Stable Growth - Cantonese restaurants in Shanghai and Macau

With the Mainland China economy continuing to grow at roughly 7% year-on-year, businesses and consumers continue to look positively into the future. As disposable incomes rise, Chinese consumers are spending more of their money on upgrading their lifestyles, including travel and entertainment. Today entertainment expenses now represent roughly 11% of the monthly household income in China.  

The annual disposable income per capita in Shanghai grew from RMB 36,230.5 in 2011 to RMB 54,305.0 in 2016, representing a CAGR of approximately 8.4%. The consumption expenditure on food in Shanghai City increased at a CAGR of approximately 6.0%, from RMB 178.3 billion in 2011 to RMB 224.9 billion in 2015. The private consumption expenditure on food in Macau recorded a robust increase from MOP 5,460.0 million in 2011 to MOP 9,129.0 in 2016, at a CAGR of approximately 10.8%.

Shanghai and Macau are also famous tourist attractions, attracting a large number of tourists. In 2016 around 268 million tourists visited Shanghai, which increased by 6.8% year-on-year. Macau’s developed gaming industry attracts a large number of tourists as well, with just under 31 million visits in 2016, thereof almost 20.5 million coming from Mainland China.

1.Description of the Cantonese full-service restaurant 

Cantonese full-service restaurants serve tea, dim sum and simple Cantonese dishes during the day, while proper dishes and banquets are served for events or dinner in the evening. Cantonese full-service restaurants’ typical table services include seating customers, taking orders, serving food, clearing the plates and processing bill payment. 

2.Overview and development of the Cantonese full-service restaurant industry

Shanghai

In 2016, there were an estimated 739 Cantonese full-service restaurants in Shanghai. The revenue of the Cantonese full-service restaurant industry in Shanghai experienced a growth from RMB 5,449.5 million in 2011 to RMB 6,149.9 million in 2016, representing a CAGR of 2.4%. 

Ipsos Business consulting estimates that the revenue of Cantonese full-service restaurant industry in Shanghai will increase at a faster pace of approximately CAGR 3.1% during the forecast period from 2016 to 2020.

The graph below sets out the revenue generated from the Cantonese restaurants industry in Shanghai from 2011 to 2020:

Macau

In 2015, there were approximately 205 Cantonese full-service restaurants in Macau.  From 2011 to 2015, the revenue of Cantonese full-service restaurants in Macau fluctuated and recorded an overall increase at a CAGR of approximately 5.0%, increasing from MOP 3,010.8 million in 2011 to MOP 3,661.5 million in 2015. 

Over the forecast period from 2016 to 2020, the revenue is expected to experience a moderate growth at a CAGR of approximately 2.6%, increasing from MOP 3,487.7 million to MOP 3,870.1 million.

The graph below sets out the revenue generated from the Cantonese restaurants industry in Macau from 2011 to 2020:

3.Food ingredients, staff cost and rental costs are the major operational costs

Shanghai

The CPI (consumer price index) for food ingredients in Shanghai has been increasing steadily over the past years. From 2011 to 2015, the average price increase for seafood, meat and meat products, fresh vegetables, and alcoholic and non-alcoholic drinks was 3.7%, 3.9%, 7.7% and 2.0% respectively.  

The monthly wage for employees in the Cantonese full-service restaurant industry in Shanghai from 2011 to 2015 increased from RMB 2,237.0 to RMB 3,196.0 at a CAGR of 9.3%. The main reason for the increase was the labour shortage, especially for employees like receptionists and service staff. Negative perceptions associated with the industry, such as low payment and long working hours make it difficult to attract and retain staff.

Throughout the period from 2011 to 2016, the monthly rent for private retail premises in Shanghai remained stable, experiencing a minor overall drop of an estimated CAGR -0.6%. However, as Shanghai covers a large are, there are differences between individual locations.  

Macau

Live and fresh seafood, meat and meat products as well as vegetables recorded growth in CPI between 2011 and 2016, at CAGR of approximately 6.2%, 5.8% and 7.8%, respectively. 

The monthly wage for employees in the industry of restaurants and similar activities in Macau increased from approximately MOP 7,500 in 2012 to MOP 9,000 in 2014, but it dropped to MOP 8,500 in 2015, bouncing back to MOP 9,000 in 2016. The CAGR over the period of 2012 to 2016 was at 4.7%.

From 2012 to 2015, the total number of dining places in Macau increased from 1,626 to 2,209, while the corresponding total annual rent from dining places in Macau increased from MOP 569.0 million to MOP 1,168.0 million. On average however, the annual rent per restaurant decreased by 33%.

4.Competitive analysis of the Cantonese full-service restaurant industry

Shanghai

The Cantonese full-service restaurant industry is highly competitive, since there are crowded well-known chained restaurant groups operating in the industry, many time-honored Cantonese full-service restaurants as well as many other Chinese and Western full-service options.

(1) Key Factors of Competition

Since Cantonese full-service restaurants have the flexibility to customize their menu according to the seasonality of produce and food trends, consumers have high expectations towards freshness and quality of ingredients used.

Brand and reputation also have a significant influence on enhancing the competitiveness of Cantonese full-service restaurants. High-end Cantonese full-service restaurants have the advantage of higher market awareness, relatively easier access to financing, and the potential for greater economies of scale, however, implementing brand strategies for sustainable expansion and growth is essential and indispensable.

(2) Market Drivers

The rise in disposable income is the main driver for the growth in Cantonese full-service restaurant industry in Shanghai. The continued growth in disposable income is expected to positively impact the demand for dining out, creating a larger consumer base and a growing market size.

Both professional and private inbound visitors to Shanghai are a further key market driver of the food service industry. According to Shanghai Municipal Tourism Administration, in 2016, there were around 268 million tourists visiting Shanghai, which increased by 6.8% compared to 2015. The continued growth in the number of visitors to Shanghai is expected to also contribute to the overall growth in the revenue of Cantonese full-service restaurants. 

(3) Major Threats 

Rental and labour costs account for the bulk of a restaurant’s operating costs. It has become a common phenomenon for landlords to raise the rental rates markedly when renewing leases with tenants. 

(4) Entry Barriers

The high initial capital investment requirements represent a major entry barrier in the Cantonese full-service restaurant industry in Shanghai. Besides growing rental and labour costs, with increasing consumer expectations, more importance is being put on the ambiance of restaurants and the quality of the service, directly increasing the fitting-out and training costs. 

A further entry barrier is the licensing process, as the application process is relatively complicated, expensive and time-consuming. For a Cantonese full-service restaurant, the application for the operation license involves different government departments, such as Industry and Commerce Administration Bureau, the Health and Epidemic Prevention Station. The complicated and time-consuming process increases the hurdles to enter the industry. 

Macau 

Compared to Shanghai, the Cantonese full-service restaurant industry market in Macau is more fragmented, since there are less than five chained restaurant groups operating in the industry and most of the restaurant companies operate less than two restaurants in total.

(1) Key Factors of Competition

Location is one of the most crucial factors of competition in the Cantonese full-service restaurant industry in Macau. Normally, the middle to high class restaurants will choose to locate in or near casino areas to attract more customers.

Similar to Shanghai, the quality of food and the professionalism of the service is important for Cantonese restaurants, which is also one of the key elements to differentiate a restaurant. Thus, to be successful Cantonese full-service restaurants must consistently provide attentive and friendly services to build service image and increase customer loyalty.

(2) Market Drivers

Increased number of visitors from Mainland China who are supported by the government’s open passenger policy, and visitors from Hong Kong who are attracted by Macau’s leisure atmosphere are providing an adequate customer base for the development of the Cantonese full-service restaurant in Macau. 

The Macau government plans to fully develop its brand as a city for culinary culture and become an appealing multicultural tourist city. Restaurants, especially those serving traditional dishes, are supported by government policies and funding to preserve the food culture. Also, international food festivals are held annually to raise global prestige of Macau as a culinary destination.

(3) Major Threats 

The high dependence on the gaming industry is a major threat to the Cantonese full-service restaurant industry. Any decline in casino revenues will also impact the revenues of Cantonese full-service restaurants. 

The Cantonese full-service restaurant industry in Macau is also competing with cities in close proximity to Macau which have a relatively better consolidated and developed Cantonese full-service restaurant industry such as Guangzhou and Hong Kong. However, these threats are foreseen to have a limited impact as the Guangdong, Hong Kong, Macau governments cooperate to build an integrated economic region. 

(4) Entry Barriers

Similar to Shanghai, establishing full-service restaurants in Macau requires high initial capital investment. The impact of interior layout cost is especially obvious to restaurants in the mid to high-end segment; accordingly, the higher-class restaurants require more initial capital.

As a tourist city famous for the gaming industry, the requirement for a strong social relationship is essential. Cantonese full-service restaurants tend to select locations in or near commercial centers with a large number of tourists, however, the competition for restaurant space in casinos is very fierce, and increases the difficulties in entering the Cantonese full-service restaurant industry. 

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