High-end Cater-ing Sector Hit by Anticorruption Campaign

Following Beijing Xiangeqing Group Co Ltd， another high-end restaurant chain—Dain Ti Hill is falling from grace， with data showing that it has shut down more than 30 stores across China within just two months.

The capital chain rupture is the last straw that breaks the back of Dain Ti Hill， which not only defaults on loans worth tens of millions of yuan to suppliers， but also defaults on staff wages and store rents.

“Currently， high-end catering sector is basically in a state of inaction， as dining companies face a harsh choice to either transform or exist from the main stage，” Sun Zhigang， chairman of Shanghai Yixiang Chunzhu Catering Management Co Ltd. “The last batch of high-end dining companies is also fac-ing the prospect of reshuffle.”

In November 2012， the government launched a frugality campaign as part of a widening crackdown on official extravagance and corruption. Upscale restaurants have been among the hardest hit amid the frugality campaign.

In 2013， Chinese catering sector recorded 2.53 trillion yuan in revenue， up only 9% on year， the lowest level in 21 years， with restaurant bankruptcy rate hitting 15%， according to data from the China Cuisine Association （CCA）.

After a two-year stumble， the catering sector picked up in 2014. According to the latest data from the CCA， Chinas catering sector recorded 2.79 trillion yuan in revenue in 2014， up 9.7% from 2013.

According to CCA head Jiang Junxian， the growth of Chinas catering sector is expected to hit double digits in 2015 with revenue topping 3 trillion yuan.

According to Qu Yousheng， chairman of the Guangzhou Catering Chamber of Commerce， more upscale restaurants are expected to exit the market. The catering industry in China has developed steadily since 1978， when China embraced economic reform， and has become a crucial component of the countrys service industry.

However， deep changes are on the horizon in the Chinese catering industry， both in market structure and business model.

Difficulties of Tansformation

In first-tier cities， such as Beijing， Shanghai， Guangzhou and Shenzhen， revenue in the high-end catering fell more than 20%. Many high-end restaurants went out of business. Some restaurants have started to offer more affordable prices but the new approach has failed to meet their revenue expectations.

“We used to have VIP tables， now we have to give them up，” said Li Hongjin， manager of Juguangju Hotel， an upscale restaurant in north Chinas Shanxi Province. “We must turn to the ordinary when the business can barely survive.”

According to Jiang， catering to ordinary consumers and adjusting to market changes will be the “new normal”for the catering sector. However， rising rents and spiraling labor costs， coupled with surging prices of raw materials， making it difficult for high-end restaurants to make the switch to the mass market.

The Rise and Fall of Xiangeqing

Beijing Xiangeqing， Chinas oncefable restaurant brand， is one example of failing to make the switch. It runs a chain of 18 restaurants in mainland China serving high-end food from the Chinese provinces of Hunan and Hubei， which use liberal amounts of chili peppers and garlic.

Xiangeqing has long prospered by serving lavish dinners to Chinese government officials on fat expense accounts. In the first year after the government curbed lavish spending by officials as part of the frugality campaign， the chain lost 564 million yuan. Heavy losses inflicted on lavish catering services.

Amid sluggish demand， the restaurant giant restructured its business by refocusing its customer base. It altered its menu to meet the governments call and the changing market， stopping serving expensive seafood and dishes priced at above 200 yuan and providing meals that cost 50 to 60 yuan.

In an effort to combat a declining domestic market， Xiangeqing closed eight restaurants in Beijing and said last August that it would invest more in branches outside the mainland， including in Hong Kong， Australia and the U.S.

However， those efforts fail to reverse its declining catering business. At last， Xiangeqing even shifted its focus from restaurants to cloud computing. In 2014， Xiangeqing changed its name to Cloud Live Technology Group Co. Ltd and announced to raise funds to expand the new media and big data business so as to change the adverse operation situation as soon as possible. But the shift turned out to be a failure again.

In April this year， Cloud Live Technology said in a filing with the Shezhen Stock Exchange that it found itself 241 million yuan short of what it would need to pay deposits and interests due on a three-year 408 million yuan corporate bond. Cloud Live Technologys default was Chinas onshore bond markets first domestic bond interest default.

In an effort to pay off some of its debt， Cloud Live Technology inked a deal to sell of its food trademarks for 230 million yuan in December 2014， but the buyer cut the price down to 100 million yuan months later in light of the bad press the company had been receiving.

Xiangeqing was the countrys first private catering company that listed in A-shares. It was listed on Shenzhen Stock Exchange in November 2009. Now， after changing its name， it became the countrys first listed company that default

Other restaurant giants that plagued by falling profit amid the market downturn also are seeking bailouts to go out of the woods. Fortune Ng Fung Food（Hebei） Co.， Ltd. issued shares to its controlling shareholder Sanhe Fucheng Investment Group， to purchase 100% equities of Sanhe Lingshan Tower Cemetery Co.， Ltd.

After reorganization， Fortune Ng Fung Food added a new business， providing the funeral and interment services.

According to Yu Xuerong， secretary general of Jiangsu Province Food Industry Association， in recent years， the catering sector has been conducting a structural adjustment. He said： “The structural adjustment is reasonable.”

The catering sector is confronted with three major difficulties： shop rents， cost for and labor cost， which have been rising in recent years.

Currently， food material cost accounts for 40%-45% of the whole operating cost， up from about 35% in earlier years， as the country attaches a greater importance to the consumers have a stricter requirement for fresh food， while labor cost accounts for over 20% of the whole operating cost， up from 17%.

However， amid fierce competition， high-end catering companies cannot afford to raise their prices. Besides， it is difficult for them to transform. The transformation of the catering sector remains in an exploratory stage. The sector faces an uphill battle in the face of difficult restructuring and a host of other issues that include food safety， the swap of business tax for VAT， standard work hours， frequent disputes with patrons， and waste disposal.

It is long way to go for high-end catering to change its adverse situation.

Some High-end Restaurant ChainsBail-out Measures