Summary of Key Issues
Luoxihe, a leading Chinese bakery brand, has faced a series of food safety issues during the critical period of its "Hundred Cities, Ten Thousand Stores" expansion plan: from the reuse of waste oil in its stores to the discovery of metal fragments in its products, to violations in the use of additives and excessive bacterial growth at the manufacturing level, indicating a complete breakdown in the quality control chain. Behind these issues lies the acceleration of its expansion from direct operation to franchising, driven by capital, as well as the pressure to grow in a tough industry environment. These problems not only affect the brand's reputation but could also become significant obstacles on its path to scalability.
Detailed Analysis
1. More Than Just Waste Oil Reuse: A Basket of Food Safety Issues for Luoxihe
The food safety problems at Luoxihe are not isolated incidents but are frequent and widespread across multiple stages:
- Waste Oil Reuse: In February, a store in Xinyi, Xuzhou, ran out of mung bean cakes and resorted to using moldy waste oil to make new batches. The affected products were sold, and the company was fined 10,000 yuan by the headquarters, with additional penalties of over 6,000 yuan and the confiscation of 77 yuan in illegal earnings.
- Contaminants and Spoilage Complaints: There have been over 300 complaints from customers on platforms like Black Cat, with consumers reporting metal fragments in butter rice cakes and the discovery of multiple expiration dates on products (expired goods being repackaged with new labels).
- Repeated Penalties: In 2021, Luoxihe was found to have added banned additives to its green tea buns, and in 2023, the bacterial count in its durian cakes exceeded safety standards. The issue is systemic, affecting the entire quality control process, not just individual stores.
2. Rapid Expansion and the Toll on Quality Control
Luoxihe originally operated with a slow direct operation model (founded in 2013 with only 100 stores by 2019). However, with the entry of capital, its pace accelerated significantly:
- Capital-Driven Expansion: After a Series A financing in 2023, the company began franchising in 2024 and launched its "Hundred Cities, Ten Thousand Stores" initiative. It opened 216 new stores in 2024, more than doubling its number from the previous year, but only added 34 new stores in the first half of 2026, falling far short of its goal of ten thousand stores within ten years.
- Challenges of Franchising: While franchising speeds up expansion, it makes it harder for the headquarters to maintain consistent quality standards. For example, the store that reused waste oil was a franchise, and cost-cutting measures may have led to substandard practices that the headquarters could not effectively monitor.
- Organizational Lag: Despite hiring Zhang Yue, who has experience from McDonald's, to oversee quality control, the company's systems have not kept up with the rapid growth.
3. A Chilly Bakery Industry: Luoxihe's Battle to Survive
The entire bakery industry is facing contraction:
- Peer Challenges: Competitors like Momo Dim Sum Shop have retreated to Changsha with only 29 remaining stores, and Hutouju has gone bankrupt. In the past year, 85,000 bakery businesses have closed, resulting in a net loss of over 80,000 stores.
- Fierce Competition: Membership-based bakeries (such as Sam's) offer high-value products, while tea brands like Xicha and NaiXue, as well as convenience stores, compete for the afternoon tea market. Luoxihe's average consumer spending of 26 yuan per visit does not give it a competitive advantage.
- Diversification Attempts: The company has tried to expand into sugar water and drink businesses, as well as launching healthy new products, but these efforts have not yet turned a profit, and their success is uncertain.
4. The Critical Balance: Expansion vs. Quality Control
To survive and achieve its goals, Luoxihe must address three key issues:
- Quality Control as a Foundation: Food safety breaches will lead to customer turnover. The headquarters needs to strengthen its supervision of franchise stores through regular inspections and strict penalties, rather than relying solely on fines.
- Stable Expansion: The "Hundred Cities, Ten Thousand Stores" plan must be approached carefully to avoid further quality control issues. It is essential to improve the quality of existing stores before expanding further.
- Focused Innovation: Diversification efforts should be strategic, focusing on creating unique products that differentiate the brand. Trying too many things may result in lack of focus and success in none of them.
5. The Dance Between Capital and Brand: The Choice Between Speed and Quality
While capital has provided the funding for Luoxihe's expansion, it also brings pressure:
- Capital's Demand for Growth: Investors (such as Housheng Investment) expect rapid increases in store numbers and revenue, forcing Luoxihe to accelerate its growth.
- The Long-Term Need for a Strong Brand: Food safety and reputation are fundamental for long-term success. A damaged brand is difficult to recover from.
- Zhu Danpeng's Advice: With over a decade of experience, Luoxihe is more stable than many internet-famous brands, but it must first improve its internal control systems and balance direct and franchise operations to avoid a rapid decline.
Conclusion
The core problem for Luoxihe is the mismatch between its rapid expansion and its ability to maintain quality control. In a challenging industry environment, it is a leading brand, but without addressing quality control, even its large scale could lead to sudden collapse. For consumers, the safety and taste of products are crucial; for brands, maintaining these basics is essential for sustainable success.