Price cuts or store closures? The catering industry is entering a new round of pressure

In 2024, the catering industry faces a new round of challenges. Plummeting profits, price wars and store closures have become the new keywords in the industry. Major brand manufacturers are looking for new paths to survival and development under pressure.

In August, two sets of data irritated the nerves of catering practitioners.

Profits of catering enterprises above designated size in Beijing plummeted 88.8%, with profit margins as low as 0.37%; the operating profit of accommodation and catering enterprises above designated size in Shanghai was -770 million yuan.

This is in stark contrast to the rapid growth after the recovery from the epidemic last year. One year later, the performance of the catering market in the super first-tier cities, which are the main consumer groups in the country, has made many people in the industry worry, "What happened to the catering industry?"

It is undeniable that the catering industry is a barometer of the consumer environment, and the industry's current predicament is closely related to the economic cycle. Starting from the second quarter of 2024, the service industry and retail industry, including the catering industry, will begin to enter a new cycle.

When the industry is facing a cyclical downturn, what tests players is their ability to withstand stress through the cycle.

With the economic downturn, consumers have become more cautious and are more pursuing cost-effectiveness. Many catering brands have been forced into the vortex of price wars.

The mysterious power of “9.9 yuan” comes from coffee and has entered more catering segments such as hamburgers and hot pot. The decline in average customer spending is the mainstream trend of catering brands in the first half of this year.

In addition to the price war, the number of offline stores is increasing, and the traffic on online platforms is becoming more and more expensive. It is not easy to make money. For some leading catering brands, the main theme is the decline in revenue in the first half of the year, and the change from profit to loss. Some high-end catering brands have fallen from the altar and even faced the dilemma of store closures.

But in fact, "food is the first necessity of the people", and as a rigid demand industry, the catering industry still has market opportunities. From a national perspective, data from the National Bureau of Statistics show that from January to July this year, the national catering revenue increased by 7.1% year-on-year, with steady growth.

Finding a way out and going through the cycle has become a consensus among brands.

The evolution of consumer behavior is accelerating the multi-channel operation of catering brands. Many brands are improving their profitability through the store + takeaway model. Faced with rising costs such as rent and labor, some brands are opening small and lightweight stores to reduce costs and increase efficiency.

It is inevitable that the average order value will decrease. If a brand wants to maintain its profits, it is important to dig deeper into the supply chain upstream...

Thin profits and low barriers to entry determine that the catering industry is not a highly cyclical industry. There will be some fluctuations after a period of time, but the rigid demand, high frequency, and relevance to the people are several key factors that determine that the catering industry is an industry with long-term resilience.

Whoever can withstand the pressure and cross the cycle will get a ticket to the next upward cycle. The turning point has arrived, and only by breaking through can we find a way out.

01 In the first half of the year, some catering companies were happy while others were sad

People in the catering industry may miss the hot 2023.

In the first half of 2023, the epidemic is over and everything is back on track. The number of tourists in various places has repeatedly set new highs, and the catering industry has also achieved great success. According to the data from the National Bureau of Statistics, in the first nine months of 2023, the catering revenue was 3710.5 billion yuan, an increase of 18.7%, far exceeding the growth rate of 6.8% in the total retail sales of consumer goods.

What makes practitioners even more excited is that with the influx of capital, the trend of catering standardization and chainization has intensified. The current good situation has given practitioners confidence to work hard, but there are also some hidden worries behind it.

According to IT Orange statistics, the number of investments in the domestic catering industry in 2022 was 126, with an investment amount of 8.428 billion yuan; in 2023, the number and amount of investments throughout the year continued to decline, reaching 111 and 5.889 billion yuan respectively.

Capital is calm and rational, and it also reveals the general trend of the catering industry.

In the first half of this year, although the catering market is still growing, the growth rate has dropped significantly and profits are under pressure. According to the data from the National Bureau of Statistics, the national catering revenue in the first half of the year was 2624.3 billion yuan, a year-on-year increase of 7.9%, which is a significant decrease compared with the growth rate of more than 21% in the same period of 2023; the profits of catering enterprises above the limit in Beijing and Shanghai are worrying.

The industry is in recession, and the top players are the vane. The current situation of the industry is that consumers are well fed, but brands are not "eating well".

This is more directly reflected in the financial report data. Judging from the performance forecasts disclosed so far, there are many leading companies in trouble.

Among them, the two "first stocks" are both mired in losses.

The financial report of Nayuki's Tea, the "first stock of new tea drinks", shows that in the first half of 2024, Nayuki's Tea's revenue decreased by 1.9% year-on-year to 2.544 billion yuan, and its adjusted net loss was 437 million yuan, turning from profit to loss year-on-year.

From 2021 to 2023, Nayuki has been climbing the road of narrowing losses, and finally turned losses into profits in 2023. Now, Nayuki is about to fall into a new round of downward cycle.

Xiabu Xiabu, the "No. 1 hotpot stock", also turned from profit to loss. According to its announcement, its revenue in the first half of the year was 2.395 billion yuan, a year-on-year decrease of 15.9%; the loss attributable to the owners of the company was 273 million yuan, while the profit in the same period last year was 2.406 million yuan.

During the same period, there were many catering brands that saw a decline in both revenue and profits.

Hailun Company achieved revenue of 441 million yuan, a year-on-year decrease of 37.85%; net profit attributable to the parent company was 69.677 million yuan, a year-on-year decrease of 55.76%;

Xi'an Catering's operating income in the first half of the year was approximately 349 million yuan, a year-on-year decrease of 7.93%; its net loss was 59.6463 million yuan, a year-on-year decrease of 29.53%;

Zhou Hei Ya achieved revenue of 1.26 billion yuan in the first half of the year, a year-on-year decrease of 11%; the net profit attributable to the parent company's owners was 32.913 million yuan, a year-on-year decrease of 67.7%.

On the other hand, although brands such as Haidilao, Luckin Coffee, Starbucks, Jiu Mao Jiu, and Cha Baidao have maintained positive profits, their profits have declined to varying degrees.

Taking Jiu Mao Jiu, a catering company that owns multiple sub-brands including Tai Er and Shuang Hotpot, as an example, Jiu Mao Jiu achieved revenue of 3.064 billion yuan in the first half of this year, a year-on-year increase of 6.42%; adjusted net profit decreased by 68.88% year-on-year from 248 million yuan in the same period last year to 77 million yuan.

Of course, what makes the market happy is that amid the low pressure, we also see positive signals.

From a national perspective, the catering industry is growing steadily. According to the National Bureau of Statistics, the national catering revenue reached 3,064.7 billion yuan from January to July this year, a year-on-year increase of 7.1%.

By region, from January to July, the catering revenue above the designated size in Jiangxi Province increased by 12.1% year-on-year; in the first half of the year, the catering revenue in Sichuan and Yunnan increased by 11% and 11.5% year-on-year; breaking down the data for the Beijing market, Beijing's catering industry suffered a loss of 454 million yuan in the first quarter and made a profit of 180 million yuan in the first half of the year, which means that the second quarter turned losses into profits, with a profit of 634 million yuan.

Multiple data prove that the resilient catering industry is gradually recovering. Especially in this competitive sea, some companies that have grown against the trend have also brought confidence to the market.

Benefiting from the optimization of operational efficiency, deepening of cost-effectiveness and product innovation, as well as the innovation and upgrading of brands and store types, Yum China achieved revenue of US$5.64 billion in the first half of this year, a year-on-year increase of 1.24%, and net profit of US$499 million, a year-on-year increase of 2.67%;

During the same period, Domino's China ended three years of losses and began to make profits. According to the semi-annual report, the company recorded revenue of 2.041 billion yuan, a year-on-year increase of 48.3%.

Both the adjusted net profit and the net profit attributable to shareholders turned positive. The adjusted net profit was 50.89 million yuan, compared with a net loss of 17.445 million yuan in the same period last year; the net profit attributable to shareholders was 10.907 million yuan, an increase of 24.6% from 8.751 million yuan in the same period last year.

In addition to fast food chain brands, the traditional Chinese restaurant brand Quanjude also achieved remarkable results in the first half of this year.

In the first half of 2024, Quanjude's revenue was 687 million yuan, a year-on-year increase of 2.87%; the net profit attributable to shareholders of the listed company was 29.3356 million yuan, a year-on-year increase of 5.08%.

It is worth noting that this is mainly due to the brand appeal of Quanjude as a time-honored brand. During the five short holidays of New Year's Day, Spring Festival, Tomb-Sweeping Day, Labor Day and Dragon Boat Festival this year, Quanjude's national catering stores achieved a year-on-year sales growth of 21%, recovering to 102% of 2019.

Among them, during the Spring Festival Golden Week, 7 stores in Beijing set new records for single-day sales. During the May Day Golden Week, Quanjude Wangfujing store exceeded one million yuan for three consecutive days.

Through the financial reports of the leading catering companies, we can already get a glimpse of the catering industry in the first half of this year. At present, the catering industry is experiencing a new cycle. Facing the same industry environment, some are happy and some are worried. This also means that brands in the transformation stage are experiencing unprecedented fierce competition.

02 High-end restaurants are no longer popular, and restaurant brands are "forced" to get involved in price wars

Faced with weak performance, brands are looking for reasons.

"We are very sorry. As we lost our sense of the market and made mistakes in our response, our performance in the first half of the year has plummeted." Guan Yihong, executive director and chairman of the board of directors of Jiu Mao Jiu, said bluntly in a conference call with financial report analysts.

Compared to Jiu Mao Jiu, which attributed the reason to "mistakes in corporate strategy", most brands such as Nayuki, Xiabu Xiabu, and Xi'an Catering still attributed the main reason to the external environment.

Indeed, the pressure on the consumption environment, rising costs and intensified competition are common problems in the industry. Chen Baoping, an observer of the catering industry and founder of Feima Technology, analyzed to Lianjie Insight that the supply of catering stores is increasing, seriously exceeding the demand, and the competition is becoming more and more fierce.

"There are six or seven tea shops on one offline street; the traffic fees of online platforms are getting more and more expensive. These two reasons drive and reinforce each other, making the competition even more intense."

Essentially, the trend on the demand side has changed significantly. After experiencing retaliatory consumption last year, consumers have become more rational in the economic downturn. Especially in the rigid demand and high-frequency catering market, consumers have become more pragmatic and more cost-effective.

The pursuit of cost-effectiveness on the demand side directly drives the "price war" on the supply side. When Luckin Coffee and Kudi launched a price war in the coffee category with a price of 9.9 yuan, the catering industry did not take it seriously. A year later, the mysterious oriental force of "9.9 yuan" swept across major catering categories.

In addition to coffee and milk tea, which were the first to enter the "9.9 era", hot pot categories followed closely behind.

In June this year, Haidilao launched its affordable sub-brand "Xiao Hai Hotpot", with hotpot base as low as 9.9 yuan, and lowered the prices of some dishes; Nan Hotpot launched fresh beef at 9.9 yuan, and Shuang Hotpot's meat dishes started at as low as 9.9 yuan.

In the category of Western fast food, in August this year, Burger King announced that it had entered the "9.9 yuan era". From August 5 to September 1, for four consecutive weeks, the prices of four signature burgers, including the Little Royal Burger and the Fruity Chicken Burger, were reduced to 9.9 yuan.

Previously, McDonald's launched the "10 Yuan Burger" campaign, and KFC also launched a 9.9 Yuan burger; Tustin, Dicos, etc. even reduced the price of burgers to around 5 Yuan.

If low-end and mid-end catering brands are "forced" to join the price war in order to find a way out, then high-end catering brands are caught in a dilemma. On the one hand, price cuts will affect brand positioning and profits; on the other hand, if prices are not cut, business will be bleak.

Faced with this embarrassing situation, some high-end brands chose to close stores to stop losses.

On August 26, Din Tai Fung, known as the "business card of Chinese cuisine", announced that since the company's business license has expired after 20 years and the board of directors has failed to reach a consensus on renewal, the company will gradually close all 14 stores in Beijing, Tianjin, Qingdao, Xiamen and Xi'an before October 31, 2024.

Din Tai Fung is not an isolated case. Many high-end brands have withdrawn from the market. Opera BOMBANA, which has been on the list of Beijing's Michelin one-star restaurant for three consecutive years, Shanghai's Michelin two-star restaurant Xiyue No. 8, and "L'Atelier 18" with an average price of 1,580 yuan per person have all closed down one after another.

In addition, in order to capture consumers, some high-end restaurants choose to launch low-priced group purchase packages.

Take the mainland's first Michelin three-star restaurant Xin Rong Ji as an example. The average per capita consumption is about 1,000 yuan, but now it is offering a group purchase set meal for 398 yuan; Shanghai Michelin one-star restaurant Cheng Longxing Crab King Palace is offering a minimum of 189 yuan; and the Michelin two-star 102 Bistro has launched a 498 yuan set meal.

According to Hongcan's big data, on July 21, 2024, the number of restaurants in Shanghai with an average customer spending of more than 500 yuan per person accounted for 0.59%, which was a decrease of more than 1,400 compared to May 10, 2023, equivalent to a decrease of more than 50%.

It is an indisputable fact that high-end catering has been in a cold market. The most critical reason is the lack of domestic demand for high-end catering.

"The poor performance of high-end catering is mainly due to the decrease in business banquets, which means fewer and fewer users. In this case, limited price cuts will not attract many customers. They also have to compete with platforms for customers, which costs more to acquire customers," Chen Baoping analyzed.

In the stage of consumption upgrading, high-end restaurants met the middle class's pursuit of scarcity and superiority; nowadays, in the environment of consumption downgrade, the consumption behavior of the middle class has become more rational, and the attractiveness of high-end restaurants that focus on added value such as service and environment has been visibly reduced.

"Michelin plating standards: big plates, few things, and a piece of grass in the empty space." This is how one netizen summarized the winning formula of Michelin restaurants. The seemingly sarcastic words reveal the essence of the "falling out of favor" of high-end dining.

Chen Baoping analyzed that if high-end restaurants want to survive, price cuts are definitely not the core solution. "High-end restaurants must first have uniqueness and scarcity in products and services, close some stores in some cities, serve users who really need them, control the scale within a certain range, and also improve their membership services to retain customers."

It must be admitted that the "price war" of exchanging price for volume, although in line with consumers' pursuit of cost-effectiveness, has squeezed the profit margins of enterprises.

Generally speaking, the profit margin of a catering business needs to be maintained at 5%-10%. If it is lower than this range, there will be operational risks.

At present, many companies have to face the fact that the average order value is declining.

Financial report data shows that the average customer spending per capita at Haidilao has dropped to 97.4 yuan, down 5.5 yuan; the average customer spending per capita at Coucou, a mid-to-high-end hotpot brand under Xiabu Xiabu, has also dropped by 4.2 yuan to 137.8 yuan in the first half of this year; the average customer spending per capita at Shuang Hotpot, owned by Jiu Mao Jiu, has dropped sharply by 9 yuan to 104 yuan in the first half of the year, and the average consumption per capita at Tai Er Pickled Fish has also dropped by 6 yuan to 69 yuan.

On the one hand, consumers are sensitive to prices, and on the other hand, companies are controlling profits. This "price war" is more like an industry elimination competition, testing the comprehensive strength of catering brands.

03 Don’t want to do business at a loss.

How do catering brands find a way out?

Is catering a good business?

If we look at the profit margin, the catering industry with its low threshold is not a good business, as most of the profit margins are below 10%; but if we look at the risk resistance, the catering industry is a good business, with many time-honored brands, because it is a business with rigid demand and high frequency.

This means that it is not easy for a catering business to succeed. The brand needs to be good at summarizing and adjusting, and finding a way out.

While focusing on price, brands are also turning their attention to store type innovation.

Referring to Yum China's counter-cyclical growth in the first half of this year, Yum China CEO Joey Wat publicly stated that the company's performance in the first half of this year was attributed to improved operational efficiency, a focus on cost-effectiveness and innovative products, and innovation of the two major brand store formats.

Among them, the innovation of the two major brand stores follows the consumer market's pursuit of "cost-effectiveness". For example, KFC's Ken Yue Coffee relies on existing restaurants and focuses on "9.9 yuan a day" coffee; Pizza Hut's WOW store focuses on dishes with smaller portions and lower prices.

Store innovations like Yum China still provide offline dine-in services, but "satellite stores" that only provided takeout in the first half of this year have become one of the main channels for revenue growth for many catering companies.

The logic of the so-called "satellite store" is to focus on the takeaway scene and exchange lower costs for higher labor efficiency and floor efficiency. At present, Tai Er Pickled Fish, Haidilao, Lao Xiang Ji, Nong Geng Ji and others have accelerated the layout of "satellite stores".

According to Meituan statistics, by the end of May 2024, 45 brands have implemented the satellite store model across the country, with a total of more than 560 satellite stores. Among them, the average store sales per square meter can reach more than 4,500 yuan, and the labor sales can reach more than 35,000 yuan.

Similar to the logic of "satellite stores" is Kudi's "store-in-store" model. It should be noted that for such small stores, the location is extremely important, and the number of takeaway orders within a few kilometers determines the upper limit of store development.

As opposed to opening stores, many restaurant brands are cutting prices while adopting a strategic contraction strategy.

Take Jiu Mao Jiu as an example. This year, its pace of store opening has become more cautious. Among them, Tai Er's annual store opening target in the mainland market has been reduced from the original 80 to 100 to 80, and Shuang Hotpot's annual store opening target has been reduced from 35 to 40 to 25.

In addition, Jiu Mao Jiu chose to divest two of its brands that were not suitable for the current consumer environment: "Uncle Na Wei is a Chef" and "Lai Meili Sour Soup Grilled Fish".

Xiabu Xiabu, which owns multiple brands, has also made similar adjustments. It decided to stop operating the high-end barbecue brand "Chenshao" launched in September 2022 and closed all its stores in July this year.

On the other hand, as of the end of June this year, the number of Haidilao stores has been reduced by 39 to 1,343. Haidilao pointed out in its financial report that in order to ensure the overall good operation of the restaurants, it maintained the principle of cautious expansion in the first half of the year. With the further improvement of its management capabilities, it is expected that the number of stores to be expanded in the second half of the year will increase significantly compared with the first half of the year.

Of course, the two actions are for the same purpose. The innovative store type is to seek growth through takeaway scenarios, while the strategic contraction is for a better single-store model. Ultimately, they are all for surviving this inevitable price war.

In essence, the core of reducing costs and increasing efficiency in the catering industry is to utilize the scale effect of stores, reduce upstream costs, and expand the scale of profits.

From this point of view, for standardized chain restaurants, developing scale and supply chain advantages are the key to reducing costs and increasing efficiency.

Japanese restaurant chain Saizeriya proves this point. Its latest financial report shows that sales from September 2023 to June 2024 reached 7.34 billion yuan, a year-on-year increase of 23.6%, and net profit nearly doubled.

Behind this is the fact that Saizeriya has achieved a greater scale effect by relying on its own supply chain, more reasonable store layout and lower labor costs.

More importantly, in the face of changes in consumer demands and habits, capturing the consumer's "stomach" is the unchanging fundamental.

"The essence of catering is service, not fast-moving consumer goods or retail. So consumers care a lot about service. Given a choice, consumers will definitely choose healthy and flavorful food," Chen Baoping analyzed to Lianjie Insight.

At the same time, in the existing market, we must retain the customer base as much as possible, improve brand membership stickiness, and increase brand private domain order revenue.

There are two types of business income for catering stores. One is public domain orders, which come from various Internet channels; the other is private domain orders, which is the order revenue when users go to the store and ask the waiter to place an order or when users place an order by themselves through mini-programs.

In Chen Baoping's view, compared with public domain orders with high traffic costs, increasing the revenue from private domain orders is more conducive to brand profit growth.

"Membership assets are long-term assets, and they are assets that will continue to grow over time. This is also the long-term advantage of catering brands. If a brand does not have its own loyal members, it will be more passive in future competition," Chen Baoping analyzed.

In the past six months, as industry competition intensified, the catering industry has indeed experienced some pain.

Whenever the economic cycle reaches a low point, the catering industry will inevitably face challenges. The key lies in whether brands can make timely strategic adjustments with keen insight and find new profit models.

The process of going through the cycle is destined to be long, but it is worth waiting for the fog to clear.

For catering practitioners who are prepared, this may be an opportunity to break through. After all, in any industry, low price is never the ultimate magic weapon for success. Brands find a balance between price and quality, efficiency and cost.

Text/Wang Huiying Editor/Ziye This article is written by the author of Operation School [Connect Insight], WeChat public account: [Connect Insight], original/authorized to be published on Operation School, and any reproduction without permission is prohibited.

The title image is from Unsplash, based on the CC0 protocol.