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This case was prepared by Xiaoming Zheng and Ziqian Zhao of Tsinghua University School
of Economics and Management as the basis for class discussion rather than to illustrate either
effective or ineffective of an administrative situation.
Copyright © Tsinghua University School of Economics and Management. No part of this
publication may be duplicated, transmitted or used in any form or by any means without the
permission of Tsinghua University School of Economics and Management.
Haidilao 2018
Xiaoming Zheng, Ziqian Zhao
Version Date: 2018-6-3
Product No.: TU0102
Haidilao 2018: Demystifying Restaurant
Employee Motivation
Haidilao (HDL), one of the leading Sichuan-flavor hot pot restaurant chains in China,
servicing over 100 million customers per year, went public in September 2018. The explosive
news pervaded every business section of the Chinese press. HDL seeking a public listing aroused
considerable attention, as HDL had been compared with the franchise chain Little Sheep, the
so-called “First-ever Chinese hot pot stock,” which had been delisted and privatized by the Yu m
Group in 2014 after six years of being a public company.1 Haidilao’s growth had explosively
accelerated before pursuing the public listing. By the time of its listing, HDL’s market
capitalization was eight times that of the second place in hot pot catering chains, Xiabu Xiabu.2
HDL adopted the direct operations model, featuring passionate waiters and highly personal
service that usually exceeded customer expectations. A book about HDL’s service and personnel
became a bestseller in 2011 and in later years the company gained a reputation through word of
mouth for delivering good service that “went against nature.”3 However, ever since HD started in
1994, the company had been facing a serious growth challenge due to its apparent lack of
sophisticated restaurant managers. HDL’s co-founder, Zhang Yong, consequently experimented
with a new incentive system for restaurant managers and achieved huge success. Thus, the
operations in 2017 delivered great progress, with the number of new outlets and the overall
financials both showing breakthroughs (see Exhibit 1). Zhang was very satisfied with the growth
speed, but he also knew that the company had to strengthen its management to prevent food
1 “From Public Listing to Delisting! Reasons Why Hot Pot Legend Little Sheep Stumbles,” QQ.com, May 30, 2016,
accessed November 7, 2018, http://stock.qq.com/a/20160530/009391.htm.
2 Xiabu Xiabu served Taiwanese mini hot pot in a bar-style environment rather than HDL’s traditional roundtable style
with shared food and condiment pots.
3 Yong Chengjie, “HDL’s Incomparable Service Went Against Nature, Have You Experienced It?” Sohu.com, March
30, 2018, accessed April 28, 2019, https://www.sohu.com/a/226794608_100108393.
This document is authorized for use only in Prof Shivganesh Bhargava's OB & HR-I at Shailesh J. Mehta School of Management (SJMSOM) from Nov 2019 to May 2020.
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Haidilao 2018
safety incidents. Another challenge was how to grow in the overseas markets. HDL had been
trying to tap overseas markets for years, but they failed to show outcomes as successful as
mainland China. Would the incentive system work just as well in these markets if it was
executed?
Endogenous Growth
In many Chinese cuisines, hot pot featured a self-service dining style and customized
multi-flavor condiment base soup. Food preparations were no more complicated than washing,
cutting, and presenting food. Key to success of a hot pot restaurant brand was food quality, base
soup formula, and service (including dip sauce variety, employee attitudes, restaurant
environment, dining entertainment, and other creative services such as video games, shoe
polishing, and manicures while waiting for a table).
HDL had built an advanced central kitchen and supply chain. Its base soup ingredient
production factory, Yihai International, grew fast and went public in Hong Kong. Yihai was
HDL’s sole base soup provider and HDL accounted for half of its revenue. HDL’s growth in 2017
and 2018 boosted Yihai’s stock price and had pushed it to grow tenfold since Yihai’s initial public
offering in 2016.
HDL employees’ enthusiastic and creative service usually exceeded customer expectations.
HDL offered free shoe shining and manicures for waiting customers, which were imitated by
many restaurants all over China. Many scholars had followed HDL’s growth and had written
books about the company. They made various observations: First, empowerment had been the
company’s cultural tradition since its inception (regular waiters had the power to waive a certain
portion of bill for irritated customers). Second, the company offered exceptional salaries and
employee welfare such as housing and children’s day care and school. Many employees felt high
self-esteem because they found themselves in a much better condition than workers in other
restaurants. They tried to pay back Zhang and HDL with more effort and high spirits at work.
Third, HDL equipped its employees, most of whom came from rural areas or small towns, with
knowledge to help them adapt to metropolitan life and gave them opportunities to grow into
restaurant managers. In fact, the CEO of HDL and nearly all senior managers in the operations
function came from within, which demonstrated the company value of “change your future with
two hands” and the company culture of “benevolence.”
For employees to internalize the company’s values and culture, the company practiced
another cultural element: “fairness and equality.” In an HDL restaurant, the restaurant manager
needed to be able to distinguish service excellence from mediocrity. He had to be familiar with all
operational details in order to be able to fairly and convincingly reward or punish subordinates.
Therefore, HDL restaurant managers were seen as core talent and had to be promoted from within.
Among HDL restaurants, fairness and equality were embodied in HDL’s performance rating
system. Every quarter, the headquarters hired a dozen “mystery customers” from a third-party
This document is authorized for use only in Prof Shivganesh Bhargava's OB & HR-I at Shailesh J. Mehta School of Management (SJMSOM) from Nov 2019 to May 2020.
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Haidilao 2018
consulting firm to rate all restaurants and give A, B, or C ratings. Restaurants rated C were
subject to serious interventions. The company sent a note to all restaurants with the names of
C-rated restaurant managers. Managers failing to improve during a probation period would be
relentlessly replaced. The rating was based on three indicators: customer satisfaction, employee
effort, and food safety. HDL never included financial indicators in its rating system for individual
restaurants.
Zhang commented, “When I only had one restaurant, of course I was worried about things
that may go wrong and may cause it to fail. But now that we open over 100 new restaurants a year,
closing several of them does not impact HDL’s bottom line severely. It should be the manager
himself, not me, who worries about his restaurant’s performance.” The idea was simple in
Zhang’s mind—if the company measured restaurant profits, the manager would eventually care
too much about minimizing cost and that would usually cause much more customer complaints.
Since 1994, HDL had expanded from a third-tier city in the Sichuan province to second-tier
cities, then to Beijing, and then nationwide. The company highlighted high-quality food and
exceptional service. Therefore, it chose to follow the direct operations model and to ignore its
competitors that adopted a franchise model to realize fast expansion. In 15 years, HDL only
opened 50 restaurants, four logistics centers, and one condiment production centre. In 2010, HDL
became more active in testing other models and finding other sources of revenue, such as
launching a new hot pot delivery business, spinning off the condiment factory, and seeking
opportunities in the overseas market. To make these happen, HDL started to recruit high-end
talent into its management team and build its functional departments at the corporate level.
In 2010, Zhang decided it was time to enhance management efficiency, because he already
saw the limitations and deficiencies of the existing management system, which could barely run
the 50 restaurants. He saw many problems surfacing and deteriorating with the growing size of
the company and the workforce. Within a pyramid structure, excellent restaurant managers were
promoted to regional and city managers, and the number of qualified restaurant managers (those
who embodied the culture and values of HDL) was clearly insufficient to support faster expansion.
Fostering new ones was a slow process. Another problem was that many excellent restaurant
managers, despite being promoted to higher ranks, were not qualified because the position of a
regional or city manager needed a completely different skill set and required a strategic
perspective.
Zhang knew by instinct that he needed to retain core talent, but simply promoting the best
employees did not seem sustainable, as it pushed up administration costs and drained the
restaurant manager talent pool. He knew well that for HDL to realize faster growth, he needed to
design a new career path for restaurant managers that could induce them to stay satisfied in the
restaurant manager position. In addition, the company needed to train and retain as many new
restaurant managers as possible.
This document is authorized for use only in Prof Shivganesh Bhargava's OB & HR-I at Shailesh J. Mehta School of Management (SJMSOM) from Nov 2019 to May 2020.
Haidilao 2018
Organizational Reform (2011–2017)
In 2010, by pure chance, Zhang was exposed to the amoeba management philosophy and
met Inamori Kazuo, the scholarly Japanese entrepreneur who invented this idea. An amoeba was
a type of single-celled organism that was very good at adapting to different environments, and
thus had lived on earth for billions of years. Kazuo transformed business departments in his
company into self-operating profit centers, and had them coordinate on a transactional basis,
rather than calling for inter-departmental collaborations, in order to flexibly reflect market
changes. Zhang felt inspired by this concept and was convinced that HDL should experiment with
this idea by transforming its structure from a pyramid to an amoeba.
HDL took drastic measures to eliminate regional and city manager levels and had restaurant
managers directly report to the headquarters. The headquarters was positioned to find resources to
support restaurant operations and monitor systematic risks (especially concerning food safety,
supply chains, and restaurant performance); one the other hand, the headquarters delegated a very
large portion of management responsibilities to restaurant managers (such as hiring, severance,
promotions, discounts, customized service, etc.). HDL also shifted towards a bottom-up growth
approach, encouraging restaurant managers to open new restaurants. Meanwhile, a coaching team
was founded to provide general oversight and performance consultation, but not give direct
commands, to all restaurants (see Exhibit 2). Restaurant managers were supposed to voluntarily
form learning groups to help each other grow. The centralization of performance reviews and the
