Haidilao: Woodpecker Plan Continues, Improved Operations Expected in Second Half of Year
Summary of Haidilao's 1H 2022 performance call:
Business Situation
1. Store situation: In the third year of the COVID-19 epidemic in 2022, the impact of the epidemic on the catering industry was significant. The epidemic broke out in many cities in the mainland in March, and strict epidemic prevention measures were adopted everywhere. For Haidilao, an average of 200 stores were suspended every day from March to May this year, and this number dropped to less than 90 in June. Due to the weakening willingness of customers to dine outside, the overall same-store sales declined. Despite the difficulties encountered in the first half of the year, the company is still continuously promoting the "Woodpecker Plan", hoping that Haidilao stores can bring consumers a good dining experience. The overall number of stores remained stable in the first half of the year. The company will continue to improve its operational capabilities in operating stores. With the improvement of the external epidemic situation and the effectiveness of the internal "Woodpecker Plan", the group is currently reconsidering the possibility of reopening closed stores. The location selection and operating performance of closed stores will be re-evaluated in the future.
2. New product situation: In order to improve store operations, the company continues to make adjustments, such as launching new products. Mainland China stores launched two batches of new products in 2022H1. The promotion of new products is mainly national. In this work, some achievements have been made, such as the "real fragrant hot pot", "prairie mutton", "boutique beef", "new generation of tomato pot", "real fish roe particles cod shrimp paste", "8-second kelp seedlings", and the first-month click-through rate of these products exceeded 15%. After many years of development, Haidilao has a strong center platform, product research and development, and supply guarantee system, and has the ability to create explosive products.
3. Organizational structure: In 2022H1, the company made new adjustments to its structure, sorted out a new community operations department, and formed a "takeout + community + live broadcast + online goods" community operation model, which can provide us with diversified catering services other than dining. We currently offer delivery services such as hot pot sets and crayfish, including self-operated brand apps and third-party external brands. The adjustment and arrangement of such organizational structure has brought about obvious effects. In the first six months of 2022, the revenue from takeout increased significantly, reaching RMB 470 million, accounting for 2.8% compared to 1.7% in the same period last year. This project also helped the company avoid the closure of stores and the significant impact on revenue, while avoiding the impact on employee morale. For customers, we have also increased customer stickiness.
4. Overseas situation: After submitting the listing application in July, as you know, we will split Haidilao's overseas business outside mainland China. Haidilao International Holdings applied for listing on July 18th. Haidilao's overseas business covers 11 countries, and the number of overseas stores has reached 103. Business development is relatively mature. With the gradual improvement of the overseas epidemic situation, Haidilao's overseas performance is also gradually improving. The company judged that the overseas business has reached the stage of being separated and operated independently due to the increase in revenue and profit of the overseas business in the first half of this year. The separation of the business has the following three advantages. (1) Resource Allocation: The differences in cultural consumption habits between overseas consumers and the Greater China region, as well as differences in restaurant management models, have resulted in this split to make Haidilao and Teahouse more targeted in their operations.
(2) Capital Operations: The split ensures independent listing status and fundraising platforms. After the split, they can re-enter the equity and debt markets, with capital operations having a better foundation for operation and expansion. In addition, as independent listed entities, both groups need to provide more comprehensive information disclosure to investors and consumers in the capital market.
(3) Operation Management: The split will strengthen the company's operational management team, allowing each team to focus more efficiently on their own business.
Financial Situation
1. Operating Income: In H1 2022, the company opened 18 new stores, 7 of which are in mainland China and 11 are overseas. In the first half of the year, due to the implementation of the Woodpecker Plan, 26 stores were closed, all within mainland China. There are a total number of 1435 Haidilao stores, 1310 in mainland China, 22 in Hong Kong, Macau and Taiwan, and 103 in other overseas regions. The revenue for H1 2022 was 16.76 billion yuan, a decrease of 16.6%. The revenue of Haidilao restaurants was 15.86 billion yuan, accounting for 94.6% of the company's overall revenue. The revenue of restaurants in mainland China was 13.9 billion yuan, accounting for 87.4%. The revenue of restaurants outside mainland China was 2.01 billion yuan, accounting for 12.6%. The revenue from delivery services was 480 million yuan, accounting for 2.8%. The revenue from retail services was 350 million yuan, accounting for 2.1%. The company posted a net loss of 270 million yuan in the first half of the year, mainly due to long-term assets impairment losses caused by restaurant closures and the impact of the epidemic, as well as impairment losses provisioned by management with a cautious attitude, totaling approximately RMB 310 million.
2. Table Turnover Rate: As of June 30, 2022, 1) Overall Table Turnover Rate: The overall store turnover rate of the company was 2.9 times/day, compared to 3.0 times/day in the same period last year. 2) Same-Store Table Turnover Rate: The same-store number was 759, including 676 in mainland China and 83 outside mainland China. The same-store table turnover rate was 3.0 times/day, compared to 3.2 times/day in the same period last year.
3. Expenses: The company mainly has three major expense categories. In the first half of 2022, raw material costs were 7.04 billion yuan, accounting for 70.2%/-0.3%; labor costs were 5.9 billion yuan, accounting for 35.2%/-0.4%, mainly due to the reduction in the number of employees due to the Woodpecker Plan; property rent and related expenses were 210 million yuan, accounting for 1.2%/+0.2%, mainly due to the expiration of property management fee discounts for new restaurants opened in 2020, as well as income reduction.
4. Assets: As of June 30, 2022, the company's total assets were 26.28 billion yuan. Total assets as of December 31, 2021 were 28.02 billion yuan, a decrease of 1.74 billion yuan, mainly due to normal depreciation and amortization. Capital expenditures mainly include the total amount of store construction and decoration, which was 530 million yuan, compared to 3.08 billion yuan in the same period last year, a decrease of 2.55 billion yuan. Capital expenditure of RMB 190 million is planned for the opening of new stores in 2022. RMB 160 million is allocated for new store decoration, RMB 30 million for new store asset acquisition, and RMB 250 million for renovation of old stores and fixed asset additions. RMB 90 million is used as prepaid engineering expenses for stores under construction in 2022.
5. Operating Cash Flow: The operating cash flow of the company in H1 2022 was RMB 2.59 billion. This represents an increase of RMB 500 million compared to the same period last year when it was RMB 2.09 billion. As of June 30, 2022, the company has monetary funds of RMB 6.39 billion.
Analyst Q&A
Q: What are the future focuses and breakthrough points for the Little Bird plan? What channels will become effective and when will they have a breakthrough?
A: The Little Bird plan will focus on two aspects: customer satisfaction and employee satisfaction. We need to satisfy customers to retain our employees. Therefore, we will increase employee salaries in the future. Increased salaries have not affected the profits of the entire group but have improved the efficiency of the group. In terms of products, we will consider the domestic situation more. Many people are experiencing economic and income decline, so we will focus on developing product structures. The company will try its best to make the customer consumption experience more affordable. In addition, we will increase the quantity of products to provide more value to customers.
Q: How is the development of the community business? What about the development of the food segment? Will the offline channels be extended in the future?
A: Community operation is a very important sector in the period of the pandemic. Being unable to dine in the stores made it imperative for customers to rely on deliveries. Cooking materials and products have been necessities in this period. It has also helped to maintain employee morale and customer stickiness. After the pandemic becomes normalized, community operations will continue to work both online and offline. The offline channels are mainly focused on the take-out food segment. We have also seen new demands emerge in this aspect. Many products of HaiDi Lao can be expanded through delivery channels. Community operation is a continuous sector and has a long-term market potential.
Community operation is different from the past direct delivery of take-out foods. We set up a new community operation department because we saw that within this sector, the core of HaiDi Lao stores and connecting points, are the needs of the food and beverage market, of the community, and of the supply. Therefore, we have arranged a special department to communicate this comprehensively, including community operation, online-offline deliveries, and e-commerce, among others. Therefore, from the perspective of business connections, the core of HaiDi Lao is still in-store dining. Everything outside of this can be obtained through community operations. We have already seen remarkable results in our community operation, but of course, part of it is due to the increase in demand brought about by risk control during the pandemic. After having found the correct channels, products, and methods, we will continue to strengthen our effort. This will be our key focus for the second half of this year and next year.
Our community operation specializes in hot pot deliveries. However, hot pot requires a specific scenario, and it will be quite inconvenient for just two people to order. Therefore, we have added hot pot set meals to our menu. These set meals are more diverse and do not require as much service as the original dishes. We split hot pot into several categories, one is the original hot pot, used for high-end family banquets, and now we have added some civilian set meals. We have also added "maocai" to our takeaway menu and plan to add "sour cabbage fish" and "pickled chicken" in the future. We will also add meals for one or two people. Community operations are divided into two main parts, one is takeaway and the other is pre-made dishes. Pre-made dishes use supply chain advantages to develop products with simplicity and speed as the main focus. Currently, products are in the research and development trial phase, and small-scale experiments are being conducted in some cities.
Q: Has the industry undergone market consolidation in the first half of the year, and how much of the increase in turnover of new stores was due to factors such as raising the turnover rate in the industry and the Woodpecker Project? Were there any other reasons for the increase in the turnover rate of new stores? In order to avoid the situation where opening stores was too aggressive in the past, what requirements and corresponding measures do we have in selecting stores for reopening?
A: Previously, when selecting stores, we did not necessarily choose the best ones. By relying on the brand, we could open a store in a key area, and it would be successful. Now we open fewer, better stores. Recently because of the resurgence of the epidemic, such as in Zhengzhou, there have been several outbreaks. After each outbreak, policies will be tightened a bit, and there will be some unstable factors in the epidemic. In addition, there are personnel reductions. We have a file and contact information for those laid off, and we will temporarily suspend the last store; employees will go home and wait for job opportunities. Therefore, we observed from March to May that it was unlikely for the turnover rate to increase in the short term unless the epidemic completely ends. In the short term, our personnel have been streamlined somewhat, but we saw good business from June to August. One reason was that there were fewer store closures, and the closure time was relatively short, about 3 days to a week. In the past from March to May, we didn't even know how to manage the closures, and there were more uncontrollable factors, even up to a closure of 3 months. This led to fewer personnel arrangements. In June to August, things were relatively stable, and the notification time and actual store closure time were more consistent.
The Woodpecker Plan closed stores that were offline in cities, such as cities with only 1 or 2 stores. We also optimized through economy measures. We are also streamlining personnel and plan to adjust to a profitable position before opening stores. In addition, for encrypted stores, where there are 2-3 stores in one area, we will make very cautious calculations to measure whether it will affect another store. If the business district and customer situation completely overlap, we will not choose to encrypt. We will open one store and then another.
Q: The number of stores in the first half of this year was about the same as that of the same period last year, but employee costs decreased by more than 1 billion. Could you tell us about the optimization of the number of employees per store and the proportion of the wage reduction for each employee? How much is sustainable when our business recovers better, and how do we balance the relationship between employee cost reduction and service quality? What is the role of the Woodpecker Plan in optimizing the same store, and what other factors, such as innovation and store service improvement, are there? Are there any measurable indicators we can evaluate?
A: In terms of employee turnover, we need to investigate data to provide specific information. In terms of numbers, first, we have achieved a 20% increase in personnel efficiency compared to before the epidemic through the Woodpecker Plan. Second, employees' income has increased overall, and the average salary has risen by 1000-1500 yuan for ordinary employees compared to before the epidemic. Third, we mentioned earlier that during the period of repeated epidemics, by balancing the number of employees, streamlining personnel, and increasing efficiency, company-wide costs for personnel can be reduced, which leads to a decrease in employee turnover. We will calculate the model of each store manager, for example, the turnover rate of the store from Monday to Thursday is lower, and the turnover rate is higher from Friday to Sunday. Previously, the store manager had to consider the daily allocation when assigning employees. If the staffing ratio was based on weekend numbers, it would lead to redundancies in employees. Therefore, we will actively promote the calculation of the single-store model and store managers and use the demand from Monday to Thursday to configure staff to ensure management. If the number of people is insufficient from Friday to Sunday, we will close some tables to ensure that it does not affect customer experience and maximize the efficiency of personnel to ensure the economy of employee costs. For employees, an improvement in personnel efficiency is also beneficial for them to get more attractive demand.
Regarding the guarantee of service quality, we have conducted internal evaluations and visited many stores from March to June. From the current situation, the first one is to increase employee compensation, and we can clearly feel the improvement in efficiency. Employees also work for money. For example, we used to have 10 people, but now we only have 7-8 people, so the salary will be optimized. The second is that we have carried out team building and training to let employees release their enthusiasm better, as well as employee training. The third is our assessment. If it is a C-level store, our elimination and accountability will be strictly enforced, ensuring our service quality in these three aspects.
Regarding employee cost, first, we do not necessarily have to reduce the income of individual employees to reduce employee costs, but instead optimize the number of employees. Second, in the first half of this year, we optimized the use of employees to allocate personnel to stores based on the actual turnover rate of the store. For example, there is no need to equip stores with lower turnover rates with the same personnel as stores with higher turnover rates. Previously, we prepared for emergencies, such as the peak period, but this will increase costs. Now we give store managers sufficient autonomy to allocate personnel based on the turnover rate. In addition, our store positions are more flexible. We have store managers, managers, and other positions. In the case of lower turnover rates in stores, in addition to the on-site management requirements of the store, personnel allocation in the past also had the function of reserving management talents. Now that large-scale expansion has slowed down, store management personnel can change the position directly into a sinking position, such as not setting up a lobby manager, which has actually brought about changes in the position and a reduction in costs. Third, all adjustments are based on returning to customers and employees, and do not affect the enthusiasm of employees because of reducing employee costs, nor will it affect customer satisfaction.
Q: What is the approximate breakeven point and turnover rate of the current store, and what are the details of the "Woodpecker Plan"? How is the expected reopening of the store determined by the company or store manager? Does the third aspect have a reversal of impairment provision in accounting processing?
A: Regarding the breakeven point, there are differences between individual stores and the overall situation, and the situation varies in different cities. From the perspective of the market in regions and countries, there are also differences between mainland China and overseas. Overall, in the first half of this year, a turnover rate of 2.+ in mainland China can achieve breakeven, and overseas will be slightly higher. Regarding the reopening of stores, we are particularly cautious and will not reopen unless we have special confidence. Among the monthly data in the past, the stores that were closed were not all closed even with the same level of operation. Currently, we see that stores with the same operating data are still performing relatively well, so the opening of these stores will still be arranged by the company as a whole. Because these stores are relatively difficult, the more difficult they are, the more investment is needed, and the income will increase. For example, the profit of a normal store is divided into 7%, while the profit of these stores will double, because the cost of these stores has already been generated. If they are restarted, the benefits will be relatively good. For these types of stores, we have specially formulated KPIs and incentive mechanisms, from manual bonuses to store manager bonuses. If the opening of new stores will affect other stores, we will also conduct actual investigations.
Regarding the impairment recovery, we do not have any plans for accounting impairment recovery in the future. We still need to look at the entire catering industry and the performance of the Dolphin stores as a whole.
Risk disclosure and statement of this article: Dolphin Analyst Disclaimer and General Disclosure
