Famous in China (7) – A Cautionary Tale

To try and create greater familiarity for those living elsewhere, we’ll periodically profile some China brands and businesses that we believe will be household names across the world soon – though this week’s example is a cautionary tale of a Chinese brand that was already in many markets around the world but may need to consolidate and regroup in China before it continues its expansion.

Lining up for a seat at the table

Hui Lau Shan (that’s the Cantonese rendering of 许留山 – Xu Liu Shan) was a pioneering dessert chain that started in Hong Kong in 1960 and eventually expanded into several markets around the world. Hong Kong desserts is a category that is very popular and huge across China and Southeast Asia and Hui Lau Shan is one of the reasons why. They invented many desserts that are still popular (and copied by many new dessert shops) and eventually had 260 stores across China, HK, US, Korea, Singapore and the UK of which about half were directly operated by the holding company in HK while the rest were franchises. Nearly 50 of those stores were in HK.

In 2007 the original family (3rd generation) sold off the HK business to a Malaysian company Navis Capital – this company eventually had a dispute over the ownership of the company name and so the franchisee in China, Hui Lau Shan was forced to change its name to Tang Lau Shan. The company was then acquired by Royal Dynasty International Holdings in 2015 but over the course of 2020, faced winding up actions from several of the property owners from whom it leased premises. It seems to have weathered that storm with some negotiation and settlements for now but still faces a somewhat bleak future.

Why is this a cautionary tale? Well, there are a few different aspects to it that fit the description.

First, the 3rd generation owners in selling to the Malaysian investment company seem to have made a classic mistake in not reading the fine print. That company wanted to enter China, discovered they could actually prevent the original franchisee from using the brand name there and forced them to change their name while the investor was able to launch new stores under the original name. While the family sold the business and moved on, their franchisee who had a 8 year contract suffered and in the long run the company suffered through losing that franchise revenue and the expansion momentum in China at a moment when the category was exploding in China (competitive HK chains as well as home-grown mainland China competitors have both thrived in the last few years while HLS was mired in this dispute).

Second, the original owners had a reputation for innovation, with several new desserts that have now become popular. However, as the company has evolved, it has stopped that product innovation and been copied by new startup dessert chains, or in some cases out-innovated by them with new versions of the original desserts popularized by HLS. Their most standout mango pomelo sago (楊枝甘露) has now been evolved into flavors for bubble tea by brands in that space and become a standard dessert everywhere else.

Third, HLS has been, for too long, a HK focused business. Even until a few years ago, 45 of it’s 260 outlets worldwide were in HK, significantly more than in mainland China which is a much larger opportunity.

Fourth, HLS has about half owned / half franchised outlets – neither of which is bad in and of itself but speaks to a lack of clarity on what kind of business they want to run.

There are no separate financials for HLS since it’s part of a holding company (Royal Dynasty) but their unpaid rental woes in 2020 and reports of a declining business are clear signs that their owned outlets and overdependence on HK as a market are core to their problems.

Unlike some of the other brands that we’ve featured here, Hui Lau Shan probably needs to rebuild a China business and potentially trim down its bleeding HK business in order to be well poised for the future. After which, funded by a large revenue base in the world’s largest market for Chinese desserts, it can continue to expand across the rest of the globe.

While our focus as a consultancy is making new brands famous in China, there are many (already) famous Chinese brands that aren’t well known overseas. We will be bringing them to light in this series over time.

If you’d like your brand to be famous and successful in China reach out to us at enquiries@searchlightchina.com – we work with both local startups as well as international brands that would like to do better in this market.

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