Restaurants give food for thought

EATING out is out. Not only the safety-conscious are avoiding restaurants in the prevailing cholera scare; adventurous stock market punters are also staying clear of restaurant shares, which for the past year have underperformed the Hang Seng Index.

On the Chinese restaurant front, City Chiu Chow (Holdings), which runs restaurants specialising in Chiu Chow cuisines, underperformed the index by about 50 per cent between July 30, 1993 and June 30, 1994, according to Bloomberg data.

In the same period, Tack Hsin Holdings underperformed by 21 per cent, Winton Holdings (Bermuda) by 37 per cent, Tak Sing Alliance Holdings by 48 per cent, Fairwood Holdings by 76 per cent and Cafe de Coral Holdings by 30 per cent.

The sector's weak performance highlights the ebbing popularity of the China concept and the difficulties of the restaurant industry.

''Many of these restaurants have China plans. Everybody was bullish on China-concept stocks early last year. But since the second half of last year, investors have become increasingly sceptical about the China concept,'' said an analyst.

Cafe de Coral Holdings managing director Michael Chan Yue-kwong said: ''Regarded as China plays, the stocks once overshot. But now [investors] have come back to reality.'' Under Beijing's macro-economic plans, the eating-out sector on the mainland has weakened.

Tack Hsin Holdings executive director Lai Lak-keung said: ''Officials putting their dining bills on the government are going to restaurants less often now, as far as I know.'' ''It is not very profitable for them to operate on the mainland. They need to form joint ventures with Chinese parties. The set-up costs can be high,'' said an analyst.

Those running joint-venture restaurants also find their decision-making undermined by mainland partners who may not be familiar with commerce but are eager to have a say in the management.

Foreign restaurateurs going it alone in a China business can find themselves facing many problems including bureaucratic hurdles.

Mr Lai also says there is intense competition among mainland restaurants situated in prime locations with convenience traffic.

In Hong Kong, however, it would seem that there are favourable factors.

''Hong Kong's economy has done better than expected since last year. The stock market's great leaps in the second half of last year and the soaring property market resulted in greater wealth for some people,'' said Bank of East Asia senior economist Kwok Hung-fai.

''With the enhanced wealth of individuals, private consumption ought to have grown to benefit the industry,'' he added.

But why is the sector wilting in the face of such increased spending power? What has gone wrong? Industry players say spending power has in fact been declining despite the positive factors.

''There is rampant inflation. Also, with jumping property prices, consumers need to spend a larger proportion of their income on residence costs. They therefore have less to spend on eating out,'' said Mr Lai.

''There is a lot of competition which, apart from thinning out the sales of each individual restaurant, also discourages them from raising prices. Moreover, rents and wages are getting ever higher. Their profit margins are squeezed,'' said an analyst.

The entire sector is also squeezed by changes in consumption patterns.

The exodus of the territory's industrial operations to the mainland has hit restaurant sales.

More importantly, banqueting - which constitutes the majority of a Chinese restaurant's income - is on the decline.

''For a wedding, for instance, few people now would host a banquet with 20 to 30 tables as they used to. Newlyweds now go for simplicity. Some even do without banqueting and spend the money on a holiday instead,'' he said.

An emerging genre of Chinese restaurants in the form of speciality eateries such as the Ah Yee Leng Tong chain is also biting into the market share of conventional Chinese restaurants.

These have emerged in the Chinese restaurant sector because of the high rentals, according to Mr Chan.

''When people cannot afford to rent an outlet of 4,000 to 10,000 square feet [the range in size of most conventional Chinese restaurants] but can only afford to rent one of 1,000 to 2,000 sq ft, they know they have to offer something different to attract diners,'' he said.

On top of intra-sectoral competition, Chinese restaurants are also facing keen competition from fast food eateries and hotels.

''Deluxe restaurants have had some of their business taken away by hotels, while the fast food outlets have become more active and this has affected Chinese restaurants' business,'' said Mr Lai.

Official figures show that last year the fast food sector grew 13 per cent while the entire eating-out industry grew only six per cent, indicating that the fast food sector had outperformed the eating-out trade.

The fast food sector accounts for 14 per cent of the territory's eating-out market now, compared with seven per cent in 1986.

Dwindling consumer spending power also means that consumers are turning from Chinese restaurants to fast food restaurants where food is cheaper, say analysts.

So what are Chinese restaurateurs doing to revive the sector? ''To combat the problem of high rentals, some restaurants are buying properties for outlets,'' said Mr Lai.

They were also trying to reduce the costs of materials, seeking suppliers who offered the best value for money and resorting to bulk ordering for price discounts, he said.

''To succeed in the industry, the restaurant's decoration must be first class, service must be good, cleanliness must be observed - but prices have to be average,'' he said.

While the fast food sector seems to be an easier play, it does not present a rosy picture either.

''It is a difficult market now. It is difficult to open new outlets. It was still good 18 months ago. Since then, It has become a saturated market. There is a competitive market to prevent price rises,'' said an analyst.

In busy districts with many fast food outlets, rentals are high, competition is keen and finding new locations is difficult.

An analyst said: ''The fast food sector now relies very much on China's potential. But the China experience is taking longer than expected. The purchasing power of the Chinese is disappearing.'' ''In some Chinese cities such as Dongguan, the fast-food concept is not yet well accepted. The people there may think 'why should I spend 20 yuan [about HK$17.86] to buy lunch at a fast-food restaurant when I can easily buy one for a few yuan elsewhere?','' said another analyst.

Fast food restaurants are of course fighting fiercely against the problems, as shown by the case of Cafe de Coral.

''We are now exploring the potential of setting up outlets in new towns such as Fanling and Tin Shui Wei,'' said Mr Chan.

''And we are exercising cost controls to safeguard our profit margins,'' he said.

''Food costs, which account for the majority of our costs, have been quite steady. However, rental costs are putting pressure on us. So we buy three to four properties for our outlets every year to relieve our rental burden. Now more than 20 per cent of out outlets are our own properties,'' he said.

Cafe de Coral also seeks to shield itself against rising labour costs with a central food processing facility.

It is also continuing to develop its institutional catering business where rentals and equipment installation are less of a problem.

Mr Chan said the group would also be careful about its China investments.

''Our China plans are going step by step and in no rush. We know China's policies are unstable,'' he said.

So what does the future hold for the territory's eating-out industry? Some analysts say that the industry is now in a cyclic depression and will recover in due course.

But the consensus is that the performance of the stock and property markets and growth in trade and tourism will be major factors.

Mr Chan expects the main trend in the industry will be towards speciality eateries.

''For entrepreneurs, they offer more avenues. For groups, they represent additional channels of making money.''