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.
After the success of the low-to-mid-end brand Grandma's Kitchen and the fast food brand Su Bao, Zhu detected a new trend of upgrading consumption in China. At the end of 2007, he introduced the Zhi Fu Men brand, which targets the higher end market with a more luxurious dining environment. Furnished in a European style and decorated with many reproductions of famous oil paintings, the Zhi Fu Men on Zhonghe Road offers an exotic dining experience.
The mix-and-match style of Grandma's Kitchen is not limited to its multi-brand strategy; its cuisine also combines the flavours of North China with the South and aims to accommodate different customer preferences from different places. After learning from his restaurants in office buildings and hotels that white-collars come from all over China, Zhu started serving cuisine from other areas like Sichuan, Hunan and Shanghai as the business started to grow.
Zhu encourages his executive chef to travel out of Hangzhou and investigate the most popular dishes in well-known restaurants elsewhere in China. The chef will then contact the restaurants to "learn the craft from the master". The Internet is another important research tool. Apart from regularly browsing restaurant review websites and finding appealing restaurants from netizens, Zhu also conducts surveys among customers in Hangzhou and other places before introducing new dishes.
Although Grandma's Kitchen is a chain, the decor in its 19 outlets is various. Part of its mix-and-match character is a diversified decoration style that seems to go against the standardized appearance favoured by most restaurant chains. The logic comes from the target consumer group. Zhu targets consumers are young people, first "born-in-1970s", later "born-in-1980s", and now the "born-in-1990s". Zhu thinks young people don't like cooking but love parties and novelties, and restaurants are a good place for parties. Zhu thus spent a lot of time on decor to present a tidy, trendy restaurant that is up to the aesthetic taste of the young.
"Young people like to try new things. They may have grown accustomed to the flavour of our cuisine, but they will still be pleasantly surprised by the different decoration styles when they step into any Grandma's Kitchen,' said Zhu. For example, the Grandma's Kitchen on Zhonghe Road is decorated in classical Chinese style, with a stream flowing under a bridge inside the restaurant. The Grandma's in the city's Beijiang District is rather modern looking. With modern paintings by the students of the China Academy of Art on the walls, the restaurant looks sharp and elegant. To make his young customers even more comfortable, Zhu is now planning to install WiFi in his restaurants so customers can get online whenever they want.
The Consolidated Background
The kitchen at Grandma's is bustling by 10:00 a.m. Wearing brand-new white uniforms and tall chef hats, the kitchen meticulously prepares dishes. Next to the chopping board, a skilful chef cuts up a fish. First he puts a big fish on the chopping board and slices it in half, and then picks it up one half and expertly throws it across the kitchen. The fish flies through the air and lands on a plate about two metres away. Another chef arrives, picks up the dish and puts it in the freezer. The kitchen operates like a smooth production line.
Although Grandma's has three different chain restaurant brands, it implements a unified management system in the kitchen. Every restaurant follows the same cooking and management standards. In addition, the delivery systems, purchasing channels and R&D for all three brands are consolidated. Although it is hard to standardize Chinese chain restaurants, Zhu is trying his best to unify background management.
Purchasing in bulk for all three brands brings costs down. Materials are also consistent and Grandma's Kitchen maintains long-term cooperation with several suppliers for the ingredients it uses. Having multiple suppliers not only guarantees stability, especially in times of short supply, but also creates competition between suppliers, which is good for pushing up food quality. It also gives the restaurant more bargaining weight.
But the biggest difficulty for Chinese chain restaurants is not consolidating purchase channels or the delivery system. Instead, standardizing cooking in all its restaurants is the major challenge: Grandma's Kitchen has its own management procedure devoted to this.
Zhu says Grandma's Kitchen has a six-member R&D team responsible for new dishes. Underneath the leadership of the Executive Chef, department heads including the Director of Cold Dishes, Director of Steamed Dishes, Director of Stir-fries and Director of Soups are in charge of developing new dishes and drafting standards. Before opening a restaurant, the Executive Chef will arrange labour based on the different positions in the kitchen, and conduct preliminary training. When the restaurant opens, the Executive Chef will lead the new kitchen team for a few days and supervise the cooking standards of all dishes. After the quality stabilizes, the chef will then move on to other new restaurants for technical support.
The Executive Chef also encourages the R&D team to develop new dishes each season. For example, the team already began working on summer flavours this February. Zhu picked up a restaurant menu with 250 dishes and told us 15% to 20% had been replaced after the spring season. Since the consumer group at Grandma's Kitchen are mostly young, repeat customers, it is important to keep them interested by offering new dishes regularly, often containing seasonal ingredients. Whenever a new dish is introduced, the Executive Chef will conduct training sessions in all restaurants and distribute the recipe so consistency is maintained.
Although the decor varies from place to place, all three Grandma's Kitchen brands have followed a corporate identity system, which includes the menus. "Although the foreground is different, the overall situation will not be chaotic as long as the background management is consolidated," Zhu said.
Cost Control and Marketing Focused on the Young
Unlike other restaurants, most Grandma's Kitchen branches are located on the second floor of the office buildings, residential communities or hotels. This is somewhat of a taboo in the restaurant industry because customers usually prefer to have meals on the ground floor rather than upstairs. Grandma's Kitchen is so popular, however, that location isn't much of an issue, and it can still be profitable even if its consumption level is relatively low. How has the company achieved this?
There is a map of Hangzhou in Zhu's office marked with many symbols, categorizing different areas of the city. From his understanding of those areas, he can get a rough idea of the seat turnover rate and thus select restaurant locations accordingly.
When choosing locations Grandma's Kitchen insists that rent must not climb above 5% of the total turnover. According to data released by the China Cuisine Association, rent took an average of 8.75% of the turnover of top 100 restaurants in 2006. This figure is still on the rise since real estate prices continued to grow in 2007. That is to say, the cost of rent for Grandma's Kitchen is below other market leaders.
This is one of the reasons why Grandma's Kitchen maintains profitability. It also contains important cost control measures like consolidating purchasing, delivery, and background resources. The current gross profit margin is around 35% for Su Bao Fast Food, around 40% for the Grandma's Kitchen Restaurant, and about 42% for Zhi Fu Men.
In both Hangzhou and Beijing, Zhu sticks to a principle that rent cannot exceed 5% of the restaurant's total turnover. He has to choose tier 1 commercial districts to maintain high turnover rates as well as low rent. This has had a clear impact on the locations of Grandma's Kitchen restaurants. Since it can't afford ground floor locations because of its tight budget, Grandma's Kitchen often opens its restaurants on second floors in these areas as a compromise.
How does the restaurant attract customers? Luxurious decor and fine cuisine are the secrets. For some customers, it is more important to have an elegant dining environment and delicious food than a convenient location.
Zhu is well aware of the importance of word of mouth marketing, and also the influence of the Internet on his young customers. He has attached great importance to cultivating a good reputation for Grandma's Kitchen on the Internet; that's why many customers come to his restaurants. Grandma's Kitchen already has its own website, and also bought the waipojia domain name for RMB180,000 (US$26,301) in an auction last year. What's more, Zhu often browses the comments on restaurant review websites like koubei.com and dianping.com. The company has specially allocated staff to respond to online comments, and also makes improvements according to some of the constructive ideas on those websites.
A post on dianping.com once criticised the dishes at Grandma's Kitchen. Zhu read the post carefully and noticed some of the food mentioned wasn't actually served at his restaurants. One of the restaurant's marketing managers contacted dianping.com shortly after and complained about the false post. His demand to the website to eliminate the post was declined, however. The same evening, the legal counsel of Grandma's Kitchen, along with the marketing manager, went to Shanghai with documents including the business licence of the company, menus and quality guarantee contracts from the pork suppliers and negotiated with dianping.com. The post was eventually removed from the site.
The story shows how much emphasis Zhu puts on Grandma's reputation online. In 2007, all twelve Grandma's Kitchen restaurants in Hangzhou were ranked among the top 50 by the netizens on koubei.com; four of Grandma's, meanwhile, ranked among the top 10 of all restaurants in Hangzhou
"Customer flow at the Grandma's Kitchen has now reached 30,000 per day. Most are repeat customers," said Zhu, indicating why he cares so much about reputation.
Low cost, online marketing and positive word of mouth comments are making Grandma's Kitchen even more popular. The company's business strategies also guarantee success for its expansion into other cities. Zhu was very proud that the Grandma's Kitchen in Jiaxing became the top restaurant on its street within only one month after opening in 2007. Another Grandma's Kitchen Restaurant that opened in Beijing in April 2007 is already profitable. Zhu told us each new Grandma's Kitchen is profitable within a year's time.
"The consumption level is low but the seat turnover rate is high in our restaurants. That is how we beat other restaurants," Zhu said. He is planning to open new restaurants in the Yangtze River Delta this year. After the successful expansion in places outside Hangzhou like Beijing and Jiaxing, Zhu is now full of confidence about the future of Grandma's Kitchen.
New Ideas for Chain Restaurant Expansion
By Liang Chen
The restaurant business is a branch of the service industry. Unlike western fast foods like McDonalds and KFC, however, it is hard to standardize Chinese cooking. Many brands are successful locally, but they often flounder when they expand. This helps explain a phenomenon we have witnessed in the restaurant industry: companies that can attract investors and have developed into nationwide restaurant chains usually serve hotpot or fast food that follows strict time requirements for steaming or roasting. Consistent flavour can only be achieved after solving the problem of standardization in Chinese cooking. Whether hotpot restaurants like Little Sheep, or fast food chains like Chamate or Kungfu, they all replicate standardized Chinese cooking with a large degree of precision.
Grandma's Kitchen has explored another possibility by expanding nationwide with different cuisines and different decoration styles. The secret to their success is that Grandma's Kitchen has closely followed the demands of its customers and adjusted its menus based on customer preference. The company has a menu R&D centre, which develops new dishes according to the changing tastes of its customers in different cities. The general manager of the company has admitted the dishes in his restaurants are not fixed to any particular style: the only requirement is that people like them. This amateurish solution has unexpectedly won Grandma's Kitchen an exceptional reputation in the restaurant industry.
The highlight of Grandma's Kitchen is its distinctive positioning and related consolidation of resources. Most restaurants are located near office buildings and offer food and beverage to young white-collar workers. The three different brands of the company, Grandma's Kitchen, Zhi Fu Men and Su Bao Fast Food, cater to demands at different times of day. Most importantly, the customer base in office blocks is relatively stable. The business risk for Grandma's Kitchen is much smaller than roadside restaurants, since it can develop repeat customers with its reputation instead of touting for different customers every day.
Grandma's Kitchen has maximised its marginal utility through three different brands and the consolidation of its background resources including its kitchens, purchasing channels and delivery systems. This business model of multiple-brand services and a consolidated background has also been adopted by other companies in the restaurant industry. For example, Fu Ji Food and Catering Services Holdings Limited, the largest meal delivery service provider in Shanghai, covers the three activities of meal delivery, hotels and instant food production. Fu Ji ranked among the top 100 restaurant companies in China in 2002 and listed on the Hong Kong Stock Exchange in 2004.
Like Grandma's Kitchen, Fu Ji also consolidated resources in both regular meals and take-away services when it developed its meal delivery services, including purchasing materials, human resources and brand sharing.
According to some estimates, the food and beverage market in China will become the second largest in the world by 2020 and account for 15% of global restaurant business revenue. Targeting various market segments, Grandma's Kitchen is attracting more and more customers with its different brands.
A big plus for Grandma's Kitchen is that it hasn't been confined by geography. It has not only opened chain restaurants in Jiaxing and Beijing, but also made them profitable within a short period. The unpredictable element, however, is that Grandma's Kitchen's business scale outside Hangzhou is still rather small. Among all of its restaurants, sixteen are located in Hangzhou and only three are in other cities. It is still too early to conclude if its business model has been successfully replicated all over China.
Yet Grandma's Kitchen has turned its restaurant into a non-standardized product and expanded with its non-standard decoration styles. At the end of the day, the company has been doing the mix and match around customer demands. When the market has proved all of these elements successful, the value of Grandma's Kitchen will increase.
(The author is Managing Director of the Investment Banking Department of Guodu Securities Co., Ltd.)