Thursday, October 25, 2012

Cost Pressure on Chinese Restaurants

One of the big changes in Chinese food consumption over the past decade is the big growth in eating out. However, the rapid growth in restaurants in China fueled by cheap labor and other low costs is coming to an end. During 2012, the restaurant business has been relatively slow and "four highs"--high rent, high labor cost, high energy cost and high raw materials cost--are shrinking profit margins.

An article in the "No. 1 Financial Daily" cites a Deloitte China report which attributes problems in the industry to several factors: rising business costs, food safety is still not under control, and difficulties with internal management, standardization and human resources.

This article emphasizes the increasing rent and labor costs. While restaurants tend to have lower rent than other retailers, the cost of commercial space in China is rising. In Shanghai the cost of space in a mall is around 10 yuan/square meter per day. Another industry research report estimates the average retail rent in Beijing at US$ 404/square foot and Shanghai at US$ 368/square foot.

One manager said rent for a high end restaurant in central Shanghai runs 20 yuan/sqmeter/day. Adding labor expense, decorations, costs for employee housing and other items, an outlet’s up-front cost is 15 million yuan or so. Said the manager, “Under ideal circumstances, it takes 2-3 years to recoup these costs.”

The era of cheap labor that drove China's restaurant business is ending. Two restaurant chains given as examples in the article had increases in labor cost of around 20% last year. The enforcement of a minimum wage policy in 2011 is one reason for the higher costs. One person in the business said you have be concerned when labor consumes 20 percent of costs; he says his restaurant's labor is now 17-18 percent of costs.

Another article on cost pressures says restaurants' cost of raw materials and ingredients has been rising 9-to-10 percent annually. It says the cost of cooking oil has risen 16 percent per year over the last five years. 

This article says wages of restaurant workers went up 10 percent in the first half of 2012. Restaurants are now being required to contribute to social insurance programs for their workers to comply with the laws for labor and social insurance.

Restaurant owners interviewed for the article yearned for the past. One boss with 30 years of experience said increases in costs are not a problem, but the big problem now is finding workers at all. He said young people in Beijing don't want to work in a restaurant and people from elsewhere don't stay in a job for very long. He said in past years he employed people from Beijing but now 90 to 100 percent of restaurant workers come from elsewhere. These "outsiders" don't put down roots in Beijing and they have no sense of loyalty. If you pay someone 3000 yuan per month they will quit as soon as someone else offers them 3100 yuan. Ten years ago, he could be picky about who he hired, but now he has to take whomever he can get.

Another restaurant owner says he hung out a sign when he opened three years ago and had lots of applicants. He paid 1200 yuan per month then. Now he pays 2000 yuan, provides food and housing and still can't find workers. 

A restaurant worker gives her side of the story. She says they have to work hard with only one day off per week. The cost of living in Beijing is high. She rents a place with some other people outside Beijing's 5th ring road and pays 1000 yuan a month. Given the tough life in Beijing, of course she's always looking for better pay, she says.

Restaurants are afraid to raise prices to pass on the higher costs since they fear losing customers. The owner of a hot pot restaurant says he has to accept thinner margins. If he raises prices he may lose too many customers and have to close. Some drop certain vegetables from the menu when the price gets too high. Some of the big restaurant chains are dealing with shrinking margins by diversifying into other businesses.

Restaurants are facing the same cost pressures as Chinese farms and many are failing. One Beijing resident notes that the space across the street from his residence has held three different restaurants. But no one is suggesting subsidies and price supports for restaurants. 

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