Pascal Martin closely studies the rapidly evolving foodservice scene in China as part of his role as a partner at Shanghai-based OC&C Strategy Consultants. Martin, who previously managed the Asia operations of Marks and Spencer, helped put together a report for his current firm investigating China’s restaurant trade, titled “Serving Up a Winner – Establishing a Winning Proposition in China’s Restaurant Landscape.”
The report explains how Chinese restaurants and their customers are evolving, revealing Chinese consumers, on average, now eat out on almost three times a week, and are becoming more sophisticated eaters, with increased awareness and openness towards international brands. The report found that Chinese consumers actively seek out new restaurants and are receptive to new formats and concepts such as restaurant theming and organic produce.
SeafoodSource: Do you have a figure for how big the annual revenue of China's restaurants sector currently is and what is your projection for growth in this annual spend into the future?
Martin: We estimate annual volume of retail sales price for all full-service restaurants in China to be about CNY 3 trillion (USD 452 billion, EUR 384 billion) per annum today. We expect the volume to continue growing in high single-digits over the next few years.
SeafoodSource: Approximately what percentage of overall spending by Chinese diners goes to restaurant chains versus independent operators?
Martin: The bulk of the spend is still with the independent restaurant operators who now receive up to 94 percent of total spend, but we expect to see much quicker growth in spend at restaurant chains, including many new ones which are not yet established in China.
SeafoodSource: Are you seeing a consolidation of the restaurant sector in China - will some of the “mom-and-pop” places close?
Martin: As in many sectors in China, small mom-and-pop players are facing increased competition from more structured chains. But the restaurant sector is one that attracts a lot of individual entrepreneurs. And there will be ongoing trials by small scale players to get into this business. At the same time, we see many restaurant chains continuing to expand – both international and local chains. The space continues to be quite fragmented with new brands entering as consumers want to try new things.
SeafoodSource: Are more chains emerging and do you see the emergence of more domestic brands or will KFC, McDonald's now remain dominant?
Martin: KFC and McDonald’s are very powerful players, but the Chinese market is huge and there will be plenty of room for other brands to expand. McDonald’s has announced major expansion plans recently after the franchise acquisition from the parent by Carlyle Group and CITIC. Chinese brands in the top 10, according to our survey, also include hot pot chains Haidilao and Little Sheep; South Beauty [high-end Sichuan-style cuisine] and Shanghai Min [seafood-heavy Shanghai-style cooking), which are all China based.
SeafoodSource: Has the Chinese government’s long-running anti-corruption campaign changed the market in favor of mid-market chains?
Martin: I don’t think the anti-corruption campaign had a major impact. A much more significant factor is the growth of China’s middle class, with increasing spending power and a willingness to dine out more often. This was clearly shown in our recent consumer survey [“Serving Up a Winner – Establishing a Winning Proposition in China’s Restaurant Landscape”] from which we learned that Chinese consumers eat out almost three times a week, on average, and are becoming more sophisticated. This growth is largely attributed to the explosive increase in China’s middle class, which now accounts for 68 percent of all urban households.
SeafoodSource: How do you define middle class?
Martin: We generally view urban households that earn USD 8,000 to USD 30,000 (EUR 6,800 to 25,500) a year as being part of China’s middle class.
SeafoodSource: The well-known Singaporean seafood restaurant chain Jumbo Seafood has been opening outlets in China but also does a big business with Chinese tourists in Singapore. How important is outbound tourism as a factor in the development of China's restaurant industry?
Martin: Our survey showed that Chinese people are increasingly eager to try foreign cuisines. Chinese tourists often discover foreign cuisine and foreign brands when they travel outside China. Therefore, when a restaurant brand in Singapore or the U.K. or the U.S. is famous and attracts Chinese tourists, it is generally a good sign that it can be successful in China. This was the case for Pizza Express, which now has 34 outlets in mainland China, and the Jumbo Seafood chain you mentioned, which started in Singapore, opened successfully in Shanghai and now is also in Beijing.
SeafoodSource: How important or influential is imported food and seafood in the decisions of Chinese consumers in choosing which restaurant to go to?
Martin: The three most popular cuisine types in our 2016 survey were hotpot, Chinese food, and seafood, in that order. These were followed by barbecue and steak – Western food groups.
Imported food generally generates more confidence and is certainly a “plus” factor for those among Chinese consumers who are most sensitive to safety and health issues. People have not forgotten the tainted baby milk powder, avian flu, and bad local suppliers to fast food outlets of recent years.
According to the same survey, health consciousness is an increasingly important driver of behavior in terms of sports activity and food. Many restaurant brands use the origin of their produce as one of their marketing tools. For example, McDonald’s claims to get their beef from suppliers in U.S., but also in Australia, Canada, and New Zealand. Hema Supermarket chain, part of the Alibaba Group, in addition to streamlining shopping through an Alipay app and barcode scanning, offers food and fresh seafood from around the world that shoppers can select themselves and take home or have cooked in the store to eat. There is also a delivery service.
But imported ingredients generally are more expensive, so most eating out is done at Chinese and some Western fast food restaurants.
SeafoodSource: How are China's restaurants responding to the challenge of online competition?
Martin: They are professionalizing, offering more consistent product and service, as Chinese consumers become more sophisticated. This leans in favor of chain restaurants, which are perceived as offering guaranteed quality. Chained restaurants have outperformed their independent counterparts in store growth, benefitting from their reputation for quality, trust-worthiness, and consistency. Haidilao, a hotpot chain, leads the way, but some Western fast food chains have made it to the top 10 list as well, such as Pizza Hut, McDonald’s, TGI Friday’s, and KFC.
There is also the rise of dark kitchens which cater directly to online orders through external food-ordering platforms such as Eleme, Meituan Delivery and Baidu Delivery. These have been gaining an increasingly larger share in the overall foodservice market since 2014. Famous chains such as KFC and McDonald’s have also created their own digital platforms or ecosystems that enable home or in-store ordering and digital payment.
SeafoodSource: Does the recent closure of Hong Kong restaurant chain Café de Coral outlets in mainland China portend fewer or more foreign chains entering the Chinese market?
Martin: I think that what happened to Café de Coral is very specific to Café de Coral… a menu that may not have been sufficiently distinctive from street offerings, and a price point probably too high given this lack of distinctiveness.
I expect more foreign chains to enter the Chinese market as the Chinese middle class continues to prosper, simply because it is a very large and growing market which is very far from saturation. I can think of a few underrepresented restaurant categories like Tex-Mex, pizza, family restaurant concepts like Denny’s, ice cream parlors, and steak houses.
What is interesting in the Chinese market is that cuisines from various regions can be relevant, not just Western cuisine. This will create opportunities not only for U.S. and European chains, but also for Japanese chains, Korean chains, Australian chains and others. Success will depend on new entrants’ ability to develop a distinctive yet China-relevant product proposition at the right pricing, and deliver this proposition properly while taking advantage of unique China-specific opportunities like online interactions and home delivery, which can greatly enhance the economics of the business model.
