China Food

Migrant workers eat three IPOs: the hardest business is worse than Malatang

20 yuan fast food, the worst business in the catering industry?
Recently, laonianshu catering Co., Ltd. pre disclosed its IPO prospectus and planned to be listed on the main board of Shanghai Stock Exchange. In January and may this year, the other two Chinese fast-food brands “rural base” and “local chicken” have successively IPO. So far, a “Three Kingdoms kill” war for “the first share of Chinese fast food” has officially started.
The three Chinese fast-food brands of rural base, old uncle and rural chicken can be said to start from the same starting line. They were born in Chongqing, Zhejiang and Anhui in 1996, 2000 and 2003 respectively. The cooking taste is also quite regional, focusing on Sichuan cuisine, Jiangsu and Zhejiang cuisine and chicken soup respectively.
After about 20 years of development, the rural base and the rural chicken have achieved the first scale and the first revenue in the track respectively. The old uncle is more conservative and delimits the Yangtze River Delta steadily.
Although the development paths are different, the three brands seek to be listed at the same time, which actually reflects some common difficulties of Chinese fast food, which also makes the situation of “Three Kingdoms kill” appear more complicated and confusing.
As the name suggests, Chinese fast food is a business of “migrant workers”, with low customer unit price and gross profit margin. Even if the annual revenue reaches 4billion, the net profit rate is less than 5%. If you want to make money, you have to continue to expand the scale of stores and improve the turnover rate.
However, these three brands are mainly in the direct marketing mode. The cost of opening a store is high, the financial pressure is high, and the taste of dishes is strongly related to regional eating habits. Cross regional expansion is even more difficult. Coupled with the repeated impact of the epidemic, the turnover rate of most stores cannot be separated from other meals.
To this end, the three brands have made their own efforts. The rural base is a sub brand, the local chicken is open to join, and the old uncle is betting on takeout, but they also bear different risks. After listing, facing the uncertain environment and under the dual pressure of expansion and profitability, they will also face the challenge of further transformation of traditional enterprises to modern chain management.
Selling fast food to “migrant workers”,
So not making money?
The IPO of three leading enterprises has made Chinese fast food unprecedented, but the data shows that the money of “migrant workers” is not easy to earn.
Among the three Chinese fast food brands to be listed, the rural base has the largest number of stores.
As of September 30, 2021, the rural base has 1145 Direct stores, of which the two brands of “rural base” and “Mr. rice” have 602 and 543 respectively. After the rural chicken was opened and joined, it did not achieve the Millennium store goal until 2021, with a total of 1073 stores; By the end of 2021, there were still only 388 stores in laonianshu.
Rural base and Mr. rice stores
Source / prospectus
But the largest revenue is the rural chicken.
Perhaps because of the higher customer unit price, its revenue exceeded 3.16 billion of the rural base in 2020, reaching 3.45 billion; In 2021, it increased to 4.39 billion. As a comparison, the revenue of rural base in the first three quarters of 2021 was 3.42 billion. Because there are few stores, my uncle’s revenue is about one third of the first two, from 2019 to 2021, it is 1.22 billion, 1.2 billion and 1.52 billion respectively.
Revenue sources of rural chicken / prospectus
However, all roads lead to the same goal. The gross profit margin of the stores of laonianshu, laoxiangji and rural base is relatively low, and it did not exceed 20% even before the epidemic.
From 2019 to 2021, the operating profit margin of Laoxiang chicken decreased year by year, 18.9%, 17.1% and 16.4% respectively; The old uncle rebounded in the late stage of the epidemic, from 17.8% to 14.6%, and then to 16.4%; The operating profit margin of rural base is lower than the first two, falling from 9.2% in 2019 to 7% in 2020, and rising to 11.6% in the first three quarters of 2021.
It can be seen from the prospectus that raw materials, labor costs and store rents are the three mountains that weigh on Chinese fast food brands. Coupled with platform service fees, promotion fees, headquarters staff salaries and other expenses, the net interest rate has been significantly reduced, and even some enterprises once fell into losses during the epidemic.
In 2020, at the beginning of the year, a large number of stores were suspended due to the epidemic, and the net profit of laonianjiu and laoxiangji fell to 20million and 110million, while the rural base lost 2.42 million, with net interest rates of 1.8%, 3% and -0.1% respectively. In 2021, the epidemic situation improved, and the net interest rate rose, but it was still no more than 5%. The net profits of laonianjiu and laoxiangji were 60million and 130million respectively, while the net profit of rural base in the first three quarters was 160million.
Old uncle’s profit source / prospectus
However, even in 2019 before the epidemic, during the normal business period, the net profits of laonianshu, laoxiangji and ruangji were only 70million, 160million and 80million respectively, and the net interest rates were 5.4%, 5.6 and 2.5% respectively.
This net profit level is at the bottom of the catering industry, which is lower than Haidilao, a hot-pot/" 22375 rel="nofollow" target="_self">hot pot seller, Zhou Heiya, a stewed duck, and Yang Guofu, a spicy hot-pot/" 22375 rel="nofollow" target="_self">hot pot seller.
Li Yingtao, research director of Analysys brand retail industry center, believes that this is related to the low customer unit price of Chinese fast food, because taking the parity route, its gross profit margin itself is much lower than that of hotpot, Chinese fast food and other chain restaurants.
For example, the customer unit price of Chinese fast food is generally between 20-40 yuan, while the customer unit price of Haidilao is usually no less than 100 yuan, and the customer unit price of grandma’s house and green tea restaurant is also more than 70 yuan. However, the turnover rate of most Chinese fast food stores can not open a gap with other dinner categories. For example, the turnover rate of Haidilao in 2019 was 4.8, while that of rural base and Mr. rice was only 2.8 and 3.3.
Therefore, if Chinese fast food wants to make money, it must rely on the “small profits but quick turnover” under the scale effect. However, the current 1000 store scale of leading enterprises is still not enough to form a strong scale effect to raise their profit level.
However, the prospect of Chinese fast food is promising. Rural foundation received hundreds of millions of yuan of investment from Sequoia China in 2020, while laoxiangji received capital support from Canada capital and Guangfa Qianhe and maixing investment in 2019 and 2021. The valuation reached 18billion at the end of last year.
In Li Yingtao’s view, Chinese fast food is still a relatively blank market area, and has a trillion market size. In the future, it is expected to open tens of thousands of stores, whether it is rural chicken, rural base or old uncle, there is a lot of room for expansion.
Many analysts, including him, believe that based on the parity characteristics of Chinese fast food, the sinking market in the third and fourth tier cities in the future is expected to become the key direction of chain brand expansion.
Play second fiddle, make takeout, join in,
Difficult to solve the dilemma of expansion?
The expansion of scale is a story that Chinese fast food seeking listing has to tell.
The old uncle disclosed in the prospectus that 300 new stores will continue to be opened in the Yangtze River Delta in the next three years, and will continue to be dominated by the direct sales model, with about 10 franchise stores.
The plan of rural base is more clear. The prospectus shows that it will open about 90-110 home village based stores and about 160-180 Mr. rice stores in 2022, and about 140-160 home village based stores and about 200-240 Mr. rice stores in 2023.
In contrast, the hometown chicken seems more ambitious. According to its prospectus, it plans to open 700 new stores in Shanghai, Nanjing, Suzhou, Shenzhen, Beijing, Wuhan, Hangzhou, Hefei, Lu’an and other places in the future, mainly direct sales, supplemented by franchising.
Although the goals and paths are different, the expansion of these three Chinese fast food brands actually faces many common difficulties.
After running for 20 years, all three are regional brands. Rural base was born in Chongqing in 1996, mainly focusing on Sichuan cuisine; Old aunt was born in Huzhou, Zhejiang Province in 2000, and the representative dishes are mainly Jiangsu and Zhejiang flavors; Laoxiang chicken was born in Hefei, Anhui Province in 2003, mainly serving Feixi old hen, chicken with scallion oil and other dishes. But so far, their stores are still concentrated in their hometown base camp, the rural base occupies Sichuan and Chongqing, the old uncle sticks to Jiangsu and Zhejiang, and the local chicken radiates to Jiangsu and Hubei with Anhui as the center.
Many analysts believe that the reasons why these Chinese fast food brands expand slowly are, on the one hand, the high cost of opening stores, the heavy burden of assets, and their own profits are not considerable. Blind expansion may bring the risk of capital chain rupture; On the other hand, it also reflects the limited ability of Chinese fast food in dish taste innovation and supply chain building.     
“Chinese fast food brands and dishes are highly correlated, and it is often difficult to change the minds of consumers; moreover, national expansion requires re layout in distribution, location, management and other operations, and it requires sufficient experience and capital.” Lin Yue, chief consultant of Lingyan management consulting, said.
However, expansion is the only way to generate income, increase profits and seize share.
To this end, the rural base, which withdrew from the U.S. stock market due to poor performance, took the lead in launching the vice brand “Mr. rice” to create a second growth curve. Compared with the rural base, Mr. rice has a richer taste, including Hunan, Jiangsu, Zhejiang and Guangdong flavors. It is sold in an innovative way of weighing dishes and small bowl dishes. Customers can eat three to four dishes for 20-35 yuan, successfully entering Hubei, Hunan and Shanghai.
Mr. rice store source / Weibo
Mr. Rice’s revenue growth rate and turnover rate are significantly higher than those of the rural base. By the end of September 2021, the revenue of the rural base of 602 stores will increase by 450million compared with the same period in 2020, reaching 1.85 billion; The revenue of Mr. rice in 543 stores doubled from 780million in the same period. From 2019 to the end of September 2021, the turnover rates of rural base were 2.8, 2.2 and 2.8 respectively, while those of Mr. rice were 3.3, 3.4 and 4.2 respectively.
However, in the all direct mode, Mr. Rice’s rapid breakthrough did not make the overall performance of the rural base better. Li Yingtao pointed out that if the brand still insists on expanding under the direct marketing mode, the next road to profitability will still be very difficult. “The cost of opening new offline stores is very high, including rent, decoration and other expenses. In addition, in the initial stage, the stores have not formed a fixed consumer group, and the revenue is unstable, so there is a certain store maintenance cycle.”
The local chicken, who also needed to break the regional curse, found another way to become a net celebrity while opening up to join.
In 2021, 991 Direct stores and 82 franchise stores finally let the local chicken enter the QianDian club. At present, its franchise stores are still concentrated in Anhui and Jiangsu, and its contribution to the brand’s revenue is not large. In the eyes of industry insiders, this is more like a “water test” of the innovative operation mode of local chicken.
Hometown chicken store source / Weibo
“Compared with direct sales, the franchise model can expand and sink faster, but it also means greater risks. For example, franchisees may reduce the quality of dishes for short-term interests, affect the standardization of meals, and increase food safety risks.” Li Yingtao said.
Lin Yue believes that in order to achieve national expansion, both direct marketing and franchise mode must be adopted, “franchise is to leverage social localization capital through a mature system, and direct marketing can ensure the stable output of brands, products and services, which is indispensable.”
Compared with the rural base and the rural chicken, the old uncle has to go slower, and has not shown a posture of national expansion, but by optimizing the takeout business to reduce costs and increase efficiency.
According to its prospectus, the company not only launched two takeout platforms, but also built the “old uncle ordering” applet and the “old uncle source mall” applet, and promoted the enterprise ordering mode. Since 2020, my uncle has also opened a smaller and lower cost “kitchen store” in Shanghai, specializing in takeout business.
Laonianshu store source / official website
In 2019, the old uncle’s take out revenue reached 490million, accounting for 41.4% of the revenue. Affected by the epidemic, the take out revenue increased to 570million, accounting for 49.1% in 2020, and continued to increase to 700million in 2021, but the proportion fell to 47.3%. However, on the whole, its take away revenue growth rate is much higher than that of the store.
Of course, the take out cost borne by my uncle has also risen, and the platform service fee has increased year by year, from 2019 to 2021, it was 23.79 million, 26.16 million and 32.22 million respectively; The rider distribution fee increased from 97.7 million in 2019 to 100million in 2020 and 120million in 2021.
Lin Yue believes that focusing on takeout business may be one of the trends of Chinese fast food in the future, “because this operation mode is lighter and faster, and it can even form a central kitchen plus distribution center mode, saving large store costs.”
How far can fast food IPOs grown in the family run?
Nowadays, these three Chinese fast food brands are still in the early stage of expansion. It is still uncertain who will be the first to get the key to open the door of IPO.
In Lin Yue’s view, one of the reasons why 2022 has become the year of catering listing is that there are bottlenecks in the operation and expansion of many chain catering brands. “The repeated epidemic and the rise in raw material costs have also weakened the profitability of catering enterprises to a certain extent, and the decline in profit margin is a common phenomenon.”
It is certain that under the dual pressure of expansion and profitability, enterprise managers will face a more severe test.
According to the prospectus, the old uncle, the rural chicken and the rural base are actually typical family businesses.
Rural base started as a “Mom and pop store”, with the founders Li Hong and Zhang Xingqiang holding 53.35% of the company’s shares in total through direct and indirect ways. Li Hong is the executive director, chairman and CEO of rural foundation, and Zhang Xingqiang is the executive director; Although their sons (stepsons) xulongxiang and zhangkunwei do not directly hold shares in the company, they serve as executive director, procurement director and non-executive director respectively.
The actual controllers of the local chicken are five family members, Shu Congxuan, Zhang Qiong, Shu Xiaolong, Dong Xue and Shu Wen. Shu Congxuan served as the chairman, his son Shu Xiaolong served as the vice chairman, and his daughter-in-law Dong Xue served as the director and deputy general manager. They and Shu Congxuan’s daughter Shu Wen jointly held 91.32% of the shares of the company. Although Shu Congxuan does not hold the equity of the company, he has “one vote veto” over the proposals and voting of the board of directors and the general meeting of shareholders of the company.
Yang Guomin, Yang Junhui and his son, the actual controllers of the old uncle, hold 53.09% of the shares in total. At the same time, they serve as the chairman and general manager of the company and the vice chairman and deputy general manager of the company respectively.
In the view of many analysts, these three Chinese fast food enterprises need to speed up the transformation to modern management after listing. “With the expansion of the scale, enterprises must formulate various rules and regulations, introduce professional managers, and change the business philosophy and management methods, rather than rely on the original ‘family culture’ and ‘apprenticeship’ to maintain.” Li Yingtao pointed out.
In fact, the prospectus of rural foundation, rural chicken and old uncle has also exposed the loopholes of previous enterprise management to varying degrees.
After the disclosure of the prospectus, laoxiangji was deeply involved in the storm of public opinion because 14000 people failed to pay social security in three years. In this regard, Shu Congxuan, the chairman of the board, issued a video apology saying, “I feel very ashamed and self reproach for not being able to buy social security for all the villagers’ chickens”, but he also stressed that there were “factors such as the high turnover rate of catering employees and the weak willingness of some employees to participate in the insurance”.
Thousands of employees failed to pay five insurances and one fund source / hometown chicken prospectus
In 2020, Shu Congxuan was also praised as “China’s good boss” for “tearing the joint letter of employee salary reduction”, and the local chicken also went out of the marketing circle because it did not reduce salary and layoffs during the epidemic. This time, the storm of “unpaid social security” exposed on the eve of listing is undoubtedly a “collapse” of the corporate image.
Coincidentally, the old uncle who recently submitted the prospectus also exposed similar problems.
According to its prospectus, in 2021, 72 of the 3419 full-time employees of the company did not pay social security and provident fund because they had participated in the new rural cooperative medical system, the new rural insurance and the entry of new employees. Although the number of people is not large, this situation is included in the risk factor, which indicates that there is a risk of being required by the relevant competent authorities to make up the payment.
What is more interesting is that the old uncle also employed a large number of part-time employees as store service personnel, up to 4129 in 2021. In April 2020, these employees were adjusted from labor outsourcing to part-time employment directly managed by the company, signed part-time labor contracts and paid commercial insurance.
Lin Yue pointed out that this operation of enterprises may be to cope with the repeated epidemic and reduce some cost pressure, but even part-time employees need to ensure that they buy commercial insurance. For full-time employees, the non-standard operation of failing to pay social security will certainly be found and corrected in the process of IPO.
“As an influential brand, it should operate legally and in compliance earlier. This is the embodiment of social responsibility and the most basic management ability to become a listed enterprise.” In Lin Yue’s view, the social security crisis of the rural chicken is also a wake-up call for latecomers.
For rural chickens, this may be explained as a loophole in enterprise management, but it can be seen from the inside. Standing in front of the listing door, Chinese fast food enterprises still have more homework to do to gain a foothold in the hardest catering business.
Author: Wu Jiaoying; Source: kaiboluocaijing, reprint has been authorized. Reprint authorization and media business cooperation: Amy (wechat: 13701559246);

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