Hot investments in China
Mar 27th 2009
From the Economist Intelligence Unit ViewsWire
An American company plans to buy a stake in a Chinese restaurant chain
On March 25th Little Sheep, a Chinese restaurant chain, announced that Yum! Brands of the US will buy a 20% stake in the company for HK$493m (around US$64m). One of China's largest restaurant franchises, Little Sheep wants to take Mongolian hotpot, a local speciality and winter staple in northern China, global. Already flush with cash after a Hong Kong stockmarket listing in 2008, it is eyeing further expansion in Hong Kong, Japan and North America. Yum!'s investment is a huge vote of confidence in the quirky restaurant chain from Inner Mongolia.
Little Sheep already has more than 350 restaurants across China and some two dozen abroad. Its success has rested on clever marketing, an eye for innovation and strong customer service. For example, Little Sheep's signature hotpot broth is an unusual, Mongolian variety, and other offerings include specially developed soups based on green tea or medicinal herbs. The restaurant also offers over 200 choices of meat. This allows Little Sheep to charge different prices for prime and ordinary meat, improving its profit margins. In 2007 the chain earned HK$146m in net profits on revenue of HK$1.4bn.
Little Sheep does things differently beyond the menu. By the time a group of customers is seated, the waitress or waiter has input their approximate ages and the size of their party in a small portable computer. After customers leave, company headquarters digitally registers how much they spent, what they ordered and how many tables the staff member was able to handle simultaneously. Little Sheep analyses this information to tweak its management and track staff performance. Keeping detailed accounts of customers may not be new for Western chains, but it is unusual in China where most restaurants tend to be small and family-run.
Open approach
Little Sheep has also taken a more open approach to management than most Chinese enterprises. Rather than a top-down flow of ideas, top management encourages employees and franchisees to suggest innovations. Those with the best ideas receive prizes. Other management and customer-service features also set Little Sheep apart from its competitors. For example, in a culture without tipping, customers are encouraged to put a sticker on the uniform of their waiter or waitress to show satisfaction. This motivates staff and improves positive interaction with customers.
Most importantly, to ensure better quality, Little Sheep has brought much of the food delivery and processing in-house. Food safety remains major concern in China. The revelation in 2008 that Chinese baby-formula producers added melamine, a chemical used in the manufacture of plastics, to falsify protein content alarmed many people. But even honest food companies sometimes find it hard to maintain consistent quality at a reasonable price amid natural disasters, such as severe droughts, and government price caps on food items that can affect supply of key ingredients such as meat, eggs and oil.
Little Sheep has taken pains to assuage food-safety concerns. Its mutton, for example, comes from sheep raised on the relatively unpolluted Mongolian plains. To show its attention to hygiene, the chain has replaced the wall to the kitchen with a window in many of its restaurants so that patrons can see their food being prepared.
Little Sheep's efforts to improve operations are in preparation for its next round of expansion beyond the domestic market. To ensure higher standards are met, the company has been buying up franchises and directly managing more restaurants in China's first- and second-tier cities. Investors seem to approve of this strategy: Little Sheep's Hong Kong-listed stock has risen almost 45% since the beginning of the year.
The restaurant chain's future growth is likely to be slower than before, given that it already commands 6% of China's dining market. But Little Sheep's willingness to test new products and ideas, while boosting customer service and improving quality, makes it stand out among Chinese firms. And this remains a good recipe to follow.
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