This is an English adaptation of a FoodBud historical article originally published on October 8, 2021.
Once a chain reaches meaningful scale and brand recognition, its pricing power can improve in two practical places: ingredient procurement and mall rent.
On October 7, 2021, Tam Jai International listed in Hong Kong and fell below its offer price on debut. For noodle-chain operators in mainland China, the question was whether that signal was good or bad.
The broader noodle category was hot for financing in 2021. He Fu Noodle, Yujian Xiaomian, and Lanzhou beef noodle concepts all raised large rounds, although many investors were initially cautious about the thesis.
Looking back, some investors may have asked why they missed He Fu Noodle. According to Juewei Food’s 2021 interim report, Juewei had invested RMB 230 million in He Fu Noodle for a 23.08% stake. After He Fu Noodle completed a new RMB 800 million financing round in July 2021, its valuation reached RMB 7 billion, leaving Juewei with a sizable paper gain.
China has many rice-noodle schools: Hunan rice noodles, Jiangxi rice noodles, Guilin rice noodles, luosifen, Nanning laoyou rice noodles, Mianyang rice noodles, Xinjiang fried rice noodles, and others. Yet some of the better-known brands were not born in the category’s native region. Baman, a Hunan rice-noodle brand, was founded in Beijing. Guilin rice noodles and luosifen are well known nationally, but neither has produced a dominant scaled chain brand.
Wheat-noodle categories are even broader, and the addressable market is larger. Yujian Xiaomian focuses on Chongqing noodles, but was founded in Guangzhou; its founder had not visited Chongqing before starting the business. He Fu Noodle was founded in Jiangsu, with its first store in Nantong, and did not attach itself to a specific regional noodle label. Its positioning was closer to a lifestyle brand using noodles as the product base: the company wanted to operate a brand and advocate a way of life, not simply sell noodles.
A strong regional label can help a brand stand out early, but it can also become a constraint. At a later stage, repositioning is difficult. Many restaurant brands run into this problem.
For example, once a brand is labeled as Lanzhou beef noodles, can it change the soup base? Customers may criticize it for being inauthentic. From the category perspective, using branding to increase chain concentration in Lanzhou beef noodles is a coherent story. But the ceiling may be limited: once average spend moves toward about RMB 40, the potential store-count scale becomes easier to estimate.
Extending from Lanzhou beef noodles into adjacent products such as barbecue may lift average spend and margins, but that only treats the symptom. The core revenue ceiling is still determined by the number of physical stores.
He Fu Noodle was willing to invest heavily from the start. Its founder viewed the noodle category as very large, with a high ceiling and potential for international expansion.
Based on that category judgment, He Fu Noodle spent heavily on market research. Over two years, the team traveled across Europe, Southeast Asia, the United States, Japan, and major Chinese cities to understand real consumer demand, the nature of the restaurant industry, and market trends. Consumer communication and research cost more than RMB 10 million.
At times in China, testing a single bowl of noodles could cost tens of thousands of RMB once flights, hotels, and meals were included. The company believed that only after spending that RMB 10 million-plus did it truly understand the market and users’ core needs.
As infrastructure improves, large amounts of capital can accelerate expansion. But money only solves part of the problem, perhaps half or even 40%. The rest depends on organization, talent pipeline, operating judgment, pace, and execution method. Capital can make the project move faster, but it cannot replace those capabilities.
He Fu Noodle’s 2021 operating figures reflected a bet that, once scale and brand effect emerged, bargaining power would improve in both ingredient costs and rent:
Costs fell as the store base expanded. In the 1-30 store stage, He Fu Noodle was barely profitable. In the 30-100 store stage, ingredient-cost control began to appear: food cost fell from 35% to about 25%, a 10-percentage-point reduction. After scale was established, the average cost across the full product line was 22%-23%, helped by improvements in production processes.
Rent had once accounted for as much as 26% of total cost. As the brand became better known, malls began actively inviting He Fu Noodle to open stores, rent became negotiable, and in some cases base rent could be waived in favor of a sales commission model. In 2019-2020, rent cost was controlled at about 16%, while overall net profit was about 15%. Shanghai and Beijing contributed the most, each with net profit around 18%. In most regions, table turnover was 7-8 times; South China stores were somewhat weaker.
Noodles depend less on chefs than many restaurant formats and are relatively easy to standardize. If soup bases and noodle formulas are supported by a strong supply chain, product consistency can be maintained.
Supply-chain capability also determines expansion capacity. Before opening its first store, He Fu Noodle had already invested in and planned a supply-chain and central-factory system designed to support 1,000 stores. From the early stage, it also invested in digital infrastructure, building in-house systems for supply chain, operations, logistics, and front-, middle-, and back-office business flows.
He Fu Noodle’s recently launched noodle production base had annual capacity of 20,000 tons, which was described as a leading level in the fresh noodle industry and enough to support 1,500 stores. That was well ahead of its 2021 store target of 450 stores.
The base was built to food-industry clean-workshop standards, with constant temperature and humidity to protect flour and noodle quality. It used automated noodle-coiling technology and automated packaging and transport processes, aiming to preserve the nutrition, quality, and appearance of noodles from production to warehousing, logistics, stores, and the consumer’s table.
He Fu Noodle’s nearly 100,000-square-meter modern factory had entered the design stage. The planned factory capacity was expected to support RMB 7 billion in sales and meet the company’s development needs for 5-10 years. It could also be opened to the industry through OEM/ODM services, addressing supply-chain pain points for other operators.
Building this supply chain served two purposes: strengthening control over product and supply, and creating the option to monetize supply-chain capability externally.
These higher-positioned brands, built around mall-store models, still face a difficult question: can they survive in lower-tier markets?
Should the main brand enter those markets directly, or should the company build multiple brands for different price tiers? After operating a premium brand and enjoying the economics of higher-end locations, can the organization still deeply understand mass-market, lower- and mid-priced consumer demand? Those questions remained open.
Note: IPO, valuation, financing, store targets, factory-capacity expectations, and forward-looking sales figures are historical as of the original October 8, 2021 article.