The Fall of South Beauty
What lessons can we learn from the fall of South Beauty Group, the once prestigious and only food service partner of Chinese cuisine for the 2008 Beijing Olympics?
By Iris Zhang Ru, PhD candidate, School of Accountancy, CUHK Business School
On March 6, 2015, CVC Capital secured a Hong Kong court order freezing the personal assets of Zhang Lan, founder of the South Beauty Group. Up to this point, the Chinese restaurateur and billionaire had lost almost everything, including her South Beauty company, PRC nationality, and her membership in Beijing Chaoyang District Committee of the Chinese People’s Political Consultative Conference (CPPCC).
Let’s turn the clock back to 2007. The South Beauty Group, which was founded in 2000, had managed to maintain profitability for eight years while its sales reached about 1 billion RMB. More impressively, the company had just won the prestigious contract to become the only food service partner of Chinese cuisine for the 2008 Beijing Olympics. Since then, Zhang Lan had set an ambitious target for her business empire and decided that South Beauty would become the “Louis Vuitton” in the restaurant business, and expand its scale to a maximum of 500 restaurants in three years. In order to realize her “Louis Vuitton” dream, Zhang Lan decided to leverage on the power of capital by introducing private equity investors and seeking a public listing.
“A founder’s own knowledge and experience may not be enough for the survival and evolution of his or her business. As the business expands, it is wise for an entrepreneur to play a strategic role, rather than micro managing the company.” – Iris Zhang
In 2008, Zhang Lan sold 10.526% South Beauty stake to Chinese private equity firm CDH Investments in exchange for 200 million RMB. Under the agreement, both parties agreed that if South Beauty failed to achieve a public listing within five years, Zhang Lan would have to require all the stake held by CDH for around twice its original valuation. This redemption clause is a standardized Valuation Adjustment Mechanism (VAM) setting in a contract between mainland entrepreneurs and private equity investors; VAM is also known in the mainland’s investment community as a “gambling term” (对赌协议). Unfortunately, domestic A stock market shut South Beauty out in 2012, so she had to seek a Hong Kong listing. Therefore, Zhang Lan relinquished her PRC nationality and CPPCC membership to support the overseas restructure of South Beauty. However, she finally gave up the Hong Kong listing because of its low valuation. In order to get enough money to buy CDH out, she had to sale 83 percent of her South Beauty stake to CVC capital in April 2014, then got involved in the dispute with CVC, and ended up with the startling court order.
Zhang Lan criticized CDH publicly more than once, saying that her biggest mistake was to accept funds from CDH since they had invested very little funds and yet held a large parcel of shares. Perhaps in her mind, CDH is the gangster who robbed her everything. However, when reviewing the short history of South Beauty, one cannot simply blame Zhang Lan’s tragedy to the introduction of CDH. The fall of South Beauty has in fact rooted in its wrong positioning.
Wrong Positioning in Catering Industry
What is the positioning of the South Beauty group? According to its official website, it is a high-end Sichuan cuisine restaurant chain. However, by expanding to 500 restaurants, it also wanted to be a fast food chain. Could it be both a high-end cuisine restaurant chain for elite customers and a catering chain targeted at the general public at the same time?
Let’s take a look at how these two types of restaurants operate.
The world’s top 50 restaurants may differ in their food and taste but they share one thing in common: each of them exists on its own, without any branches; even supply is limited every day. These high-end restaurants rely on their genius chef to provide the most unique cuisine in their glamorous ambience and setting. They never expand, let alone seek a public listing.
As for catering chains targeted at the public, McDonald’s and Yum! Brands are the two most successful fast food chains. Standardization and superior management are two fundamental elements of any successful catering chains. Standardizing food means you don’t have to rely on a chef. Standardization in Chinese cuisines requires a systematic backup system, including a powerful central kitchen, an efficient logistic and supply chain, and even raw material bases. Restaurant chains often adopt a franchise strategy to speed up the expansion. A strong control over the franchise system requires a superior management team. The capital market and investors want to see rapid market growth in a company. And a company can only achieve that through standardization and effective management. A restaurant chain can leverage on the power of capital, only when it invests enough capital to improve its ability in standardization and management capability.
As the saying goes, you can’t have it all. South Beauty can’t be a high-end restaurant and a successful restaurant chain.
Wrong Positioning in Founder’s Role
Like many Chinese private entrepreneurs, Zhang Lan treats her enterprise as her baby. From the first South Beauty restaurant to a restaurant chain with over 50 branches, she attempted to take control of everything in every stage. Not only is she the chairwoman, but also the babysitter of the South Beauty Group. However, as the business environment changed, South Beauty was faced with various challenges.
Strategically, as a founder, she needs to consider a number of questions carefully.
What’s the positioning of the South Beauty group? Can South Beauty achieve an aggressive expansion in a family firm structure? How to attract and retain professional? Should South Beauty introduce private equity investors and go listing? Does South Beauty build a qualified management team to take care of potential operational and financial difficulties? Specifically, how to innovate and standardize the Chinese cuisine? How to develop and monitor a franchising system? How to design its ownership structure to maintain absolute control in future financing?
The transfer of special knowledge is difficult. Specialization and decentralization is inevitable. A founder’s own knowledge and experience may not be enough for the survival and evolution of his or her business. As the business expands, it is wise for an entrepreneur to play a strategic role, rather than micro managing the company. As Jim Collins and Jerry Porras put in their book “Build to Last: Successful habits of visionary companies”, a visionary entrepreneur should play the role as “clock building” – building a company that can prosper far beyond the presence of any single leader, rather than “time telling” – having a great idea and being a charismatic visionary leader. This is the lesson Zhang Lan failed to learn in her business.
Beauty No More: Assets of Chinese Restaurateur Frozen Over Dispute With CVC. Forbes Asia. March 25, 2015.
CVC freezes Chinese restaurateur’s assets. Financial Times. March 19, 2015.