees not having a strong willingness to participate in insurance, as the Chairman of Laoxiangji, I feel very ashamed and self-reproachful for failing to purchase social insurance for all employees. I express my deep apologies to all my employees and the general public.'
In fact, this situation has been explained in the prospectus. The prospectus shows that in 2021, the number of employees of Laoxiangji who were insured was 12,629, with 1,874 employees not paying social insurance, including 1,033 retirees who were rehired.
National expansion
In 2003, KFC's number of stores in China exceeded 800, and it launched a landmark localized flavor adaptation product—Lao Bei Chicken Wraps, which has continued to this day. It was also in 2003 that a Chinese fast-food chain named 'Fuxi Old Hen' (the predecessor to Laoxiang Chicken) opened its doors in Hefei. Nineteen years have passed, and while KFC has now surpassed 8,000 stores, 'The No.1 Fast-Food Chain in China' still remains elusive. Laoxiang Chicken, which has grown to over 1,000 stores, is racing to claim the title.
On May 19, Laoxiangji Chicken submitted its prospectus to the Shanghai Stock Exchange. The prospectus shows that from 2019 to 2021, Laoxiangji Chicken's operating income was RMB 2.859 billion, RMB 3.454 billion, and RMB 4.393 billion respectively; the net profit attributable to the parent company was RMB 159 million, RMB 105 million, and RMB 135 million respectively.
The prospectus shows that the company has 991 direct-operated stores and 82 franchise stores. Over the past two years or so when the pandemic continued, Laoxiangji's store count increased from 769 at the end of 2019 to 1,073 by the end of 2021. In terms of growth, in addition to the expansion into the Anhui market, the development of markets outside the province such as Shanghai, Hubei, Jiangsu, and Shenzhen also contributed to the increase.
However, the operating conditions of newly established subsidiaries outside the province in the past two years have not been very satisfactory. Many subsidiaries in multiple locations such as Zhejiang, Guangdong, Beijing, and Henan have fallen into losses, with a total loss amounting to 162 million yuan. Taking Zhejiang Laoliangji Catering Co., Ltd. as an example, its net profit for 2021 was -1,390 yuan, while Laoliangji (Beijing) Catering Co., Ltd.'s net profit for 2021 was -20.22 million yuan.
Jiangsu and Hubei markets, which Jiangsu Fortune Capital has been involved in since 2017, have yet to achieve profitability. The prospectus shows that the subsidiaries in Jiangsu and Hubei incurred losses of 38.99 million yuan and 38.42 million yuan respectively in 2021.
The issue of expanding profitability is facing Laoxiangji. In fact, compared to the localized exploration of Western cuisine, Chinese cuisine needs to face up to a more refined requirement of localizing flavors. Zhang Jian, an expert in brand positioning and general manager of Red Arrowhead Brand Marketing Company, told reporters that there are still no truly national Chinese fast-food brands. One major constraint is the localization of flavors. If one wants to win the national market, products need to conform to local tastes, which is very important for Chinese cuisine. In this regard, Hunan and Sichuan's cuisine has an advantage, as 'spicy' and 'hot spicy' flavors have been proven to be national tastes with high acceptance.
Frost & Sullivan analyst Wang Zilun pointed out that many local catering brands focus on local consumers and maintain relatively high foot traffic with lower unit prices. Therefore, for large chain Chinese fast-food brands like Laoxiangji, how to use a standardized menu to dominate the national market is a problem, as well as how to build barriers to prevent competitors from engaging in price wars.
However, regarding the current national expansion of Laoxiangji Chicken, industry insiders believe that there is no need to worry too much about losses in markets outside the province. Zhang Jian stated that on one hand, Laoxiangji Chicken has indeed been affected by the pandemic, resulting in fewer customer visits. On the other hand, Laoxiangji Chicken's influence outside the province has not yet been fully established.
Next, internal cultivation
The national expansion of Laoxiangji will continue to accelerate. The prospectus shows that Laoxiangji plans to open 700 new stores in key regions across the country in the future. However, with Anhui accounting for over 70% of its revenue, where does Laoxiangji's competitiveness lie when entering new markets?
Laoxiangji stated in its prospectus that, with the increasingly fierce homogeneous competition in the catering industry and consumers seeking new and innovative experiences, brand and culture have become the core competitiveness of catering enterprises.
Since the beginning of 2020, when the video 'Chairman Su Congxuan tears up a staff letter' has attracted widespread attention, Laoxiangji has frequently appeared on hot search lists, including local flavor strategy press conferences and the daily release of Weibo posts featuring 'cooing'.
Wang Zilun stated that when standardization, chain operation, and the provision of high-quality dishes have almost become a necessity for every catering enterprise, if catering businesses want to stand out, they also need to enhance their brand awareness and the transmission of brand culture that is deeply rooted in people's hearts.
Judging from the current expansion achievements of Laoxiangji Chicken, there is still a long way to go before its brand awareness can be fully established.
In addition to this, the internal cultivation of catering enterprises also lies in multiple aspects including product power, standardization, and management. The catering report from LeadLeo Research Institute shows that these three are the core elements for the success of Chinese chain fast-food enterprises.
When discussing the direction of internal cultivation for catering brands, Wang Zilun stated that first and foremost, the brand needs to have good marketing capabilities to expand its influence. Secondly, the brand should also make appropriate local adaptations. Furthermore, balancing the speed of expansion with costs is also a crucial point. Generally speaking, having a relatively complete process-based and scaled system is one of the effective ways to ensure both an expansion rate and cost reduction.
According to the '2021 China Chain Restaurant Industry Report', the chain restaurant penetration rate in China reached 15% in 2020, which represents a significant improvement compared to the United States and Japan where the chain restaurant penetration rates have already reached 54% and 49%, respectively.
The report from LeadLeo Research Institute points out that in addition to the diversified demand for Chinese cuisine, backward supply chain levels are also one of the factors contributing to the low degree of chain operation in China's catering industry. Currently, there are issues such as overly dispersed upstream operations, long supply chains, and a low prevalence of cold-chain logistics in the entire catering industry. Facilities such as central kitchens, cold-chain transportation, and ingredient bases need continuous upgrading.
Various constraints also make investors pay more attention to the brand's ability to break through in these areas. Wang Zilun stated that for catering chain brands, building their own central kitchens and cold chain transportation systems, creating upstream and downstream connection resources, and utilizing digital information technology can all become ways for them to reduce costs and increase efficiency in standardization and chain operation. These are also important factors when evaluating an investment target for a catering brand.
Regarding Laoxiangji, according to the prospectus, Laoxiangji plans to raise 12 billion yuan through listing on the Shanghai Stock Exchange this time, which will be used for the construction of the East China headquarters, new catering outlets, and data informatization upgrades. Laoxiangji stated in its prospectus that the project for the East China headquarters will help enhance the company's central kitchen capacity; the new catering outlet construction project will help improve the national store layout; and the data informatization upgrade project will help strengthen the company's intelligent management level.
Frost & Sullivan Insight & Extended Readings
Q: Can the development of Laoxiangji in its early stages be understood as Laoxiangji standing firm amidst the wave of Western fast-food brands due to its healthy and light Chinese cuisine?
A:With people's increasingly fast-paced lifestyles, fast-food forms that are prepared and served quickly are gradually gaining popularity among consumers. However, as consumers pay more attention to their physical and dietary health, Western-style fast food, which mainly consists of fried foods, can no longer fully satisfy consumers' pursuit of healthy eating. In this context, Chinese-style fast food, characterized by 'healthiness, lightness, and convenience', has gradually developed.
In recent years, several Chinese fast-food brands such as Laolongjian, Rural Base, and Lao Niangjiao have been actively expanding their market presence through listing; among them, the number of Laolongjian and Rural Base stores has now exceeded 1,000, indicating that the influence and popularity of Chinese fast food have increased among consumers. In addition to its name, which suggests healthy dining options like chicken soup and chicken dishes, Laolongjian's core competitive advantage also lies in its integrated upstream breeding industry, slaughtering, processing, and retail business. Through the healthy cuisine at its restaurants and an integrated full industrial chain, Laolongjian has established itself in China's catering market.
*This article is reprinted from the Economic Observer Network, with reporter Ye Xinran. The original title was 'Laoxiangji IPO: Difficulties in National Expansion and Competitiveness'.
