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DBS Group Research • November 2019
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SECTOR BRIEFING
China Catering Sector
Blue Skies
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China Catering Sector
Blue Skies
Produced by:
Asian Insights Office • DBS Group Research
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Alice HUI
alicehuism@dbs.com
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Executive Summary
Industry Overview: China’s Catering Sector
How Large Is The Market?
A Longer-term View
A Fragmented Market
Comparative Analysis:
What Does It Take to Succeed?
Category #1: Operating Scale
Category #2: Operating Efficiency
Category #3: Innovation
Delivery Market: A Strong Force Ahead
According to Frost & Sullivan, China’s restaurant industry has been growing at a 10.1%
CAGR over the past five years to become one of the largest global markets. Rising disposable
income, rapid urbanisation, favourable income tax initiatives, changing household sizes and
spending patterns have all increased the dining-out trend in China. Coupled with the swift
progress of online food ordering and delivery, sector growth could sustain at a 10.6%
CAGR in 2018-22E.
China’s top 100 restaurant chains account for only 7% of the total restaurant revenue in
2017, versus 30% in the US. Given the rapidly changing store formats and increasingly
stringent requirements for standardisation, we expect this ratio to rise strongly, supported
by aggressive store expansion plans of both domestic and global chains with strong capital
backing.
Beyond operating scale and efficiency, we believe that a company’s degree of innovation,
including digitalization and delivery are all critical to business success in this highly
competitive market.
Expanding operating scale will be a key focus to deliver growth in the medium term. Based
on our analysis, the largest fast food operator in China, KFC, has c. 4.35 outlets per million
population, while casual-dining Pizza Hut’s figure stands at c. 1.6. This pales in comparison
with the average coverage of US top fast food restaurants’ 16.2 outlets and casual diners’
2.3 outlets. As such we foresee that the catering industry should see strong room for
expansion in China.
At the same time, we believe restaurants’ cost management is an essential area of focus
due to the expansion in scale of operations, intensifying competition and market volatility
ahead. Key initiatives including leveraging on digitalisation to raise productivity, as well as
better reach to consumers through the more effective use of capital would be key pillars of
support in the medium run.
China’s food retail and service industry, with an online penetration rate of 13.4% in 2017,
is expected to grow to 29.5% by 2023E. The food delivery sector is expected to deliver a
sales CAGR of 26.6% over the next five years along with rising online penetration. It has
become an essential component for subsectors such as QSR, fast-casual and casual dining.
We expect delivery sales, while softer in margins could contribute incrementally to make up
for potential declines in table turnover ratios.
Executive Summary
Eating out is
becoming a prevalent
habit
Fragmented market
presents consolidation
opportunity
Scalability, cost
management and
innovation critical factors
to business success
Delivery becoming
more prominent;
restaurants adapt
with changes in store
formats
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Industry Overview:
China’s Catering Sector
How do Chinese
consumers spend
compared to the rest of
the world?
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How Large Is The Market?
China’s catering service market has been growing at 10% CAGR in FY13-18 to Rmb4,272bn.
Driven by favourable tax reforms, growing disposable income, changes in household sizes
and habits, we forecast China’s catering service market to outperform GDP growth and
sustain a 10.6% CAGR in 2018-22E.
Compared with the rest of the markets, China’s restaurant sales per capita was higher
than most ASEAN countries except for Singapore, but at US$504/capita (Rmb3,551) in
2018 remained low versus >US$1,600/capita in developed nations (US and EU) (Source:
Euromonitor). China’s national catering revenue accounted for around 5.7% of GDP per
capita last year. We expect this ratio to rise as consumption patterns continue to move
towards eating out.
Revenue of catering service market, 2013-22E Total consumer expenditure per capita - China
Source: Euromonitor, Frost & Sullivan, OECD, iResearch, NBS, DBS HK
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A Longer-term View
On a broader and longer-term picture, we look at key developed countries including the US,
UK and South Korea to try and gauge how China’s spending patterns could change from the
recent period till 2030E. By trailing gross national income per capita (price- and forex-adjusted)
across these nations, we note that China’s income level of US$8,000+ per person by 2016-17
could be comparable to the US in 1975, the UK in 1980, and South Korea in 1993.
Hence, analyses of consumption basket shifts across the food & beverage (F&B) sector for
these developed countries (e.g. US market) beyond the respective identified years could
provide some clues on what to expect for China by 2030E. For the analyses, we adopt a
13-year period of 1975-88 in the US to project for China’s 2017-30E.
How fast is China’s catering sector growing relative to
other nations?
Gross national income per capita (Atlas Method)
Restaurant sales per capita (USD/capita)
* China 2018-22E
Source: Euromonitor, Frost & Sullivan, OECD, iResearch, NBS, DBS HK
Source: World Bank (price- and forex-adjusted), CEIC
Over the 13-year period of 1975-88 in the US, key consumption categories across the F&B
sector saw substantial proportionate increase in the dine-out category, rising from 25%
of total F&B household spending in 1975, to take up 33% in 1988. By projecting a similar
spending pattern for China, its dine-out trend should at least capture a 7.3% CAGR in the
longer run during 2017-2030E.
Household
consumption shifts
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Household consumption: F&B Sector (US, 1975-1988)
Est. consumption CAGR: F&B Sector (China, 2017-2030E)
Restaurant sales per capita (USD/capita)
*off-premise consumption
Source: CEIC, DBS HK
*off-premise consumption
Source: CEIC, DBS HK
A Fragmented Market
China’s top 100 catering chains accounted for only 7% of total sales in 2017. Compared
with the US top 100s’ concentration ratio of 30.8%, this suggests ample room for market
consolidation in China.
According to Frost & Sullivan, restaurant chain operators are expected to see their businesses
growing at a faster rate of 11.4% CAGR in 2017-22E than stand-alone restaurant players
9.5% CAGR. This is largely due to fast expansion to take advantage of a growing delivery
market, increased awareness of food safety and hygiene, and their attraction to better
standardisation in restaurants.
One of the key reasons for the fragmented restaurant market is the sheer number of local
cuisines available in China. Chinese cuisine remained the dominant segment, accounting
for at least 80.5% of the market share in 2018. The Chinese cuisine market can be further
categorised into formal Chinese restaurants (hotpot, Sichuan, Cantonese), or quick-service
restaurants (simple dining ambiance with limited table service).
Restaurant chain
operators expected to
outgrow independent
players
Chinese cuisine is
dominant in meal
preference
China vs. US restaurant concentration (%) - 2017 Types of cuisine breakdown in China (%)- 2017
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Source: NBS, Frost & Sullivan, China Catering Industry, US Catering Association
China – Chain operators to outgrow independent players
Types of Chinese cuisine breakdown in China (%)- 2017
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Source: NBS, Frost & Sullivan, China Catering Industry, US Catering Association
As a point of reference using Hong Kong’s restaurant sector, Chinese cuisine accounted for
the majority of restaurant receipts, at a 73% share in 1987, which had since fallen to 42%
in 1Q19. Fast food rose from 7% to 19% of total share in 1987-1Q19, while non-Chinese
cuisine rose from 18% to 30% over the same period.
With Chinese cuisine’s dominance in China, it is expected that Asian Cuisine and Western
Cuisine will deliver stronger CAGR at 15.7% and 11.9% in FY17-22E, while Chinese Cuisine
will deliver a CAGR of 9.7% over the same period. Of which, Chinese cuisine’s market share
will reduce from 80.5% in 2017 to 77.8% by 2022E. That said, hotpot cuisine is expected
to grow at a faster pace at 10.2% CAGR over the same period, and take a larger share of
14.5% in 2022E (2017: 13.7%) within the Chinese cuisine segment.
Hong Kong restaurant receipt breakdown (%) China - Revenue of catering service market by cuisine
type
Hotpot cuisine market size
China’s cuisine
choices will become
increasingly diversified
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Source: CEIC, Frost & Sullivan, Company data
Regional map on most ordered food in China via delivery
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Source: Meituan Research
0.1%
0.1%
1.4%
1.5%
1.7%
9.8%
11.5%
13.30%
39.1%
0.2%
1.2%
1.5%
2.1%
2.8%
5.8%
13.0%
16.4%
39.3%
0.1%
0.3%
1.0%
2.0%
2.6%
8.6%
12.2%
14.1%
38.7%
0.0%
0.2%
2.0%
2.7%
2.7%
6.5%
12.4%
12.8%
44.8%
North
China
Huazhong
West China
South China
East China
0.1%
0.5%
1.8%
1.8%
3.0%
8.9%
11.3%
12.2%
44.1%
Southeast Asian cuisine
Porridge noodles
Seafood / Buffet
Japanese and Korean cuisine
Western food
Hot pot / barbecue
Light dining
Chinese food
Fast food
Southeast Asian cuisine
Porridge noodles
Seafood / Buffet
Japanese and Korean cuisine
Western food
Hot pot / barbecue
Light dining
Chinese food
Fast food
Southeast Asian cuisine
Porridge noodles
Seafood / Buffet
Japanese and Korean cuisine
Western food
Hot pot / barbecue
Light dining
Chinese food
Fast food
Southeast Asian cuisine
Porridge noodles
Seafood / Buffet
Japanese and Korean cuisine
Western food
Hot pot / barbecue
Light dining
Chinese food
Fast food
Southeast Asian cuisine
Porridge noodles
Seafood / Buffet
Japanese and Korean cuisine
Western food
Hot pot / barbecue
Light dining
Chinese food
Fast food
According to McKinsey, based on analyses across 16 countries in 2016, when comparing a
selection of restaurants with similar pricing levels, delivery time has the largest impact on a
user’s experience. Hence, this explains the fast store expansion of compact/kiosks to reduce
delivery time.
Based on our compilation of >20 restaurant brands based in China, the fastest growing
category by number of outlets in 2016-18 was coffee & bakery chains (+63.8%), driven
largely by Luckin Coffee & Starbucks. This was followed by hotpot cuisine (+31.2%), and
cha-chaan tengs (+11.4%).
Delivery plays a role
China: store expansion plans earmarked by major players based on a sample of >20
restaurant brands
Source: NBS, Frost & Sullivan, Euromonitor, DBS HK estimates
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Scale matters
Beyond operating scale and efficiency, we believe that a company’s degree of innovation,
including digitalization and delivery are all critical to business success in this highly
competitive market.
Category #1: Operating Scale
Operating scale is a key driver to improving productivity. Quick-service segments, with the
likes of KFC and Starbucks, generally perform best for this metric. Within China, we also
noted strong performance from hotpot players.
Based on our analysis on the US, fast food remains the dominant dining category, with
Subway and Starbucks boosting a total of 75.8 outlets and 42.5 outlets per million
population respectively. These numbers far exceed those of China’s and suggest that the
country remains largely underpenetrated in terms of outlets per million population.
Category #2: Operating Efficiency
In an ever changing operating landscape where players frequently adopt different types
of store formats, revenue per sqm appears to be one of the most appropriate options
to assess efficiency. Our analysis reflected that China operators generate c. 60% less in
terms of revenue per sqm than Hong Kong operators. The is largely due to Hong Kong’s
higher table turnover ratio amid a high population density, large number of tourist arrivals
and a low adoption in food delivery. With higher revenue per sqm, Hong Kong operators
absorb higher rental and labour cost, which sometimes results in lower margins than
China peers.
Operating Costs
According to China Catering Industry, food costs (including drinks) generally make up the
largest component of total costs across different restaurant segments (main meal, hotpot,
fast-food).
In order to increase operating efficiency and relieve food cost pressure and reduce food
wastage, we note that many restaurants are focusing on the following:
Comparative Analysis:
What Does It Take to
Succeed?
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1. Building an integrated supply chain
Restaurant players are opting to directly source for vegetables, while meat and
other ingredients are usually purchased collectively and delivered to central kitchens/
distribution centres.
2. Relieving raw material cost pressure
Impacted by the African Swine Fever outbreak, global meat prices have been rising YTD
in China. Domestic beef, pork, lamb, and chicken have recorded 12%/46%/9%/19%
increases in prices YTD. To offset this, we have seen the following trends: (1) an
increase in sourcing of imported products (e.g. Pizza Hut importing New Zealand
steak and recorded mild cost deflation in 2Q19), (2) diversification of alternative raw
material sourcing (seafood), and (3) the introduction of beverages menu that normally
commands higher gross margins.
Apart from food material costs, labour, rental and other operating expenses (utilities,
depreciation & amortisation, and advertising & promotions) are the other key cost
components within the restaurant sector. Of which, we found that labour expenses
remain the most concerning factor for restaurant players.
Based on a study conducted by Frost & Sullivan, China’s national annual salary in catering
services recorded a CAGR of 7.0% to Rmb45,305 (Rmb3,775/month) between 2013-18,
and is expected to grow at a higher rate of 7.5% in 2018-22E, driven by rising demand
for labour.
From our analysis, we found that additional perks (housing and education subsidies),
on-the-job training, a clear development path and promotion opportunities appear to be
differential points amongst restaurants’ compensation offerings, not base salary. Further
to which, to combat rising wages, companies have also increasingly opted for higher
usage of automation to reduce frontline staff demand, including cashiers and servers.
Digital Payment Systems
Many restaurant operators have been introducing online-preordering and digital pay-
screens since 2015 to improve order accuracy, and to improve employee efficiency. Others
also provide QR codes and devices such as iPads to offer digital menus and payment
platforms. Some operators even went a step further and tried out robots preliminarily.
However, as customers still value good services, we believe the use of robotics to replace
bulk of the frontline staff will be less prevalent for now.
Improvement in
restaurant productivity
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Category #3: Innovation
Driven by public policy such as the Made in China 2025 Plan, China has been an early
mover in the development of an omnichannel model, by way of increasing automation and
productivity. We expect automation and digitalisation will continue to be key drivers in the
evolution of the restaurant sector in the following areas:
1. Redeployment in manpower from frontline staff to delivery or backend kitchen staff
2. Predictive analytics through artificial intelligence (AI)
3. Internet of Things (IoT) development on the securitisation of supply chain, product and
transaction volume forecasting, and labour scheduling.
Artificial Intelligence
IoT has been adapted across industries to improve operational efficiencies. Through
monitoring food service equipment with connected sensors, restaurant operators can
collect data on inventory and food warming stations, alert on periodic maintenance and
compliance monitoring.
For example, restaurant operator Yum China has been working with Baidu to develop
payments by facial recognition, personalised menus through KFC applications and AI
-powered forecasting of transaction volume to improve labour scheduling and reduce
wastage. By determining sales performance, location, weather, promotions and holidays,
Yum China aims to improve the forecast accuracy on transaction volume and product unit
count. This will reduce wastages as well as enable better labour scheduling.
Fast food giant McDonald’s also recently acquired Israeli-based start-up Dynamic Yield which
helps to personalise options while considering algorithms such as weather, time of day,
local traffic, nearby events, sales data at the specific outlet and globally. Second, through
predictive analytics, companies are also able to make better predictions on transaction
volumes and thereby reduce wastage.
The Omnichannel Model
Creating an omnichannel relationship is just the first step. As restaurant chains attain a
certain scale, it is important to recognise the need to go the extra mile to reach out to
their customers through loyalty programmes and proprietary data of their own customers.
By compiling and analysing big data, restaurants can make smarter decisions. Through
the help of other interactive methods, restaurants can also identify locations with a high
concentration of customers and their preferences. This enables the restaurant operators to
make better strategic decisions in store planning, operations, marketing and more.
Artificial intelligence to
drive mass-marketing
to customized choices
Connecting mobile and
retail
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Development of an omnichannel model
Source: iResearch
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China’s food consumption through e-commerce platforms had expanded by a whopping
86.9% in 2013-17 to Rmb479bn. Supported by a rising number of active users and rising
transaction volume per active user, the on-demand food delivery market is expected to post
a CAGR of 26.6% in 2018-23E.
Between 2015 to 2018, the number of transacting users rose at a CAGR of 25% to 400.4m
users, with average number of transaction per annual transacting users rising to 23.8 units
(2015-18 CAGR of 32%).
Restaurateurs typically embrace delivery as it helps drives topline growth. According to
100ec, Meituan riders typically make Rmb8-10 per order, while ele.me riders earn Rmb5-7
per order in addition to a monthly base salary of Rmb3,000. As the food delivery aggregators
are competing for market share, we understand each order is subsidised. Commission fees
are between c. 17% and c. 21%, while delivery costs range between c. 8-13% for chained
operators depending if the company opts to leverage on the delivery fleet.
Delivery market size Compared to developed nations, China’s delivery
market growth is expected to outstrip others
significantly
Source: iResearch
Delivery Market:
A Strong Force Ahead
On-demand food
delivery to grow faster
than general food
consumption through
e-commerce
Rising number of users
and transactions per
transacting users
on-demand
food delivery
Delivery market penetration
on-demand
food delivery
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Delivery services are rapidly changing the eating habits of the younger-generation
consumers. The key attributable reasons for this shift include the lack of time to prepare
meals, convenience, eating alone, volatile weather conditions, special discounts available,
lack of cooking skills, and adopting delivery as a key habit.
The key impacts on the restaurant industry include the following:
1. Driving demand during non-peak periods
Previously, consumers only opted to eat out during lunch and dinner periods. With the
ease and convenience accorded by its delivery services, there has been reportedly a
rising number of transactions during non-peak periods including breakfast, and supper.
2. Store expansion strategy altered based on big data
Restaurants are locating their latest stores through data released by data aggregators
such as Baidu. They will refer to the demographics and information relating to active
users, and determine whether it is feasible to set up new outlets in those new areas. For
example, outlets were traditionally located close to residential, office and school areas.
Now, restaurateurs are also able to identify rising demand from venues such as hotels,
hospitals and entertainment centres. We also note that quick-service restaurant chains
have been upgrading their store formats to cater to delivery and an increase in online
orders from certain areas.
Delivery is driving higher usage during non-peak hours – breakfast and supper
Source: Company data, DBS HK
Delivery services change
consumer behaviour,
but what is the impact
on restaurants?
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Delivery market breakdown by areas (%)
Stronger expansion focus on lower-tier cities
Source: Company data, DBS HK
Source: Company data, DBS HK
3. Rise in demand from new customers
According to Meituan Research, Tier 2-5 cities have seen the strongest growth in recent
years. In January-October 2017, transaction volumes rose by 157%/187%/238%/300%+
in Tier 2-5 cities. It is reported that Tier 2 cities generate the bulk of transaction volume
at 40%, while the contribution from Tier 3-5 cities is rising rapidly.
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4. Demographic of delivery users - younger and more frequent users
The generation born after 1990 has reached over 400m in population size, and
accounts for roughly one-third of the total population. According to Meituan Research,
customers aged 20-35 contribute 74% of total transaction value. The number of
younger consumers within the middle-class population is also expected to expand from
100m to 250m, accounting for 20% of the total population.
We believe the degree of innovation is highly important for restaurant players as the market
is likely to accelerate its consolidation process as a result of the rise of delivery, and demand
for food safety concerns. As >80% of China’s population is connected through mobile
devices, continuous digital engagement and communication with consumers remains the
most relevant for restaurant players.
Younger consumers are more likely to place delivery orders
Source: Meituan Research
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