Restaurants adapt to harsher industry conditions

The profits of China's catering and dining industry grew by just 5 percent year-on-year in the first half of 2012, 3 percentage points slower than the same period last year, and a record low since 2003 when anxieties about outbreaks of SARS, an infectious disease, on the Chinese mainland kept people away from restaurants, according to a report released by the China Cuisine Association (CCA) on August 10.

The CCA's report also shows that the restaurants which suffered the biggest losses in the first six months were predominately small eateries in terms of revenue. In Shanghai, for example, only some 10 percent of the restaurants in the city were able to turn a profit during this period, and most of them were large franchises.

But in China's highly competitive dining market, the hardscrabble existence many small and independently-run restaurants are being confronted with now will likely only get more difficult as operating costs mount and customers stay at home.

In the past, many restaurants were able to easily record a profit by paying their staff a pittance and shirking their responsibilities as employers to contribute to their workers' social security funds. But during the first half of this year alone though, salaries of restaurant workers have shot up by 10 percent year-on-year, according to data from the CCA. At the same time, the government has strengthened its oversight on labor rights and has compelled many restaurants to pay social security on behalf of their workers.

And while restaurants pay out more to their employees, they are also finding themselves saddled with mounting rents. Most restaurants are able to see a profit if their rents equal less than 10 percent of their overall revenue, but many are now shelling out as much as 30 percent of the money they bring in just to keep a roof over their heads.

Additionally, as the country's economy slows, more and more diners - especially low-income diners who keep close tabs on their spending - are eating at home in order to save money. And as many restaurants lower their standards on the quality of the raw materials and ingredients they purchase as a way to cut costs, it's likely a safe bet to say that many Chinese diners are feeling satisfied by their decision to take charge of their own meals.

In order to stand out from the crowded market and entice more diners to step through their doors, small restaurants should focus more on advertising, an area they have historically ignored. Also, they should step up their food, service and sanitation standards in order to make the dining experience more enjoyable. While these tactics may increase expenses over the short run, growing overhead costs and fiercer competition to attract diners are issues which will never really leave the dining industry, and the sooner a restaurant confronts these problems, the better prepared it will be to survive and thrive in the long term.