Restaurant Profits Squeezed in China

According to China's Commerce Ministry, restaurants just barely made a profit in 2012. The profit margin was the worst for restaurants since 1991 (except for the unusual year in 2003 when everything closed during the SARS epidemic). Costs are up, sales growth is slowing and experts say China's food service industry is transitioning into a new, more competitive stage of development as the industry matures.

Restaurant sales were up 13.6 percent last year, but the growth has been slowing for three years in a row. The growth rate was 3.3 percentage points slower than in 2011. Growth also slowed during the preceding two years but the slowdown was less than 1 percentage point during those years. Expenses grew 14.2 percent. A Ministry of Commerce spokesperson described it as an "unprecedented" grim situation.

The slowdown is hitting both upscale and downscale eating places. A ramen noodle chain's sales grew just 3.7 percent during the first half of the year. Profits are down throughout the industry. Industry analysts say restaurant companies are focusing on improving operational efficiency at their stores, improving service and brand recognition. They are dialing back on the breakneck growth strategies pursued in earlier years.

High end restaurants are being hit by a severe crisis. Many are seeing double-digit decreases in profits. They are adjusting product structure, looking into adding hot pot and fast food, and considering mergers and acquisitions.

Restaurants are being hit from all sides. The slow economy and orders to scale back on official banqueting are curbing sales growth. Wages for unskilled workers are rising fast, as are rents, utilities and the cost of food items. Enforcement of food safety regulations boosts costs as it becomes more risky to cut corners by procuring "gutter oil" or meat from cheap, unsanitary underground butchers. Bans on selling waste to pig farms and gutter oil processors also eat into profits.