Daily Opens 7 New Stores! Kuai Circle's IPO Hearing Passes with "Franchise Model" Profitability Unclear

As people's living standards have risen, their dietary habits are no longer limited to traditional rice and home cooking. Instead, they have started researching various cuisines. In recent years, hot pot has become a trend in the catering market, becoming one of the most popular foods. Especially in cold winter, eating hot pot not only provides a culinary experience but also reflects a lifestyle attitude.

The Hong Kong Stock Exchange showed that Kuai Circle Food (Shanghai) Co., Ltd. had passed the hearing on October 6, with this company, which operates 6 flagship stores and has set up 9,838 franchise stores, ready to list on the main board of the Hong Kong Stock Exchange, with Hua'an International and CITIC Securities as co-sponsors.

However, Kuai Circle's main revenue comes from selling its own branded products to franchisees. This means that Kuai Circle's performance is heavily dependent on the number of franchise stores it opens.

A company can only go public if it has the ability to sustain operations and quality control remains a question mark.

Six Years of Opening Nearly 10,000 Franchise Stores

Kuai Circle was founded in 2015 by Yang Mingchao, Meng Xianjin, and Li Xinhuai in Zhengzhou. Initially, it focused on hot pot food supplies, covering a wide range of products, including convenience self-heating, pre-cooked meals, fresh vegetables, cooked dishes, beverages, snacks, flavorings, hot pot utensils, barbecues, and local specialty foods.

In 2017, Kuai Circle opened its first physical store in Zhengzhou's Fumu Lane, with the slogan "Kuai Circle Food, Good to Eat, Not Expensive!" Since then, the number of stores has continued to grow rapidly.

In the past few years, due to the pandemic, many restaurants have closed, and people have rarely left their homes for dining. This has provided an opportunity for Kuai Circle's development.

From 2020 to 2022, Kuai Circle opened 2,883, 2,762, and 2,631 new franchise stores, respectively. This means that on average, it adds approximately 2,758.7 franchise stores per year, or about 7.6 stores per day.

Kuai Circle's prospectus shows that as of April 30, 2023, the company had set up a network of 9,844 "Kuai Circle Food" brand stores in China, including 9,838 franchise stores and 6 self-operated stores, covering 29 provinces, autonomous regions, and municipalities.

According to this development speed, Kuai Circle's chain store will quickly break through the threshold of 10,000.

At the same time, Kuai Circle has also developed online sales channels, including the Kuai Circle APP, WeChat mini-program, and popular social e-commerce platforms (such as Douyin). Additionally, Kuai Circle has partnered with Meituan and Ele.me to provide consumers with delivery services.

According to data from Frost & Sullivan, the market size of home dining food products in China was RMB 367.3 billion in 2022, accounting for 6.5% of China's home dining market. Kuai Circle positions itself as a leading one-stop-shop brand for home dining food products in China, focusing on family hot pot and barbecue products.

In terms of profitability, Kuai Circle's main revenue does not come from the franchise fees of nearly 10,000 stores, but rather from selling its own branded products to these franchisees. The six self-operated stores serve as a model for innovation in store operations and management, marketing activities, digital tools, and new decorative styles.

From 2020 to 2022, Kuai Circle achieved revenue of RMB 29.65 billion, RMB 39.58 billion, and RMB 71.74 billion, respectively. From 2020 to 2022, Kuai Circle's gross profit was RMB 3.29 billion, RMB 3.55 billion, and RMB 12.49 billion, respectively. The overall gross margin rate of the company showed an upward trend from 11.1% to 9.0%, 17.4%, and 21.1%.

Regarding this, Kuai Circle explained in its prospectus that "During the pandemic period, due to restaurant closures, infection risks, and quarantine measures, people began to eat more frequently at home, leading to a surge in the home dining market from 2020 to 2022. This may have contributed to our revenue growth."

How Long Can Franchise Model Profit Last?

Opening franchise stores is one effective way for brands to rapidly enter new markets. By establishing partnerships with franchisees, brands can quickly set up stores in new geographic locations and expand their market coverage. This enables brands to better meet the needs of different regional consumers and gain new customer groups.

Historically, many companies have gone public or are planning to go public through franchise models. Following Nai Xue's tea, Honey Snow Ice Cream, and other successful cases, Tea Bao has also begun to rush towards its IPO, and Tihu Auto, which recently went public three times on the Hong Kong Stock Exchange, is essentially a franchise model.

From a business model perspective, Kuai Circle primarily relies on its franchise model. It signs franchising agreements with franchisees, sells them branded products, and provides store operations management strategies, but does not collect franchise fees.

Kuai Circle's prospectus also openly admitted that "Our revenue mainly comes from selling branded products to franchisees. Franchisees operate stores under our brand and sell products to consumers. Therefore, our revenue is driven by the number of stores we open, and the success or quality of these stores ultimately depends on the franchisee themselves. If a store with poor performance exists in large numbers, it will have a significant negative impact on our income and profitability." Meanwhile, Kuai Circle's franchise model lacks a strong moat, making it difficult to fend off future competitors.

As Kuai Circle's IPO process accelerates, how to strengthen franchisee management while ensuring continuous operating capabilities has become a particularly knotty issue.