Tuesday, September 17, 2013

Curb on Banqueting Dents Food Industry Profits

In 2013, Chinese officials have been ordered to curb their eating and drinking at the public's expense. The impact on the food industry reveals the significant role of government consumption on an important service sector as the leaders try to install a consumer-driven service-oriented economy.

The new leadership of China has responded to the Chinese public's irritation over officials' expenditure of public funds on eating and drinking, travel, and use of public automobiles, known as "three public consumptions" (三公消费). In 2010, 61 central government departments reported a total of 9.47 billion yuan (about $1.5 billion) for expenses on cars (6.2 billion), foreign trips (1.8 billion yuan) and official banquets (1.5 billion yuan). The National Bureau of Statistics estimated the per capita "three public" expenses at over 5000 yuan, slightly higher than per capita rural income that year. Beijing's municipal government found it owned over 60,000 cars. This is probably just a fraction of the public consumption since banquets and gifts are often hidden in accounts as "office supplies."
Expenses reported for cars, overseas travel, and hospitality in 2010.

In December 2012, new Communist Party Secretary Xi Jinping chaired a politburo meeting where "eight regulations" were issued exhorting officials to get in touch with the common people, speak in plain language, stop abusing their use of automobiles and stop holding flashy banquets and ceremonies. As one saying goes, officials "spend the day at the meeting table and evening at the dinner table."

In June, an essay commenting on the curb on public consumption was published by a Beijing University professor who studies communist party administration.  The professor remarked that many restaurants that used to be crowded are now dark and silent, some struggling to stay open. With its patronage by officials dwindling, the Quanjude chain, famous for Beijing Duck, has opened a duck buffet. A high-end hotel and a Hunan-Hubei-themed restaurant chain have begun offering steamed dumplings and hot pot to make up for the lost business from the curb on banqueting. The Maotai Group, which sells Chinese liquor that is a staple at official banquets, revised its sales targets downward and is marketing its products to the general public.
General Secretary Xi Jinping's "Eight Regulations"

The National Bureau of Statistics reported a slowdown in food service industry growth in the first quarter of 2013, which their spokesman attributed to the crackdown on eating at public expense. Earnings by food industry companies in the first half of the year were off 10 percent. COFCO's earnings were adjusted down from 500 million to 300 million yuan, attributed to the cut-back in "three public" consumptions. COFCO's red wine business (also a common component of banquets in Beijing) was hit by both the curb on official consumption and competition from imported wine.

Gift-giving is so common and wasteful that shops for "gift recycling" are common in Chinese cities. These mostly deal in cigarettes and liquor, but high-end foods, fruit and tea are also commonly given as gifts by officials. This market has been "devastated," according to the Beijing professor. A Henan tea dealer said teas that used to sell for 3000-5000 yuan per 500g are now offered at 1500-2000 yuan and are not selling.

The curbs have not completely stopped the banqueting. The Beijing professor observes that banqueting has moved from restaurants into private dining halls. Officials still serve prawns and sea cucumber in their private dining rooms. They remove the labels from liquor bottles and serve their booze in mineral water bottles to hide their extravagance. This highlights the vast network of cafeterias and restaurants in government offices which also form a significant component of food consumption. These cafeterias are usually subsidized and divided by class--one for the common workers and a private dining room with high-end food for the senior officials. There are even special farms to produce food for high-level officials.

The professor criticizes the "amazing extravagance and waste" of China's public consumption, and he excoriates the different cafeterias for different ranks as a feature of feudal society. He praises officials in foreign countries who buy lunch with their own money and have no special requirements for food. He remarks that even the president in some countries lines up to buy lunch at a fast food restaurant.

He also connects the public eating and drinking practice to "unusual prosperity" for the restaurant industry and exorbitant prices for some foods. There are many products, such as Maotai and Wuliangye liquor and Great Wall wine that owe their success entirely to public sector sales for official banqueting. The professor doesn't mention more humble examples: many farmer cooperatives rely on selling gift boxes of fruit, tea, mooncakes and other products, probably to officials. These boxes can be seen stacked in the lobbies of office buildings at holiday times. However, the restaurant industry is now facing a painful transformation as it weans itself off the demand created by officials spending other peoples' money.

The apparent success of many premium food products is illusory, having been engineered by government and communist party connections. China has further to go than we realized to build a consumer-driven economy.

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