Creating a sustainable advantage in any industry in China is difficult, especially when competitors promptly copy anything that works. Hai Di Lao, a hot pot chain, uses extraordinary service to draw large crowds to its many locations and offers lessons for entrepreneurs in China on how to create a sustainable competitive advantage.
Hai Di Lao was founded in 1994 and now has over 50 locations throughout China. Due to their success in China, they are planning to expand into the US and Singapore. They are renowned for their high levels of service and high-quality food, and for customers waiting hours for a table on most nights.
Hot pot around every corner
Hot pot restaurants are as abundant in China as Starbucks are in the US — or as Starbucks are in most other countries for that matter. If you’ve never eaten hot pot (you may know the Japanese version: Shabu Shabu), I can offer a simple explanation: they bring a pot to your table, put it on a burner, and then you order vegetables, thinly-sliced meats, fish, or anything else to cook in the boiling broth. The most common style includes a pot with chicken broth on one side, and chili oil on the other. It’s delicious simplicity, and comes in many forms throughout China.
The simplicity of hot pot also usually comes with mediocre service, which, to be fair, I expect at restaurants throughout China, whatever the cuisine. Since I’m from the US, where we have an overly generous tipping culture, I have high expectations that are rarely met in China. Those expectations were exceeded at Hai Di Lao — and I didn’t even have to leave a tip.
Competing in a unique way
I was excited to go to Hai Di Lao for the first time for a UCLA Anderson alumni event, where we were discussing entrepreneurship in China. I had heard about their remarkable service, but wasn’t sure how much of what I heard was true. When I arrived I saw people getting free manicures while waiting for their tables, and I’ve also read about free shoeshines and free internet access being offered for hungry customers often facing a long wait.
When the waitress brought us to the small private room we had reserved, we asked her what happens when someone complains about their service — she said they get fired on the spot. That’s when I knew they aren’t merely striving for average levels of service. I could even imagine the offending server being fired in front of the complaining customer. That’s a serious commitment to service.
We ordered hand-pulled noodles with the meal, and when it was time, a noodle puller came into our room and introduced himself. After he prepared the noodles, and his constitution, he started “pulling” the noodles in a compelling performance. If you’re not sure what pulling is in this context, it’s essentially the noodle equivalent of tossing pizza dough at a pizzeria that involves smacking, twisting, and twirling the noodles. For the climax, he pulled the noodles in a circle over his head, and then over mine since I was sitting nearest him. He even skimmed the top of my head, which I would have reacted to in normal circumstances — but in this case I was afraid he would get fired over it, so I just kept smiling like nothing had happened.
Lessons for entrepreneurs
If the founder of Hai Di Lao had come to you for advice when launching the first restaurant in 1994, you would have been forgiven for laughing after hearing the plan: “service as a differentiator in China, really?” you may have snickered. I probably would have asked if Chinese customers would ever pay extra for these high-levels of service, or, if the pricing would be low (Hai Di Lao isn’t particularly expensive, though it’s not the cheapest hot pot you can find), I would have been concerned about the margins in an already low-margin business. I would have been wrong, and therefore find several lessons in Hai Di Lao’s story:
1. It’s possible to create a sustainable competitive advantage, even in a hyper-competitive industry in China.
Even though it’s difficult to differentiate yourself in China, especially in a way that Chinese are willing to pay for, Hai Di Lao has shown it is possible. They took a feature within the restaurant business that was being ignored by their competitors and turned it into a competitive advantage. What facet of your business is your competition ignoring?
2. If it’s uncommon, it might be hard to replicate.
Because it would take a lot of time and effort to replicate, it’s also sustainable — this is important anywhere, but is especially important in China, where competitors will instantly copy all aspects of your business. The constant training, and willingness to follow-through with firing employees who are complained about, has created a culture of quality service that is hard for other restaurants to copy. Is there something you can do in the long-term to differentiate yourself that might take a while to implement?
3. Consistency is beneficial, both over time and at multiple locations, especially in a highly decentralized market.
Although I haven’t visited multiple Hai Di Lao locations to confirm that the service levels are consistent, I think it’s safe to assume that they are consistently high across locations and over time. That consistency is important for a decentralized business, and if yours is also a decentralized one you’ll have to make sure you keep training your employees, and align incentives, to defend your unique advantage. The consistency makes your position more defensible, so keep at it.
4. Thinking about your value proposition in contrast to others’ might lead to a breakthrough.
Hai Di Lao realized that people don’t only go out to dinner for the food, they often go for the experience as well. They decided to bring the experience to the forefront, while also providing high-quality food. That experience sticks with people, leading to customers who tell friends about the restaurant, and come back for more themselves. And while this may seem obvious now, I’m sure it was a contentious decision when it was made.
What do your customers want to get out of shopping with you? Are they just looking for the product or service you provide, or can you offer something that seems ancillary but may end up being a key differentiator?
Have you ever been to Hai Di Lao? Do you draw different lessons from their success in China? Please share your thoughts in the “What do you think” section below!
I also recommend this article on NPR about Hai Di Lao extending this idea of extraordinary service to home delivery. They bring everything, including the pot and hot plate to your home, and even pick up the trash after you are done.