China Restaurant ; Foodservice Review

Enterprise Improvement Corporate Turnaround and Restructuring financial Advisory dishs Information Management Services AlixPartners 2010 chinaw are eating place & regimen receipts Review May 2010 AlixPartners, LLP, 2010 www. alixpartners. com contents A. administrator Summary B. patience environs C. financial action Profiles of Selected eaterys D. 2010 chinaware Consumer Survey Results E. Opportunities for Restaurant durance F. Conclusions 2 2010 Restaurant & Food assistant Review Executive Summary (1) trade Trends assiduity coordinate The Chinese eating place industry has grown by ab push through 11% in 2009 to roughly 2 trillion RMB. harvest-festival was down from 16% in 2008. ?However, despite annual growth rates of 13% since 2003, the Chinese eatery industry by 2009 has reached exclusively ab forth half the size of the US eating house industry, as eat out expenditure per capita in mainland chinaware is less than 10% the expenditure of US people. ? Chin ese consumers persist unattackablely more(pre n integrityinal) conservative in terms of eat out than US consumers while in the US, people nearly go half their fodder expenditure in restaurants, Chinese people scarcely set down 22% in restaurants. The number of restaurants in chinaware is vastly racyer(prenominal) than in the US (5. 1 vs. 0. 9 trillion restaurants) and the industry is significantly more fragmented. Whereas the authorise ascorbic acid restaurant fetter in the US have a 45% overall commercialize percent, Chinas Top 100 only has a 6% market sh atomic number 18 in 2009 (down from 9% in 2003). ?western sandwich restaurants remain at a very downhearted level in China, and have a market sh are of only about 1% in 2009. Apart from KFC, McDonalds and Pizza Hut, no major US restaurant chain has achieved a major presence in China. Although the leading Chinese restaurant chains have minor market shares as the industry is highly competitive, positivity levels of leading chains were around 10-12% in terms of EBIT margins in 2009 and in line with average US fast-food chains in 2009. ? Given the hale profitability levels and weapons-grade future growth effectiveness for Chinese restaurant chains, it is a highly attractive industry for M&A deals and we are likely to see further private legality investments as swell up as takeovers by leading chains. 3 2010 Restaurant & Foodservice Review Executive Summary (2)Per capita expenditure on dining out will go forward to annex at double digit growth rate in 2010. Consumers anticipate spending about 10% more in restaurants than they did in 2009. This is in stark contrast to US where people expect to spend 4% less in 2010. ? To remain competitive, operators must serve high prize food and market themselves more on an individual primer to consumers. Similar to in U. S. , food quality is the most outstanding chemical element when Chinese consumers determine overall value. Other top factors are footing and service ? range restaurants are increasingly popular in China. 50% of consumers prefer chains over autonomous restaurants, while another 35% are indifferent. This indicates a major growth potential for chains, which currently only have a 7% overall market share in China. ? Hesperian restaurants have enormous growth potential. On average, Chinese consumers cast to eat 40% of their meals in occidental ardour restaurants in 2010. This is a substantial contrast to the 1% market share of occidental possess restaurants in 2009. Consumer Survey Results Opportunities Consumers preferring Western restaurants cite cleaner environment, better tune and better service as key remnants to Chinese style locations. ? Western restaurant chains have substantial opportunities in the Chinese market, except will have to develop tailored concepts to the market. cracking a brand topographic point and good quality reputation will be critical for Western chains in the highly fragment ed and competitive market. Especially in the casual dining sector, which has multiple major players in the US, there are major opportunities for new entrants into the Chinese market. Established leading Chinese restaurant chains will likely continue to expand and achieve strong margins, as scale results in significant advantages in purchasing, operational intensity level and trade. However, it will be critical to implement professional systems to support growth. 4 Contents A. Executive Summary B. Industry Environment C. Financial Performance Profiles of Selected Restaurants D. 2010 China Consumer Survey Results E. Opportunities for Restaurant irons F. Conclusions 5Chinas Foodservice Industry Has Been Expanding At 13% CAGR in 2003-2009, But Remains At Nearly one-half The US Market Size China foodservice industry revenue 2003-2009E bn RMB 0. 17 0. 16 0. 14 YOY 0. 13 growth 0. 12 0. 11 0. 1 0. 09 0. 08 0. 15 16% 14% 13% 11% 14% 11% 3,860 956 1,090 1,232 1,365 1,556 1,800 2,000 2003 2004 2005 2006 2007 2008 2009 E US 2009 By contrast, US Restaurant Industry has shrunk for the termination 2 years in revenue Source China Statistics Bureau, AlixPartners psychoanalysis 6Chinas Per Capita eat appear Increased To About 980 RMB Per Year In 2009, Which Is Less Than 10% Of US Per Capita eat Out China per capita dining out expenditure RMB per capita per year 0. 24 0. 22 22% YOY 0. 18 0. 16 growth 0. 14 0. 12 0. 1 0. 08 0. 2 14% 14% 10% 15% 12% 10,100 438 533 607 691 761 878 980 2003 2004 2005 2006 2007 2008 2009 E US 2009 Per Capital dine Out Is Driven By Growing Disposable Income Per Capita (Per Capita dine Out Has Been Around 6% Of Disposable Income 2004-2009) Source China Statistics Bureau, AlixPartners analysis 7Chinese muckle Eat Out Only About 1/3 As Frequent As US People In 2009, As Dining Out Represents 21% Of nitty-gritty Food Expenditure Average add Of Times Dining Out 2009 Dining Out As % Of inwardness Food Expenditure, China vs. regular army 204 48% 184 130 22% 72 18% China HK Taiwan ground forces China 2003 China 2009 E ground forces 2009 Source China Statistics Bureau, AlixPartners analysis 8 The Chinese Restaurant Industry Remains Highly Fragmented, With More Than 5. 1 Mio. Outlets And Average taxs Of 0. 4 Mio. RMB No. Of Restaurants Mio. Outlets Average taxation Per Outlet 000 RMB 4,091 5. 1 3. 0. 9 308 377 China 2003 China 2009 E USA 2009 China 2003 China 2009 E USA 2009 Source Euromonitor, China Statistics Bureau, AlixPartners analysis 9 The Top 100 Chinese Restaurants Have A Market Share Of Only 6% in 2009, Compared To 45% In The USA China restaurant revenue, Top 100 vs. Others % of Industry Total Top100 9% 6% 45% Western style restaurants only account for 1% of the Chinese restaurant industry in 2009 profuse food restaurants account for about 23% of the market in China, compared to about 29% in USA Others 91% 94% 55% China 2003 China 2009 USA 2009Source China Statistics Bureau, National Restaurant Association 20 10 Industry Forecast, AlixPartners analysis 10 Quick Service And Hotpot Restaurants cover For 2/3 Of The Top 100 Restaurants Revenues In China Number of companies Revenue % Revenue per play along bn RMB Comments straightaway food plane section is expanding in China rapidly due to services & quality stock(a)ization and relatively low price level key players admit YUM brands, McDonalds, Dicos, etc. Hot potful restaurants are popular in China, esp. in central and north regions Key players include little Sheep, Xiao Wei Yang, Dezhuang, etc.Quick Service Restaurants (QSR) 20 31% 1. 8 hotpot 23 34% 1. 7 Full-Service Casual Dining 17 11% 0. 8 Casual dining is pointing to a growth trend among vernal professionals who are seeking places for social activities specialty / okay dinning mainly include famous Chinese brands and large restaurant groups, and western fine restaurants Specialty / handsome Dining 40 24% 0. 7 Western fine restaurants are growing fast but focused on coastal cities Source China Statistics Bureau, AlixPartners analysis 11 Chain Restaurants Still Account For Small Share In Chinese Market, But HaveBeen Consistently Gaining Market Share China restaurant revenue, Top 100 vs. Others % of Industry Total enchained 8% Chain restaurants Independents Chain restaurants have grown at a faster rate than independent restaurants, driven by advantages in publicizing / brand building Cost and quality control operative readiness Independents 92% 19% 15% 12% 20% 16% 22% 18% 23% In Hong Kong, chained restaurants account for 28% of fall market size by revenue Going forward, chain restaurants are likely to rapidly win market share 2001-06 CAGR 06 vs. 07 appendage 08 vs. 07 Growth 09 vs. 08 GrowthSource Euromonitor, China Statistics Bureau, AlixPartners analysis 12 Contents A. Executive Summary B. Industry Environment C. Financial Performance Profiles of Selected Restaurants D. 2010 China Consumer Survey Results E. Opportunities for Resta urant manacles F. Conclusions 13 Three Western Restaurant provokers Are Currently Among The Top 10 (KFC, McDonalds and Pizza Hut) No. 1 2 3 4 5 6 7 8 Brand KFC McDonalds Dicos Little Sheep Xiao Wei Yang Pizza Hut UBC Cafe Xiaotiane Company Yum Brands Inc. McDonalds Corp Ting Hsin international Group Little Sheep Group Limited Inner Mongolia Xiao Wei Yang YumBrands Inc. UBC Coffee food Co Ltd Chongqing Xiaotiane Catering Type QSR QSR QSR Hot Pot QSR Casual Dining QSR QSR Market share 1. 2% 0. 5% 0. 3% 0. 2% 0. 2% 0. 2% 0. 2% 0. 1% of Stores gt2,000 gt1,000 gt1,000 gt 400 ca. 600 ca. ccc ca. 500 ca. three hundred 9 10 Xiao Tu Dou Malan Lamian Shenyang Xiao Tu Dou Malan Lamian Fast Food QSR QSR 0. 1% 0. 1% ca. ccc ca. 300 Source Euromonitor, China Statistics Bureau, AlixPartners analysis 14 Major Chinese Restaurant Chains On Average Outperform US Restaurants In EBIT gross profits, And Are In Line With US QSR EBIT margin comparison 2009 E Chinese Chains 5. 2% 11. 6% 9. 6% 7. 3% 11 . 9% 17. 0% 11. 2% 10. 1% 6. 2% Fairwood Quan Ju De Little Sheep Cafe De chromatic capital of Red China Xian Ge Qing Ajisen US Average Asia FB USA QSR Peers Source IQ Capital, Annual reports, AlixPartners analysis 15 Leading Chinese Restaurant Chains Remain Small Players Compared To US Peers, But With significantly Different Growth Perspectives Leading Chinese Chains Company Dafe de red coral Ajisen Little Sheep Fairwood China Quanjude Beijing Xiangeqing HK Catering Management Leading US Chains Growth 2009 9. 1% 18. 7% 23. 5% 2. 2% 8. 3% 20. 6% -7. 2% Revenue 2009 Mio. RMB ,674 1,986 1,570 1,466 1,204 738 328 Company McDonalds Yum Starbucks Darden Brinker OSI Jack in the Box Burger King Wendys Arbys Cracker Barrel Revenue 2009 Mio. RMB 162,112 76,287 70,989 48,407 27,926 Growth 2009 -3. 3% -4. 1% -5. 9% 8. 9% -14. 5% NA -2. 7% 3. 4% -2. 2% -0. 7% 27,816 17,363 17,277 16,691 Xinjiang Bai Hua Cun 64 62. 8% 16,254 Major US chains with limited growth potential in mature home market Chinese restaurants with major growth potential ( twain organic growth and through takeovers) Source Euromonitor, China Statistics Bureau, AlixPartners analysis 16Solid EBIT Margin and Growth Potential Are Main Reasons For MA natural action and PE coronations Increase In Investments searched Chained Restaurant of restaurants in 2009 422 Investment size m US$ N/A Key MA and PE investments Yum Brands bought 20% equity in 2009 The combined YUM Little Sheep will be the largest and most diversified restaurant company in China, providing both Western and Chinese style restaurants with brands including KFC, Pizza Hut, East Dawning and Little Sheep Nov. 2005, a group of investors including IDGVC invested $ 14 million GGV and first round investors invested $10. million in 2007 In 2008, Oaktree and existing investors, invested $23 million In 2007, Capital now and Liandong invested $43 million 70 14 11 23 300+ 43 98 40+ 50 43 Nov. 2008, Actis invested USD 50 million Dec. 2008, CDH invested $43 million With solid EBIT margins and strong growth opportunities, private equity investments and takeovers by leading restaurant chains are likely to increase Source Published data, AlixPartners analysis 17 For Example, Little Sheep Restaurant Chain A Success Story Company Overview Little Sheep is the leading full-service restaurant chain operator in China. Its ranked 4 in all restaurant companies in China and 1 in local companies The company focuses on operating hot pot chain restaurants as well as developing, processing and selling food product including birth and hot pot soup Little Sheeps revenue rise from RMB 513 millions in 2005 to 1,272 millions in 2008, growing at 35% CAGR It has 422 restaurants in organic by mid 2009 146 companyowned and 276 franchised restaurants RMB Millions Revenue CAGR 05-08 35% 08-14E 31%Revenue Growth Breakout Success Factor Standardization facilitates expansion into China The standard products in hot pot restaurant cuisine require marginal kitchen preparation and enable easier quality control Its focus on quality creates a strong brand. In particular, it is known for high-quality lamb Focuses on consumer segment of 20-40 year olds and invests heavily in advertising and its royalty program Shifted from furbish up franchising model to a mixed franchising owned model in 2002, facilitating geographical expansion Franchised vs. Owned Business Model Company-owned model helps Little Sheep get up its operational efficiency by better executing its branding and marketing strategy, optimizing menus and facilitating the launching of new products Franchised restaurants model obviates the need for the company to raise heavy(p) and run the day-to-day business, thus very effective or the company to penetrate lower-tier cities Source Annual report, Yuanta Research report, AlixPartners analysis 18 Contents A. Executive Summary B. Industry Environment C. Financial Performance Profiles of Selected Restaurants D. 010 China Consumer Survey Results E. Opportunities for Restaurant Chains F. Conclusions 19 AlixPartners 2010 China Consumer Survey Overview encounter March 2010 Population 1,030 adults, 13 major cities in China, age 18+ (average age 25) Demographics Respondent group was representative of the Chinese population crossways key demographics and income ranges Survey Focus Key areas of focus included ? think frequency of dining occasions ? Expected spending on meals alfresco the home ? pickred type of restaurants ? Key criteria for consumer preference in restaurant selectionUS Survey In March 2010, AlixPartners also conduced a similar theatre of trading operations in the USA, also covering a survey population of 1,000 adults AlixPartners, LLP, 2009 20 In China, Average Spent Per Meal Is Expected To Increase By 10% In 2010 By Contrast US Diners Expect to dedicate 4% Less Expected average spending per meal RMB mainland China USA -4% 82. 6 +10% 79. 2 48. 8 53. 7 experience 12 c alendar months beside 12 Months Last 12 Months conterminous 12 Months 21 Over The coterminous 12 Months, Nearly 46% Expect To Spend More Money in Restaurants in China, While Consumers in USA Remain Cautious picturened consumer spending, 2010 CHINA USA 51% 46% 41% 5% 39% 34% 13% 16% 15% Spend less Spend same Q1-2010 Spend more Spend less Spend same Q1-2009 Spend more Q1-2010 22 Fine Dining and Fast Casual Will Benefit most(prenominal) From Dining absolute frequency Increase In China Fast Food and Fast Casual Most Impacted in USA Dining frequency per month and restaurant type CHINA +9% USA S 2009 13. 7 S 2010 15. 1 6. 4 -20% S 2009 13. 8 S 2010 11. 8 5. 1 6. 2 5. 7 +13% 4. 4 3. 9 +7% -17% 2. 9 3. 1 +17% 2. 9 2. 4 2. 9 2. 8 1. 6 1. 5 1. 2 1. 4 Fast Food Fast Casual LTM Freq/Month Casual Fine Dining Fast Food Fast Casual LTM Freq/Month Casual Fine Dining 2010 Expected 2010 Expected 23Biggest Drivers to Increasing Frequency At Favorite Locations Are (1) break up Quality, (2) Clos er Location, and (3) Improved Service Better food quality Closer location Improved service Better atmosphere Healthier menu options 26% 37% 36% 35% 25% 22% 17% 15% 15% 13% 12% 10% 8% 7% 5% 4% 3% More or better promotions, discounts, or Better value Family informal environment Expanded menu variety Bigger portion sizes trend age to get in and out Offer take out service Other, specify Expanded sweet and/or beverage options draw off information available on the internet Accommodate special dietary needs Smaller portion sizesWhat would cause you to eat out more often at the restaurant(s) you visit most frequently? 24 In Determining Overall VALUE, Chinese Consumers Are Far Less focus On Price Promotions Than American Diners Food quality Overall service Low prices Healthy menu options Good promotions, discounts, or coupons Updated environment interior decoration Big portion sizes Value meals Amenities and atmosphere Range of dessert and/or beverage options 9% 6% 5% 9% 28% 27% 31% 2 4% 22% 19% 23% 44% 47% 42% 60% 59% 75% 6% China U. S. 16% 34% As a consumer, what factors are most important to you in defining OVERALL VALUE for your dollar? 5 In China, Word-of-mouth Is The Strongest Form Of Advertising For Restaurants Word of mouth Street walk-by profits Flier, coupon, booklet, etc. Self experience TV Magazine Newspaper 17% 16% 5% 28% 25% 37% 36% 71% 34% emails 26 50% of Survey Respondents in China Prefer Chain Restaurants 50% 35% 15% Yes No No difference Do you prefer a chain store over independent restaurants? 27 Majority of Chinas Consumers Prefer Chinese movement Dining, But Western Style is Very Popular Among Survey Respondents Total Sample Fast Food Next 12 months,Western style Next 12 months,Chinese styleTotal Sample Fast Casual Next 12 months,Western style Next 12 months,Chinese style 40% 60% 61% 39% Total Sample Casual Next 12 months,Western style Next 12 months,Chinese style Total Sample Fine Dining Next 12 months,Western style Next 12 months,Chin ese style 15% 34% 66% 85% Approximately 40% of Consumers in China Plan to Eat at Western Style Restaurants Penetration of Western Chains Most Prominent in Fast Food 28 Those Preferring Western Restaurants Cite the Cleaner Environment and Better Atmosphere Key Differences to Chinese Style Locations Clean or better environment 52%Better atmosphere (music, decor, etc. ) 46% Better services 40% approximate something different 31% Better taste of food 29% cultural attraction 26% Healthier menu options 19% Dessert and/or beverage options 16% What do you like about Western restaurants compared with Chinese restaurants? 29 Contents A. Executive Summary B. Industry Environment C. Financial Performance Profiles of Selected Restaurants D. 2010 China Consumer Survey Results E. Opportunities for Restaurant Chains F. Conclusions 30 Operational Improvement Levers For Major Restaurant Chains Winning strategies in operations improvement alter purchasing to implement professional process purchas e Negotiations sweeps coupled with strategic sourcing Logistics optimization and commodity risk analysis Centralized operations and facilities management, and IT Operational Effectiveness Lean Kitchen/Operations including emphasis on food waste % RD Process Improvement Develop clear brand position and tailored advertising strategies Marketing appliance effective LTOs with input from supply chain partners Encourage first time visits and push customer loyalty Partnering effectively with ocal owners who know the market elaboration Implement rigorous store selection process, with clear criteria Increase no. of stores to build brand awareness Restaurant chains have substantial scale advantages in operations 31 Opportunities For Western Restaurant Chains in China, Which So Far Have Been Hesitating To Invest on a Large Scale Leading US casual dining chains and their current China presence US Chain Brand Applebees Outback Steakhouse of stores Globally 2,000 900 880 780 of store s in China 0 100 0 30 Remarks unfastened a restaurant in print in 2007, but has since left the country Operates two restaurants in Beijing and around five in HK market leader in Korea Opened in Philippines in 2007, but has not expanded into other Asiatic countries Entered China in 1995 and has four restaurants in Beijing, but only one each in Shanghai, Tianjin and HK Highly successful chain, but no operations outside North America (same for sister company Red Lobster, both part of Dardens) One restaurant in Shanghai and two in HK Ruby Tuesday TGI Friday Olive Garden 700 Tony Romas 0 0 260 3