Food is the top priority for the people. In 2023, the catering industry will recover well and show strong growth. However, with the iteration of consumers and changes in the economic environment, the domestic catering industry is also undergoing a series of new changes.
Recently, the China Chain Store Association and Meituan jointly released the “2024 China Catering Franchise Industry White Paper” (hereinafter referred to as the “White Paper”), which shows that in 2023, with the rapid recovery of the domestic catering industry, various “snacks and drinks” projects have become popular in the eyes of capital and the industry. At the same time, the expansion fever brought by franchising has accelerated the development of “snacks and drinks” projects and also driven the rapid increase in the domestic catering chain rate.
(”,)
Franchise Wars Drive Catering Chain
Many attentive consumers have found that catering brands in different business districts are becoming increasingly close, especially in third – and fourth tier cities, where the number of well-known chain catering brands is rapidly increasing.
In 2023, due to the long-term suppressed demand for catering, the domestic catering industry finally experienced strong recovery growth in revenue. According to statistics from the National Bureau of Statistics, the total revenue of the domestic catering industry in 2023 increased by 20.4% year-on-year, reaching 5.3 trillion yuan, breaking through the 5 trillion yuan mark for the first time.
But the reporter noticed that in this round of catering growth, chain catering brands have made significant contributions. The white paper shows that the domestic catering industry is facing a new round of chain transformation in 2023, with the chain transformation rate increasing from 13% in 2019 to 21% in 2023. Although this proportion still lags behind the 50% chain transformation rate in Europe and America, the growth of the chain transformation rate in the domestic market is rapidly increasing.
In 2023, the number of stores owned by large domestic chain catering enterprises (with over a thousand stores) accounted for 24% of all chain stores, an increase of 1.1 percentage points from the previous year. Among them, KFC and Luckin Coffee joined the Ten Thousand Store Club in 2023, which has also led to the number of domestic chain catering enterprises breaking through the scale of ten thousand stores reaching six, and these six enterprises account for 7.6% of the total number of chain stores in the country.
(”,)
(Chart source: “2024 China’s Catering Franchise Industry White Paper”)
The increase in chain operation rate is related to the new wave of restaurant opening in China in 2023. Driven by coffee and new tea brands, more and more catering brands are joining in, especially the franchise expansion method, which has accelerated the process of opening stores for various brands.
Even many catering brands that originally only had self operated businesses have put aside their presence. Since 2023, leading companies such as Hai Di Lao, Luckin Coffee, Jiumao Jiu, and Naixue Tea have started franchising. In July 2023, Naixue Tea, the “first stock of new tea drinks” that has been directly operated for 8 years, officially announced the launch of the “Partner Plan” and significantly lowered the threshold in 2024. At the end of 2022, HEYTEA, which had been directly operated for 10 years, opened more than 2300 new business partnership stores in 2023.
This trend has become more apparent this year, with several well-known catering brands announcing the opening of franchise from February to March. For example, in March 2024, Hai Di Lao announced the opening of franchise; Starting from February 2024, Jiumao Jiu Group will gradually open up the franchise and cooperation of Tai’er and Shanwai Sour Soup Hot Pot; In addition, Pei Jie’s Chongqing hot pot franchise will also be opened in March 2024 to develop urban partners.
In the industry’s view, behind this store opening battle is a two-way struggle between chain catering brands and entrepreneurs. On the one hand, for chain catering brands, under the impact of the epidemic, the development pain points of brand chain direct operated stores, such as high costs, high financial pressure, and bottlenecks in store size that limit the effectiveness of the supply chain, have been exposed. Therefore, top catering brands are choosing franchise models with larger cooperation areas, less financial cost pressure, and faster development speed.
On the other hand, for entrepreneurs, some of them have insufficient financial strength and weak risk resistance ability. The risk coefficient of opening a single store for their own brand is relatively high. In order to reduce the probability of failure, they turn to seeking brands with a sense of brand, a supply chain, and a relatively sound operating system to open franchise stores.
Zhan Junhao, a strategic positioning expert and founder of Fujian Huace Brand Positioning Consulting, stated in an interview with First Financial News that the annual increase in the chain rate of the catering industry is actually a natural result of market competition. Big brands, with their advantages in brand awareness, supply chain management, operational efficiency, etc., can occupy a more favorable position in market competition and achieve stable development. However, small stores often find it difficult to compete with big brands due to the lack of these advantages, and may ultimately choose to join other brands or exit the market. Behind this phenomenon is the increasingly fierce competitive environment in the catering industry and the increasing consumer demand.
Cao Zhe, Chief Investment Officer of Aiwen Zhilue, also believes that the increasing chain rate in the catering industry is mainly due to the stable growth of large brand stores, occupying more market share, while small brands face greater competitive pressure. Moreover, chain brands usually have advantages such as higher brand awareness, standardization, and replicability, making it easier to expand to more markets and regions.
(”,)
The rapid rise of “snacks and drinks”
In the eyes of the outside world, the rapid growth of domestic catering chain rates is also related to the continuous changes in the current hot spot of the catering market, and domestic catering is entering a “small era”. The white paper shows that in this round of catering chain transformation, the snack and fast food category has consistently ranked first in the number of stores, accounting for 48% of the total number of chain stores in 2023.
According to data from Hongban.com, there were a total of 175 financing events related to the domestic catering industry in 2023, a significant decrease from 238 in 2022. However, there have been new changes in the direction of capital attention. Among the catering brands that received financing in 2023, snack and beverage brands accounted for a considerable proportion, with a total of 85 financing events generated in the snack and beverage two major tracks. The white paper also shows that the investment and financing proportion of “snacks and drinks” projects will increase by 9.8 percentage points to 72.2% in 2023.
By the end of 2023, there are more than 6000 stores in China at present, including Guming, Chabaidao, Hushang Aunt’s Fresh Fruit Tea, Shuyishao Xiancao, Yihetang, Tianlala, Tastin, Ziyan Baiwei Chicken, Yang Guofu Spicy Hot Pot, Zhang Liang Spicy Hot Pot and other brands. Most of these brands are “snacks and drinks”.
Zhan Junhao believes that “snack and drink” projects have become a new favorite of capital and the market, reflecting capital’s preference for light asset projects in the post pandemic era. Light asset projects often have a smaller economic burden, flexible and variable business strategies, and faster market response speed. Under the influence of the epidemic, capital is more inclined to choose projects with low risk and fast returns, and the catering sub sectors such as snacks and drinks perfectly meet this demand. However, heavy asset projects may appear less attractive in the current market environment due to the need for larger initial investment, long-term operating cycles, and higher operational risks.
The reporter noticed that with the intensification of internal competition in the catering industry, “snacks and drinks” projects are also more in line with the current market environment.
Fan Hongmei, who has been engaged in catering entrepreneurship for many years, told First Financial reporters that it is not easy to open a traditional catering single store now, and the market competition is particularly fierce. Currently, only stores that have technological advantages in food or can play with new media marketing and follow the internet celebrity route can still operate well, but these types of single stores are often rare.
Fan Hongmei stated that compared to large-scale catering projects with higher costs, “snacks and drinks” projects have the characteristics of low investment costs, simple management, low operating costs, and high flexibility. Moreover, most of the franchisees are well-known chain catering brands, which have the advantage of brand effect. However, the investor cost is higher. Although the return period is a bit long, it is easier to get started because of the advantages of brand and supply chain.
In addition, the input-output ratio of the “snacks and drinks” project also attracts entrepreneurs.
Compared to large restaurants and comprehensive restaurants that often invest millions or even tens of millions, the initial investment cost of the “snacks and drinks” project is lower, and the expected time for cost recovery is also shorter.
It is understood that the catering industry has the problems of three highs, high rent costs, high labor costs, and high food loss. Although large-scale catering has high income, the expenses in the above three aspects are also high. Moreover, if one does not have sufficient economic strength and lacks distinctive catering, their risk resistance will be relatively weak. Some small shops may not seem to invest much, but the input-output ratio is not low.
The investment personnel of the internet celebrity Kua Fu fried skewer shop told First Financial reporters that in addition to rent and decoration, franchisees need to invest about 150000 yuan to open the shop, which includes franchise fees, first year management fees, equipment and first-time material purchases, etc. Considering that fried skewer shops are generally small in scale, with an area of about 20 square meters and decoration costs of 20000 yuan, labor and rent costs vary in different regions, but it is expected that the comprehensive gross profit will be around 55% in theory, and the payback period will be 6 to 8 months.
According to Kudi’s publicly available franchise information, its commercial formats can be divided into in store stores, quick access stores, standard stores, brand stores, etc. The store area ranges from 6 square meters to over 150 square meters, and the investment amount of the store ranges from 200000 to 500000 yuan. These investments include equipment costs, cabinet advertising, and basic decoration. A Kudi investment brochure previously obtained by a journalist from First Financial News also mentioned that from the perspective of investment payback cycle, based on the daily sales models of different stores, the fastest and slowest way for a fast delivery store to recover costs is more than a month and less than a year.
Wen Zhihong, an expert in the chain operation industry and the general manager of Hehong Consulting, told First Financial reporters that behind the chain operation of the “Snack and Drink” project, it is related to its small scale, high standardization, clear business model, and low investment, which caters to the idea of small and medium-sized investors starting their own businesses through franchising; At the same time, the “snacks and drinks” project also needs to quickly expand its scale through franchising to achieve rapid improvement in brand, scale, and efficiency.
Joining a chain is not just about making money
Although the franchise manuals of various catering companies have tempting statements about future profits, and the “snack and drink” project is becoming more and more popular in the market, it does not mean that franchising can “make money”.
At the recent catering industry forum, Liu Guoliang, President of Wuhan Catering Industry Association, stated that the internal competition in the catering industry is intensifying in 2023, and the entire Chinese catering industry has changed from “532” to “235”. During the period of rapid development, 50% of catering was profitable, 30% remained stable, and 20% was at a loss. Now it has become 20% profitable, 30% remained stable, and 50% at a loss.
During the visit, the reporter from First Financial learned that the revenue situation of franchisees is also uneven.
Taking advantage of the hot coffee, Liu Ming joined a lucky coffee shop in a county in eastern Sichuan. Since opening the shop for more than two years, the business has been in a lukewarm state.
“There are still many people drinking milk tea here, and we feel that the coffee business is not very good. We can only say that we are making a small profit and will continue to operate this year.” Liu Ming told reporters that the gross profit margin of making coffee is indeed relatively high, about 50%, but the rent of the store has also brought great pressure. “Our store has a rent of approximately 100000 yuan per year and employs three employees. The daily sales volume is around 100 cups, and the summer sales volume will be higher,” said Liu Ming.
According to preliminary estimates by reporters, based on the average order price of Lucky Coffee at around 8 yuan and a daily average of 150 cups, the average monthly gross profit of the store is around 18000 yuan. But if we subtract the store rent, employee wages, utilities, etc., there is indeed not much profit left.
Similarly, in the new-style tea beverage industry, the return on investment time for stores of different brands, locations, and periods also varies.
A few years ago, Wang Yue, who opened a Guming store in Guilin, Guangxi, may have a net profit of 50000 to 60000 yuan per month at the beginning of the month, but it will break even in less than six months. At that time, the gross profit margin of the store was relatively high, reaching 60% -65%. However, Wu Tian, who runs a dominant tea queen in Nanning, Guangxi, spent three years to make a profit from this 150 square meter store. In addition, a boss who runs three Yihetang stores in a fourth – and fifth tier city in Hunan said, “Our store’s gross profit margin is about 50%, and the net profit margin is about 25% -29%. Some of these stores recoup their profits in 11 months, while others only recoup their profits in 30 months.”
The reporter noticed that franchise brands will provide consultation and support services related to site selection and subsequent operations for franchisees to ensure the survival rate of their stores.
However, in Fan Hongmei’s opinion, opening a store is a comprehensive knowledge. It is not simply a matter of sowing beans, but the choice of franchise brands, site selection and the ability to operate stores are very important. The difference in site selection and operation ability will bring great income differences. For example, Spicy Hot Pot stores with the same 100 square meters can only produce 5000 yuan of water a day if they are poor, and 15000 yuan of water a day if they are good.
Wen Zhihong also believes that domestic catering is a fully competitive market, and the entry threshold is not high. Therefore, for many years, the market competition in the catering industry has been very fierce, and the internal metabolism and elimination are very fast. Therefore, joining a chain entrepreneurship may not necessarily guarantee profitability. It can only be said that compared to independent entrepreneurship, chain brands have a stronger ability to resist risks.
However, compared to franchisees, the revenue of franchised brands is relatively stable. In addition to collecting franchise fees, they will also earn management fees, revenue or profit sharing, and profit from price differences in supply chain products.
For example, although Kudi Coffee does not charge franchise fees to franchisees, it will split the profits and charge different proportions of service fees based on the gross profit of the store’s operations. If the monthly gross profit of the store is below 20000 yuan, no service fee will be charged. But for stores with a monthly gross profit of over 20000 yuan, a service fee of at least 10% and a maximum of 30% will be charged. In addition, a deposit of 50000 yuan and a store design fee of thousands of yuan will be charged. In addition to the franchise fee and management fee collected for the first time, there is also a portion of the revenue from Kuafu’s fried skewers that comes from the price difference of some raw materials purchased by merchants in the future and the usage fee of the financial system.
Fan Hongmei told a reporter from First Financial News that joining a chain store does not necessarily mean success in entrepreneurship. There is also a phenomenon of 28% in chain stores, with 20% of stores operating well, but a considerable number of stores losing money. Relatively speaking, brand stores have relatively stable customer flow, higher consumer recognition, and more opportunities.
(”,)
Can “going abroad” become the second growth curve
Although the domestic catering industry is recovering in 2023, it is also a highly competitive year. According to data from Qichacha, as of early January 2024, there were 1.359 million domestic catering enterprises revoked, which is more than twice the total number of revoked catering enterprises in 2022 (519000 in 2022). The survival of the fittest in the catering industry is constantly accelerating.
With the further intensification of internal competition in the domestic catering industry, going abroad has become the second battlefield for various chain catering brands.
Since 2020, domestic catering enterprises, especially chain restaurants, such as Haidilao, Xiaolongkan, Ruixing Coffee, Xicha, and Mixue Ice City, have accelerated their overseas exploration. From coffee to milk tea, from Spicy Hot Pot to crayfish, they have all made overseas acquisitions.
The recently released “2024 Catering Enterprise Development Report” shows that currently, domestic overseas catering enterprises have the widest layout range in Southeast Asia and North America. From the perspective of layout trends, Chinese catering brands’ overseas business has gradually spread to countries or regions such as Europe, Australia and New Zealand, East Asia and the Middle East, from Southeast Asia and North America markets with high Chinese population density, high consumption capacity, and mature supply chain layout.
The reporter from First Financial News noticed that with the rapid development of chainization, China’s catering management and supply chain levels continue to improve. In addition, China’s influence in overseas markets is also significantly increasing, providing prerequisite conditions for Chinese catering brands to go abroad and allowing them to see new incremental market opportunities. However, the path for domestic catering brands to go global is still being explored, and various enterprises are relatively cautious in their strategies.
For example, as of the end of 2023, Luckin Coffee, a major domestic coffee producer, had a total of 16218 stores, but remained highly cautious in its overseas business. After entering the Singapore market in early 2023, Luckin only opened 30 new stores throughout the year. In the eyes of the public, its entry into the Singapore market is more like an attempt to see if it can penetrate Luckin’s overseas business model.
“Our overseas expansion is not because of domestic competition, but because there is indeed a need in this place. Overseas expansion is definitely a game for the strong, not a safe haven for the weak, so now everyone is exercising in China and going abroad. However, one thing is certain that the future international market will be reshaped by Chinese catering creators.”
Recently, Jiang Baidong, General Manager of Zhang Liang Spicy Hot Pot, talked about the issue of “going to sea” in an interview. In his opinion, how to achieve localization locally is very important for catering brands to go global.
“At present, most people are considering doing Chinese business when going out, but in the end, you need to think of one thing: there are only tens of millions of Chinese people outside, and if everyone goes out, it will also be very competitive outside. So you need to do localized business, foreign business, and local business, so that you can live long overseas.”
At the same time, Jiang Baidong also believes that when chain catering brands go global, they should deeply cultivate a regional market rather than casting a wide net, which will be better for enterprises to manage their radius and supply chain.
“For chain catering brands, going global is indeed a strategic choice worth exploring. Overseas markets not only provide broader sales space, but also help brands achieve diversified development and reduce dependence on a single market. However, the choice of going global strategy needs to be based on the brand’s actual situation and strategic goals. If the brand wants to establish a deep market foundation in a specific market, then a deep cultivation strategy may be more appropriate; if the brand wants to quickly occupy multiple markets, then a wide net strategy may be more attractive. Regardless of which strategy to choose, it requires a deep understanding and sufficient preparation of the target market.” said Zhan Junhao.
Cao Zhe believes that for chain catering brands, going abroad is indeed a potential choice. However, this requires careful consideration and planning, as there may be significant differences in different markets and cultural environments. If a chain catering brand wants to succeed in overseas markets, it needs to understand factors such as local market demand, consumer behavior, laws and regulations, and cultural differences. In addition, it also needs to consider how to address challenges such as language, logistics, supply chain, and marketing. Therefore, for chain catering brands, going abroad is a high-risk choice that requires careful evaluation and planning.
(Wang Yue, Wu Tian, and Liu Ming are pseudonyms in the text)