Hai Di Lao: Service Beyond Imaginations

How a hot pot chain creates and captures value from focusing on customer services in China?

Hai Di Lao (in Chinese: 海底捞) is a popular hot pot restaurant chain with 130 eateries in 35 Chinese cities, and 6 branches overseas[1]. The hot pot restaurant business is extremely competitive because it is quite challenging to distinguish oneself from others in taste. Hai Di Lao, however, stood out due to its exceptional customer service, introduction of showmanship into the restaurant business, and standardized lean supply chain management.

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Business Model  

Although Sichuanese hot pot is historically mostly consumed in southeastern part of China, Hai Di Lao targets the customers in the more developed regions of the country where hot pot is more of an “occasional treat”, and where customers value “service” as much as the food itself. On average, a diner spends approximately RMB100 to 150 ($16~$23) at the restaurant [2], making Hai Di Lao sit at the premium end of the hot pot business with 20~30% higher than the market average. It justifies its premium pricing with exceptional service, fresh ingredients, and an overall pleasing customer experience. All these three competitive advantages are effectively supported by its operating model. At the same time, the high margins gives the company the resources to operate in its unique way.

Service Beyond Imaginations

Hai Di Lao boasts itself for providing customer services beyond a typical Chinese diner’s expectations, even when the patrons are waiting. The chain invests heavily in its waiting areas. Unlike most hot pot restaurants where waiting customers don’t have seats to sit on, waiting areas at Hai Di Lao are well-decorated, and can account for 1/3 of the total space of the restaurant[6]. It also provides WIFI, manicure/shoeshine/hand massage services, board games, and a variety of snacks and drinks, all for free [3]! This unrivaled waiting experience created significant amount of buzz for the restaurant among young diners, and received critically good feedback given that hot pot is a type of food for a group of families and friends. The services provided at the waiting area gives the consumers a chance to relax and connect without feeling wasting times.

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After an average wait time of 45min to 1 hour, diners sit by the hot pot table, and are given free full size aprons to prevent themselves from staining their clothing and protective baggies for their cell phones. From time to time, a server will perform the restaurant’s signature Olympic-style “noodle dance”, winning lots of “wows” from the patrons (see below).

Employee Management

In addition to providing these services for free, Hai Di Lao also designs its employee incentive schemes to support its unique value propositions on services. The branch managers are not evaluated on the revenues of the branch. Instead, “customer satisfaction” and “employee satisfaction” are the two main metrics that determines the management team’s compensations. The company understands the the front-line waiters and waitresses know the customers’ needs and problems the best. Therefore, they are given the authorities to do whatever makes the customers happy, including paying the meals for the customers on behalf of the restaurant without the involvement of the manager.

Hai Di Lao understands that loyal employees make happy customers. Therefore, it offers a highly competitive compensation packages for its best employees. The perks of working for Hai Di Lao may include free apartments, nannies, and sometimes parental subsidies. A dedicated fund was set up to help employees with personal emergencies. China’s restaurant industry observes notoriously high turnover rate. Hai Di Lao, however, has much lower turnover rate than its competitors—almost zero at the management level. Hai Di Lao’s service-centric business model will not be sustainable without a loyal employee base [4]

Supply Chain Management

To improve the scalability of the business model and consistency in service and food quality, all the Hai Di Lao branches are directly managed, and shared a centralized of distribution network. No franchises are allowed. Four distribution centers are established in Beijing, Shanghai, Xi’an and Zhengzhou to cover the four regions. All the ingredients are sourced, washed, processed based on the company protocol, and then packaged, and delivered to the individual branches based on demand forecast from each branch. Unlike most of the local Chinese restaurant chains, Hai Di Lao adopts a very standardized and data driven supply chain management system to keep low inventory, and ensure high quality products across its 130 branches.

Applying standardization to its ingredient processing and preparation eventually allows Hai Di Lao to provide delivery services to customers, which has been unimaginable for hot pot. The delivery service helps the brand reach many more customers, and extend its “beyond your expectations” services value proposition beyond its offline branches. According to a branch manager, the delivery service is actually a money loser but it provides convenience to the customers, and they believe doing what makes customers happy will eventually create values fro the brand.

 

References

[1] http://www.haidilao.com/index.php?m=content&c=index&a=lists&catid=65

[2] https://book.douban.com/reading/14594653/

[3] http://www.wsj.com/articles/SB10001424127887324767004578485361216000412

[4] http://www.forbes.com/sites/christophermarquis/2014/01/22/successful-chinese-hot-pot-chain-stumbles-in-us-expansion/

[5] http://www.ceocio.com.cn/e/action/ShowInfo.php?classid=255&id=125804

[6] Personal store visits in 2014 and 2015

 

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4 thoughts on “Hai Di Lao: Service Beyond Imaginations

  1. Interesting post, thank you. I see lots of similarities between what Hai Di Lao and Benihana’s operating model. I am intrigued by your last comment on their loss-making delivery service. I wonder how you see this working out for the company. Are they banking on larger delivery volumes eventually leading to economies of scale and therefore a profitable business line, or do you think they see it like the waiting areas of their restaurants: an investment that gets their name out there and creates more of a buzz?

  2. First and foremost, this makes me want to eat at Hai Di Lao! I am very intrigued by the waiting area that spoils you with hand massages and free drinks, and could see how that draws many people in. Especially when you’re out shopping and walk in without a reservation, the opportunity to begin the “experience” before you are even brought to your table sounds like a great way to maintain a steady in-flow of guests.

    The focus on a dining “experience” as supposed to just the food does remind a lot of Benihana (though this noodle dance might even beat their chopping skills). Another parallel is the deliberate focus on streamlining processes. It seems like the owners have a very concrete mission to manage costs and quality, while providing a differentiated, entertaining dining option. The restaurant business is known for its high failure rates, and playing at a premium price point with a unique appeal seems like a savvy way to increase odds of survival.

    Without having been to Hai Di Lao or anything like it, my only concern relates to how scalable this model is. Can you really preserve a vibrant, customer-centric dining experience when you reach a large number of locations? With 130 eateries, they must be faced with this question already. Maybe the solution os the block on franchising, and therefore an inherent preference to grow more slowly, but deliberately.

  3. This business sounds INCREDIBLE. Agree with the above comments that the very intentional focus on customer experience and operations makes this feel a lot like Benihana. But they seem to have taken it to a whole new level with this waiting area concept, that’s a full 1/3 of the entire store! In a way, they’ve almost pivoted away from the hot pot business and are just in the “Hai Di Lao” business, where customers expect to spend two hours, one getting a manicure / massage and the second eating. All of these “free” add-on services are also a way for people to justify paying top dollar for hot pot (which, as you state, is otherwise pretty undifferentiated).

    Numbers probably aren’t public but I’d love to know what the financial health of this business looks like. Is the investment in such a large waiting area and extra staff worth it to justify (only) a 20-30% pricing premium? Do they have room to push this up given how differentiated their customer value prop is?

    In any case, thanks for opening our eyes to such a unique concept. Can’t wait to try one out one day and see it in action!

  4. Thank you for your thoughtful comments. Two of the key issues brought up is 1) how scalable is this business given the operational challenges to preserve a consistently unique Hai Di Lao experience across the country and 2) is this business model financially viable given the investment in the extra stuff?
    First, I think the owner of HDL recognizes the challenge of scalability early on, and started to make investments in standardizing the food sourcing and preparation process in the beginning to ensure consistent quality for the dinning experiences. On the service side, they applied the same layout and service items to all the eateries across the country and the staff are also trained by the same protocol. However, I did had various quality levels of the services in different eateries. This could one of the areas the owner needs to establish better performance controls to even out the variance in quality.

    Secondly, the 20-30% price premium is an average #. The restaurants actually selectively add price premium for food items that have low price transparency or not widely available in other hot pot restaurants. By doing so, they left the impression to customers that HDL is not much more expensive than other hot pot restaurants, and they are getting the free stuff for free for real. I believe their margins are so much better than average hot pot restaurants. Most of the price premium was used to cover the operating expenses. It’s the sheer volume that drives its business’ growth.

    Anddddd–we should all go to have hot pot as a team one day!

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