Xiaonanguo Founder Wang Huimin Says the Group Will Run Many Restaurant Brands, Western Food Included

From one brand to many, and then to other companies' brands: Xiaonanguo's path is about more than a shift from Chinese to Western food.

On June 19, Wang Huimin, founder of the Shanghai Xiaonanguo brand and now rarely seen by the press, turned up at Shanghai's Xintiandi to support the opening of a restaurant called ORENO.

Its signature dishes include "Italian truffle and foie gras risotto," "French fisherman-style braised mussels" and "Rossini-style sliced beef with truffle sauce and foie gras." Its head chefs are Japanese chefs from Michelin-starred restaurants, yet it claims its prices are only a third of those at high-end restaurants. So it sells itself as "affordable Michelin," at an average of 200 yuan a head.

Italian truffle and foie gras risotto, RMB 95

None of this seems to have anything to do with Xiaonanguo, a brand of Shanghai-style Chinese sit-down dining. Yet ORENO is the 200th restaurant in the Xiaonanguo group.

ORENO is in fact a brand of the Japanese restaurant group Oreno Corporation. Its hallmarks are starred chefs, high-end ingredients and more down-to-earth prices. Since opening its first restaurant in Tokyo's Shimbashi in 2011, it has grown to 32 outlets in Japan and more than 40 chefs who once worked in Michelin-starred restaurants. All 10 of its brands carry the name "Ore no" ("my"), as in Ore no Italian, Ore no Japanese and Ore no French.

ORENO [Ore no French-Italian Restaurant] is its first restaurant on the mainland. Xiaonanguo, which operates the brand, opened the first ORENO in Hong Kong this February; the two sides struck their deal in mid-2014.

High-end dining has had no good news for a long time. After the Central Commission for Discipline Inspection issued its "eight-point regulations" in 2012, banning lavish spending of public money, high-end dining fell by 30% to 50% in 2013, according to the China Hotel Association. Although the industry as a whole stopped falling and recovered last year, spending per head kept dropping, down 20% year on year. Xiang E Qing announced last year that it was turning itself into a cloud-data company, and South Beauty, which once claimed it would be "the LV of the restaurant world," now sells boxed lunches for 26 and 38 yuan.

Xiaonanguo, which listed in 2012, also lost money for two years running and returned to profit only last year. Its annual report shows 2014 revenue up 11.4% to 1.54 billion yuan, and gross profit up 11.6% to 1.035 billion yuan. But the growth did not come from the namesake brand, Shanghai Xiaonanguo: its mainland business grew 4%, below the group's 11.4%. In 2014 the group also closed two more Shanghai Xiaonanguo outlets and suspended four loss-making ones.

Shanghai Xiaonanguo achieved same-store growth in the second quarter of last year

Xiaonanguo's answer, announced in 2013, was a multi-brand strategy. Over the past year Nan Xiaoguan, a second brand built on Shanghai dim sum, opened 11 outlets in Beijing, Shanghai, Tianjin, Shenyang and other cities; last year it brought in 8.3% of Xiaonanguo's total revenue. While expanding Nan Xiaoguan quickly, Xiaonanguo also launched another cheaper second brand, Xiaoxiao Nanguo.

Then, starting last year, Xiaonanguo signed one foreign restaurant brand after another, most of them Western. Besides ORENO there are Boathouse, a joint venture, and Wolfgang Puck restaurants. The first is a popular American theme restaurant; the second was founded by Wolfgang Puck, the chef behind the Oscars dinner and a legend of American dining. In 2014 the group also paid HK$195 million for 65% of Pokka HK, a 20-year-old company that serves mass-market Western food through 32 restaurants under 10 brands. You might not guess it, but Uncle Tetsu, the cheesecake shop, and Mizhilian, which sells milk tea at 10 yuan a cup, are run by Xiaonanguo too. By the end of 2014 Xiaonanguo owned 21 restaurant brands.

A Nan Xiaoguan outlet

Wang Huimin calls the move from one brand to many, and then to running other brands in the industry, "a completely different landscape." "From here on we will certainly have fewer brands of our own and more of other people's," she said, without a moment's hesitation. Will the deals be acquisitions or licensing? "All kinds. We won't rule out any good opportunity."

Casual Western dining is not Xiaonanguo's strength, but it is an attractive market. According to the China Catering Industry Development Report (2014) from the China Cuisine Association, revenue from Western food grew 19%, second only to hot pot. Dianping's restaurant data also show that Western food is Chinese diners' first choice after Chinese food, followed by Japanese and Korean.

Xiaonanguo makes no secret that it wants partner brands that are "well known in the industry." It holds to two principles: a mid-to-high-end position, and food that can be standardized and easily copied, so the brand can scale up fast.

Paying attention to "customer experience" is the most important lesson Xiaonanguo has learned from its turnaround of the past few years. "Before 2012 we never had to worry about business. No discounts, no promotions, no bringing your own wine, and a minimum spend for private rooms. We've given way on all of that, and we talk more and more about customer experience," Leng Yijia, vice president of the Xiaonanguo group, told QDaily. High-end restaurants, she said, have to learn to come down off their high horse.

"Here's what we picture: you walk into a shopping mall and see all kinds of restaurant brands. Most of them are actually run by Xiaonanguo, but you may not know it."

How does a restaurant that started with four tables go from running one brand to many, and from running its own brands to running other companies'? How did it manage the change? We talked with Wang Huimin, founder of the Shanghai Xiaonanguo brand and chairwoman of Xiaonanguo Catering Co., Ltd., and with vice president Leng Yijia.

(Below, Q = QDaily, W = Wang Huimin, L = Leng Yijia)

Why is Xiaonanguo getting into Western food?

Q: A cheaper second brand like Nan Xiaoguan is easy to understand. But Western food isn't Xiaonanguo's strength, and both the dishes and the setting are quite different from Chinese food.

W: Running restaurants takes some intuition. As I see it, dining is heading in four directions: social venues, mass canteens, food experiences and home kitchens. ORENO is more of a food experience; POKKA Cafe leans toward a social venue. Many people now feel that coffee and a light meal count as a meal, young people especially. Western food is also a way to make the brand younger.

L: The market for casual Western dining is big, and there are only a handful of brands in it. Dianping's 2013 Shanghai Urban Life Consumption Report shows that Western food, though still a small share, has grown fastest in the past two years. Another fairly simple method is to look at Hong Kong and Japan: they are Asian too, so they go through similar cycles.

But we really aren't strong in Western food, and the company has no experience in it. So we partner with good restaurant brands from Japan and the United States, and buying Pokka HK was also about building our own Western-food skills.

Q: Which Western brands does Xiaonanguo run now?

L: In casual Western dining there are three: ORENO, Wolfgang Puck and Boathouse. ORENO is a Japanese brand, but it serves Japanese-style Italian, Japanese-style French and Japanese-style Japanese food. Wolfgang Puck is a very famous restaurant brand in the United States. It was mentioned in the hit American TV show 2 Broke Girls, and many Americans and other foreigners recognize the name at once. Boathouse is a fairly popular American theme restaurant.

Beyond these, we've lately been trying some more interesting things, such as Mizhilian milk tea. It isn't a restaurant; it sells casual snack items. In a small shop it sells products that are very easy to standardize: milk tea, little cookies, bowl-shaped rice cakes, egg waffles. Very simple products. They cost less than 10 yuan, so customers don't think twice. Mizhilian shops are opening fast too; franchised across the country, there are already more than 100.

A Mizhilian milk tea shop

Q: How do you choose partner brands?

L: First we look at whether a brand fits our direction and has room to grow. Our new brands follow two broad lines. One is mid-to-high-end dining that can stand for the top of the industry. The other is food that can be standardized, so it's a bit easier to copy. That's the direction.

ORENO is a fairly creative model, especially its "affordable Michelin" idea, which I think will win a lot of fans on the mainland. Wolfgang Puck basically represents the trendiest restaurant model in the United States, and if we're going to bring something in, we want the newest things from abroad. Wolfgang Puck is a mid-to-high-end brand, and Wolfgang Puck himself is a famous chef who runs the Oscars dinner.

And of course they all have to be well known in the industry.

Q: Is partnering with a mature brand like ORENO easier than starting a new line like Nan Xiaoguan?

L: With a partner it takes more effort to get used to each other. Every day there are requests for approval, reports, exchanges and discussions; a lot has to be talked through. But we can clearly see that the Japanese and American sides bring us advanced management know-how, which we couldn't buy with money.

The Japanese side, for example, has sent many Michelin-starred chefs, who have taught us a lot about using ingredients and making dishes taste and look better.

The Americans' management is very advanced, including the data systems they use. We may have to wait until the books close at the end of a month to see how much we spent on ingredients and on labor the month before. The Americans can see it the same day, which also has to do with how mature their food-processing industry is.

Q: So what is Xiaonanguo's main role in these partnerships?

L: We understand the Chinese market better, including site selection, hiring and, very importantly, pricing. Many restaurants do badly largely because their prices are wrong. Overall, we are the operator.

How did Xiaonanguo, once so high-end, start caring about customer experience?

Q: In these years of brand transformation, what has changed in how Xiaonanguo is managed and run?

L: We've evolved a little; you could say we've become more human and more flexible. Xiaonanguo used to have a single menu. We thought the food was delicious, and when we went to other cities (to open new outlets), nothing on the menu could change, the prices couldn't change, nothing could change.

In the past two years we've realized we can't decide things by our own tastes, and we've started letting other cities come up with some new dishes of their own. They still have to pass strict tasting, but some authority can be handed down. Outlets also used to work to strict budgets; now their bonuses are tied to their performance and to customer satisfaction.

Q: When did you start caring about customer experience?

L: After the anti-corruption campaign hit spending in 2012. Before 2012, business was... nothing to worry about, right? The product was good, and pricing was basically in our hands. If it was a bit expensive, so be it; people weren't very sensitive to value for money. Things had gone too smoothly for Xiaonanguo, so when sales suddenly fell 10% in 2013, everyone, from top to bottom, was shaken.

The labor market has also changed a lot in the past two years. Social-insurance contributions keep rising and so does the minimum wage, so we can't use as many people as we used to. The market forced us to make some reforms.

We used to do many things quite subjectively; you could say we did them to suit the company's own convenience. Take pricing: if raw materials got cheaper, then I'd cut prices. We used to think more from our own side. I've recently been reading a book about 7-Eleven, The Philosophy of Retail, which shows me how to run things from the customer's point of view and follow the customer.

Q: Why do you think some of your peers have collapsed?

L: They panicked a bit. Because Xiaonanguo started in Shanghai, "three public expenses" spending (official receptions, official cars and official trips abroad) made up about 20% to 30% of our revenue. Some of the companies that went under started in Beijing, and their customers were mostly that kind of official spending from the start. Group buying had just taken off then, and many high-end brands ran group-buying deals at more than 30% off, which I think did their brands great harm. We did quite a lot of group buying then too, but overall we didn't cut prices sharply. We put more effort into reworking the menu and launched some new, cheaper dishes.

The mid-to-high-end sit-down dining market has declined overall. Data from http://www.zhihu.com/question/29137109

Q: What role did being a listed company play in this period?

L: A big one. Without the listing, the past two years would have been very hard. The money from the listing got us through them and helped a great deal, though of course it brings pressure too.

On the other hand, a listing is in fact recognition of the whole brand. It really helps with getting sites and attracting talent. Because you're listed, you can open more stores and grow bigger, and you can attract better people. When we recently talked with those foreign brands, our status as a listed company was one of the reasons they were willing to work with us. It's a virtuous circle.

How does the restaurant industry see the internet?

Q: What does your industry think of the internet? Group buying, for example: it brings some traffic, but does it also raise costs?

L: The internet has become an everyday tool; you can't do without it. Customers use the platform companies to choose restaurants, book tables and order delivery. So for us it's a tool, and we just need to embrace it with an open mind.

When the eight-point regulations first came in, we really didn't understand group buying and the like. But lately we've got the hang of it. Each side does its own job and we work together, but we keep control of our own brand image.

Q: What kinds of marketing do you run on platforms like Dianping and Meituan, and how often?

L: It's fairly varied: set meals, promotions of our star products. At the very least, customers should always see something going on there. We have an annual plan each year, with special promotions on some holidays or in the slow season. The annual marketing budget is about one million yuan.

We also look at Dianping's data a lot: how much money Jiangsu-Zhejiang cuisine makes, whether competition is fierce, what promotions the nearby shopping districts are running. That's still very useful to us.

Xiaonanguo imagines a bright future, but one in which "Xiaonanguo" matters less

Q: What did Xiaonanguo mainly do in 2014, and what are the plans for 2015?

L: Mainly we've been focused on the transformation: filling the hole left by the eight-point regulations and winning back the 10% of sales we lost. The multi-brand plan has moved into negotiations, and it has started to take shape on every front.

In 2015 the work is mainly operational. Externally, we need to give customers a better experience and launch more distinctive products, products people remember. Some customers have told us there aren't enough new items, and we need to make bigger changes there. Internally, we need to meet the market's challenges and make ourselves more efficient.

As for new brands, the ones we've brought in will open one after another this year, and we'll make sure the new stores open and succeed.

The first ORENO restaurant on the mainland opens in Xintiandi

Q: The first ORENO on the mainland is in Xintiandi. What are the plans for more openings?

W: The ORENO in Xintiandi is a flagship, and its main purpose is to build influence. We'll expand quickly with single lines and single brands, because I think restaurants are heading toward single brands built on single products. People used to say "I'm going to such-and-such restaurant"; now you can say "I'm having such-and-such product," and over time the product becomes the brand that springs to mind.

Q: What kind of company will Xiaonanguo become?

W: I started Xiaonanguo with four tables, and that was 28 years ago. In that time the restaurant industry has changed enormously, and Xiaonanguo has to change with the wider (trend). We've gone from one brand to many, and then to running other brands in the industry. Xiaonanguo will go from a company that runs its own brands to a company that runs the industry's.

So bringing in more of the industry's brands is what this company will do from now on. It is the company's future strategy, and it is a completely different landscape.

Q: Will the Shanghai Xiaonanguo brand be played down in future?

W: Definitely, but only after quite a long time. Xiaonanguo is the symbol of our company's name and a symbol of Shanghai dining, and we'll watch it closely. In recent years Shanghai Xiaonanguo has also closed some old stores that were making money, moving out of aging shopping districts to newer, more prominent locations such as the L'Avenue mall and the Expo Park. We won't actively add to the total number of outlets, and we'll let Xiaonanguo's aging outlets close naturally.

Q: Ideally, what share of revenue would the flagship brand, Shanghai Xiaonanguo, bring in?

L: We haven't set an ideal.

Q: Will it fall below 50%?

L: Sooner or later.