Page 159 of Haidilao’s Hong Kong listing prospectus, published in September 2018, sets out how the hot pot chain pays the people who run its restaurants. There are two options, and each manager gets whichever comes out higher. Headquarters, it notes, may adjust the percentages from time to time.
Option A: 2.8% of the profits of the restaurant you manage.
Option B: 0.4% of the profits of the restaurant you manage, plus 2.8% to 3.1% of the profits of the restaurants run by your apprentices, depending on where they are, plus 1.5% of the profits of the restaurants run by their apprentices.
Put in one apprentice whose restaurant earns as much as yours, and Option B already beats Option A. In the prospectus’s own words, managers “may receive a higher percentage of profits from their mentees’ restaurants than their own.” The Chinese edition uses the old words for a master and pupils: shifu, tudi and tusun, master, apprentice and grand-apprentice.
At the time, Haidilao ran 363 restaurants, 332 of them in mainland China. It had 363 restaurant managers and about 400 candidates waiting. Almost every one of those managers had started as a waiter, a busser or a janitor. Each new employee is assigned a mentor on joining, gets a week-long orientation, and can reach restaurant manager in about four years. Before training as a floor manager, an apprentice has to have mastered at least ten jobs in the restaurant.
In mid-2016 Haidilao reorganized to make its growth, in its own words, “bottom-up driven,” powered by this pipeline of people. Its headquarters, the prospectus says, “do not have a fixed target for new restaurant openings.” It estimates how many it can open from the size of its pool of manager candidates. Of the 98 restaurants it opened in 2017, 58 were proposed by existing managers. Managers are required to open a new restaurant every two years, and when a proposal is approved, the manager’s own apprentice is typically first in line to run it.
Neighboring restaurants form groups of five to 18, usually along mentor lines, with a mentor typically serving as group leader. There were 41 groups covering more than 350 restaurants. Out of 53,504 employees, 925 worked at headquarters level.
Decisions are pushed down the same way. Restaurant managers handle hiring, firing, promotion, discounts and personal service. Servers follow no fixed script, and the prospectus says they may use “reasonable discretion to give discounts, free dishes or even complimentary meals.”
Headquarters keeps food safety, supply chain, site selection and expansion strategy. Every quarter it rates each restaurant A, B or C. The prospectus names guest satisfaction and employee effort as the only key performance indicators, “instead of operating or financial metrics,” and ratings from mystery diners are among the most important inputs. A manager rated C cannot open new restaurants, and any restaurant with a serious food safety incident gets a C automatically.
The bet on an apprentice runs both ways. If a manager’s nominee fails the training course, the manager and the nominee pay for it. And if a restaurant manager fails the company’s assessments and is removed, the prospectus says, “his/her mentor and the mentor’s mentor will be subject to financial penalties.”