BEIJING (20 May 2010) -- Rapid growth is anticipated in the restaurant industry in China as a key segment of consumers say they plan to dine out more, however, with 5.1 million restaurants, the industry is also set for consolidation,according to a study by the global business-advisory firm AlixPartners. The study included research into the industry and a survey of 1,030 young adults from the ages of 20-25 from 13 major cities in China, to establish future trends in the industry.
The AlixPartners study finds that Chinese consumers are spending only 22% of total food expenditures in restaurants, compared with nearly 50% for US consumers. However, that seems to be set to change, as almost half of those surveyed anticipate eating out more, with the total average spending in restaurants increasing 10% in 2010, driven by increasing disposable income. By comparison, in a similar AlixPartners survey in the US, consumers said they anticipate spending 4% less per capita this year. The Chinese restaurant market is currently very fragmented, finds the study, with the top 100 chains, which are dominated by quick-service and hot-pot restaurants, accounting for only 6% market share, compared with a 45% share enjoyed by the top 100 chains in the US. However, the study finds that profitability is strong among leading Chinese restaurant chains, with 10% to12% EBIT margins in 2009, in line with average fast-food chains in the US. The survey found that 50% of respondents, Chinese consumers in their twenties, claim that they prefer to eat in chains rather than independent restaurants, suggesting a huge opportunity for growth in this sector.
Christian Paul, Director for AlixPartners in China, notes, “The restaurant industry in China is likely to see significant levels of activity over the coming years, as established local chains are looking to expand and Western chains will enter the market. Several leading domestic restaurant chains have raised capital for expansion and further M&A activity is most likely in the restaurant industry, both acquisition by larger chains and investments from the private equity industry. We have already seen deals such as Yum! Brands’ purchase of 20% of Little Sheep Condiment last year, making them the largest and most diversified chain in China, Actis’ investing US$50 million in Xiabu Xiabu and CDH’s investing US$43 million in South Beauty at the end of 2008.”
Western restaurants are also expected to experience growth in China, according to the study. Presently, US companies have a market share of about 1% in China, and only American fast-food chains such as KFC, McDonalds and Pizza Hut have a major presence. However, the AlixPartners survey finds that whilst still preferring Chinese-style dining overall, young adult consumers in China plan to spend 40% of their dining-out expenditure in Western-style restaurants, stating that they are typically cleaner and have a better atmosphere and service than their local counterparts.
Paul notes, “The segment of consumers we surveyed, young adults, are a key indicator for the growth potential of the restaurant industry. There are major opportunities for new entrants into the Chinese market, especially in the casual-dining sector which has multiple major players in markets such as US and South Korea. However, developing a brand position and good quality reputation will be critical for Western chains in this highly fragmented and competitive market.”
He continued, “For any restaurant to remain competitive in China going forward, operators must serve high quality food and deliver consistently good service. Similar to in the US, food quality is the most important factor when Chinese consumers determine overall value. Service rates far higher for the Chinese consumer than the US, who are more focused on price. Other top factors in China are price, atmosphere and proximity, and word of mouth is the strongest form of advertising.”
About AlixPartners
AlixPartners LLP is a global business-advisory firm offering comprehensive services to improve corporate performance, execute corporate turnarounds, and provide litigation consulting and forensic accounting services. The firm’s specialty is urgent, high-impact situations when results really matter. The firm has more than 900 professionals in 14 offices across North America, Europe and Asia. The firm can be found on the Web at www.alixpartners.com.