There is a dry joke in the restaurant industry about a Chinese executive having a meal in the United States. Two restaurants stand side by side. One is a well-decorated, romantic and extremely expensive French restaurant, while the other is a fast food chain that serves the general public. The executive orders Vanilla Lamb at the fast food restaurant, and the waiter delivers beef by mistake. The beef is soon taken away, but the man is curious to know how the restaurant disposes of the dish. The waiter simply shrugs his shoulders and says it had been sent to the neighbouring French restaurant after adding some garnish. The Chinese boss then realized the two restaurants, though different, actually share the same kitchen and use the same ingredients.

The joke illustrates a business model that consolidates multi-brand restaurants with their background resources. The model can be applied to some kinds of western food, but may not be suitable for Chinese cuisine. Zhu Minghua, founder of Zhejing Grandma's Kitchen Restaurant Limited Co., decided to give it a try, and unexpectedly achieved good results. Using different market positioning, the company's three independent brands-"Grandma's Kitchen", "Zhi Fu Men" and "Su Bao Fast Food" have all developed into chain restaurants. There are now nineteen Grandma's Kitchen Restaurants, eight Su Bao Fast Food and two Zhi Fu Men branches nationwide. Su Bao Fast Food usually stands next to the other brands, which is an effort to maximize resource utilization by consolidating the kitchens operating in the background.

The annual turnover of nearly RMB200 million (US$29 million) from Grandma's Kitchen in 2007 was trivial compared to the total revenue of RMB1.2 trillion (US$175 billion) for the Chinese restaurant industry, where fierce competition is commonplace. According to the 2006 Chinese Restaurant Industry Operation Report, "On average in China, the opening of 100 new restaurants means the simultaneous shut-down of 120 old restaurants." Without advertising, however, the business in every newly-opened Grandma's Kitchen is even more prosperous.

Investors have developed an interest in the restaurant industry since 2006. Though he received frequent offers from venture capitalists, Zhu was cautious when choosing investors. Grandma's Kitchen currently has six to seven new restaurants each year, but business expansion has been fuelled by its own profit.

Compared to other restaurant companies, Grandma's Kitchen's business strategy appears unusual. Many restaurants are located on the roadside, but Grandma's Kitchen generally chooses the "toxic" zones of office blocks, hotels, commercial areas and residential communities; other restaurants prefer to operate on the ground floor right beside the street, but Grandma's usually opens its restaurants above street level. Both have located their outlets in business districts and shopping centres, but the average consumption per person at Grandma's Kitchen is only RMB42 (US$6.1) to RMB45 (US$6.5), 50% less than the RMB100 (US$14.5) to RMB150 (US$21.8) spent per person at South Beauty, a high-end restaurant targeting professionals. Even so, Grandma's Kitchen still remains profitable and its turnover grows by 30% to 40% year by year. Although they are chain store brands, the style of each Grandma's Kitchen differs. Many people don't understand why, but the restaurant still earns money.

Unexpected Success of Mixing and Matching

It's 11:00 a.m. and customers are queuing for seats outside the Zhonghe Road Grandma's Kitchen in Hangzhou. Smug expressions decorate the faces of those already seated. In Hangzhou, almost everybody knows that it is impossible to get a seat at Grandma's Kitchen during meal times. It often turns over as many as 4 tables a night, while the figure in most restaurants enjoying good business is only 2 tables per evening.    

A few metres away, the Zhi Fu Men Restaurant is also packed. With more luxurious decoration and refined cuisine, customers spend between RMB60 (US$8.7) to RMB65 (US$9.4) per person. At the same time, inside the Hangzhou Daily Building behind the Zhi Fu Men Restaurant, many white-collars are queuing at Su Bao Fast Food, which offers a la carte fast food for about RMB10 (US$1.4) per person. The business in both restaurants is equally brisk.

Grandma's Kitchen, Zhi Fu Men and Su Bao Fast Food are usually clustered in the same area. Since there are no kitchens inside office buildings, Su Bao always uses the facilities in the kitchen of Grandma's or Zhi Fu Men for processing and distribution. This can maximize the consolidation of resources and reduce delivery time.

Zhu didn't consider consolidating the company's resources during the company's early stages, but he began experimenting with the idea after all individual brands of Grandma's Kitchen Restaurant Co., Ltd. were established independently. When he set up the company in 2002, Zhu made a firm decision that it would develop chain restaurant brands. His decision opposed the prevailing industry approach in Hangzhou, which generally focused on large operations, usually over 10,000 square metres. Zhu, however, realized that size didn't always count. He noticed the economy of scale in the overseas restaurant industry was not achieved through size, but instead though chain store concept. In contrast, some top-notch restaurants were huge and expensive, but there was often only one of them.

Zhu positioned Grandma's Kitchen as a chain with large public appeal. The size of an individual restaurant would be 600 to 1,000 square metres, so it would be easier for the restaurant to fit into different districts in Hangzhou. Grandma's Kitchen can now be found in all six of Hangzhou's districts.

Su Bao Fast Food was launched in 2003. In the early 2000s, Hangzhou's economy was booming and many companies set up their offices inside the mushrooming office blocks. Lunch is a must for white-collar, but restrictions against food prevent some people from eating at their desks. Thus if a restaurant is located inside an office building, it can easily achieve a monopoly and won't need to compete with its rivals on the roadside.

Due to its early entry on the market, Zhu's Su Bao Fast Food has become the lunch canteen for all prestigious office buildings in Hangzhou, including the most distinguished, the Anno Domini Building; the renowned World Trade Centre; the Hangzhou Daily Building; and the Wang Xin Building.

Zhu later realized that the positioning of Su Bao Fast Food and Granma's Kitchen were complimentary. The peak time for Su Bao Fast Food is noon; when business tapers off during evenings and weekends, Grandma's Kitchen picks up the slack. White-collar workers also have elastic dining requirements. They usually eat lunch at Su Bao, but choose a restaurant with better ambience when dining with friends or clients.

Based on Zhu's concept of "staying flexible and catering to white-collar demand", Grandma's Kitchen was initially positioned as a complementary brand near office blocks where Su Bao outlets were also located. The biggest problem, however, was the lack of kitchens inside office buildings. In the past, food had to be prepared well in advance in the central kitchen and delivered to Su Bao Fast Food outlets inside the office buildings. It was not only time-consuming but also extremely slow.

When a sufficient number of Grandma's Kitchens were in position, Zhu started using their kitchens to prepare Su Bao's food and delivering it. The advantage was maximizing the utilization of background resources at Grandma's Kitchen, which now prepares food for Su Bao every morning. By noon, when the food arrives at Su Bao, Grandma's is ready for its own lunch rush.

At the moment, Su Bao outlets in the Hangzhou Wang Xin and Hangzhou Daily buildings have adopted a business model that uses Grandma's Kitchen facilities for preparation and delivery. Zhu hopes the arrangement can be extended to more Su Bao Fast Food outlets as soon as possible, and even be applied to new office blocks during future expansion.