Austerity drive prompts catering sector transition

The Chinese catering industry, especially high-end dining businesses, is seeking a transition to survive after seeing sharp profits drop under the government's ongoing frugality campaign.

The industry's growth rate in the first half of 2013 dropped 3 percent from the same period last year, hitting the lowest ebb since it felt the impact of SARS in 2003, according to a report released recently by the China Cuisine Association (CCA).

Analysts say catering is experiencing the pain of transition under the pressure of authorities' drive against banquets at the public's expense and also the rising costs of rent and labor.

The frugality decisions are part of efforts to implement the "eight requirements" that the Communist Party of China leadership began promoting in December to reject extravagance and bureaucracy.

According to the CCA report, 20 percent of the country's catering businesses saw their profits decline in the second quarter. In some cases, business revenue plummeted by as much as 300 percent.

In Shanghai, the profit of the city's dining sector fell for the first time since 1991. The sales of medium- and large-sized restaurants logged a decline of up to 20 percent, according to the Shanghai Cuisine Association.

Among listed companies, China Quanjude Co. Ltd. which is famous for Peking duck, suffered a revenue decline of 6.52 percent year on year in the first half. According to reports from Beijing Xiang'eqing Co. Ltd., another representative of the high-end restaurant sector, the company's performance Jan.-June showed losses of 220 million yuan (35.9 million U.S. dollars), shrinking 38 percent year on year.

For restaurants, the rising cost of rent, labor and various other fees piled difficulty on top of the frugality campaign.

According to an August report on China's retail industry by financial auditors Deloitte, the growth rate of commercial real estate rent was around 3 percent to 5 percent in 2012, with this surging to 10 percent in major business areas.

Under the circumstances, the upmarket catering sector is seeking a way out, by transforming to please mass tastes, promoting group meals and fair-priced dishes.

Analysts say that the average profit margin of foreign caterers is about 10 percent, while the rate in China is as much as 30 percent, which is unreasonable and unsustainable.

"Although high-end catering is still necessary for some business events, the future trend of the industry is catering to the public," said Feng Enyuan, executive vice president of the CCA.

Dining companies should focus more on the performance of individual restaurants, instead of rushing to expand the business, Feng suggested.

Apart from working to shift the industry's focus, many catering business owners have also called for more favorable policies from the government to help them through the tough times.

According to the Ministry of Commerce, such policies are currently being drafted. They include plans to promote more chain restaurants and the introduction of new regulations to ensure food security and better management of the industry.

Feng believes that with the guidance of government as well as the industry's transition, its total revenue this year will top 2.5 trillion yuan (408 billion U.S.dollars).