Little Sheep Group (the Chinese name and brand reads 'Little Fat Sheep'), the hotpot restaurant chain that listed in Hong Kong this year, has reported record gains in revenues and profits for the six months ended June 30, 2008. Revenues were up 48.2 per cent at 528.6 million yuan (HK$603.3 million), while profit attributable to shareholders increased by 81.9 per cent to 42.2 million yuan. Basic earnings per share increased from 2.72 fen to 4.84 fen, indicating year-on-year growth of 77.9 per cent. 'We had a very good start in 2008,' said Lu Wenbing, co-founder, executive director and chief executive of Little Sheep. 'Our [initial public offering] IPO in Hong Kong was a success and it was an important milestone for us. Our first set of interim results have demonstrated remarkable growth and strong business momentum.' The company's core earners are its 103 owned restaurants, which account for more than 80 per cent of revenues. However, according to Yuka Yeung Yiu-keung, chief operating officer of Little Sheep, the success is predicated on an approach that builds on natural synergies in their business model. 'We have a holistic approach,' said Mr Yeung. 'We own our own processing plants because we want to have total control over the source of the materials we use. We set it up for our own stores, but the excess capacity we ship to supermarkets, hypermarkets and other sales outlets. This has two ramifications. It leverages the asset we have and absorbs some of the cost, and we can actually promote the brand in the supermarkets. It gives us extra channels for extending brand penetration.' Little Sheep's rise in profit derived mainly from the addition of 23 new stores and a significant increase in same-store sales. Concerted brand marketing initiatives, including joint nationwide and regional promotion campaigns with Coca-Cola and Bank of China respectively, drove a surge in customer traffic and led to 12 per cent same-store sales growth. Mr Yeung said the same-store increases can be traced back to the introduction of new products, particularly at the high end, with higher margins, and to renovating stores and improving service standards. 'We're making the Little Sheep experience special. We want our customers not only to come to our stores more often, but to spend a few more dollars in our stores when they get there. They look at the bill, they look at the restaurant and they think: 'this is a great deal for us'.' Chief financial officer Wang Daizong is equally bullish about the company's ability to position itself at the high end of the chain restaurant market. 'Per capita spend is up 6.5 per cent since the end of last year,' he said. 'Our average spend per customer is around 52 to 53 yuan, and it's our aim to raise that by degrees to 80 yuan. That's going to take years to achieve, but we're headed in the right direction.' Mr Wang acknowledged there were significant challenges in dealing with escalating inflation and raw material prices. 'We have already imposed effective cost control measures to address inflation, and have our own logistics centre precisely for that reason,' he said. 'We've also stepped up our efforts to centralise more supply purchases and negotiate better pricing with our vendors. 'As a result, we've been able to keep the increase in cost of inventories in line with revenue growth. As for the macroeconomy, we don't believe the Chinese catering industry will be affected by a downturn. According to the National Bureau of Statistics of China, hotel and catering retail sales increased by 24 per cent in the first half of the year, and we don't see that slowing down.' By far the biggest challenge for Little Sheep, however, as for so many growing companies in China, is finding the talent to fuel continued expansion. Mr Wang explained: 'Little Sheep does not lack money and we have a huge potential market. The biggest challenge will not be insufficient funds, but insufficient talent. So for that reason we have set up our own training school where employees with college or university education go for intensive induction training with us. We also visit colleges and universities in China for on-site campus recruitment. We have programmes for recruiting more talent, strengthening staff training programme and continuously upgrading our standards.' Mr Yeung is convinced that the simplicity of hotpot is fundamental to Little Sheep's ability to continue to expand without compromising quality and brand integrity: 'Firstly, we've revised our franchising structure radically. Revenues are down from franchising because we're taking a long-term view. Our goal is to motivate the franchisees with more support and a revenue-sharing principle that helps them make more money by keeping quality high. We're also concentrating on increasing our own-owned restaurants, including flagship stores. 'As for the product itself, we have a great brand, we're standardising each of our procedures, using videos, manuals, everything we can. If you go back of house in any of our restaurants you'll find it's not the most complicated of set-ups. It's a very standardised type of food. You don't need woks to make hotpot. You don't need a huge amount of culinary skill. All you need is a chopper, a slicer, you dice and cut, and that's it.' Mr Wang compared the experience to a classic western fast-food: 'It is like eating pizza,' he said. 'The hotpot draws everyone to the table. No rules, just drink beer and enjoy the food. Little Sheep is a place to have fun, good for family and friends gathering.' Surely, though, if hotpot is really so simple to make, Little Sheep must be highly vulnerable to competition? Mr Yeung laughed off the suggestion. 'It's the taste,' he said. 'That's the reason people come to our restaurants and keep coming back. The taste of our special condiments, the taste of our soup and the taste of our meat from Inner Mongolia. And before you ask, yes, I eat it every week.'