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In the past two years, everyone in the catering market has been complaining.

Restaurant owners are worried that customers won’t go out to eat. From fast food to hotpot, the average customer spending has been declining uniformly[1]; shopping malls are troubled by tenants running away. In the past year, the average vacancy rate of shopping malls in the 24 key cities was 9.06%[2], far above the 5% warning line[3]; young people are leaving Anfu Road and heading to the paradise of poor people.

Great innovations are always born in adversity. Faced with the growing pressure of survival, the chain restaurant industry has jointly bred a new species:Satellite Store。

The so-called satellite stores are small stores specially opened by catering brands that do not provide dine-in services. Not only are they smaller in size and have fewer employees, but the menus are also specially optimized and designed specifically for single-person scenarios.

Log Cabin BBQ Takeaway

The real killer feature of satellite stores is that they are cheap. Take the pilot satellite store of Tai Er Pickled Fish as an example. Compared with normal stores, the average customer spending at satellite stores is cut in half.

When restaurant owners lower their standards, has the victory of the poor really come?

A kitchen disguised as a restaurant

Looking through Tai Er’s 17 takeaway stores, their common characteristics are that they are small in size, have few operators, are far from core areas, and do not provide dine-in services.

Some are opened on the street, and some are opened directly in the shared kitchens of office buildings. A single room is both a kitchen and a store. A sign "Tai Er Takeaway" is hung at the entrance of the store, and a sign "Kitchen Restricted Area No Entry" is also posted on the door.

Most satellite stores of most brands have similar features: the store is the kitchen, with an open kitchen. Most of them only do takeout business, with no customers at the door, only a mysterious organization in yellow uniforms. If you are determined to eat in the store, the staff will find a chair from the back kitchen.

For catering brands, the effect of satellite stores is immediate:Among the three major cost items of raw materials, labor, and rent, the last two were drastically cut down.

A 250-square-meter Tai Er Pickled Fish restaurant requires at least 27 employees to run. [4] The good-looking waiters are at the door to attract customers, and the waitresses are responsible for shouting "pickled cabbage is better than fish" when serving the dishes. However, the entire process of the satellite restaurant, from cleaning to taking orders, making and serving the dishes, can be completed by only one or two people.

Although both are back kitchen operation rooms, the dine-in restaurant and the satellite store are also two different scenes. The back kitchen of the dine-in restaurant is transparent and spacious, and its image project attributes far exceed its practicality. However, since the satellite store does not need to display, the space utilization rate is comparable to that of an IKEA model room. All materials are filled in a space of less than 30 square meters, so people don’t forget to manage their body after work.

The rental costs reduced by reducing the area have an immediate effect. Most catering brands have to symbolically stir-fry the food in the wok twice in their dine-in restaurants, but when they move to satellite stores, they can finally put aside their idol image and directly put the meal bags into the microwave, saving space for pots and pans.

In other words, a satellite store is essentially a kitchen disguised as a restaurant.

Tai Er's dine-in restaurant and satellite store, image source: Dianping, Ele.me

The concept of satellite stores first appeared in the automotive retail sector. Automakers would set up satellite stores in small cities around sales centers. Sales centers would sell products and provide logistics, technology, and after-sales services to satellite stores, thereby expanding sales radius at low cost.

The starting point of catering satellite stores is similar to that of dine-in restaurants.brand effect, “diverting” consumers’ takeout orders to satellite stores through lower pricing.Although it is essentially a kitchen, it is guaranteed by the brand's standardized quality control, so even the most sophisticated poor can eat safely.

Faced with the dual pressures of rent and average customer spending, freshly brewed tea drinks were the first to give up struggling.

Nayuki's Tea, which once emphasized the store experience, has stores with an area of ​​200-300 square meters. Due to the existence of baked products, there is also a kitchen of comparable size. However, after 2020, Nayuki's Tea gradually abandoned the baking business and switched to opening stores of about 100 square meters. In order to attract franchisees, Nayuki also lowered the area requirement for franchise stores from 70-150 square meters to 40 square meters[5].

Taking Luckin Coffee as a reference, Kudi Coffee simply created a "store within a store" model, which only requires an independent stall of 1-2 square meters, and employees are punished by standing at work. This kind of business of borrowing someone else's land to open a store may not seem very decent, but it has the advantage of small investment and quick return.

With the industry's model of trial and error, chain restaurants, although starting late, have a high level of awareness and have directly cancelled dine-in services. In the face of survival, no one cares about dignity. The number of satellite stores of Nong Geng Ji, a Hunan cuisine restaurant, even exceeds that of offline stores.

Once upon a time, a takeaway stall with only one kitchen was synonymous with a low-quality restaurant. Today, catering brands that have transformed into satellite stores have finally become what they once hated the most.

Faced with the choice of jumping off a building dressed neatly and respectably or running away in their underwear, everyone unanimously chose the latter.

The expansion problem

At a catering industry summit in the first half of 2023, Zhu Yonghua, founding partner of Meituan Longzhu, estimated that by 2025, there will be more than 20 “10,000-store brands” in China[6].

For well-known reasons, at the beginning of 2023, even those with social phobias had to go out to meet people and have a few meals with friends, and the catering industry became the industry with the most obvious recovery and growth. However, as of today, with only five months left until 2025, there are only seven catering brands in China that have achieved a scale of 10,000 stores.

It’s not that restaurant owners don’t work hard, it’s that they really don’t dare to open stores randomly.

In 2020, Haidilao bought a lot of bargains and opened 829 new stores in a year and a half, more than in the past 25 years. However, due to misjudgment of the recurrence of the epidemic, Haidilao lost 4.16 billion yuan in 2021, returning to the pre-liberation era overnight. Hailuns, which was also blindly confident, opened a total of 564 new stores from 2021 to the first half of 2022, and suffered a loss of 1.601 billion yuan in 2022.

Many restaurant owners fell before dawn. In 2023, there were 1.359 million restaurant businesses whose registrations were revoked, more than double the number in 2022[7].

The emergence of satellite stores has largely solved the expansion problems of chain restaurants.

Except for a few restaurants that have appeared in anti-corruption documentaries, most restaurants have very slim profits. The core of chain restaurants is to use economies of scale to reduce upstream costs and expand profit scale.

Since the three major cost items of raw materials, labor and rent are all fixed expenses, if the new store does not perform as expected and the fixed expenses cannot be cut, it will cause losses. As an analogy, the fuel cost of a flight is fixed, and the only way to make money is to sell as many tickets as possible.

In first- and second-tier cities, the biggest change that new consumption has brought to chain restaurants is that restaurants that were originally located on the street have flocked to shopping malls and office buildings, with the most typical offerings being milk tea and ramen. Chain restaurants have traded higher rents for greater customer traffic. In the past year, 5,165 “first stores” opened in 80 cities. For the first time, the number and proportion of new restaurant stores exceeded those of retail stores, with first stores accounting for 43.27%[2].

On the other hand, by rushing into shopping malls, restaurant brands can quickly increase their “single store valuation”. The core logic of chain restaurant valuation isSingle store index × number of storesFor catering brands, as long as the performance and valuation of a single store go up, the more stores there are, the greater the company's valuation will be.

In this context, catering brands have enough motivation to achieve rapid expansion through the standardization of store management and processes. The capital market is also willing to add fuel to the fire, allowing catering brands to replicate stores at full capacity. As a result, a large number of catering brands have formed a copyist alliance, which is like a swarm of crucian carp.

However, the increase in rigid costs also magnifies risk exposure, and once the demand side begins to weaken, the gap between the two will widen.Satellite stores are actually a compromise product of chain restaurants in order to reduce risk exposure in their expansion intentions.

The fundamental difference between satellite stores and dine-in stores is that dine-in service is eliminated and the area is reduced to one-sixth of that of a store in a shopping mall, which saves a lot of money on rent alone. At the same time, satellite stores are largely free from the constraints of location selection and can choose a third-rate location in a first-rate business district, or a street shop 3-5 kilometers away from an office building, or even an underground food court.

As long as the wine is fragrant enough, no matter how deep the alley is, it can stop Meituan.

Compared with dine-in restaurants, satellite stores do not need to purchase too many equipment, and the back kitchen equipment is highly versatile. Even if the store is closed, the induction cooker can be moved to other stores. The threshold for recruiting workers is also greatly lowered, and you don’t need to know how to flip the wok or heat up pre-prepared dishes.

At the beginning of this year, Jiu Mao Jiu planned to open 35-40 Shuang Hotpot restaurants, but adjusted the plan to 25 in the middle of the year. [8] In the past month and a half, Tai Er has opened 13 satellite stores. By reducing labor and rent costs through satellite stores and relying on Meituan to expand the operating radius, the calculation is not difficult.

The capital tycoon and the sophisticated poor man finally signed the contract in the small satellite store.

Landlord

The first person to discover the identity of McDonald's landlords and take action was probably hedge fund manager Bill Ackman.

Around 2005, most investment institutions on Wall Street viewed McDonald's as a catering company. However, Bill Ackman keenly discovered that real estate and franchise businesses were the core profit sources of McDonald's, and the valuation given to McDonald's by the capital market was far from that of a landlord who collected money without doing anything[11].

McDonald’s is not only the licensor of franchise stores, but also the landlord of many franchise stores. Therefore, McDonald’s can not only collect franchise fees, but also rent. Bill Ackman not only invested in McDonald’s himself, but also submitted a proposal to the management that made McDonald’s followers furious[11]:

Separate the directly-operated stores with low profits and high risks, and become the landlord in good faith.

Although McDonald's did not directly agree to Bill Ackman's plan, in the following years, McDonald's did expand the scale of its franchisees and even transferred some directly-operated stores to franchisees.

Similarly, the competition among China's chain restaurants is not a tit-for-tat battle of knife skills and seasoning, but a battle of wits and courage between tenants and landlords.

In Shanghai, the average rent for the first floor of a hotel in a core business district can differ by nearly three times from that in a non-core business district. In the second quarter of this year, the average rent for the first floor of a hotel in a core business district was 46.1 yuan per square meter per day, while in a non-core business district it was only 16.2 yuan[9]. For a 250-square-meter Tai Er hotel in a core business district, the rent alone would be more than 11,000 yuan per day, and the hotel would have to receive at least 167 customers per day to be able to afford the rent. In a non-core business district, the rent would only be 4,050 yuan per day.

The landlords above cannot be shaken, and the customers cannot be neglected, so the only thing left is to make the employees suffer. Manner, which has more than 90% of its stores in first-tier and new first-tier cities, operates high-cost-effective coffee under the pressure of rent. The only thing left is for the baristas to manage one store, and they have to use a timer even when going to the toilet.

According to Meituan’s statistics, a satellite store can pay back its investment in just 8-10 months[10]. The first satellite store of Lao Xiang Ji in Shenzhen received 18,000 orders in the first month. Shu Xiaolong, the second-generation successor of Lao Xiang Ji, was overjoyed and immediately decided to open 50 stores this year.

Therefore, it is not difficult to understand why catering brands are chasing after satellite stores. The increasingly crowded Poor Man’s Paradise is just another stage result in this tug-of-war.

Catering brands increased their profit margins, food delivery platforms expanded their orders, and workers enjoyed half-price branded work meals. It seemed like a victory for everyone.

However, as more and more restaurants open near the company, the eight major cuisines look more and more alike, and the pepper and sesame chicken and boiled beef always seem familiar.

References

[1] “Tai Er Pickled Fish” is no longer popular? The parent company Jiu Mao Jiu’s profit fell by nearly 70% in the first half of the year, Blue Whale News

[2] Are large shopping malls relying on catering to survive? What happened to large shopping malls? , Jianghan Vision

[3] Ding Zuyu: The highest vacancy rate of commercial real estate in Shanghai has reached 34%, China News Service

[4] Business Model Industry Research Plan Column | Tai Er Pickled Fish, a Designed Dish to Go with Rice, Xingyuan Consulting

[5] Nayuki Tea achieved its first full-year profit after listing, gradually “bowed” to the market, 21st Century Business Herald

[6] The catering industry is recovering significantly, and China will have more than 20 “10,000-store brands”, China National Radio

[7] White Paper on China’s Catering Franchise Industry, China Chain Store & Franchise Association

[8] A price war breaks out in the catering industry. The average customer price of Tai Er Pickled Fish has dropped to the level 7 years ago. Jiu Mao Jiu CEO He Chengxiao: Be cautious when opening new stores in the second half of the year, National Business Daily

[9] Despite “consumption downgrade”, these business districts in Shanghai are still growing, Jiemian News

[10] More affordable satellite restaurants are being launched to “feed” the working class. Tai Er, Haidilao, etc. have already set up such restaurants. Jiemian News

[11] How does the “essential analysis” of a consumer company affect its valuation and returns, Jade Cheung

Author: Xi Rui

Editor: Li Motian

Design: Shu Rui

Map: Xi Rui

Editor-in-charge: Xi Rui

Cover image from ShotDeck