Cafe looks to profit in mainland fast lane

PUBLISHED : Monday, 05 February, 2007, 12:00am
UPDATED : Monday, 05 February, 2007, 12:00am

Fast food is not a good fit with the culture of China, a nation known for its love of good food and slow cooking. But Cafe de Coral chairman Michael Chan Yue-kwong believes the Chinese market is the future of his fast-food chain.

'The mainland lifestyle is becoming just as fast-paced as it is in cosmopolitan international cities. More and more people like going to fast-service restaurants,' he said.

'The mainland's fast-food market is taking off as affluence grows. It's just like Hong Kong was 20 years ago.'

Mr Chan said fast food accounts for slightly less than 2 per cent of China's food service industry, compared with 19 per cent in Hong Kong, 30 per cent in Japan and 45 per cent in the world's largest fast-food market, the United States.

But Mr Chan believes China gradually will accept the fast-food culture. 'Twenty years ago, fast food represented only about 7 per cent of Hong Kong dining expenses. Now it's 19 per cent. It won't take long for China to catch up.'

Cafe de Coral has 562 restaurants of which 127 are located in the mainland and branded either Cafe de Coral or New Asia Dabao. Mr Chan said mainland operations accounted for about 13 per cent of the group's HK$151 million net profit in the six months to September.

The company plans to add eight shops in China every year. 'We can't grow too fast since it takes about 60 staff to run a shop, meaning we have to train about 480 people a year.'

The average bill in its mainland restaurants is 10 yuan per person which Mr Chan hopes to increase to 15 yuan. The average bill in its Hong Kong restaurants is HK$25 per meal.

Lyn Foo, an analyst at UBS Securities, said the mainland expansion plan was a plus for Cafe de Coral. 'China business is profitable and the group has expanded carefully in the mainland,' she said.

But Hong Kong is still the group's driver. 'In Hong Kong, the company has good organic growth. In addition, its central processing unit, where its dishes are made and then distributed to the different shops, achieves economies of scale and ensures consistent food quality,' Ms Foo said.

Hong Kong generates about 80 per cent of the chain's earnings. Its Cafe de Coral, Spaghetti House, Ah Yee Leng Tong and Oliver's Super Sandwiches serve 300,000 customers a day.

Mr Chan said 10 new Cafe de Coral outlets opened in Hong Kong last year and expansion would continue.

Analysts say Cafe de Coral enjoys a 15 per cent market share among Hong Kong's 1,600 fast-food outlets.

Cafe de Coral (whose Chinese name means 'everybody's happy') was founded by Mr Chan's father-in-law, Victor Lo Tang-seong, in 1968. At first it served traditional cuisine but took up the fast-food banner in the 1970s. The founder, now 91, is still a non-executive director of the company.

Mr Chan joined the group in 1984 at the invitation of Mr Lo. He knew nothing about restaurants, having studied town planning and practised that trade for six years before returning to Hong Kong and a government job in 1983.

'City planning is a slow process. I prefer to work in a fast-paced business environment and a fast-food company seems to suit me well,' he said.

Mr Chan started his second career by helping to introduce many new dishes, such as the individual hot pot. (His personal favourite is baked pork chop with rice.) He also met investment bankers, initiating a process that turned the family-owned chain with 30 outlets into Hong Kong's first listed fast-food company in 1986.

Analysts say this has helped pave the way for its expansion to 562 outlets in Hong Kong, the mainland, Canada and the US.

The listing almost did not happen. Cafe de Coral just barely met the stock exchange's requirement of a HK$30 million profit in the year before coming to market. In the financial year to March 2006, however, it had a profit of HK$321 million.

Being publicly traded gives the company an advantage not enjoyed by its unlisted competitors - it can dole out share options.

'Once we were listed, we could award our staff - from the management to the chefs - stock options, which are a key incentive to work better,' Mr Chan said. 'The listing rules also require the management to enhance corporate governance and improve transparency.'

With Cafe de Coral's share price up almost 13 times in 20 years, Mr Chan and quite a few members of his staff have become millionaires. He was appointed a director in 1988, managing director in 1989 and executive chairman in 1997.

Some people in the industry suspect he wants to turn Cafe de Coral into a Chinese answer to Yum! Brands, the world's largest restaurant company with more than 34,000 restaurants including KFC, Long John Silver's, Pizza Hut and Taco Bell.

Mr Chan thinks Cafe de Coral has already surpassed Yum! in some respects. 'Cafe de Coral has more items on the menu - we serve more than 100 items while many fast-food chains have only 10 or 20. Many chains use pre-packaged food; for many dishes we do the last stage of cooking when the customer places the order, to ensure the food tastes better.'

Cafe de Coral has progressed according to five-year plans. The first one followed its listing and consisted in expanding the number of outlets of Cafe de Coral proper. In the second phase, from 1990 to 2000, it set off to acquire other restaurant groups.

Mr Chan said the shift in strategy was a response to the situation in 1989 when the June 4 incident shook confidence in the economy and many staff migrated abroad.

'To restore employee confidence, we decided to expand more rapidly. We believe in turning a crisis into opportunity,' he said.

Purchases included the Ah Yee Leng Tong Chinese restaurants, Oliver's and Spaghetti House. Abroad it acquired 50 per cent stakes in Shanghai's New Asia Dabao and the Manchu Wok restaurants and China Inns in the US and Canada.

'We did careful due diligence. We never paid an excessive premium to buy restaurants. And we would only buy those that had a familiar culture and appealed to the mass market segment, where you don't expect your customer to spend more than HK$100 for a meal,' Mr Chan said.

The acquisitions turned Cafe de Coral from a pure fast-food play into a multi-brand firm that foreign investors were willing to look at.

But the acquisition trail has not always been smooth. Manchu Wok, the North American chain it bought in 2000, was a disappointment, losing HK$28 million in 2005. Mr Chan said it learned a painful lesson after deciding to leave the management to its partner. It finally bought out the partner in October 2005.

Since Manchu Wok became a wholly owned subsidiary, Mr Chan has carried out a series of cost cuts and closed down unprofitable locations. 'We already reduced the loss by 50 per cent in the US in the past year and we expect to turn it around in a year,' he said.

Ms Foo said she expected the company's profit to rise 19 per cent this year and 20 per cent next year, thanks to the improvements at Manchu Wok and continued growth in Hong Kong and China. UBS has a HK$14.40 target price for the stock which closed on Friday at HK$13.92. The stock peaked at HK$15.08 in December, a 12.7-fold appreciation since its debut at HK$1.18 per share 20 years ago.

The analyst said good management had been the key to the firm's success.

Mr Chan said Cafe de Coral had been a winner because it anticipated changing customer tastes and demands. 'We have taken a market-driven approach in which we customise our service and food to adapt to the changing diet preferences of our customers.'

Customers grow ever more demanding, he said. 'In the old days, a quick breakfast or lunch would be enough but now they want a dinner menu, special dishes and a comfortable environment at a reasonable price. This led Cafe de Coral to think of special dishes such as individual hot pot, Japanese eel with rice and Christmas turkey.'

Mr Chan has embarked on his five-year plan to find successors for himself and his other senior managers.

'I'm 55 years old and many of the senior management have come up together so we are all of a similar age. Five years from now we will be reaching the company's mandatory retirement age of 60. We need to think ahead and train younger staff to take the helm.' Potential successors in their 30s and 40s are being singled out.

His successors would not necessarily come from among his own children. They could be anyone who is prepared to take on a job that he describes as tough but fun.

'Sure, the restaurant business is difficult. To have a career you have to be prepared to work long hours, to attend to details. If you want to succeed in the restaurant business, you have to see it as your life,' he said. 'But then, the brighter side of the business is, it's always full of surprises because every day when you open the shop, you will be dealing with different scenarios and different customers.'