As lavish government banquets are curbed, food service companies now focus on general diners

As the first food service company to go public in China, Beijing X. E. Flavor Group Corp. Ltd., an upscale restaurant headquartered in the capital with branches inShanghai, has now seen its fortunes nosedive.

According to the company’s 2013 annual financial report released on February 27, X. E. Flavor’s revenue dropped 41 percent year on year in 2013. Net profit plummeted about 788 percent compared to the previous year, making 2013 the company’s worst in six years of operation.

This plunging revenue mirrors the downturn of the entire industry. Besides X. E. Flavor, top and medium-end restaurant brands like Xiao Nan Guo and South Beauty, where a meal for two people would cost about 300 yuan ($48.8), saw a drastic drop in revenue over the past year.

With the government’s ongoing efforts to crack down on wasteful expenditure on lavish banquets for officials and calls for frugal dining, the high-end catering firms are now facing unprecedented challenges and are struggling to reshuffle their business models.

Bleak prospects

Revenue ofChina’s catering industry amounted to 2,539.2 billion yuan ($414 billion) in 2013, an increase of 9 percent year on year. This is the lowest increase over the past 21 years, according to the 2013 annual report on the catering industry issued by the China Cuisine Association.

Upscale food service firms have borne the brunt of this drop. “Companies whose annual sales revenue exceeds 2 million yuan ($325,800) witnessed a negative increase for the first time with a year-on-year decrease of 1.8 percent,” said the report.

“SinceChinareinforced its efforts on fighting corruption, a frugal dining style won widespread support among the public, resulting in a significant decline in the number of official and business banquets from government departments, public institutions and companies,” said the X. E. Flavor financial report, adding that this directly led to the company’s abrupt drop in its primary revenue.

“The catering companies used to blindly boast of being high-end establishments, with some even investing over 10 million yuan ($1.6 million) to decorate the restaurants as luxuriously as possible. Many of them were blindsided by such an unexpected drop,” said Hou Yuwen, Deputy to the National People’s Congress (NPC) and General Manager of Jiangxi-based Pingxiang Xin Coast Hotel.

Some tried to adjust to the shrinking market by laying off staff. Yan Qi, a National Committee member of the Chinese People’s Political Consultative Conference (CPPCC) and Director of Taoranju Catering Group, said revenue of the high-end catering industry in Chongqing Municipality dropped by 40 to 50 percent in 2013, with 15 percent of the sector’s employees being laid off.

Workers who supply food ingredients for such restaurants are also feeling the squeeze. The Zhejiang-based Yongqiang Agriculture Co., one of the suppliers of X. E. Flavor, estimated that its sales of farm-raised giant salamanders, tailored to upscale restaurants, dropped by eight folds year on year in 2013. “In the meantime, the ex-factory price has been sharply cut. The price has decreased to 1,000 yuan ($162) per kg for wholesalers, only one third of that in 2011,” said He Xiaogang, a staff member from Yongqiang.

Shift in consumer focus

As the government lavish banquets began to be reined in, food service companies began to focus on general diners. Strategies like reducing restaurant sizes, reducing prices, eliminating minimum charges and launching products favored by locals were introduced.

X. E. Flavor has contracted canteens of organizations like government departments and public institutions, while also blazing a trail in the environmental protection sector. In 2013, the company invested in a company manufacturing biomass energy equipment and purchased the whole company in February this year. It is now the biggest shareholder of a Jiangsu-based company engaged in recycling sulphur research and development (R&D). In March, X. E. Flavor said it would get involved in the movie industry by purchasing Beijing CCTV Splendid Film and TV Corp. Ltd.

Xiao Nan Guo is bullish about food service to the general consumer market and believes its subsidiary brand of “Nan Xiao Guan” tailored to this market will expand and become the engine for the company’s future growth. The company said it would open 12 more Nan Xiao Guan branches and promote the brand in the second-tier cities this year. Launching package meals for group buying is another of Xiao Nan Guo’s strategies. A meal for four people that previously cost 426 yuan ($69.4) will now cost 258 yuan ($42) through group buying.

“China’s catering industry now faces a changing environment. The general food service market will be the mainstream [target market] as consumption at extravagant banquets has been curbed,” said Yan Qi. As an important part of the service industry, the catering sector driven by consumption of general diners will be the lifeline ofChina’s domestic demand, she said.

Zhang Shuguang, Chairman of the Academic Committee of Unirule Institute of Economics, said that a crackdown on wasteful expenditure on lavish banquets resulted in a slowdown in the food service and tourism sectors and undermined a boost in domestic demand in the short term. But in the long term, it stimulated a reshuffle in the sector. “With high-end restaurants adapting their menus and launching dishes acceptable to general consumers, it will lead to rational and sustainable increases in domestic consumption,” said Zhang.

Diversification challenges

However, transformation is not easy. X. E. Flavor admitted that its move to the environmental protection sector is fraught with difficulties. “As a newcomer to the sector, we are inexperienced and face challenges in core technology R&D, management, talents, risk control and so on,” said the X. E. Flavor financial report.

“High-end food service firms had originally positioned themselves to provide a tailored catering service and dining environment in a luxurious setting. It is really hard for them to reposition to a general market in a short time,” said Yang Xiulong, General Manager of Beijing Parade, a domestic five-star restaurant. “Besides, there are many well-known enterprises in the general food service market. To position ourselves in such a market with such fierce competition is not easy.”

Yan Qi said with the rise in rent, raw material and labor costs, the profit margin of the food service sector was shrinking. “Price reduction is not the solution to sustainable growth. A company has to create its unique competitiveness,” she said. Yan added that her company encountered no severe loss during last year’s slump, due to her previous efforts of setting up a complete food service industrial chain, which includes seasonal vegetable gardens, poultry and aquaculture farms.

“The combination of agriculture and catering not only gives us a unique advantage, but also helps farmers to increase the added value of their farm products,” said Yan.

Wu Shixiong, NPC Deputy and former Vice Chairman of the Standing Committee of Beijing Municipal People’s Congress, said the senior-citizen service sector is an area of investment for high-end catering companies. “Government efforts alone are not able to deal with the problems brought byChina’s rapidly aging population. Private capital should be encouraged to engage in the development of the senior care sector. High-end food service firms that are experiencing a sharp decrease in profit are one such private capital source,” said Wu.