Sat, July 13

Lanzhou Beef Noodles in China: A Culinary Saga of Tradition, Transformation, and Consumer Shifts

Over three years, a loss of seven hundred million yuan, with some cities experiencing a closure rate of up to 50%. Internet-famous beef noodle shops opening in malls have started to close down en masse. If one were to ask what the hottest category in Chinese cuisine has been over the past two years, Lanzhou beef noodles would undoubtedly be the answer. In 2021 alone, the noodle segment completed 13 financing deals, amounting to more than 1.44 billion yuan. With the backing of capital, beef noodle restaurants began to transform, adopting a more upscale approach. What used to be small, family-run shops tucked away in neighbourhood alleys have now become chain stores in upscale shopping malls, leading to the emergence of leading brands such as Chen Xianggui, Hefu Noodles, and Wuye Mixed Noodles. Naturally, this transformation also included a significant price hike, with a basic bowl of beef noodles now starting at over 26 yuan. However, just two short years later, news of closures and losses among these new upstarts in the beef noodle arena has emerged. Maji Yong’s national closure rate has reached 14%, Chen Xianggui is not far behind, and Zhang Lala has hit a staggering 43% closure rate, meaning for every ten stores opened, four will shut down. Hefu Noodles, despite several rounds of financing, accumulated losses of over 700 million yuan from 2020 to 2022, leaving investors bewildered. How did these internet-famous beef noodles rise to popularity?

Chen Xianggui Beef Noodle

Chen Xianggui Beef Noodle

The massive financing of internet-famous beef noodles took place in 2021, but the category had been popular for many years prior. China has 400,000 noodle restaurants offline, half of which are Lanzhou lamian. The ability to establish ten thousand stores nationwide is rare, and Lanzhou lamian is one such success story. There’s also a bit of a factional dispute; Lanzhou itself doesn’t have “lamian” but Lanzhou beef noodles, which have spread nationwide. In reality, the lamian known across the country is started by people from Hualong, Qinghai. The debate over authenticity and who holds the title of the original has been ongoing for many years without resolution. So why did the capital sector set its sights on Lanzhou beef noodles? The answer lies in its profit-making potential, primarily due to three factors: its broad appeal and large market size, with no leading brand among the nation’s 400,000 noodle shops. Becoming a leading brand in this space could be immensely profitable, much like a new restaurant brand aiming to be the Starbucks of China; Lanzhou beef noodles could aspire to be China’s McDonald’s.

Hefu Noodles

The second profit-making potential comes from the fast serving time and high standardization of Lanzhou beef noodles, making it an excellent candidate for fast-food chain operations. The broth can be prepared in a central kitchen, frozen into blocks or soup cubes, and shipped to each store, while radish slices, beef slices, and chilli oil can all be pre-made. Even the dough for the noodles can be prepared in advance. Thus, serving a bowl of noodles in-store requires only four steps: pulling the noodles, cooking the noodles, adding broth, and topping, with the entire process taking less than two minutes.

The third appeal to capital investors is the high profit margin. With genuine ingredients, the gross margin of Lanzhou beef noodles can reach about 80%, compared to the average gross margin of 52.9% for fast food and snacks in China, as reported in the 2020 China Catering Annual Report. Furthermore, adopting a chain model reduces costs as the number of stores increases. For instance, once Hefu Noodles surpassed 30 stores, the cost of ingredients dropped from 35% to about 25%. After conducting field research, investors recognized the lucrative potential of this business, leading to frequent investments since 2021 and heralding a spring for the noodle segment. Chen Xianggui, established in July 2020, had over 200 direct stores nationwide by the end of 2021. Zhang Lala, born in the same year as Chen Xianggui, had signed 100 franchise stores nationwide by the end of 2021. Hefu Noodles raised 800 million yuan in one year, reaching a valuation of 7 billion yuan.

But even the most beautiful stories encounter hitches. The boom in opening stores in 2022 led to a wave of closures in 2023. Hefu Catering suffered a loss of over seven hundred million yuan in three years. Chen Xianggui, aspiring to open 350 stores in 2022, has only managed to maintain around 200 stores. In certain cities like Zhengzhou, the closure rate has even reached 50%, and the number of stores for other chains such as Zhang Lala and Xima Xiang has decreased rather than increased. So, why have these new, heavily invested beef noodle ventures failed to thrive? The most frustrating reason is their lack of profitability, with an exceedingly low return on investment. Let’s first examine the cost of opening a store. Do you know how much it costs to open a modern noodle restaurant? The answer is at least 500,000 yuan. For example, franchising a Zhang Lala requires an initial investment of about 575,000 yuan, including an 88,000 yuan franchise fee, 250,000 yuan for decoration, 60,000 to 80,000 yuan for kitchen equipment, and 60,000 yuan for fire safety and ventilation promotion. The net profit margin of such stores is 17%, meaning if a store makes 100,000 yuan a month, the net profit would be 51,000 yuan, with a payback period of about one year.

But is the money really that easy to make? The aforementioned costs do not include rent, utilities, labour, etc. Achieving a monthly sales volume of 300,000 yuan requires choosing locations in core business districts or near office buildings in new first-tier cities, where rents are not cheap. According to data from the China Index Academy, in the first half of 2023, the average rent for 100 typical shopping centres in key cities nationwide was 27.02 yuan per square meter per day. For a 100 square-meter Lanzhou beef noodle restaurant, the monthly rent alone would be 81,000 yuan, essentially working for the landlord. Rent constitutes 20% to 30% of the cost ratio, with labour costs around 20%. Adding food and marketing costs, the difficulty of making a profit initially is quite high.

Zhang Lala Beef Noodle

Zhang Lala Beef Noodle

Franchising with Zhang Lala is not even the most expensive option. Chen Xianggui advertises globally for partners, essentially seeking franchisees. The investment budget ranges from a minimum of 500,000 to 800,000 yuan to over 1.5 million yuan at the highest level. One might argue, “If I had 1.5 million yuan, why would I sell noodles with you?” High initial costs are one thing, but many would dive in if the returns were high, hoping for profitable days ahead. However, the issue over the past few years has been that the noodles just aren’t selling. Why? Because consumers find them too expensive. Looking at the average price, these upscale noodle shops charge between 35 to 50 yuan. Small bowls from Maji Yong and Chen Xianggui cost 35-40 yuan, while Zhang Lala and Hefu Noodles are priced between 40 to 50 yuan. In contrast, a bowl of noodles from a street-side Lanzhou lamian shop costs just 15 yuan, with little difference in taste and the same scant amount of beef. Yet, prices double when these shops move into malls. What’s the appeal then?

For the working class, noodles are just fast food, and prices of thirty to fifty yuan already exceed their budget. iMedia Consulting’s survey shows that nearly half of the Chinese people budget below 20 yuan for a meal of Chinese fast food, with eighty percent finding prices above 30 yuan acceptable. What can 30 yuan buy? In the northeast, it’s enough for three boxed meals; in Shaxian, five servings of mixed noodles. Compared to this, a bowl of beef noodles lacks appeal. Moreover, noodle-based products face a major disadvantage in delivery, as noodles tend to clump together, relying mainly on dine-in service. Franchise owners share that their customers mainly consist of office workers from nearby buildings, with delivery accounting for only about 10% of sales and frequent complaints about noodles clumping. Netizens have shared their experiences of ordering beef noodles from certain brands, only to find the noodles stuck together, severely affecting the taste.

With high costs of opening stores but lackluster sales leading to franchisees not making money, naturally, they’d stop engaging, halting positive expansion abruptly. In fact, if we step back from the trend of new-style noodle shops to examine the overall consumption environment, we’ll find that the narrative of upscale noodles doesn’t hold up, which makes sense. The world previously talked about consumption upgrading, but now, it’s about downgrading. With many industries facing pay cuts, salary caps, and layoffs, Starbucks is filled with people who can’t find work, and there’s an oversupply of people delivering food or driving for ride-hailing services. As everyone tightens their belts, the pursuit of value for money becomes more pronounced. Thus, products that were initially mass-market and aim for a higher-end positioning or target middle-class consumers with a light luxury concept are more likely to fail. For example, Japanese ramen is famous, but it barely sells in China. Do you remember Hanamaru Udon under Yoshinoya? It exited the Chinese market in 2022. A bowl of their thick chicken and pork bone ginger ramen was priced at 52 yuan, making the 30 yuan bowl of Chinese-style noodles less appealing in comparison.

Looking at other categories, Luckin Coffee, focusing on affordable coffee, has been expanding aggressively in fourth- and fifth-tier cities, becoming more formidable. When the market seemed saturated, another competitor, Cotti Coffee, emerged, offering coffee for just 9.9 yuan a cup and opening over 6000 stores in a year. As for new-style tea drinks, HeyTea’s products priced over 30 yuan have vanished, and Nayuki Tea has introduced a drink series priced between 9 and 19 yuan. In the e-commerce sector, Pinduoduo, once looked down upon within the industry, has become the dark horse, with revenue increasing by 94% in the third quarter of the year and surpassing Alibaba in market value. According to Red Spear data, from last October to this April, the number of restaurant stores at different price points has seen significant changes; the proportion of high-end restaurants averaging over 300 yuan per person is decreasing, while the number of dining establishments in the 100300 yuan and 50100 yuan ranges is increasing. In the long run, value for money remains the primary consideration for consumers. The new Chinese-style noodle shops have considered transforming, like Chen Xianggui launching a 9.9 yuan per bowl promotion, but it didn’t last long and failed to make a splash after the initial hype. The idea was to attract customers with the 9.9 yuan offer, hoping to build brand loyalty and then return to the original price of 29 yuan, but consumers thought differently: they’d eat if there was a promotion and abstain if there wasn’t. In such a consumer environment, these superficial marketing strategies don’t work. Lowering prices and adding more meat to the bowl would be much more effective; the focus should always be on value.