Hefu ladles up lower prices to soak up more business ahead of IPO

The company is one of two Mainland noodle chains reportedly planning IPOs to collectively raise up to $300 million, as the catering sector bounces back post-pandemic 

Key Takeaways:

• Hefu Catering is reportedly preparing to list in Hong Kong as early as this year, with plans to raise up to $200 million 
• The noodle chain operator lost a combined 716 million yuan between 2020 and 2022 during the pandemic, before bouncing back last year with growth of more than 50%

By Ken Lo 

A noodle war is coming to Hong Kong, as two of China’s largest chains reportedly prepare to serve up their stock to growth-hungry investors.

The larger of the listings would see Jiangsu Hefu Catering Management Co. Ltd. make an IPO as early as this year, aiming to raise $100 million to $200 million, according to financial publication IFR. Joining it in the listing race is Guangzhou Yujian Xiaomian Catering Co. Ltd., which is also reportedly planning to raise $100 million.

Before word of its IPO plan leaked out this month, Hefu made headlines in Hong Kong when it took over part of a high-profile storefront that was previously luxury brand Prada’s flagship store in the city’s popular Causeway Bay shopping district. That move drew extensive local media coverage, hinting at Hefu’s upcoming IPO by drumming up interest in the chain in the financial hub where it will list. 

Such gimmicks look savvy, but they also come at a cost for companies like Hefu, which make their money one bowl at a time for noodles typically costing $4 to $6 per serving. During Hong Kong’s headier go-go days back in 2013, Prada rented the 15,000-square-foot space on four floors for rent that climbed as high as HK$9 million ($1.15 million) per month.

But the city’s retail industry has grown much chillier these days, and some industry experts estimate that Hefu’s monthly rent is a far more digestible 300,000 yuan ($42,000) for space on just a single floor covering a much smaller 1,576 square feet. One thing the two brands have in common is their upmarket tilt, with Hefu known for catering to a more discerning crowd with its relatively upscale fare compared with many scrappier local noodle joints.

Healthy noodle focus

Hefu was founded in 2012 by Li Xuelin, who spent a decade in the mobile phone business before cashing out as that industry flagged. Before jumping into restaurants, he spent two years traveling the country, trying local delicacies before setting his sights on noodles. 

Rather than trying to win over customers with local flavors for the daily staple that comes in countless variations across China, Li decided to seize on Chinese consumers’ growing health awareness by focusing on healthy noodles as his chain’s main selling point. More than a decade later, Hefu had developed a network of more than 500 self-operated stores and 20 million members spanning more than 80 cities across China by the end of last year.

The brand champions an upscale and relaxing dining experience, which contrasts with the conventional perception of noodles as a hurried, eat-and-go type of fast food. But three years of pandemic restrictions, combined with China’s economic slowdown that has cooled consumer appetites for discretionary spending, don’t seem to bode well for a brand whose noodles typically started at a relatively high 30 yuan, or about $4.20, per serving. 

Hefu’s dining environment is far better than more typical streetside mom-and-pop shops, and its food and service quality are standardized and also generally higher. But its average spending per customer of 41.36 yuan might be considered pricey by many, limiting its attraction outside more affluent major cities like Shanghai, Beijing and Shenzhen.

Some of Hefu’s financials were revealed last July, when Juewei Food (603517.SH), responding to a query from the Shanghai Stock Exchange, disclosed its investment in Hefu back in 2015. That announcement revealed Hefu’s revenue rose from 1.11 billion yuan in 2020 to 1.73 billion yuan in 2021, only to fall to 1.46 billion yuan in 2022 as China forced many restaurants to close in its last-ditch effort to stop Covid. Its losses were steadier over that period, growing from 206 million yuan in 2020 to 299 million yuan in 2022, totaling 716 million yuan for the three-year period.

According to corporate information website Tianyancha, Hefu raised a combined 1.65 billion yuan in six funding rounds between 2016 and 2022, achieving a valuation of about 7 billion yuan. Back in July 2021, media reports said the chain raised nearly 800 million yuan in its series-E financing, which was reportedly the best ever for any Chinese noodle chain.

The company’s continued losses may worry investors, especially since such losses are likely to continue with its rapid expansion. That may have prompted the company to rethink its pricing strategy to broaden its appeal and improve its margins.

Going down market 

Last year the chain adopted a new differentiated pricing scheme that effectively brought down its overall prices. All its noodles are now priced within a range of 25 yuan to 108 yuan, including quite a few selections under 30 yuan, which dropped its overall pricing by 30%. A case in point is the company’s popular braised beef noodles priced at just 29 yuan, while member prices for many selections are now also below 30 yuan.

The repricing reflects market trends as consumers become more cautious with their spending. In 2022, more than 90% of consumers spent less than 40 yuan per person when eating Western-style fast food, according to Hongcan Big Data, a catering data application. As many as 63.5% spent less than 20 yuan, up 0.4 percentage points over 2021, while other common food categories have also seen consumers becoming more cautious.

Following last year’s price adjustments, Hefu’s overall sales increased by more than 50% last year. At the same time, the company has been implementing a series of structural cost reductions to pave the way for further price reductions and better sales going forward. For example, all its stores are now digitally managed for everything down to monitoring water temperatures for cooking noodles, helping to drive down Hefu’s back-end operating costs by 30% to 40%. Those savings, combined with falling rents, have helped the company’s margins improve.

Hefu has yet to publish any IPO documents, so its latest finances still aren’t publicly available. It did provide some hints about its future direction with the announcement that its future strategies would include “seeking partners, expanding overseas, reaching deeper into lower-tier cities and further developing its network.” It said it aimed to have 2,000 Hefu-branded stores and another 1,500 for its other main brand, Alanjia, without giving a timeframe. 

At the same time, the company said it intends to use Hong Kong as a springboard for a global expansion to Japan, Singapore and other markets. Its serious moves to rapidly expand and broaden its appeal underscore Hefu’s ambition to build itself into a sprawling but efficient Chinese leader in the noodle restaurant business, both at home and abroad, in its search for the magic recipe to attract investors to its listing. 

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