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In July 2024, the Shanghai Municipal Commission of Commerce issued Several Measures to Promote the High-Quality Development of the City's Catering Industry (hereinafter referred to as the "Measures"), which mentioned that one of the three major development trends in the supply and consumer demand of Shanghai's catering industry includes "digitalization", and intends to promote the "high-quality" development of catering enterprises from ten aspects such as empowering third-party platforms.

According to The Paper, the revenue of many Shanghai chain catering companies began to decline in the second quarter of 2024, which was lower than the same period in previous years. Coupled with the increase in costs such as rent and employees, some companies closed a large number of stores or even went bankrupt.

Regardless of whether the industry situation is affected by the economic downturn, whether government supervision and public policies in the chain catering industry are reasonable, effective, and conform to market logic and can truly support the healthy development of the industry is a topic worth discussing.

In mid-August 2024, researchers from The Paper Research Institute interviewed five chain restaurant companies to understand their approaches to and challenges in surviving the "cost reduction and efficiency improvement" strategy, in order to preliminarily explore the above issues.

The per capita consumption of these five chain catering companies ranges from 50 to 500 yuan, and the types of food include snacks and fast food (2 of them), Asian cuisine, and Chinese meals and drinks. Both dine-in and non-dine-in services are available, which makes them quite representative.

Chain rate of eight catering categories in China in 2023. Image source: Red Can Big Data

Problem 1: Mutually beneficial with the platform, but also being "bitten back" by the platform

Digital models such as online ordering, online ordering, store pickup, and scanning QR codes to place orders were first and widely used in the catering industry, which also led to the rapid expansion of a number of catering companies' "chain operations", becoming a hot spot for investment in recent years, with the proportion of large and leading companies increasing. In addition, chain catering companies have more advantages than non-chain catering companies in terms of risk resistance due to their scale and capital support.

The two main benefits that the platform brings to enterprises are wider customer acquisition and capturing digital value. The owner of a snack fast food company (light food) said that although the current commission rate of the platform is 20% to 30%, the relationship between the platform and the catering company is "mutual help". The platform helped his company complete the initial accumulation and also helped growth. "After receiving the initial investment in 2018, we first opened 3 stores without dine-in services on the 'back street', and the platform helped us quickly reach customers." In addition, he also mentioned that the platform's big data helps make decisions and select sites, allowing companies that choose to expand relatively slowly to gain market share. "Every time is fully demonstrated."

However, in addition to problems such as high commission rates, platform economy may be a "double-edged sword" for some chain catering companies. The reason lies in the setting of the platform mechanism.

First, the "overtime" pressure from the platform has led to the "distortion" of the implementation of food safety regulations in stores.

At present, risk grading is the government's way of supervising the catering industry. Whether a store gets a "red, yellow or green face" in dynamic supervision determines how to allocate regulatory resources. After the annual grading assessment, the market supervision department will supervise in different frequencies and forms: for those with "lower" risks, the impact on the normal operation of the enterprise will be reduced by cancellation, integration, off-site inspection, etc., while for those with "higher" risks, the number of spot checks and on-site inspections will be increased.

In mid-August 2024, a chain restaurant cashier posted a risk level. The "green smiley face" was rare, which means the risk level is low. The following pictures were taken by Lv Zhengyin, a researcher at The Paper, unless otherwise specified.

In terms of actual operations, companies need to implement their primary responsibility for food safety and develop operational standards for their stores to ensure food safety. Even in big brand stores, the degree to which store employees follow operational standards may not be the same. Therefore, among the catering companies that have been punished for food safety issues, there are also well-known chain catering brands.

A fast food company (Malatang) said that when the volume of food served is large, "fear of order timeout" is an objective reason for the failure of pesticide testing due to inadequate preparation and cleaning of food. "It takes time to follow the complete operating specifications for food cleaning, slicing and other processes. When the store serves a large volume of food, the riders will rush them, which can easily cause the implementation of the specifications to be 'deformed', leading to complaints and bad reviews later." The boss said that he spent most of his time this year thinking about how to formulate easy-to-implement rules to improve the company's main responsibility for food safety, so as to "balance the difficulty and speed of serving food", but still "cannot avoid receiving bad reviews and complaints."

Second, the platform’s “jury system” rules are difficult to prevent “unfair competition”.

Most consumers will look at reviews to decide whether to make a purchase, but the credibility of reviews seems to have declined because there is too much water in the comment area to "brush good reviews" and "brush bad reviews" for rival companies. Unfair competition means will eventually affect consumers' overall trust in the platform and affect the healthy development of the market.

In order to regulate the business order, the "Guiding Opinions on Promoting the High-Quality Development of the Catering Industry" issued by the Ministry of Commerce and other nine departments in March 2024 proposed that local governments should "investigate and deal with unfair competition in the catering field in accordance with the law", and the new version of the "Anti-Unfair Competition Law" was introduced. However, there are still doubts about how much can be "investigated and dealt with". Because it is not easy to track and investigate, and there is even the possibility of eliminating traces, it is difficult for catering companies to "fix the evidence required for judicial proceedings" for unfair competition on the Internet;

The platform's "Internet jury" mechanism, which is placed in front of the legal channel, is used more frequently than the judicial litigation channel. Although it is widely used, it is also considered "not sound enough" and "difficult to ensure fairness", which has forced many businesses to close their stores. The platform's market management rules lack penalty clauses for malicious competition means, and the "bad review" behavior that disrupts the market has low risks and low costs.

An Asian restaurant chain said that he received 80 or 90 negative reviews from a rival company, but the Internet jury failed to identify the rival company's problems, and he suffered irreversible losses and eventually "closed the store." The owner said that the jury system is based on the principle of "the minority obeys the majority" rather than "judgment based on facts", and that the "jurors" come from the votes of Internet users, and the evaluation criteria are "fuzzy", which can easily lead to "misjudgment."

According to a beverage company, a negative review affects "nearly 20% of the orders" that day, and new stores in the rising period need to "spend twice as long" to make up for the rising trend data. If malicious batches of negative reviews are not revoked, store traffic will continue to be affected. The boss can only "close the store" to stop the loss in time, and irreversible losses have already occurred before he can resort to legal channels in the future.

Although it is not certain that the business owner has been criticized, the Internet "jury" mechanism "does not punish" unfair competition methods such as posting malicious reviews on the Internet, and legal channels "have difficulty in obtaining evidence", leaving Internet behaviors that disrupt market order in a regulatory "vacuum". The market cannot fully and healthily compete, which will be detrimental to the improvement of catering quality in the long run.

Question 2: Using “pre-prepared meals” reduces costs but also reduces consumer “favorability”

The platform takes a large commission, and the use of pre-prepared meals has become a "burden-reducing and cost-reducing" method for most chain catering companies to survive. According to statistics, it can reduce costs by about 40% per month.

From the perspective of profit logic, pre-prepared meals guarantee fast and low cost. The production method of pre-prepared meals is "industrialized", with most of the processing work completed in factories with low land rents. The back-end only requires simple processing, and some even do not require "chefs" and "kitchens" to obtain a good "stable output".

But in the long run, the use of pre-prepared meals will also reduce brand image and revenue.

First of all, although the pre-prepared food industry has been strongly supported by the country in the past two years and is also one of the investment hotspots, pre-prepared meals currently still lack "standardized" market standards, resulting in consumers' lack of confidence in pre-prepared meals.

A hot comment under a report on a catering company showed that the large-scale use of pre-prepared dishes, which consumers generally dislike, may be one of the reasons for the decline in catering profits. Source: https://m.thepaper.cn/newsDetail_forward_28421891

The country is accelerating the formulation of standards. In March 2024, the state issued the "Notice on Strengthening Food Safety Supervision of Pre-prepared Meals to Promote High-quality Development of the Industry". This policy puts forward three very detailed requirements for food safety supervision of pre-prepared meal companies in various places. First, urge companies to fulfill their main responsibilities for food safety; second, strengthen the management of pre-prepared food production licenses, implement "classified licenses", strict license reviews, and on-site inspections; third, strengthen the supervision and inspection of pre-prepared meals, strengthen supervision on incoming inspections, production process control, storage and transportation, and organize pre-prepared meal supervision sampling and risk monitoring to crack down on illegal and irregular behaviors. Relevant regulatory standards will also be further improved.

However, in the context of conflicts between principal responsibilities and interests and fierce market competition, whether companies will fulfill their responsibilities in the future may still be a major issue. For example, the "Notice" issued this time intends to protect consumers' right to know and choose pre-prepared dishes by "explicitly indicating pre-prepared dishes in the catering link". Most of the restaurant companies interviewed said that "it may be difficult to promote it."

A Chinese restaurant that uses a large proportion of pre-prepared dishes said that the "repurchase rate" of pre-prepared dishes is low, and explicitly indicating pre-prepared dishes will definitely affect the "table turnover rate." Some consumers will explicitly refuse pre-prepared dishes when ordering.

However, even if the food is not labeled as “pre-prepared”, most consumers can identify pre-prepared food after a purchase, which will significantly reduce consumers’ favorability and repurchase rate for the restaurant. In addition, if the regulation of additives and sodium content in pre-prepared food is also perfunctory due to the impact on interests, it will be difficult to meet the dietary needs of special groups such as children and the elderly.

The kitchen window of a Chinese restaurant in mid-August 2024.

The proliferation of pre-prepared meals and the perfunctory supervision have affected consumers' trust in the catering market and ultimately affected the long-term interests of enterprises. Therefore, how to conform to business logic is a long-term problem that catering companies and the pre-prepared meal industry need to solve.

Competition in the catering industry is fierce. As an advantageous enterprise type, chain catering enterprises have huge market potential and are related to the health of community residents. However, due to the imperfect platform mechanism and the "unestablished" government regulatory policy, the use of platforms and pre-prepared dishes is the main way for catering chain enterprises to "reduce costs", which is also a "double-edged sword" and may not be conducive to the long-term healthy development of the market.

Against the backdrop of the country's strong support for the development of the "platform economy" and "pre-prepared food industry", regulatory measures from platforms and the government should fill the regulatory "vacuum" as soon as possible on the basis of respecting market rules to avoid regulation becoming a formality; and for catering companies, they should gradually shift towards long-term competitiveness strategies such as food quality and retaining chef talent on the basis of short-term survival strategies such as reducing food quality, increasing marketing, and price wars.