Spicy Soup From China Tempts Foreign Palates as Chain Expands

(Bloomberg) -- Sichuan HaiDiLao Catering Co., the Chinese spicy soup chain that offers free massages and manicures to awaiting customers, may open 80 outlets this year as it expands abroad.

As many as 10 of the new restaurants will be outside China, Chairman Zhang Yong said. The Beijing-based company, which entered Los Angeles in 2013, is testing the appeal of its signature hotpots -- steaming broths that diners flavor with meat, vegetables and noodles -- in the U.S. and U.K.

Haidilao expects revenue to jump more than 30 percent to 10 billion yuan ($1.5 billion) this year, Zhang said in an interview with Bloomberg Television. The company, whose strategy of offering customers “delightful dining experiences” made it a Harvard Business School case study in 2011, is betting on China's growing global influence to draw consumers to the nation's cuisine, much like the U.S. has done with its own consumer brands.

“McDonald's, Coca-Cola and Starbucks are all a reflection of American culture,'' said Zhang last weekend in Zhengzhou, where he attended the China Green Companies Summit. “As the Chinese economy grows and the world starts to put more focus on China, I believe there's a chance for Chinese restaurants.”

Others are already pursuing that opportunity. Yum China Holding Inc. announced plans last year to expand its Little Sheep hotpot outlets globally through franchises, adding to its 40 outlets in North America.

Noodle Dancers

HaiDiLao has expanded to 176 outlets in 53 cities in mainland China since it was founded in 1994, according to its website. It also has restaurants in Singapore and Seoul. While its only U.S. outlet is performing well, Zhang said it's important the brand not rely on the Chinese diaspora for business.

Local Americans currently make up about 1 in 10 customers in Los Angeles, where Zhang said he's trying a new approach of offering individual pots, set menus, pop music and a night-club-like atmosphere. In China, customers are routinely entertained by staff resembling rhythmic gymnasts who twirl ribbons of dough into noodles that they plunge into bubbling pots of broth on diners' tables.

It will take time for Western consumers to understand what a hotpot is and flavors might need to be tweaked to broaden their appeal, said Shaun Rein, managing director of the China Market Research Group in Shanghai. It's difficult for the chain to replicate its Chinese model in the U.S. because of higher labor costs, he said.

‘Cost-Prohibitive'

“When you're waiting in line in China, you get a free manicure,” he said. “It's cost-prohibitive in the U.S. They might have to adjust their value proposition and, slowly, foreigners will eat their food.”

In any case, there is more than enough opportunity for HaiDiLao in the domestic market, Rein said.

“They need to expand more in China before they start looking overseas too much,” Rein said. “They don't have enough restaurants in China. You often have to wait two or three hours to get into HaiDiLao.”

Expansion of the HaiDiLao chain is a potential boon for Yihai International Holding Ltd., the soup-flavoring and dipping-sauce unit that is controlled by Zhang and his wife. The shares have climbed 12 percent to HK$3.70 since it was spun off from HaiDiLao and went public in Hong Kong last July. Yihai's net income may increase 20-to-30 percent this year to at least 200 million yuan, Zhang said.

Subsidiaries may continue to be listed in either Hong Kong or China, but the parent company has adequate capital and no plan for an initial public offering, Zhang said.

“Our bottleneck right now is we don't have enough store managers who understand the culture difference of the U.K. and U.S. well,” he said. “It will be several years later should we start to consider funding with either IPO or bank loans.''

--With assistance from Rachel Chang Haze Fan and Tom Mackenzie

To contact Bloomberg News staff for this story: Yan Zhang in Beijing at yzhang1044@bloomberg.net, Zhang Dingmin in Beijing at dzhang14@bloomberg.net.

To contact the editors responsible for this story: K. Oanh Ha at oha3@bloomberg.net, Jason Gale

With assistance from Yan Zhang, Zhang Dingmin