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Economy

RECIPE FOR RECOVERY

Facing constant Covid restrictions, rising costs and decreased customer spending, the struggling food and beverage industry must seek new ways to cope with these issues in the long term, experts say

By Xu Ming , Yu Yuan Updated Aug.1

We are providing dine-in services from now on. Welcome back!” staff at a restaurant in Beijing’s Chaoyang District shouted to passers-by on the breezy morning of June 6. The city’s food and beverage community let out a collective sigh after authorities lifted a five-week ban on dine-in services. On Guijie, one of Beijing’s well-known inner city restaurant strips, customers lined up late at night outside crayfish restaurants, waiting for the clock to strike midnight. Restaurants lured consumers with special offers, eager to get back in the black.  

China’s catering sector totals nearly 5 trillion yuan (US$742b), a major contributor not only to GDP growth but also the livelihoods of millions. The Covid-19 outbreak nearly brought the industry to a halt in early 2020. Two and a half years on, the industry is still reeling: Frequenting restaurants is associated with increased risk of infection, and eating-in is banned as soon as new Covid outbreaks are detected.  

In 2022, major cities like Shanghai and South China’s Shenzhen and Guangzhou have suspended dine-in services at least once for a minimum two weeks, stifling the industry’s return to normalcy. Between January and April, the food and beverage industry brought in 1.33 trillion yuan (US$197.4b) nationwide, a drop of 5.1 percent year-on-year. April saw 260.9 billion yuan (US$38.7b), or 22.7 percent, decrease over the same month last year, according to the National Bureau of Statistics of China (NBS).  

Besides pandemic restrictions, the industry faces rent hikes and increased costs for materials and labor. In 2021, one million food and beverage companies went bankrupt, more than three times the number in 2020, according to data from Tianyancha, a company information provider. 

Even when dine-in services resume, many restaurant owners are now worried about covering their costs as consumption tightens, and in the uncertainty surrounding pandemic restrictions, how long it will be before they are shut down again. 

Smaller Portions 
Xuan Jianjun, who has worked in the dining industry for over 30 years, is more anxious than ever about keeping his business afloat. With 12 outlets and over 100 employees, his restaurant chain in Xi’an, Shaanxi Province costs over 1.3 million yuan (US$192,900) a month in rent and payroll alone. His business has been bleeding since the pandemic started, and faces a shortfall of 3 million yuan (US$445,000) to keep operating.  

Li Weihua, associate business professor at the China University of Political Science and Law, told NewsChina that the catering industry requires sufficient cash flow as labor, rent and materials are fixed expenses and dine-in services are the primary source of revenue. “In other words, they have no income without selling food, and they need to pay fixed expenses. It is hard to sustain that in this situation for a long time,” Li said, adding that things are particularly difficult for smaller companies with thinner profit margins and less cash on hand. Xuan told NewsChina that after 2020, business declined every year. In 2021, his income halved compared to 2019 from 70 million yuan (US$10.4m) to 35 million yuan (US$5.2b), creating capital turnover problems.  

Xuan said that since the second half of 2021, his restaurants have been closed six times because of pandemic restrictions, each lasting 15 to 30 days. He invested 600,000 yuan (US$89,040) to open a new location near the ancient Big Wild Goose Pagoda in Xi’an in August 2021, anticipating the popular tourist site would bring in steady business. But by March, the location had lost 1.3 million yuan (US$192,920), mainly because of pandemic-induced restrictions. He eventually shut its doors.  

The situation is similar nationwide. Even though the central and provincial governments have clarified that places deemed low-risk for infection should not restrict dining-in, many local authorities do so after the detection of a single Covid case. In late March, Shandong provincial capital Jinan stopped dining services for 41 days. Shenyang, Liaoning Province suspended eating in for five weeks until April 25 when it allowed restaurants to operate at 50 percent capacity. Beijing halted all restaurant dining from May 1 to June 6.  

Many restaurants turned to takeaway or makeshift sidewalk dining. In 2020, takeout accounted for a record high of 16.6 percent of overall catering revenue, according to a report released by data platform Urora. But this is just a drop in the bucket. A report published by the Jiangsu provincial catering association shows that within a week of the Covid resurgence in the region in March, the surveyed 417 companies lost a total of 608 million yuan (US$90.2m). Nearly 70 percent had cash flow issues, 17.51 percent were considering major layoffs and over 80 percent had canceled plans to expand.  

“Cash flow is the blood while profit is the fat,” said Wen Zhihong, an expert in the restaurant chain industry. “Without profit, they can still hang on for a while, but without cash flow, they will have to close.”  

An April report on the catering industry by KPMG China and the China Cuisine Association found the slump in customer traffic is the biggest challenge for enterprises during the pandemic, followed by increased overheads. 

A KFC restaurant in Zhengzhou, capital of Henan Province, announces it can only offer food deliveries, on January 13, 2022, when dining-in was prohibited in the populous city due to the pandemic

People enjoy night snacks at outdoor vendors in Xiangyang, Central China’s Hubei Province, May 30, 2022

Hard to Swallow
Even though the government encouraged credit support for industries heavily affected by the pandemic, lack of collateral makes it difficult for catering companies to get loans from banks, NewsChina found.  

Increased cost of rent, materials and labor add pressure. According to a 2021 survey by the China Hospitality Association, 77.5 percent of restaurants said they struggle to pay rent, and the majority failed to persuade their landlords to take rent cuts.  

For example, according to the 2021 financial report from Haidilao, China’s largest hotpot chain, which was released in March, rent, materials and labor costs increased by over 40 percent in 2021.  

Compared with restaurant chains that have more sway in negotiating rents, smaller companies and individual owners are at the mercy of landlords.  

In February, the National Development and Reform Commission and other departments released policies targeting the recovery of service sectors, suggesting a six-month rent freeze for small companies and individual business owners in medium and high-risk areas who rent State-owned real estate. However, most catering businesses do not rent State-owned properties.
  
The cost of labor is increasing too. An annual report on the Chinese catering industry by the China Hospitality Association in September 2020 shows that labor costs accounted for an average 21.35 percent of revenue and are growing faster than the cost of rent and materials.
  
Qin Wei, founder of a beef noodle franchise, told NewsChina that restaurants face a shortage of waitstaff and cooks as young workers are put off by the long hours, low pay and lack of social status. This has forced food and beverage enterprises to raise wages, which further eats into profits.  

Meanwhile, the cost of materials is going up. Over the past year, vegetable and meat prices rose along with those for bulk commodities globally. In late 2021, Haitian, which produces sauces and flavorings, announced 3-7 percent price hikes for its product line. Other ingredient companies, including Lijinji and Hengshun Vinegar, followed suit.  

Apart from these costs, restaurants face increased costs for marketing, Covid-19 prevention measures and more. “Over these two years, we tried all kinds of promotions to attract consumers, including inviting them to dine in for free. It’s part of the cost too,” said Zhang Xin, who owns and operates a restaurant in eastern Beijing’s Tongzhou District. Under pressure, chains and mom-and-pop operations alike are withdrawing from the market. 

Declining Consumption 
The lines of eager customers after eat-in dining resumed in Beijing provided a much-needed boost for the city’s restaurateurs. But concerns linger over when consumption levels will return to normal.  

Zhang Xin said that beyond the pandemic, decreases in consumption and spending power that he witnessed over the past two years have profoundly affected the industry.  

For most restaurants, Zhang said, beverages are an important revenue stream, making up half or even more of total profits. But after the pandemic, Zhang noticed his customers stopped ordering beverages. Instead, they brought their own. When they do order in, it is cheap beer. “Their spending also dropped from over 100 yuan (US$15) to 80 yuan (US$12) per person,” Zhang said, adding he rarely gets new customers: “They are mainly returning ones.”  

Wen Zhihong said slowed economic growth against the backdrop of the pandemic has led to overall declines in consumption expectations among consumers. When people are less confident about their future income, they save and cut spending.  

Statistics from the NBS show that by the end of 2021, household savings reached 102.5 trillion yuan (US$15.2t). The figure rose to 110 trillion yuan (US$16.3t) in the first quarter of 2022, increasing monthly. In 2019, it was 82 trillion yuan (US$12.2t).  

In contrast, growth of total retail sales has slowed since the latter half of 2021. Coupled with Covid restrictions, catering services experienced negative growth. According to the NBS, since 2019, the share of catering services in total retail sales has fallen too, from its highest point of 17 percent to 10.6 percent in 2021.  

The decline in spending power is gnawing away at confidence in the industry. The Jiangsu provincial catering association survey shows that over 80 percent of catering companies believe pandemic restrictions will not lift soon and will continue to impede customer traffic.  

After Beijing resumed dining-in, the Beijing-based China Times interviewed restaurateurs along Chaoyang District’s Liangmaqiao Road who said that despite an obvious bump in customer traffic, turnover has not rebounded to pre-restriction levels. Those interviewed said consumer confidence will need time to recover. 

More Ways Out 
Attracting new customers is another headache. Qing Yong, founding partner of Fanqieziben, a catering industry investment firm, believes that demand for dining out will not change. “It’s the scenario that has changed. Catering enterprises need to figure out how to transcend traditional industry boundaries,” Qing said.  

Consumption patterns and dining scenarios have diversified since the pandemic, partly because of the boom in delivery platforms. Takeout has since been the go-to market for additional revenue streams.  

Qing noted that in the past two years, many companies have invested heavily in expanding services beyond eat-in dining, particularly delivery services. He said such avenues could help restaurants and grocery retailers recoup losses, as delivery already accounted for a large share of their business during the pandemic.  

For example, seafood restaurant chain Yunizaiyiqi and dumpling brand Xiongdaye saw growth as the catering industry suffered overall thanks to their takeout service offerings. Xiongdaye opened over 100 new locations in March and April. Yunizaiyiqi has opened over 300 locations a year since its founding in 2017. It now has over 1,400.  

Major franchises including hotpot chains Haidilao and Xiabu Xiabu and Starbucks upped their product lines, while more Chinese food brands are jumping on the bandwagon.  

According to Qing, these changes in consumption are influencing location choices for restaurants. In the past, franchises used to prefer big shopping malls or commercial centers to guarantee foot traffic and maintain brand influence. But commercial property development has stagnated in recent years, while rising rents and decreased foot traffic have taken the shine off shopping malls. 
 
In contrast, local community-based locations boast multiple advantages. There are over 100,000 urban communities across China, according to China’s Ministry of Civil Affairs, while there were 6,300 shopping malls in operation at the end of 2021, data from the Chain Store & Franchise Association released in early June shows. Besides, communities usually offer longer contracts than shopping malls, giving small businesses a chance to become more established. Rents are lower and more stable.  

“In the future, more franchises will likely set up shop in communities,” Qing said.  

Wen Zhihong said the recent dip does not mean the overall industry is in decline. “People cannot do without food, so the catering industry will never fade. Instead, it will keep expanding as the economy grows,” Wen said.  

Zhu Xiaohu, managing director of GSR Ventures, noted in a 2021 speech that the scale of offline catering would reach 10 trillion yuan (US$1.5t) in 10 years. “If half the restaurants are chains, then they can share half the market. If there are 500 chains, then each could net 1 trillion yuan (US$148.4b). It’s an opportunity for China’s offline catering industry,��� Zhu said.  

Despite the pandemic, the number of newly registered food and beverage companies rose in both 2020 and 2021, and increased 10.5 percent year-on-year in the first quarter of 2022, data from business data provider Qichacha shows.  

But for now, the situation remains challenging. Li Weihua told NewsChina that the threat of resumed pandemic restrictions still dangles above the heads of restaurants nationwide.  

“It seems like it depends more on luck right now,” a restaurant supplier in Beijing said.

People wait in socially distanced queues outside restaurants, June 6, 2022, after dining-in partially resumed in Beijing

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