BRANDED CHAIN OF RESTAURANT ENTERPRISE WILL BE STRENGTHENED
The previous unhealthy price war in the process of standardization could no longer fulfill the sustainable development of the catering industry and branding concept will play a more important role in the future. There is no doubt that it will take time to refine quality control and human resources management of a company but it will facilitate the transformation of the Chinese catering firm into a more sustainable business model in the future.
FACTORS OF SUCCESS
There are three factors of success to the Little Sheep in the Chinese hot-pot market, namely the core competence, successful marketing mix and the benefits of acquisition.
COMPANY’S CORE COMPETENCE
MANAGEMENT
The first task of every division head on each day is to read financial report and sales statistic which reflect yesterday’s performance. This allows the managers to make managerial decision promptly.
STRICT FRANCHISING SYSTEM
Franchising system is becoming stricter to ensure the quality of food. It stopped accepting new franchisees by 2003 and stopped co-operation with franchisees of poor performance.
SUCCESSFUL MARKETING MIX
PRODUCT
At the beginning, hot-pot catering in the restaurants is Little Sheep’s core business. The recipe of the hot-pot soup consists of Chinese herbal medicine. This was a new attempt and it attracts many people.
Little Sheep products differentiate into other areas, like products on the shelves of supermarket and gifts targeting different groups, for instance health-conscious people, families and rich people. By introducing more products in the market, it can further utilize its brand and generate more income.
Apart from the types of products, it concerns about the quality of food. The quality of the mutton is ensured as it is originated from Mongolia. Its food passed FDA & SGS tests by the US Food and Drug Administration.
PROMOTION
Little Sheep realized two things. Young people have more purchasing power. This group getting more focused on mental enjoyment. To approach them, specific promotion is devised. Little Sheep used a slogan “Reach the peak of dreams, share our joy” (巔峰夢想 快樂共享) and contracted with the Chinese Mountain-climbing team. This gave the public an image of that Little Sheep provides green, healthy and delicious food.
It co-branded with Coca-cola. They worked together and created marketing synergy, building association between two products in customers mind. Little Sheep’s products are coherent with the theme of Coca-cola “to make good food more delicious”. This co-branding can help Little Sheep attract young consumers. For example, one of the joint campaign with Coca-cola, “Who is the next King of Expression”, helps Little Sheep build relationship with an international brand through this well-promoted event.
It launched an interactive marketing campaign to encourage involvement and build an emotional bond with customers. If a customer “check-in” through social networking sits in any Little Sheep store, he will get a free dish of mutton. It also promoted its brand through different e-media, for example SOHU.com, the NETEASE and dianping.com.
PLACE
Restaurants
Little Sheep has opened over 700 branches all over mainland China, primarily in first- and second-tier cities. The provinces with the highest penetration includes Guangdong (66 branches), Hebei (54) and Zhejiang (53). Its presence in almost every part of China makes it a dominant player in this market.
Out of mainland China, Little Sheep has over 20 branches in many affluent regions and countries including Hong Kong, Macau, USA, Canada and Japan. Such presence is limited, but is still significant as a traditional hot pot restaurant chain.
Logistics
Little Sheep has an efficient and strict quality control and logistics system to ensure the highest level of quality in their products and services. All their meat products and soup bases are produced in the national production base which ensures they can maintain consistent quality in their most important products.
They have developed their own logistics facilities called Little Sheep Logistics. As it is self-owned, it can be controlled so that it will follow a strict set of policies. For example, they have a minimum storing period policy so that stock will be delivered as soon as they are produced. Their system is in fact efficient, evident by that they manage to deliver meat products from Mongolia to Hong Kong using refrigerating lorries in four days consistently.
For the whole delivery system as a whole, they have implemented a five-step procedure as shown in the below diagram. All products produced in the production base or from suppliers will be delivered to one of the six main warehouses located in different parts of China. They are then transported to secondary warehouses, followed by distribution centers. The products will then be distributed to branches all around China from the distribution centers. Such a clear and effective procedure helps Little Sheep to maintain a consistently high level of delivery efficiency.
Little Sheep has established clear hygiene guidelines for the production and warehouse workers. However, it is difficult to manage the hygiene standards of the hundreds of branches, especially the franchised ones. For this, Little Sheep aims at keeping branch-end procedures at minimum. In other words, most products are already edible or can be directly put into the hot pot on arrival at the branches. The branch workers do not have to apply a lot of final procedures to the food products and the hygiene standard could then be maintained.
PRICE
There are geographically diversified pricing strategies. For example, in China, the average price per person (in HKD) is about $80. This is due to Chinese people are more price sensitive and there are abundant competition in the hot-pot market in China. Luckily, the low production cost and low standard of living in China allowed the company to charge a lower price. In Hong Kong, consumers are charged at the medium price of around $135-150. In Japan, per capital consumption is charged relatively high about $400 on the average due to the lack of competitors in the Japanese hot pot market and higher production cost. Customers are also less price sensitive and they have higher purchasing powers compared to Chinese citizens, making a high-price strategy more profitable.
As Little Sheep owns its production and logistic facilities, the company is able to maintain a stable source of supply, hence lowering the production and maintenance costs.
The target consumers of the Little Sheep are supposed to be the middle-class people. But due to the decreasing production cost and taking advantage of the economy of scale, the price of the Little Sheep is less expensive at about HKD$80 that becomes more affordable by most of the citizens nowadays. Currently, the Little Sheep remains a popular choice of dining places among Chinese citizens.
BENEFITS OF ACQUISITION
Little Sheep has become a listed company in HK Stock Exchange since 2008. However, in Feb 2012, they were acquired by Yum! Brand Inc. (中國百勝餐飲集團) and delisted from the HK Stock Exchange. Yum! is a US-based company, which is the world’s largest fast food restaurant company in terms of system units. Yum! is very successful worldwide, they entered China since 1987. Their brands include KFC, Pizza Hut and East Dawning (東方既白, which is a Chinese-style fast food restaurant) and so on.
After the acquisition, Yum! will manage the entire operation of Little Sheep. They aim to improve Little Sheep’s operation mode, in order to increase the leading role of Little Sheep and provide a high quality food and beverage service to Chinese customers. [1]
There are several advantages for Little Sheep. First of all, since Yum! has a very successful business in China, it would help Little Sheep to establish a better brand image. Second, they can enjoy economies of scale through brand synergy. For example, Little Sheep could have a co-advertising campaign with other Yum!’s brand like Pizza Hut. This may save costs due to the larger size of the promotion campaign. Little Sheep can also share the same site with KFC and Pizza Hut so that they can save rent. On the other hand, since they have joined Yum!, they can enjoy better negotiation power with suppliers and proprietor, which may help them to find a better site location, or to save costs.
[1]
CHALLENGES
Little Sheep is facing its weaknesses and threats. Lack of hygiene is the main weakness of Little Sheep and intense competition is its main threat.
WEAKNESS: HYGIENE
We have done a survey on my3q.com, asking “what do you value the most when having hot-pot?” And there are totally 125 respondents, in which 48 are Chinese respondents and 77 are non-Chinese respondents. (Survey statistics please refer to the appendix) When asked which aspect do they value most when having hotpot, Chinese consumers replied by saying price was their main concern, and then followed by hygiene and taste. However, non-Chinese consumers replied to the question differently. They deemed that hygiene was the most crucial factor, and then followed by price and taste. The survey result provides us with insight that if Little Sheep wants to perform well in foreign countries, it should strive to provide a clean and hygienic place for consumers to enjoy hotpot.
Unluckily, if you search Little Sheep on Youtube, the most frequently searched result is ‘Little Sheep- Mouse’, which then plays a video where a mouse appears in the restaurant. It may be due to several reasons such as lack of sufficient training for staff on food and personal hygiene, and after the clip has been released, more bad news on the poor hygiene conditions were publicized. Not using hand gloves but with bare hands while handling food, complaints on the greasy tableware, knocking the cattle bones on the floor for the soup base etc. These had dwindled consumers’ confidence in having hotpot in Little Sheep. It seems that much has to be done before Little Sheep can actually become an international brand.
THREATS: INTENSE COMPETITION IN THE HOT POT MARKET
Competitors copying the idea of adding Chinese medicine into hot pot soup or imitators using very similar brand names are common nowadays. These situations had harmed the company’s profits largely, leading to an intense competition within the hotpot industry.
The Inner Mongolian Little Lamb limited company had been established in September, 2001. The company serves three sub-brands, Yuan Dynasty Quality TOP HOTPOT, the Wishing Bone, and the Happy Greenland. Through chain-like management, this modern business model carries its business in global market. Up to 2010 year's end, has developed chain store more than 500, overseas markets and so on Japan, Australia, England, Saudi Arabia has its chain store. The company had been the fourth strongest companies in China (with Little Sheep being the third).
The Wishing Bone is the Little Lamb’s newest project. It emphasizes on health and fashion. The targeted customers are income stable working class. The Wishing Bone has a countryside style environment, graceful pure, simple nature, to place oneself as if in the countryside.
The Yuan Dynasty Quality TOP HOTPOT is the Inner Mongolian Little Lamb’s high-end brand, mainly focus on the quality. In September, 2008, the first shop is born in Baotou. The Yuan Dynasty Quality TOP HOTPOT strives to serve at the highest quality in every aspect such as environment, food material and services.
The Happy Greenland mainly targets on those who were born after 1980's and 1990’s. The subject of this restaurant is happy and fashion. It promotes itself as the self-service fashion hot pot brand. The first shop is born in August, 2008 in Baotou. At present it has opened 21 branch stores in China. The Happy Greenland’s environment is sprightly, the colors are bold and the facilities are stylish. All these favour those who were born after 1980's and 1990’, making it an ideal space for them to get together.
In comparison, Little Sheep only has two different models, which are “all you can eat” (unlimited food at fixed price) and “a la carte” (pay for the amount you eat).
POOR IT TECHNOLOGY INFRASTRUCTURE
Little Sheep’s website provides an English version. However, the product names are still in Chinese and there are errors in showing the pictures. The last updated news was in July, 2011, which shows that it is outdated. Compare to Little Lamb’s website, it is much better categorized, with up-to-date news and attractive layout.
Nowadays restaurants mainly use two methods for ordering food, one is the traditional paper method, and the other one is hand-hold wireless orders food equipment. Little Sheep uses the traditional method, but in Little Lamb, waiters use a controlling wireless equipment system to help customer order their food, and the information will be directly passed to the kitchen. Here, we can see that Little Sheep is not utilizing as much information technology as its competitors.
RECOMMENDATIONS
EXPANSION TO THIRD-TIER CITIES
As it was commonly mentioned in news, GDP in China, which is a measure of income of Chinese citizens, is fast rising. This shows that even small and poorer towns and villages in China will start to be able to enjoy a higher standard of living. By expanding the Little Sheep chain to these cities, we can give them a first impression of how a higher-class hot pot restaurant is like. This will give us a first mover advantage so that in the future, even when other high-class hot pot restaurant enter these cities, the citizens will have a higher awareness in our brand.
The decision on which city to expand to need to be evaluated every year based on a number of factors, including customer’s purchasing power, competitors, our presence, economy of the cities, etc. As an example, Hainan is currently a good location for us to open more stores. Currently there are only 2 branches opened there, meaning that it is yet far from saturation. The fast-developing tourism there means that there will be more potential foreign customers and tourism also makes the cities richer and giving the citizens a higher purchasing power. Despite the fact that Hainan is hot throughout the year, the invention of air conditioner has made hotpot an all-year-round activity without any time constraint.
However, such expansion strategy also has its risks. The hot pot market in China is very competitive and hot pot restaurants are everywhere, the market is more or less saturating. Also, Little Sheep already had a considerable presence in China and this may make further growth difficult. Therefore, we decided to adopt a slower expansion strategy in a way that we will open around ten new branches in third-tier cities every year.
GOING INTERNATIONAL
The second part of the expansion strategy is going international. With the Chinese market saturating, expanding overseas surely offers a great opportunity. An internationally larger size can help the company achieve economies of scale. And in fact many foreigners are interested in Chinese cuisines, and hot pot is undoubtedly a Chinese specialty. This ensures that there will be demand for our products in the overseas market. As we mentioned earlier, Little Sheep already had around 20 branches outside of mainland China, but we think that it is worthwhile to continue going international.
Take the entrance to Toronto in 2005 as an example, it was a great success and it received lots of compliments from the customers and even from newspaper critics. They were impressed by the quality and the taste of food, and they saw that Chinese hot pot will introduce a new era of cuisine in the western world.
In order to enter the international market smoothly, we propose a few strategies here. First of all a better-organized English website needs to be set up as the Internet is an important channel for western customers to search for information of restaurants. Apart from offering traditional Chinese hot pot, products with some variations to cater for localities should be considered to cater for different customers, e,g, cheese hotpot. At last, brand image must be improved and promoted in the overseas market as westerners always regard Chinese food as unhygienic and dirty. Efforts must be paid to make them feel that Little Sheep is not the same as other Chinese brands.
IMPROVING THE HYGIENE CONDITIONS OF THE RESTAURANTS
The Unhygienic kitchen conditions leads to the occurrence of mice. To cope with the hygiene problems, the Little Sheep restaurants are suggested to set up regulation all workers in the kitchen should use plastic gloves, upgrade the washing machine with the function of UV sterilization and managers should inspect and supervise the hygiene conditions frequently. In the long haul, the Little Sheep should set up a hygienic supervising taskforce. The taskforce regulates the rules regarding to the basic food and personal hygiene, and conducts regular inspections on the hygiene conditions. Moreover, ‘The Secret Customers’ Program is encouraged to be conducted to evaluate the hygiene environment of the restaurants by the consumers. Furthermore, the company should put more resources on staff training courses about food and personal hygiene before official appointment.
CONCLUSION
The case of Little Sheep provides an insight of the keys to success while running hot-pot fast chain restaurants in China. Although it is facing different threats and weaknesses, our three recommendations can help overcome its shortcomings and continue to expand and lead a dominant position in the hot-pot market. Along with the mission of the company “basing on quality to maximize customers’ value” in mind, Little Sheep is believed to stay as a strong tycoon in the industry.
APPENDIX
- Survey result from my3q.com
-Little Sheep Official Website
-Little Lamb Official Website
-Youtube
