This is an English adaptation of a FoodBud historical article originally published on December 27, 2021.
Yihai International’s development path is worth studying for Sichuan-style seasoning companies and restaurant operators building upstream supply-chain businesses.
The company grew out of Haidilao’s hotpot ecosystem, with hotpot soup bases still at its core. Moving from restaurant operations into packaged hotpot seasonings requires a first major step: building factory capability. Some Sichuan and Chongqing hotpot brands have already crossed that threshold.
The second step is reducing reliance on related-party transactions with the main brand or anchor customer. That is the path Yihai International has been taking.
For Yihai, there is a clear incentive to “de-Haidilao” its revenue base. Transactions from related parties, including Haidilao and Shuhai, carry gross margins far below third-party business, by nearly half. There are also public-market governance questions around related-party transactions, plus brand-linkage risk if Haidilao faces negative news or food-safety issues.
The third step is building owned consumer brands. In October, Yihai’s brand Kuaishou Xiaochu announced Wang Yibo as the first brand ambassador for its convenient ready-meal series. Brand building and online customer acquisition require a different set of capabilities from factory production.
At one point after listing, Yihai International’s market value exceeded RMB100 billion. By the time of this article, its market value had fallen to RMB40.9 billion.
Across Yihai’s distribution network, the revenue share contributed by Haidilao and related companies had already declined from more than 50% in 2015 to less than 30% in 2020.
Yihai began repositioning Kuaishou Xiaochu in 2018. It gradually reduced Haidilao branding and, this year, removed the Haidilao logo, replacing it with “produced by Yihai.” Advertising spend increased by about 2 to 3 times compared with earlier levels.
Kuaishou Xiaochu performed well this year. Despite a high 2020 base created during the pandemic and the removal of Haidilao branding, it continued to grow strongly. The next challenge is creating large national hero SKUs, including major Sichuan-style seasoning products.
Yihai’s annual advertising expense used to be only tens of millions of yuan. This year it reached RMB130 million, mainly directed toward compound seasonings and convenient ready-meal products.
The compound-seasoning business had been planned for separation from Haidilao branding since 2017 and has now fully removed it. In the long run, compound seasoning is a strategic category: it suits domestic and overseas markets and B2B channels. However, Haidilao does not allow its brand to be used for restaurant-channel or overseas-market compound-seasoning products.
Hotpot soup bases are still sold under the Haidilao brand, and that is not expected to change in the short term.
According to Yihai International’s financial reports, 2020 revenue reached RMB5.36 billion. Revenue in the first half of this year was RMB2.6 billion.
Its core revenue comes from three businesses:
Yihai’s Chinese-style compound-seasoning business is, in effect, comparable to a Sichuan seasoning company. Many companies in the sector operate at roughly this scale.
In convenient ready meals, Yihai’s recognition is not especially high, including for its owned brand Kuaishou Xiaochu. In self-heating hotpot, Zihai Pot has had stronger consumer visibility. According to related media reports, Zihai Pot’s 2020 revenue was around RMB1 billion. Its marketing looks aggressive, but its actual business data remains far below Yihai’s.
Yihai views its competitors differently by category. In ready-to-eat convenience products, Uni-President is seen as a strong player with major momentum. In hotpot soup bases, the competitors include Tianwei and Dezhuang. Haitian previously gained some share in hotpot soup bases through brand and price advantages, but sales momentum reportedly stopped from the second quarter; heavy inventory buildup led Haitian to decide to exit the market and seek a third-party sales company to take over. Competition in hotpot soup bases eased somewhat in the third quarter.
The broader lesson: even large companies and strong founders need respect for the commercial logic of a new market before entering it.
Beyond Kuaishou Xiaochu, Yihai had expected low-price small hotpot products to see explosive growth, with projected sales of RMB600 million to RMB700 million. Dipping sauces were expected to become first in the industry, with sales above RMB300 million. Over the past two years, Yihai focused on dipping-sauce R&D, upgrading from 3 sauce products to 9.
This year, Yihai reduced prices for small hotpot products. The online price was adjusted to RMB28 to RMB29, and offline pricing to just above RMB30, with the change made in November. Factory prices stayed unchanged. Distributor gross margin remained above 20 percentage points, with most expenses borne by Yihai.
For the four best-selling SKUs, the factory price was RMB22 per box. The previous retail price was RMB38 per box, while distributor shipment price was around RMB28. After adjustment, terminal pricing was around RMB30 and distributor shipment price around RMB24.
Without the price reduction, Yihai’s small hotpot business would still have achieved low-single-digit growth this year despite last year’s high base and negative growth across the industry. The growth mainly reflected price adjustment and heavy investment. The first half was negative, while the second half flattened the decline. Small hotpot gross margin was previously around 33% and is now about 22%. Management expected margin to hold or rise from there, with 22% treated as a red line; below that it would be lower than instant brewing products, whose gross margin is above 20%.
Yihai had planned for its instant brewing product series to reach RMB800 million in revenue this year, but it did not achieve that target. The company still planned to push for RMB800 million next year.
The main reason for missing the target was capacity release. In the past, capacity constraints limited large-scale distribution and promotion. Current national distribution coverage across terminal outlets was about 40%, mostly in supermarkets and larger stores. Small and medium-size stores were not yet fully covered.
Across China, there were about 700,000 outlets in Yihai’s network. Around 300,000 of them could sell convenient ready-to-eat products. Many wet markets and family-run stores mainly sold soup bases. Some third- and fourth-tier supermarkets also did not sell convenient ready meals, while special channels such as tourist areas sold only convenient ready-meal products.
For the convenient ready-meal business, Yihai left distributors roughly 20 percentage points of gross margin, higher than traditional instant noodles, which usually offer around 10 percentage points, though instant noodles have much larger volume.
Yihai’s overall expectation was for 2022 growth above 30%. By category, the target was more than 30% growth for compound seasonings, more than 20% for hotpot soup bases, and more than 40% for convenient ready meals. Across its three major product categories, Yihai expected to be able to cover roughly 900,000 outlets in the future, compared with 1.5 million sellable outlets nationwide.
Note: market-value figures, IPO/listing context, and 2022 targets are historical figures from the 2021 source article.