This is an English adaptation of a FoodBud historical article originally published on November 3, 2021.
China’s breakfast market remains large, fragmented, and difficult to consolidate. Independent operators dominate, and even a leading chain such as Babi Food still holds a market share far below 1%.
Babi Food listed in October 2020 with the label of “China’s first baozi stock,” but investors continued to question its dependence on East China. The company had said it would keep deepening its presence in Shanghai, Jiangsu, Zhejiang, Guangdong and other regions, while cultivating markets such as Beijing and gradually expanding nationwide.
Its third-quarter data showed that reliance on East China had not yet eased. At the time of the article, Babi Food’s market value was still RMB 8.2 billion.
For the first three quarters of 2021, Babi Food reported:
According to Babi Food’s investor-interaction response, the third-quarter profit decline was mainly linked to Dongpeng Beverage. Babi Food indirectly held shares in Dongpeng Beverage through Tianjin Junzheng, and the decline in Dongpeng Beverage’s share price during the third quarter created fair-value volatility that reduced Babi Food’s quarterly profit.
From October 14 to November 3, 2021, Dongpeng Beverage’s share price fell 17.59%, wiping out about RMB 15 billion in market value.
This was a reversal from the half-year report period. In late July, Babi Food’s earnings forecast said fair-value gains from its indirect Dongpeng Beverage holding were expected to increase net profit by about RMB 140 million to RMB 150 million. In the first half of 2021, Babi Food’s investment income from Dongpeng Beverage reached RMB 200 million.
Babi Food’s model is franchise-led, and the category is heavily dependent on supply-chain consistency. The company has built its own factories in East China, South China and North China to support stable supply.
The company was still using a single-store operating model. On whether it would adopt regional agents for expansion, Babi Food said the product’s characteristics require strong food supply-chain management and operating capability, and regional agency structures also carry the risk of brand switching.
The stores are standardized across exterior decoration, staffing and other store-level elements. The company has also had to combat counterfeit use of the Babi brand. Chinese breakfast chains have not yet reached the standardization level of Western chains such as McDonald’s, partly because of the nature of the category, but Babi Food is relatively advanced within its segment.
Babi Food was also upgrading to third-generation stores. Equipment upgrades included three major items: automatic proofing cabinets, baozi steaming cabinets and warming cabinets. About 60% of stores had been upgraded. The company said these upgrades improved product quality stability, store image, cleanliness and consumer trust, with a positive impact on store revenue.
Babi Food’s regional markets operate through subsidiaries. Each subsidiary has an independent team, works under the group’s overall strategy, and is responsible for local business planning and market development.
Across regions, the company was using several measures to increase market share:
The Nanjing factory was expected to add capacity and allow the company to further cover northern Jiangsu, Anhui and nearby markets.
Outside East China, national expansion had not been smooth, although North China and South China both achieved some sales growth. Babi Food planned to continue supporting stores through delivery, group-buying-to-store, corporate meal services and other channels. Large-account business was also growing.
For investors, store-opening speed had not yet met expectations. The company’s main answer was to lift single-store revenue through delivery, lunch and dinner products, regional product differentiation, store upgrades and possible M&A. The article noted that single-store revenue had recovered to the highest level of prior years, which was not easy in a competitive foodservice market. Product industrialization and frozen dough technology, which Babi Food had worked on for more than a decade, were seen as important to future expansion.
Adding delivery plus lunch and dinner products was described as critical to improving store sales, because relying only on in-store breakfast traffic leaves limited room for growth.
Babi Food’s Central China expansion was being pursued through acquisition and was still in progress.
The company said it had provided full support to the acquired party, including food R&D, production, quality control, supply-chain management, logistics and back-office functions such as finance and legal. Specialist teams from the Shanghai headquarters were sent to support the market.
Babi Food also helped operate online delivery in Central China and strengthened the brand. According to the article, store revenue increased by several tens of percentage points, and the overall business moved from loss to profit after this support.
Babi Food’s sales model was mainly franchise-based, supplemented by directly operated stores and group meal sales. The group meal business supplied finished or semi-finished flour-based products to factories, companies, schools, hospitals, government entities, restaurants and group meal operators. At the time, this business still accounted for a relatively low share of revenue.
In the first three quarters of 2021:
Babi Food saw strong synergies between group meals and its store business. The supply of group meal products could improve capacity utilization and scale efficiency, while the company already had R&D and manufacturing experience to meet customized customer needs.
The prepackaged product business was handled by the large-account division and targeted at-home consumption. The article noted that COVID-19 had changed consumer behavior, but growth in consumer-facing packaged products would take time, as would consumer recognition of the brand.
On pricing, Babi Food said raw materials were at relatively high historical levels. The company would not adjust prices lightly as long as it maintained reasonable profit, but if costs kept rising, it would consider price increases to maintain gross margin.
Breakfast operations are labor-intensive and require early starts, making hiring increasingly difficult. The article noted that young workers were less willing to enter the breakfast business, labor dividends were fading, and skilled pastry workers were becoming harder to find. This was accelerating the shift toward more finished and semi-finished products.
All Babi Food stores used an ordering system, giving the company clear store-order data. Consumer-end data was still limited, partly because the breakfast category has speed requirements and POS-based ordering can be too slow.
The company planned to develop online ordering and self-ordering, which would allow it to capture more complete data on product sales and ingredient usage. The article compared this direction with the adoption of digital ordering by McDonald’s and KFC, and described it as a trend for Chinese breakfast operators as well.
Babi Food was also adjusting its organization and talent base as strategy advanced:
The company said these changes were intended to clarify departmental responsibilities and strengthen digitization. It had also adjusted leaders for the Digital R&D Center and E-commerce Operations Center; the new e-commerce leader had been in the role for one year.
After clarifying organizational roles, Babi Food introduced new management talent and teams across departments. Its incentive approach included long-term profit sharing, an employee shareholding platform for middle and senior managers before listing, piece-rate wages for frontline staff, and performance-linked mechanisms for store management and the large-account division.
Note: IPO, market capitalization, investment-income and forward-looking expansion figures above are historical, based on information available in the original November 3, 2021 article.