From Delivery to Heat-and-Eat Meal Kits: How Are Wangxiangyuan, Xibei and Their Peers Courting Chinese Diners Who Increasingly Don't Want to Eat Out?

Behind it all is the industrialization of production at Chinese restaurant brands.

Open the package at home, toss the pre-washed fish head together with the sauce, steam it for 10 minutes, add cooked noodles, and you have Wangxiangyuan's signature dish: fish head with chopped chili.

Haidilao's retail self-heating hot pot is easier still. Add the seasoning, pour cold water over the heating pack, and it warms itself. Last year this product — an upmarket instant noodle, essentially — was a runaway hit.

Xibei recently launched a delivery set for two to three people. If you have ordered from Xibei, you will have noticed that the bag contains, besides a newly designed food box and a wet wipe, a tablecloth and a dental floss pick. These new "accessories" are now standard at several chains.

Chinese restaurant brands that once pulled foot traffic into shopping malls are selling more and more of their food through online platforms.

They have little choice. Look at the delivery riders threading through office buildings and residential compounds every day. Delivery is growing faster than the restaurant business as a whole: according to iResearch, restaurant spending will grow at a compound annual rate of 8.8% between 2017 and 2023, while delivery will grow by as much as 31% a year. Online retail is growing far faster than offline. At Meituan alone, nearly one user in ten places an average of 98 delivery orders a year, and most of them live in the tier-one and tier-two cities where restaurant spending is densest.

Semi-prepared meal kits are the restaurant brands' latest attempt to adjust to these new habits.

Semi-prepared dishes that need reheating and a little work — adding a seasoning packet, say — and finished dishes that only need heating have appeared over the past year on Hema, Tmall Fresh and JD.com. FamilyMart has also rolled out small ready-made dishes you open and eat straight from the bag, among them braised chicken wingtips, Sichuan-style diced bamboo shoots, and shredded pork in fish-flavored sauce. Retailers, supply-chain companies and restaurant companies are all pushing this along, which is one measure of how far the industrialization of Chinese cooking has come.

Restaurants used to be only the offline part. Not anymore

Wangxiangyuan, a chain built on Hunan cooking, began selling semi-prepared products in March: nine dishes, including chopped-chili fish head, free-range chicken pot, beef-and-tripe slices in chili oil, and beef in sour soup, priced between 30 and 60 yuan. Judging by portion size, they are aimed mainly at small households of two or three.

The fish head sold well at first: 5,000 units on Tmall in the three days after launch, about what a single Wangxiangyuan restaurant sells in three months. That sounds like a lot, but Wangxiangyuan has 72 restaurants nationwide, so three days of online sales work out to roughly one day's business across all of them.

Zhao Jianguang, Wangxiangyuan's deputy general manager, told QDaily the company will add 13 more retail dishes.

"I see it as an omnichannel idea," Zhao said. "Restaurants used to be only the offline part. When online sales take a bigger and bigger share of the whole market, that's a market you have to reach." Through Tmall's cold-chain logistics, Wangxiangyuan's dishes can now go to cities of every size across the country, no longer bounded by where its restaurants are.

Wangxiangyuan is not the only restaurant selling semi-prepared dishes straight to consumers. Guoji Tianshi, the parent of Xiao Nan Guo, is doing something similar through two retail sub-brands, Zhuhaomian and Xiao Nan Guo Family Banquet. The first sells four products — scallion-oil noodles, dandan noodles and plain noodles among them. The second started out chasing the Chinese New Year's Eve dinner market and now sells year-round: grandma's braised pork, sweet-and-sour ribs, velveted shrimp, sixi kaofu (braised wheat gluten). Guoji Tianshi set up a branded-retail department only this year, and plans a full overhaul of product development and operations.

Xiang'e Qing has started selling semi-prepared dishes on JD.com too, including beer duck and clay-pot braised pork. Bifengtang and Xinya are also in the business.

How strong the demand behind these kits really is, is hard to say. Delivery is more convenient, after all, and a kit is not much cheaper than delivery.

Big restaurant brands used to draw customers with location, a large sign and a reputation. On Meituan and Ele.me they compete for space on a phone screen against thousands of restaurants that may not even have a storefront. To keep hold of their own data and profits, brands prefer to use their own couriers, which spares them the 15-20% cut the platforms take on delivery. But the platforms do not push restaurants that bring them so little revenue; they would rather win over small merchants who have no bargaining power and no illusions about high margins.

Many restaurant brands are still feeling their way through delivery. Shanjiantang, which sells clay-pot soups, has dropped its single-serving business set. Xibei tried a delivery-only outlet for a while and then closed it, and is now testing a small fast-food format called Xibei Super Roujiamo.

National restaurant revenue in 2017 came to 3.9 trillion yuan. If delivery accounted for 240-340 billion yuan of that (Meituan's delivery order value alone was 171 billion yuan), overall penetration was somewhere around 6.2-8.7%.

Apart from Wangxiangyuan, where delivery penetration is close to 20%, delivery contributes little to most restaurant brands. Ajisen and Xibei are at 8.3% and 9%. Wangxiangyuan itself admits that delivery margins still fall short of what it hoped for.

Delivery, meal kits, even dine-in: all of it comes out of an industrialized central kitchen

Wangxiangyuan built its own central kitchen back in 2008. A central kitchen is something like a food factory: it produces finished or semi-finished dishes at scale and ships them straight to the restaurants. About a third of the cooked dishes Wangxiangyuan sells in its restaurants today are essentially made at the central kitchen and delivered to the store, where the cook need only add one or two ready-mixed seasoning packets while heating them.

Central kitchens are what let these brands open hundreds of outlets and still taste the same. Gao Yang, brand director of Xinliangji, told QDaily that once a chain has three restaurants, "how to keep output consistent" becomes a serious operational question, and that is when a chain may start buying central-kitchen services. At eight to ten restaurants, many start building central kitchens of their own.

Take Xibei Youmiancun. It runs three large central kitchens, in Beijing, Shanghai and Shenzhen. The one in Shanghai's Minhang district ships 70 kinds of prepared ingredients, drawn from more than 200 raw materials, to the city's 80-odd restaurants every day. This is how a Chinese chain can open a hundred outlets and keep one flavor: every dish is taken to the semi-finished stage, chilled, and shipped to the restaurant, where a little work turns it into a meal once a customer orders.

Chinese restaurants remain a fragmented business, dominated by independents — the five largest chains together hold less than 1% of the market. But according to the research firm Frost & Sullivan, chains (both company-owned and franchised) are growing at double-digit rates, far ahead of independents, which grow in the single digits.

According to the China Chain Store & Franchise Association, more than 70% of sizable domestic restaurant chains have already built central kitchens. Most of the well-known ones have their own systems: Fengshouri, Xibei, Grandma's Home, Bifengtang, Meizhou Dongpo, Din Tai Fung, Haidilao.

Central kitchens have raised standardization and operating efficiency across the industry, and they help with food safety as well. Many chains are moving toward a "light kitchen" model, which shifts most of the work to the central kitchen or the factory. More industrialization is coming.

Professional equipment of the sort fast food uses can already heat food in stages to reproduce the effects of stir-frying, deep-frying, steaming and boiling. Jinbaiwan and Wangxiangyuan both say they are testing cooking robots.

Central kitchens were built to give different restaurants the same flavor and to demand less of the cooks in them. Faced with delivery, that same machinery lets a restaurant heat a dish and send it out faster. And the meal kit on a retail shelf is basically the same thing the restaurant uses itself.

Xinliangji is a supply-chain company incubated by Xinladao, a fish hot pot chain. It started in seafood — crayfish above all — supplying third-party merchants including Bifengtang. The crayfish you order for a late-night snack may well come from this company, though nothing will tell you so.

Xinliangji has six large processing plants and nine regional warehouses. At its plants the only step done by hand is sorting the crayfish; washing, draining, frying, seasoning, boxing, sealing and warehousing all run without human hands.

This year Xinliangji began selling pre-packaged, ready-to-eat crayfish direct to consumers. Spicy crab and spiced river snails are on the same shelf.

Gao Yang, the company's brand director, told QDaily that Xinliangji may widen its range of semi-prepared dishes. For a supply-chain company the reason to sell them to consumers is a different one. "We want to build some brand and some noise," Gao said. "We want consumers to recognize frozen-food brands."

Shuhai, the supply-chain company tied to Haidilao, relaunched a brand for small merchants and consumers early this year called Caiduomei, built mainly around 300g packs of fish fillets in various flavors.

It tried something like this three years ago, but conditions inside and outside the company are riper now. On top of the procurement, pre-cut vegetable processing (washing and cutting on production lines) and warehousing and logistics that grew out of serving Haidilao, Shuhai has assembled a 50-person R&D team and built production plants in 13 cities, offering standardized dishes and joint development.

How big can a restaurant supply chain get? Comparing Shuhai with Haidilao says something: in 2017 Haidilao took in 10.6 billion yuan, Shuhai about 3.6 billion yuan, of which 2.6 billion came from Haidilao itself. Shuhai was founded in 2011; Haidilao has been around since the 1990s.

According to the China Cuisine Association, restaurant revenue should reach 5 trillion yuan by 2020, with ingredient purchasing at 1.2 trillion yuan. The domestic restaurant supply chain — everything that moves food from the field to the table — can account for 30-40% of the industry's total scale.

Besides the chains and the supply-chain companies, retailers led by Hema are pushing semi-prepared dishes at the retail end.

Alibaba's Hema launched finished and semi-prepared dishes under its own label, Hema Workshop, soon after its first store opened, in March 2017. Mostly sized for two or three people, they sit in the chilled cases of Hema's dining area, the part of the store that draws the most traffic.

The Hema app has a section called "Cook a Meal in 10 Minutes," selling frozen semi-prepared dishes, chilled products (which, unlike frozen ones, keep only three or four days), pre-cut vegetables and live seafood, with dishes such as bamboo shoot and pork stew, braised chicken, and sukiyaki. It also carries semi-prepared and finished dishes from other brands, Wutingqiao and Xinya among them.

Hou Yi, Hema's CEO, argues that because restaurant food has to be cooked in the store, no single restaurant company can easily reach 10 billion yuan in size — in-store capacity is limited. The retailization of restaurants, he says, is the biggest opportunity in the market right now. Speaking in May at Hema's New Retail x New Restaurant co-creation conference, he noted that eating out used to be driven by business meals and has now swung back to the family meal.

That fits Hema's central pitch and its positioning as "the solution for getting dinner home." It intends to work with chains that know how to run a central kitchen, turning their dishes into semi-prepared products for Hema's shelves.

It wants a place in restaurant companies' supply chains. This year or next it will open a channel for small-lot supplies between its stores and restaurant merchants, and in time it may offer more supply-chain services, including building vegetable farms and breeding operations.

The industrialization of restaurants will keep going

Semi-prepared food is not a new business in China, but the companies that tried it before were mostly startups. By early 2015 a crowd of meal-kit delivery ventures had appeared. The larger ones included Qingnian Caijun, which kept a shop running for a long time on Ele.me and other delivery platforms, and prettier, lighter-touch brands like Nuanshi and Xinwei. Most of those startups have since pivoted or closed.

"If you sell dish by dish, the average order is very small, which drives operating costs up, and you have to add a shipping charge on top. That leaves you a long time in a state where it's hard to make your money back," said Pan Xiaoyue of 321 Cooking, explaining why her company chose a subscription model instead, along the lines of Blue Apron in the United States. Blue Apron has had few comfortable days since going public, and still trades below its offering price.

Chains that built their own central kitchens, or that make ingredients through an affiliated company, are in a different position. They already have to produce semi-finished dishes for their own restaurants or for other small and mid-sized ones. For a company with a central kitchen or a factory, selling to retail is fairly simple, a matter of small adjustments: swapping the wide starch noodles that come with the fish head (a chilled product shipped to restaurants) for regular noodles (a frozen product shipped to a retailer's warehouse).

Delivery, meal kits and dine-in all depend on ingredients that come out of the central kitchen. They are really just different distribution channels.

That is not so different from other thoroughly industrialized trades — chain coffee, for instance. Starbucks buys its beans centrally, roasts them centrally, and turns them into different product forms sold in different places: espresso drinks pulled in the store on fully automatic machines with milk and water added by hand; bottled Frappuccinos in supermarkets and convenience stores; Green Mountain Starbucks capsules and VIA instant coffee that people buy to make at home.

In mature markets, where food and restaurants are further along the industrial road, semi-prepared and ready-made dishes are already part of how people eat. FamilyMart's ready-to-eat range is fuller and offers more choice in Japan and Taiwan, where one person or a small household can buy a portion of rice and one of those dishes and call it dinner. In the United States, Costco and Trader Joe's carry a wide own-brand range of semi-prepared and finished foods, from Korean bibimbap to curry dumplings to Mexican burritos.

Behind an American restaurant market of nearly $800 billion sits a supply-chain market of more than $280 billion, most of it — roughly 40-60% — in the hands of a few giants: Sysco, US Foods, PFGC. Sysco, the largest food-service company, has annual revenue of $55.4 billion, 18% of the whole market.

Americans eat in a post-industrial way already, and they have begun to think again about what that costs. Factories and heavily processed food have made both restaurant companies and households more efficient, but they may take something out of health: frozen processed meat skips the preservatives, yet for the sake of texture and shelf life it tends to be high in salt. In the view of the food journalist and author Michael Pollan, industrial food takes up more room in the stomach, which means less room for plants and fresh food.

Chinese cooking, long thought too hard to standardize, is now traveling the same road, growing more industrial from one end of the chain to the other. That brings convenience to consumers and raises efficiency. Two-income households in tier-one and tier-two cities do not have time to cook every dish of every meal, so delivery and semi-prepared food are an obvious choice.

The process is not without cost. Beyond the health questions that attach to processed food rather than fresh, there is flavor.

Supply-chain companies joining in, central kitchens spreading — as restaurants industrialize, flavor is standardized. But does it also become monotonous? "Consumers move around within limits; they aren't actually very good at telling whether the same dish tastes the same at two different restaurants," Gao Yang answered.

The same standardization happened after coffee, Western fast food, packaged food, and candy and snacks were industrialized. Now it is Chinese food's turn.

Cover image from Visualhunt, Tmall, Shuhai and others.