Grassroots Restaurants 2018 - SPOTLIGHT Savills China Research Retail
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Savills China Research
Retail
SPOTLIGHT
Grassroots Restaurants 2018
savills.com.cn/research
Grassroots Restaurants
Hunger Breeds
Discontent
Diving into a RMB3.9 trillion market
T
here are believed to be at least six million The varied taste of consumers in different parts of however, the majority of the F&B market still
restaurants in China. The food & beverage the country also generates significant competition belongs to small and medium size enterprises
(F&B) industry generated RMB3.9 trillion in and opportunities. Overseas frontrunners have (SMEs). In 2016, 74% of the industry's revenue
revenue in 2017 according to the National Bureau already established a foothold in China. Starbucks was contributed by F&B operators with annual
of Statistics, accounting for 11% of total retail currently owns over 400 stores in Shanghai, while sales below RMB2 million.
sales. The sector is also taking an increasingly McDonalds owns approximately 250 stores in
large share in the tenant mix of shopping malls, up Beijing. Leading local brands are also becoming In this report, we take a look at a selection of small
from less than 20% to more than 30%. Some new stronger than ever. China’s leading hot pot brand scale F&B operations that are run by individual
projects even allocate over 50% to F&B tenants. Haidilao operates over 150 restaurants in 50 cities; partners who are passionate about food. We
talked to 20 restaurateurs in Beijing, Shanghai,
Guangzhou and Shenzhen to better understand
their costs, challenges and future plans. The
background of our interviewees varies from those
who have previous experience in the F&B industry,
Figure 1： Tier-1 city restaurants, by cuisine while others come from accountancy, advertising,
financial to IT or education sectors. These
restaurants range from a smaller 20 sq m coffee
Western Non-western
shop to a 400 sq m Cantonese food restaurant.
The business model of individual restaurateurs is
100% definitely different from established restaurant
chains. A number of the restaurants surveyed
opened their first outlets in street stores rather
Shanghai Beijing Guangzhou Shenzhen than shopping malls. Food accounts for the
80%
largest cost, though staff management is one of
the key concerns. Thanks to the Internet, small
restaurants can gain more exposure to the public
60%
through key opinion leaders (KOLs) on Weibo and
WeChat where social media users are eager and
excited to discover up-and-coming stores.
40%
20%
0%
Source: Euromonitor, Dianping, EY, Savills Research
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Grassroots Restaurants
Looking for Something New?
Here today, gone tomorrow.
T
he first step is always the most difficult. All Consumers are willing to pay a premium for capitalize on these factors to seize the up roughly the same amount in costs for Another issue that restaurateurs need to consider
of our interviewees have utilized their own
capital with no external investments. The
artisanal products. It could be the cheese-
cream-topped green tea, a bagel made with
consumers’ appetite with their quality and
variety.
The User base of traditional non-delivery operators, there are very
few savings in moving to a pure delivery business.
is that just like paying higher rents for physical
space in more visible locations, with more F&B
boom in the F&B sector has attracted waves of French flour, spicy frogs mixed with noodles or online food delivery Nevertheless, a restaurant that utilizes both operators crowding the online platforms, vendors
money into the industry—though the vast majority Cantonese barbecue made by a renowned chef. platforms is able to enhance sales volumes and will increasingly need to pay extra for search
has found its way to the established brands rather Things aside from food can also draw customers, Delivery service better offset fixed costs. Cost savings are not engine optimisation, advertisements and the like.
than start-ups. Leading brands have an easier such as a three-metre high doll, minimalistic purely limited to extra space, but also the cost of
time as they have both higher affordability and decorations or anything worthy to share on social Delivery services have grown dramatically since wait staff. At the end of the day, every restaurant
stronger bargaining power to secure good media. the third-party delivery services such as Ele.me and F&B outlet is different in terms of price point,
343
locations. and Meituan launched. According to China product range, cost breakdown, marketing
The essence of a restaurant, however, is always Internet Network Information Centre (CNNIC), the strategy, customer demographics and scalability.
Consumers will tend to choose established its food. In recent years, food safety and user base of online food delivery surged by 64.6% For some, it may make sense for part or all of their
restaurant chains in shopping malls, where they restaurant sanitation scandals have made to 343 million users in 2017. Meituan estimated sales to be done online and delivered to
are more assured of food quality. Grassroots consumers more aware of what they are eating, that 4% of revenue from the F&B industry was million customers, for others it may not.
restaurants, on the other hand, need something to where it is coming from and who is preparing it, generated from delivery services in 2016 and that
distinguish themselves from other F&B outlets. and they are willing to pay premium for peace of this figure would increase to 10% by 2018. A few of our interviewees mentioned the
mind. Products with natural ingredients and less importance of interacting and communicating with
preservatives are becoming more popular, which Due to food safety regulations, the number of pure customers as a way to improve their operations or
Innovation, artisanship, passion might explain why the number of salad shops and delivery F&B operations is very limited (snacks and adjust their menus, but delivery services seem to
and credibility light food restaurants are exploding. Some of the drinks kiosks are an exception); nevertheless, we be breaking this connection.
restaurateurs we interviewed have spent over 40 do see an increasing number of 30 to 40 sq m
Some restaurants have concentrated on a limited percent of their cost on food, hoping to establish a micro stores with only enough seating for five to Restaurants are also not just about receiving
range of products—becoming specialists in order reputation of quality. ten customers. Such stores are either serving nutritional sustenance, but also an important
to eke out an advantage over their competitors. highly specialised products, are take-away stores social activity. Delivery service will have an impact
This normally comes hand-in-hand with a store The future remains promising with household or are looking to use the space for branding while on sales in the same way that ecommerce has,
facelift and product innovation. Milk tea and juice sizes shrinking, more people getting used to relying on deliveries as the main source of but it is unlikely to reach the same given existing
shops are a great example: stores are upgrading eating out and consumers’ palates refining. The revenue. While some restaurants may look at limitations. Nevertheless, restaurateurs may start
their image from RMB10-15 per cup cheap drinks trend is particularly clear in the wealthier delivery being the whole business, others will taking into account deliveries when they look at
to a customized, health-conscious, higher-quality, Chinese cities with high population densities continue to rely upon in-store sales, treating Third-party delivery companies will typically store locations, sizes and layouts to meet the
no-additive RMB20-40 cup of milk tea. where there are open-minded consumers who deliveries as icing on the cake. charge vendors roughly 15%-35% of sales value needs of all customers.
are willing to spend. Restaurateurs can for a single delivery. Given that rental rates make
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Grassroots Restaurants
Costs and Challenges 食材成本占比最高，
Food material is the highest cost, but labour is the key concern. 但最大挑战
来自人力因素
W
hat is the most challenging aspect drinks shop; however, for a fine dining restaurant,
about running an F&B store? 39% of the percentage could be as high as 40%.
our interviewees highlighted staff
recruitment and management as the top concern, Even for restaurants operating in the same sector,
followed by branding (22%), which includes how the F&B costs as a percentage of total expenses
to promote the brand, maintain customer loyalty could vary by up to 10 to 20 percentage points
and increase footfall. between restaurants. This is largely down to the
owners’ business strategy—some owners
17% of interviewees put location as the number emphasizing high-quality raw materials and offset
one challenge; in particular, they are worried about the additional cost by choosing a more affordable
the higher cost for shopping malls and the store location on a secondary or tertiary street in
difficulty in finding a suitable street store with full the city centre. Patrons discover the venue by
licenses and qualifying facilities. word of mouth or through online review sites
rather than by stumbling upon them in expensive
Although regulations in the F&B sector can be high footfall locations.
onerous, it is still a relatively minor concern for
many of our interviewees—only 11% picked it as a
key concern. Regulatory oversight can vary
significantly depending upon the type of food
preparation and kitchen, with Chinese restaurants
typically requiring higher health and safety The increase of salary
standards than cafés and dessert stores.
in accommodation
and catering service
F&B costs
For the restaurants interviewed, food material
costs are the largest daily expense, accounting for
over a third of the total cost on average. However,
this percentage varies between stores
significantly—more so than labour and rent.
Statistics from China General Chamber of
Commerce indicates that F&B costs typically
account for 27% of the operational expenses for a
Staff salary and recruitment
Figure 2: Cost distribution
Labour costs are the second highest cost for
grassroots restaurants, accounting for 27% of
total costs. This percentage is very close to the
national average for mature F&B outlets—24% of
Food material: 32% the total cost. Average national salary for SMEs’
employees in the accommodation and catering
industry increased 8.9% in 2016 to RMB2,893 per
Labour: 27% 27% month. A waiter in China’s first tier cities however
Rent: 23%
32% can cost RMB4,000 to 5,000 per month plus
accommodation.
Others: 18% 23% 18%
Store managers also often complain about high
staff turnover rates. High turnover requires
managers to spend time and effort finding
replacements and training. New staff who are not Wage inflation is hard to control, especially if you
yet familiar with the menu, certain practices or want to reduce turnover, but overall labour costs
know regulars will also impact the restaurant’s can be controlled and reduced by the adoption of
image and level of service. Managers consumed new IT systems that enable ordering and paying
with training new staff have little time to focus on online. Some restaurant operators may also adopt
Source: Savills Research
other aspects of running the business. cafeteria-style service, ask customers to return
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Grassroots Restaurants
From street to mall constantly under pressure to grow revenues and
control costs rather than investing in the future
and developing a local client base.
The growing influence of shopping malls and ecommerce Street stores have better visibility, a tremendous
amount of variety, longer lease term and,
platforms is not good news for grassroots stores. potentially, a relatively stable customer base. The
restaurants we surveyed had a lease for 4.8 years
on average, which gives owners ample time to fine
tune business operations and brand image and
W
e randomly selected 50 start-up F&B provided to residents or is required by the develop a sustainable business. A more unique
brands which are on the “hot list” at government, rather than a focal point for the consumer experience helps to establish customer
Dianping in Shanghai. Most have less development. It therefore often lacks diversity and loyalty.
than three stores while a few have four or five. an enriched retail ambiance.
Results indicate that 60% started their business Street stores also enjoy longer and more flexible
from a street store location. However, 64% of the With shopping malls offering a one-stop shop for operating hours. Malls tend to, for the majority of
operators decided to open their second store most conveniences, strong connectivity and a vendors, require fixed operating times, typically
within a shopping mall, showing that a presence in growing share of retail stock, more diners are 10am to 9pm. This can sometimes be difficult for
a mainstream location is important when trying to choosing to go to restaurants in shopping malls. A new start-ups that are open every hour possible to
build a brand and expand a business (Figure 4). total of ten million square metres of shopping mall maximize business revenues, often with the
space is expected to complete in the coming three founder running the business themselves.
Most of our interviewees operate out of street years in the four first tier cities alone. Moreover, some Cantonese-style restaurants,
stores and are cautious about opening stores in crayfish restaurants and bars require
shopping malls for many reasons: While there are new malls being completed every non-standard business hours which are not readily
trays themselves or adopt disposable utensils in locations and that the additional cost would be Shopping malls tend to be more expensive but • Difficult and/or expensive to secure the quarter, competition for space from an increasing- accepted by shopping malls.
order to cut down staffing costs. offset by more business. If rents become should be able to generate significant footfall, a right spot in a mall ly competitive and rapidly maturing F&B sector is
unsustainably high they have the option to seek controlled environment and clear positioning, • Shopping mall environments are too pushing up the mall entry thresholds. Increasing One area however that it might be possible for
alternative, more affordable premises elsewhere. while providing property management and an commercialised rents, extra management and promotion fees, street stores to flourish could be in urban renewal
Rent and location experienced landlord or agent to deal with tenant • Business hours are too short and rigid strict regulations, and restrictive business hours projects and creative parks, especially those
When choosing a location to open a new concerns. • Restaurant business is still in its infancy and are not easy for start-up restaurants. A mature supported by the government. These provide
Rent accounts for roughly 23% of operational restaurant, operators will consider whether or not not mature enough brand can secure a lease period of five to eight start-ups with an opportunity to secure city centre
expenses after food and labour. However, the to be situated in a prime or non-prime retail area, Should the operators consider street stores, they years, sometimes even on a high footfall location locations, often with unique architectural styles, at
grassroots restaurants interviewed were much on a main or secondary street, and whether to will be looking for the right atmosphere while also Entry into a mall is a sign of stepping into the on the first floor, whereas a start-up might be a discount to locations on main streets. At the
more tolerant of the current rents, believe that locate in a street store or shopping mall. referencing some of the other restaurants in the mainstream market and the maturity of the squeezed into a food court with over 20 other same time, landlords fill up retail spaces with
higher rents are to be expected for higher footfall same location. Not every concept will work in a business model. A lack of F&B experience could outlets in a basement location. The lease period entrepreneurial retail operators that relate to the
specific location as catchment areas for street expose the store to higher risks when operating in for such stores is typically just one to two years. SMEs and start-ups that are normally found in
stores tend to be more limited. They will also have malls. Mall owners will typically not accept a new These locations give business owners very little these locations.
to be comfortable renting from a small company restaurant concept until they have a proven control over their environment and they are
Figure 3: Key challenges in a manager’s brain or individual. proven track record and loyal customer following.
After all, they have to consider the impact that
Longer lease terms are also attractive to every tenant could have on the rest of the mall.
grassroots restaurants, allowing the business Figure 4: Location of first and second stores by 50 selected start-up F&B brands in Shanghai
owners to have ample time to build awareness The importance of street stores to grassroots retail
and fine tune their operation. 65% of our operators is one of the reasons why many are 100%
Staff
interviewees signed a lease for over five years, concerned about the closure of these retail
39% especially when securing a street store location. premises and the continuous influx of large-scale, 80%
mixed-use developments. Some of the street store
closures are a result of F&B outlets working
Branding Location 60%
without the proper licencing or a change in
22% 17% existing health and safety codes, but, instead of Street
40%
bringing properties up to code or applying for the
proper regulations, many operations are being
Regulation Others 20% Mall
permanently shut down.
11% 11%
In more decentralized areas or new master
0% Others
planned locations, large residential communities 1st store 2nd store
tend to lack suitable retail locations; many
Source: Savills Research developers see retail as a utility that must be Source: Savills Research
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Grassroots Restaurants
Interviews
D
uring the past six months, we talked with related to food and beverages. But now I really is usually free and comfortable. We were less
20 restaurateurs in Beijing, Shanghai, want to grow it in the future. restricted in terms of design and management, so
Guangzhou and Shenzhen to better it just started. However, if you want to grow your
understand their costs, challenges and future Q: What’s the most challenging step when business and increase your brand reputation,
plans. Some of the restaurants were already you’re opening a restaurant? shopping malls will be more suitable. The biggest
closed due to the street store cleaning campaign challenge for us is finding a suitable shopping
in 2017, which reminds us of the risk and Homeslice Pizza: My partner's main business is mall. Apparently, there are not many choices for
challenges of F&B market. providing support for restaurants—from the set up both good positioning and affordability.
and back office side of things, so we avoided
QWhere did you get the idea to open your headaches on that side. In addition, this isn't the Q: What are the key considerations for your
restaurant? first time opening a restaurant in China for me, so I expansion plan?
was ready for most of the issues. The first time I
Egg: I have always wanted to be in the food did the whole process myself, so this [time] was Shua Niu Man: The consumer profile in
industry—I was that nerdy kid who read much easier. Construction always comes with surrounding areas is very important. We are
cookbooks at night instead of novels. I love the some unexpected issues, but the biggest interested in areas where young people like to live.
way that food brings people together, tells stories, challenge for restaurants here is people—finding But young consumers are not loyal to brands, so
and creates experiences. When I moved to and keeping good [employees] is hard. we have to constantly provide something new to
Shanghai, there was a gap in the market for a attract customers. Rental level is also very
comfortable ‘neighbourhood’ place that served Kaffeine: The most difficult decision we needed to important. Shopping malls are also attractive to
simple food done well—it was type of shop I make was the retail location. Our coffee beans are us, but business hours will be a key issue for us.
missed from other cities I had lived in. Having lived strictly selected—which means our quality and
in New York and London, I would have never cost of raw materials is very high. We needed to Nooxo: We are looking for any location where
thought that it would have been possible to open be close to mature business areas which are football is well-balanced, not too much concen-
a restaurant with little capital and very little normally surrounded by consumers with good trated during lunch or dinner time. It will also be
experience, but Shanghai is (was—less so now!) taste and spending capacity for good coffee. better if workday and weekend customers are well
the perfect market. It was significantly less
expensive to start up here when we opened,
Unfortunately, rents in the city centre are too high.
Some street stores could offer rents within our
spread.
Please contact us for further information
especially with the model chosen for the shop. It’s budget, but it is very hard to find a street store Homeslice Pizza: I like to work with smaller
also a collaborative community, with chefs/owners
ready to share information and help each other.
with full licences. We might consider going to a
shopping mall in the future, but now the focus is
spaces; it is easier to create atmosphere and it
means that you have less exposure on quiet
Research Retail
on our existing stores. nights. I would look for different landlords for
Marway: I have been working in the F&B related different concepts. Right now, we would like to
business for years. Marway is our brand set up to Sugo: Shekou is an international location in find a second smaller space so that we can
focus on F&B service for events and conferences. Shenzhen, and is more suitable to the food and increase our brand recognition and expand our
We also manage a café and comfort food brand, positioning of our restaurant. This store is not delivery business—weekend business levels in our
which works as a showcase for our products. We facing the main street, so footfall was quite limited existing space mean that we cannot do delivery
are still looking at places and opportunities to at the beginning. We are trying to establish our on weekend nights. After that, I would like to find a
open new restaurants, probably smaller, but which brand reputation by providing quality food. The space in a mall with predominantly Chinese
James Macdonald Siu Wing Chu Aileen Zhong Lesley Wang
offers some new ideas and concepts to business is much better now, which gives us more clientele. Our needs are different according to
Head of Research Managing Director Senior Director Director
customers. confidence to move on. what stage of the brand lifecycle we are at.
China Central China Central China North China
Home Pub Craft Beer: The place and business Rong Yi: We started our brand in a creative park
+8621 6391 6688 +8621 6391 6688 +8621 6391 6688 +8610 5925 2086
began with a hobby. I did not have any experience in Guangzhou. The atmosphere of creative parks james.macdonald@savills.com.cn siuwing.chu@savills.com.cn aileen.zhong@savills.com.cn lesley.wang@savills.com.cn
Figure 5: Restaurants interviewed
Chester Zhang Iris Lin Dorian Zhi
Associate Director Director Director
China West China South China
+8621 6391 6688 +8628 8147 1803 +86755 8828 5720
chester.zhang@savills.com.cn iris.lin@savills.com.cn doriandl.zhi@savills.com.cn
Savills plc
Savills is a leading global real estate service provider listed on the London Stock Exchange. The company established in 1855, has a rich heritage with unrivalled growth. It is a
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