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Economic Observer reporter Tian Jin and Zheng Yuexin

In the second half of 2023, Zhang Yiwen discovered that the Beijing catering market suddenly changed. Since the fourth quarter of last year, the monthly turnover of a Japanese barbecue restaurant he operated has dropped from more than 1.5 million yuan to about 1 million yuan. After entering this year, this trend has not eased but intensified, and the monthly operating income has gradually shrunk to about 700,000 yuan. The restaurant's monthly net profit has fallen by nearly 80% compared with the first half of last year.

This barbecue restaurant opened in 2018, with a customer spending of more than 1,000 yuan, more than 50% of its customers coming for business banquets, and regular customers including corporate executives and entertainment stars. However, Zhang Yiwen found that since the second half of last year, the customer spending has been gradually declining, the frequency of regular customers has been decreasing, and customers have begun to "bring their own drinks".

Zhang Yiwen is a veteran in the catering industry. He has been in the catering industry since the 1990s and has successfully operated several catering brands in Beijing. Now, he must make adjustments to cope with market changes. A month and a half ago, Zhang Yiwen launched a 588 yuan double meal for white-collar workers on the platform. Recently, he plans to launch a beef burger meal for lunch at 68-88 yuan per serving.

Now, his philosophy is: "Fly legs are meat too."

Since the beginning of this year, low-price competition has been lingering in the catering industry. Major restaurants have launched a series of low-priced packages or actively reduced meal prices. Now, the results of competition have gradually emerged. According to data from the Beijing Statistics Bureau, in the first half of 2024, the total profit of Beijing's catering industry above a certain scale (i.e., annual revenue of more than 10 million yuan) was 180 million yuan, a year-on-year decrease of 88.8%, and the profit margin was as low as 0.37%.

Liu Zheng, marketing director of Xiaodiaolitang, said that in order to maintain daily operations, catering companies need to maintain a minimum net profit margin of 5%-10%. If a catering company continues to have a profit margin lower than this, any small wrong decision may lead to a break in the capital chain. Even chain catering companies must close stores with large losses under such low profit margins.

Tang Junzhang, chief marketing officer of Burger King China, said that during the epidemic, the catering industry also faced cash flow problems. At that time, catering companies had some concerns, but they all thought it was a short-term phenomenon. In September and October last year, consumer demand fluctuated. At the beginning, practitioners believed that business would slowly return to a strong growth track after a quarter, but after more than half a year of waiting, everyone is no longer considering "emergency relief", but how to make a "qualitative" change in the way of operation in such an economic environment.

A year and a half ago, Beijing's catering industry, which had experienced the baptism of the epidemic, was still on the road to rapid recovery. In 2023, the revenue of catering industries above a certain scale increased by 27.7% compared with 2022. Such temptation attracted many industry professionals to join in. But in a blink of an eye, low profit margins have put them on the brink of "crisis".

Whether to stay and continue the "involution" or to cut off limbs to survive has become a choice for more than 100,000 catering business owners in Beijing.

The frequency of consumption in high-end restaurants is shrinking

Zhang Yiwen misses the prosperous times of the restaurant in 2019. At that time, every private room in the restaurant was full, and many customers would choose dishes with a unit price of more than 600 yuan. The single consumption of a private room was often more than 5,000 yuan. Relying solely on the consumption of the private rooms during dinner, the restaurant's daily turnover could reach 50,000 to 100,000 yuan.

"High-end restaurants with an average per capita consumption of more than 500 yuan are also seen as a subtle sign, and senior white-collar workers can rarely afford such a price," he said.

Since the second half of 2023, such days are gone. Zhang Yiwen's restaurant revenue and net profit have both shown a downward trend. As of July this year, the restaurant's profitability has shrunk to the edge of slight profit, and entering August, it is expected to face loss-making operations.

The decrease in the frequency of consumer visits and the decline in the average amount of consumption have become the key factors in the decline in Zhang Yiwen's restaurant revenue. During this transformation, he also saw the changes in the structure of high-end catering consumer groups. In the past, business owners in traditional industries were frequent customers of restaurants. They frequently entertained guests here and spent lavishly. Especially at the end of the year, business negotiations between government and business people made the restaurant crowded. Now, the number of business owners in traditional industries who come to consume is decreasing. Although technology-based companies make more money, the helmsmen of such companies rarely choose to entertain guests in high-end restaurants.

Liu Zheng said that when the macro-economy fluctuates, individuals' spending power will decline. Declining spending power does not mean that individuals will choose restaurants with lower average prices, but rather they will reduce the frequency of going to restaurants of the same grade. For example, going to high-end restaurants three times a month will be reduced to one or two times a month.

In order to attract more new customers and increase the restaurant's turnover, Zhang Yiwen launched a two-person set meal priced at 588 yuan. The set meal focuses on the restaurant's most popular classic dishes, and the portion size has been reduced accordingly. In addition, the restaurant will also launch a beef burger set meal with a unit price of several dozen yuan. Now, the per capita consumption in the restaurant has dropped to more than 500 yuan. The beef burger set meal is expected to be sold only at noon, mainly as an employee meal for white-collar workers. "In the past, the restaurant's lunchtime turnover was very low. Now we think that even a small meal is meat, and a low-priced set meal can not only increase turnover, but also will not affect normal business in the evening."

In the first half of this year, many high-end restaurants launched "poor man's set menus". Among them, Xinrongji, a restaurant with an average per capita consumption of more than 1,000 yuan, launched a set menu of 398 yuan, while Lamelouse, another restaurant in Shanghai with an average per capita consumption of nearly 2,000 yuan, reduced prices and gave away drinks worth nearly 200 yuan.

At present, Zhang Yiwen's idea is to follow the market trend. He said that the initial investment in opening the restaurant has been recovered. If the restaurant's capital chain breaks down in the future, he will stop the loss immediately instead of continuing to "transfuse blood" to the restaurant. In the past few years, he has witnessed many friends who sold their houses and cars to maintain the operation of high-end restaurants, and eventually lost their entire fortunes.

In the first half of 2024, consumption in first-tier cities represented by Beijing was generally under pressure, especially in the catering industry.

Zhang Liqun, a researcher at the Macroeconomic Research Department of the Development Research Center of the State Council, said that since the beginning of this year, the cumulative growth rate of national consumption has continued to decline. This shows that residents have become more cautious in spending money due to the decline in employment and income expectations. In first-tier cities, improvement and fashion consumption usually dominate, so the consumption growth rate in first-tier cities is more elastic. At present, the growth rate of consumption in first-tier cities has declined, and even negative growth has occurred, indicating that the market-led demand contraction trend is becoming more and more obvious.

Consumers who pursue the ultimate cost-effectiveness

Over the past six years, while running a restaurant with an average customer spending of about 100 yuan, Zhang Jun has felt deeply the changes in personal consumption habits.

In 2019-2020, a considerable number of consumers in Zhang Jun's restaurant would choose the premium hand-pulled lamb priced at 200 yuan, which was also the most profitable dish in his restaurant. However, starting in 2021, the number of orders for this dish began to decline, and consumers became more and more cautious when consuming.

Zhang Jun found that more and more consumers choose to bring their own liquor or expensive beer or order takeout and then have it delivered to the restaurant. At the same time, some customers also consume through group purchase packages instead of directly placing orders online. Both of these consumption changes have caused restaurants to lose a considerable part of their profits.

Zhang Jun said: "If you launch a discount package on the platform, or distribute flyers near the restaurant to promote discounts, the restaurant's customer flow will increase instantly, but once the discount ends, the restaurant's customer flow will immediately return to normal."

Zhu Danpeng, a Chinese food industry analyst, said that starting from the fourth quarter of 2023, consumers' pursuit of extreme cost performance has become a trend. After 2024, affected by macroeconomic fluctuations, consumers' consumption confidence, willingness and ability will further decline, prompting consumers to further increase their rigid demand for cost performance.

Changes in consumer psychology have also quickly led to changes in consumer habits. Liu Zheng said that after three years of the pandemic, a large number of consumers have become very skilled in comparing group buying activities launched by various platforms, and have become accustomed to purchasing discounted packages. When choosing restaurants of the same price, they are more inclined to choose restaurants with the largest discounts.

In addition, the composition of consumers is also changing. Lai Yang, a member of the Expert Committee of the China General Chamber of Commerce and executive vice president of the Beijing Society of Business Economics, said that the "Z generation" has gradually become the main force of consumption. This generation is more inclined to eat out, choose pre-prepared dishes and takeaway services, and the market size of these areas has increased. However, they attach great importance to cost-effectiveness, because frequent dining out makes them more sensitive to prices, and they will compare and choose better-priced catering services through channels such as group buying.

For catering companies, consumers' pursuit of the ultimate cost-effectiveness often directly translates into the challenge of low profits for the companies, and even the phenomenon of "losing money to gain publicity". Liu Zheng introduced that because the catering industry itself has fixed costs such as rent and personnel, the catering industry usually only has a net profit of 10%-15%. At the same time, catering companies have a critical value for profit decline. Once the discount reaches a certain level, the profit margin of catering companies will quickly collapse, and even enter a situation of loss-making operation.

Faced with the pressure of continued losses, Zhang Jun closed his restaurants in the first half of this year and bid farewell to the catering industry. At the peak of 2019, he once operated three restaurants, with an average daily turnover of about 20,000 yuan per restaurant.

Zhang Jun said: "In order to improve their competitiveness, restaurants are forced to join the price war. As an individual restaurant fighting alone, they cannot eliminate many of their peers through this means, and are more likely to become cannon fodder in this price war."

Platforms and catering companies promote low-price melee

In addition to running a high-end Japanese barbecue restaurant, Zhang Yiwen also runs a Japanese hot pot restaurant in Beijing with an average of 120 yuan per person. But in early August, he experienced something that made him laugh and cry.

Because the Japanese hot pot restaurant business was not very prosperous, a platform staff member approached him that day and suggested that the restaurant launch a 58 yuan set meal for two. He asked the other party: "I have been engaged in the catering industry for more than 20 years. What kind of dishes can I serve to customers for 58 yuan?" In the end, he rejected the proposal.

Compared with Zhang Yiwen's persistence, in order to cater to the changes in consumers' consumption habits, since the second half of last year, a large number of low-price models have emerged in the catering industry.

Lai Yang said that some catering companies may still reduce prices this year. Overall, the price reduction of companies is about 15%.QuanjudeThe cancellation of private room fees and the price reduction of Hefu Lamian are typical cases in the market.

Tang Junzhang said that in the current macroeconomic fluctuations, consumer confidence is declining. At this time, most brands would like to maintain a certain stability and growth in customer flow. Therefore, Burger King also took the initiative to adjust prices in a short period of time, that is, to launch more powerful promotions. This is a very common phenomenon in the catering industry, and peers also adopt different forms of price adjustments.

Data from the Beijing Statistics Bureau also showed that in the first half of 2024, the total profits of Beijing's large-scale catering industry (i.e. annual revenue of more than 10 million yuan) fell 88.8% year-on-year, while its revenue was 49.21 billion yuan, a year-on-year decrease of only 2.9%.

Taking tea drinks as an example, Yihetang told the Economic Observer that it has recently lowered the prices of some of its products. The price war is indeed more prominent in the new tea drink industry. It can be seen that the customer unit price of some brands may have been 20-30 yuan in the past, but now the price is constantly dropping, and even the signboard of 9.9 yuan is put up.

The "China Chain Catering Enterprise Capital Road Series Report 2024" released by PwC and the China Chain Store Association also shows that the price war in the coffee and tea beverage sectors is constantly escalating, and the average unit price of a cup of drink has dropped from "9.9 yuan" and "8.8 yuan" to "6.6 yuan", "5.5 yuan" and "4.9 yuan".

Major platform companies are also fueling low-price competition in the catering industry.

Wen Zhihong, a senior chain industry expert and general manager of Hehong Consulting, said that price competition between platforms has been very obvious since the second half of last year. Once the price war between platforms started, catering companies were forced to get involved. Although the platforms will provide certain subsidies to catering companies, the restaurants themselves also need to reduce prices to cater to market trends.

Liu Zheng said that except for street shops serving residents in the surrounding communities, other catering companies basically cannot refuse to cooperate with the platform. Catering companies can only attract more online and offline customer traffic by placing traffic on the platform or launching low-discount packages. The platform is increasingly influencing the operating logic of catering companies.

Liu Zheng said that now more and more of the turnover of catering companies comes from food delivery platforms, which is an important reason for supporting the turnover of catering companies. However, the profit margin of food delivery has dropped significantly compared to dine-in, and the discount price of food delivery and the commission of food delivery platforms will further erode the profits of catering companies.

Price war will continue

In the interview, almost all catering practitioners and industry experts gave a consistent judgment: the price war cannot be stopped in the short term.

In June, the China Cuisine Association pointed out that price wars, homogeneous competition and increasing cost pressure are the major factors causing the current phenomenon of "increasing revenue but not profits" in the catering industry. It also called for an end to price wars and a shift to healthy competition.

Yihetang told the Economic Observer that the new tea beverage industry is currently very "lively", with a hundred flowers blooming and a hundred schools of thought contending. But overall, the brave will win when they meet on a narrow road, and the top brands will gather. Maybe each brand thinks that they will be the last one laughing, so they are all trying hard to stand out from other competitors.

Yihetang believes that it is necessary to call on catering companies to stop lowering prices, although such calls may not be effective in the short term. "The phenomenon of increased revenue but not increased profits in the catering industry is undoubtedly a crude price competition, not a quality and efficiency competition."

Liu Zheng said that the essence of price war is a commercial behavior, which cannot be interfered by any external force. At present, it will remain the same for at least a few years. Consumers will gradually become more rational and analyze the discount strength of products and the cost-effectiveness of meals.

However, as the Beijing Statistics Bureau announced that the total profits of large-scale catering industries fell by 88.8% year-on-year, the risk of a price war in Beijing's catering industry has already emerged.

On July 8, Wang Guoyu, the founder of Nanchengxiang, revealed: "The financial report for the first half of 2024 is out, and the numbers are ugly. Prices are falling, profits are falling, the peak season is not prosperous, and the winter is difficult. It is becoming a dangerous signal. The money you earned in the first half of the year will be lost in the winter." Currently, Nanchengxiang has more than 100 directly-operated stores in Beijing.

In the first half of the year, the performance forecasts released by many listed leading catering companies also showed that the companies were in the loss range.Xiabu XiabuThe net loss is expected to be approximately 260 million to 280 million yuan.Nayuki's TeaThe net loss is expected to be about 420 million to 490 million yuan, and Ajisen (China) expects the loss in the first half of the year to be no more than 20 million yuan.McDonald's、Tea 100 Ways、99、HelensNet profits also declined year-on-year.

Lai Yang warned that in addition to price, the essence of competition among catering companies is quality. If catering companies sacrifice quality in order to lower prices to attract customers, it will have more negative impacts on the company. At present, consumers are pursuing reasonable prices while ensuring good quality.

Farewell to the shop?

Even with the intensifying competition, more new stores are still pouring in. According to Qichacha data, the number of newly registered catering companies in Beijing in the first half of the year was 4,841, up 33.2% and down 15.7% respectively from the same period in 2022 and 2023. However, many previous research reports have shown that the catering industry is a "nine-death" business, and the average life cycle of a restaurant is generally considered to be only 18 months.

Wen Zhihong said that in the future, the increase in the chain rate of catering formats and the pursuit of high cost performance will be the main development direction of catering companies in first-tier cities. The foothold space for small and scattered catering in first-tier cities will become smaller and smaller, and catering companies need to work hard to improve their internal strength.

Zhu Danpeng believes that the catering industry has now entered an era where "big fish eat small fish". Even with low gross margins, many chain catering brands can still achieve sustainable operations through economies of scale, while single-brand and smaller catering companies are unlikely to have such risk resistance and economies of scale. Therefore, even if the taste is good, a large number of single-brand stores cannot survive this catering winter.

During the interviews, several chain restaurant companies all mentioned that their current profit points come from the supply chain.

Kuafu Fried Skewers told the Economic Observer that the company's profits mainly come from the supply chain. Compared with the industry, Kuafu's supply chain has always been in a low-profit state, and its revenue has been relatively stable. Yihetang said that the recent price cuts at Yihetang are mostly due to the improvement of our supply chain and the optimization of product costs, which has reduced our costs compared to before, leaving room for consumers to benefit.

In addition to actively joining the price "involution" war, many catering companies, from single stores to chain restaurants, are also actively seeking change.

Zhu Danpeng found in his research that a restaurant launched a plan to increase the stickiness of nearby customers: "If the customer spends more than 200 yuan, the restaurant will bear the driver's fee within 5 kilometers." He said that in order to achieve sustainable operation, a single store needs to actively reduce gross profit and continue to work hard to improve the service system.

At a time when many catering companies in Beijing are competing to join the price war, Li Bo's Dumpling Restaurant insists on going against the market trend - the restaurant only provides dumplings, porridge and cold dishes, and the average price of a plate of dumplings is 24-30 yuan. This price range and the variety of dishes have not changed in the past three years. The restaurant only settled in one platform and has never launched discount activities.

His dumpling restaurant, which has more than 100 chairs, receives an average of more than 1,000 customers every day. During the peak lunch hour, customers lining up often have to wait for more than half an hour.

He said that the restaurant has been operating for nearly 20 years, and has always been focusing on delicious food, low prices, and quick turnover, which has established a good reputation among the surrounding college students and residents. The price range was set by accident, and it was not expected that it would become more and more popular in recent years. This price is just in line with the price range of similar restaurants after price reduction.

Now, he is also busy preparing for his second restaurant and plans to replicate the same operating model in the new store.

(At the request of the interviewees, Zhang Yiwen and Zhang Jun are pseudonyms in this article)