Food for Thought

　　As the first food service company to go public inChina， Beijing X. E. Flavor Group Corp. Ltd.， an upscale restaurantheadquartered in the capital with branches in Shanghai，has now seen its fortunes nosedive.

　　According to the company’s 2013 annual financial reportreleased on February 27， X. E. Flavor’s revenue dropped 41percent year on year in 2013. Net profit plummeted about788 percent compared to the previous year， making 2013the company’s worst in six years of operation.

　　This plunging revenue mirrors the downturn of the entireindustry. Besides X. E. Flavor， top and medium-end restaurantbrands like Xiao Nan Guo and South Beauty， where ameal for two people would cost about 300 yuan ($48.8)， sawa drastic drop in revenue over the past year.

　　With the government’s ongoing efforts to crack down onwasteful expenditure on lavish banquets for officials and callsfor frugal dining， the high-end catering firms are now facingunprecedented challenges and are struggling to reshuffletheir business models.

　　Bleak prospects

　　Revenue of China’s catering industry amounted to 2，539.2billion yuan ($414 billion) in 2013， an increase of 9 percentyear on year. This is the lowest increase over the past 21years， according to the 2013 annual report on the cateringindustry issued by the China Cuisine Association.

　　Upscale food service firms have borne the brunt of thisdrop. “Companies whose annual sales revenue exceeds 2million yuan ($325，800) witnessed a negative increase forthe first time with a year-on-year decrease of 1.8 percent，”said the report.

　　“Since China reinforced its efforts on fighting corruption，a frugal dining style won widespread support among thepublic， resulting in a significant decline in the number of officialand business banquets from government departments，public institutions and companies，” said the X. E. Flavor financialreport， adding that this directly led to the company’sabrupt drop in its primary revenue.

　　“The catering companies used to blindlyboast of being high-end establishments， withsome even investing over 10 million yuan ($1.6million) to decorate the restaurants as luxuriouslyas possible. Many of them were blindsidedby such an unexpected drop，” said Hou Yuwen，Deputy to the National People’s Congress (NPC)and General Manager of Jiangxi-based PingxiangXin Coast Hotel.

　　Some tried to adjust to the shrinking marketby laying off staff. Yan Qi， a National Committee member ofthe Chinese People’s Political Consultative Conference (CPPCC)and Director of Taoranju Catering Group， said revenueof the high-end catering industry in Chongqing Municipalitydropped by 40 to 50 percent in 2013， with 15 percent of thesector’s employees being laid off.

　　Workers who supply food ingredients for such restaurantsare also feeling the squeeze. The Zhejiang-basedYongqiang Agriculture Co.， one of the suppliers of X. E. Flavor，estimated that its sales of farm-raised giant salamanders，tailored to upscale restaurants， dropped by eight folds yearon year in 2013. “In the meantime， the ex-factory price hasbeen sharply cut. The price has decreased to 1，000 yuan($162) per kg for wholesalers， only one third of that in 2011，”said He Xiaogang， a staff member from Yongqiang.

　　Shift in consumer focus

　　As the government lavish banquets began to be reinedin， food service companies began to focus on generaldiners. Strategies like reducing restaurant sizes，reducing prices， eliminating minimum chargesand launching products favored by locals wereintroduced.

　　X. E. Flavor has contracted canteens of organizationslike government departments and publicinstitutions， while also blazing a trail in theenvironmental protection sector. In 2013， thecompany invested in a company manufacturingbiomass energy equipment and purchasedthe whole company in February this year. It isnow the biggest shareholder of a Jiangsu-basedcompany engaged in recycling sulphur researchand development (R&D). In March， X. E. Flavorsaid it would get involved in the movie industryby purchasing Beijing CCTV Splendid Film and TV Corp. Ltd.Xiao Nan Guo is bullish about food service to the generalconsumer market and believes its subsidiary brand of “NanXiao Guan” tailored to this market will expand and becomethe engine for the company’s future growth. The companysaid it would open 12 more Nan Xiao Guan branchesand promote the brand in the second-tier cities this year.

　　Launching package meals for group buying is another ofXiao Nan Guo’s strategies. A meal for four people that previouslycost 426 yuan ($69.4) will now cost 258 yuan ($42)through group buying.

　　“China’s catering industry now faces a changingenvironment. The general food service market will be themainstream [target market] as consumption at extravagantbanquets has been curbed，” said Yan Qi. As an importantpart of the service industry， the catering sector driven byconsumption of general diners will be the lifeline of China’sdomestic demand， she said.

　　Zhang Shuguang， Chairman of the Academic Committeeof Unirule Institute of Economics， said that a crackdown onwasteful expenditure on lavish banquets resulted in a slowdownin the food service and tourism sectors and undermineda boost in domestic demand in the short term. Butin the long term， it stimulated a reshuffle in the sector. “Withhigh-end restaurants adapting their menus and launchingdishes acceptable to general consumers， it will lead to rationaland sustainable increases in domestic consumption，”said Zhang.

　　Diversification challenges

　　However， transformation is not easy. X. E. Flavor admittedthat its move to the environmental protection sector isfraught with difficulties. “As a newcomer to the sector， weare inexperienced and face challenges in core technologyR&D， management， talents， risk control and so on，” said theX. E. Flavor financial report.

　　“High-end food service firms had originally positionedthemselves to provide a tailored catering service and diningenvironment in a luxurious setting. It is really hard for themto reposition to a general market in a short time，” said YangXiulong， General Manager of Beijing Parade， a domesticfive-star restaurant. “Besides， there are many well-knownenterprises in the general food service market. To positionourselves in such a market with such fierce competition isnot easy.”

　　Yan Qi said with the rise in rent， raw material and laborcosts， the profit margin of the food service sector wasshrinking. “Price reduction is not the solution to sustainablegrowth. A company has to create its unique competitiveness，”she said. Yan added that her company encounteredno severe loss during last year’s slump， due to her previousefforts of setting up a complete food service industrial chain，which includes seasonal vegetable gardens， poultry andaquaculture farms.

　　“The combination of agriculture and catering not onlygives us a unique advantage， but also helps farmers toincrease the added value of their farm products，” said Yan.

　　Wu Shixiong， NPC Deputy and former Vice Chairmanof the Standing Committee of Beijing Municipal People’sCongress， said the senior-citizen service sector is an area ofinvestment for high-end catering companies. “Governmentefforts alone are not able to deal with the problems broughtby China’s rapidly aging population. Private capital shouldbe encouraged to engage in the development of the seniorcare sector. High-end food service firms that are experiencinga sharp decrease in profit are one such private capitalsource，” said Wu.