This is an English adaptation of a FoodBud historical article originally published on November 10, 2021.
FoodBud looked at how China’s three major duck-based lo-wei chains, Juewei Food, Zhou Hei Ya and Huangshanghuang, were performing after Covid disruptions had already weighed on the third-quarter results of larger foodservice operators including Haidilao, Yum China and Starbucks China.
All three chains were affected by pandemic disruption, but the impact varied by store format.
For Huangshanghuang, street-side stores had broadly recovered to 2019 levels and were slightly above them. Transport-hub stores and shopping-complex stores had recovered to roughly 80-90% of 2019 levels.
Supermarket stores were weaker. At the steepest point, sales were down by around 40%, mainly because community group-buying reduced supermarket foot traffic. Huangshanghuang had relocated some stores that were more heavily affected by lower traffic. Overall, supermarket stores had recovered to around 80% of 2019 levels.
Huangshanghuang remained optimistic about future same-store growth. At the time, supermarket stores accounted for about 20% of its store base, shopping-complex stores about 10%, community and street-side stores about 50%, with the rest in airports, high-speed rail stations and other formats. Because supermarket stores were more exposed to community group-buying pressure, Huangshanghuang planned to shift further toward community and street-side stores, with that mix expected to rise to 70%.
Juewei Food also faced pressure. Covid disruption in July and August, plus a strong third quarter in the prior year, created some year-on-year revenue-growth pressure. The company still expected to meet its equity-incentive target of 25% growth, with fourth-quarter growth expected to improve. Profit was expected to grow slightly faster than revenue, helped by exits from some investment projects. Juewei had realized part of its holdings in Hefu Noodle and Qianwei Central Kitchen.
Juewei’s per-store performance had recovered to around 98% of 2019 levels. Its store-opening pace was in line with previous years, with a range of about 1,500 new stores, plus or minus 100. Over four months, it had added more than 700 net new stores, and management viewed 25% revenue growth as achievable.
Zhou Hei Ya said its offline store mix and business structure were healthier than before the pandemic. August showed stronger resilience: non-transport-hub stores were now a larger part of the network than hub stores, terminal retail accounted for 72%, lower-tier market stores had increased, the revenue share from self-operated stores had declined, and the internet-channel share had risen.
In August, Zhou Hei Ya had been concerned that Covid might affect the start of the school term in early September, but by early September school openings appeared normal. The Fujian outbreak was also limited in scale. In July, Zhou Hei Ya’s average single-store sales were close to the levels seen in April and May. First-half performance had recovered to around 70% of 2019 levels, while April and May were close to 90%. August declined, mainly because of transport-hub stores, while other store types were less affected.
Zhou Hei Ya’s full-year guidance at the beginning of the year was 800-1,000 new stores. It opened 551 stores in the first half, and nearly 100 stores in each of July and August. Around 70% of first-half openings were by existing franchisees. Although the company had worried that Covid would slow openings in August, some scarce store-location resources became available that month.
The company’s internal view was that, under pandemic conditions, investors had become more cautious. Store openings had slowed in categories such as milk tea, where investment could be several hundred thousand yuan, and small-format foodservice. For site selection, one route was for franchisees to apply with existing store resources, after which Zhou Hei Ya would run the numbers before approving. Another route was to negotiate sites together with the company.
Huangshanghuang also commented on transport-hub locations, especially airport and high-speed rail stores. These sites were important brand-showcase locations. If operated well, payback could be fast, sometimes within a few months. But opening investment was high and required access to limited premium sites. Many of the best locations were already occupied by Juewei, Zhou Hei Ya and Huangshanghuang. Even when all three operated near each other, all could survive and make money.
The first entrant into a hub location might earn less than before. For example, when only Zhou Hei Ya operated in some high-speed rail or airport locations, annual store sales might have reached RMB4-5 million or even more than RMB10 million. After Juewei and Huangshanghuang entered, Zhou Hei Ya’s store sales might fall from RMB4-5 million to around RMB3 million. Even so, all three could remain profitable, and the overall market capacity expanded after Juewei and Huangshanghuang entered.
Huangshanghuang had not lowered its full-year target of 1,400 new stores. It opened more than 400 in the first half, and its marketing centers planned to push toward the target in the second half. Performance targets tied to equity incentives had also not been lowered. Second-half openings were expected to come roughly half from existing franchisees and half from new franchisees.
The company increased franchise recruitment activity during the year, holding investment-promotion meetings more frequently than in previous years. A July meeting in Guizhou signed more than 50 franchisees; a September 4 meeting in Nanning signed more than 60; another meeting was expected on September 25; and meetings were expected every month in October, November and December in other cities such as Beijing and Xi’an. The company had also begun using third-party agencies to support franchise recruitment, though this was still a small share. It believed franchisee quality was improving.
Zhou Hei Ya was still looking for high-quality transport-hub resources for self-operated stores, while franchisees were mainly expanding in commercial-district street stores and community stores. In Wuhan, Zhou Hei Ya had more than 200 community stores, with 60-70% opened by franchisees after the company opened up franchising the previous year. These stores had monthly sales of RMB90,000, or annualized sales of more than RMB1 million, which the company said was much higher than peers.
The company had previously assumed community consumers preferred loose-packed, higher-value products. In practice, community-store consumers were still mainly young people, similar to the customer base in core commercial districts; the difference was the consumption occasion. Community stores had the lowest rent-to-sales ratio across the network, at around 4%, and were small, at roughly 10-15 square meters. Internally, Zhou Hei Ya hoped franchisees could recover investment within 18 months; actual payback periods were shorter. Across all store types, Wuhan had around 400 Zhou Hei Ya stores.
The core strategy remained to increase store density. July was better than June, and if Covid had not repeated, the company had expected the second half to continue improving. In August, transport-hub stores were the main format hit by Covid.
Huangshanghuang viewed community group-buying as an emerging sales model that had become very popular over the previous two years as Covid developed and large institutions entered the space. It had a significant impact on Huangshanghuang’s supermarket stores, but not an especially obvious impact on street-side stores. Huangshanghuang was taking an active approach and had begun cooperating with community e-commerce platforms such as Duoduo Maicai. At that stage, it was encouraging franchisees to participate in community group-buying to offset offline-store pressure. If the company itself did it directly, management believed it could affect franchisee stickiness.
Juewei Food was asked about the impact of competitors’ format shifts. The company said the market was large enough: the broader lo-wei market was worth RMB200-300 billion, and concentration among the leading players remained low. Juewei believed more competitors were positive for the industry. It had begun shifting from direct operation to franchising in 2012 and 2013, and had been exploring the model for many years.
Juewei was also expanding into meal-accompanying lo-wei through investment projects. Among the top five players in that segment, it had one controlled investment, one minority investment and one joint venture. It had invested in six or seven brands in total, including new-style lo-wei brands and Wuhan duck-neck brands. It had also invested in seasonings, including compound seasonings and pickled vegetables. The article also mentioned A’man, a local brand from Northeast China, which had run into bottlenecks; a joint venture had been set up in East China to explore the opportunity. At the time, it operated more than 70 stores and was expected to reach more than 100 by year-end.
Note: growth targets, store-opening plans, equity-incentive targets and investment-exit figures are historical references from the 2021 article.