Overview

The food and beverage (F&B) industry in China has been one of the greatest beneficiaries of the country’s drastic economic growth over the past decade. The market is predominately occupied by domestic F&B enterprises in the high end sector with greater part of the growth resulting from 2nd and 3rd tier cities.

There is one restaurant for every 2000 people in China, which indicates a promising prospect for future development in comparison to the ratio of one to 268 in developed countries. On the other hand, the increasingly intensive competition for labour, together with the inflation of food prices, cast a shadow over the F&B industry in China, resulting in a diminishing bottom line. Inflation and wage rises, rather than political turmoil, are the essential elements that most affect business according to industry leaders.

Growth Rates

According to “the Eleventh Five-year Outline for Commercial Development” issued by China’s Ministry of Commerce, the actual growth rate of added value in catering industries is expected to increase by 9% annually from 2011 to 2016. As a traditional pillar industry in the service sector in China, sales of food and beverage has maintained an annual growth rate of over 10% for the past 20 years.

Risk factors for F&B enterprises in China

There are three principal factors commonly recognized in the F&B industry as well as indicated by statistics to beware. 1) Food price inflation. It has been the most significant contributor to overall inflation in the country. 2) Shortage of labour. The younger generation in China looks for professions that offer better pay as well as higher social status. 3) Uncertainties in real estate. Both rising rental costs in 1st tier cities and the looming correction of the property industry place pressure on domestic consumption.

Inflation

There are no signs of inflation in China being tamed in the near future. The latest official data shows that the CPI index shows an upward trend since 2009 while food price alone sees a bigger increment.  F&B enterprises serving fast food are raising their prices accordingly, but high end F&B outlets are having a hard time shifting the cost to consumers given the already premium pricing. The inflationary pressure creates a diminishing bottom line for all F&B enterprises in China, therefore producing marginal real growth for the F&B industry.

High Employee Turnover

Jobs in the F&B industry attract mostly undereducated labour. With the diminishing labour force within this segment, due to demographic change in China, fierce competition results in high employee turnover. Wages have more than doubled over the last decade.

Following the popularization of higher education in China, the younger generation is more reluctant to do manual work. In 2011, about one-fourth of young people aged 18 – 22 have enrolled for higher education. These young people usually look for job with better pay and higher social status when they get into the labour market.

Housing bubble in China? The potential consequences

For years, analysts have warned of a looming real estate bubble in China, but the predicted downturn, the bursting of that bubble, never occurred -- that is, until now. In a telling scene two months ago, Shanghai property developers started slashing prices on their latest luxury condos by up to one-third.

As frightening as it might seem, the popping of China's real estate bubble is not all bad news. Cheaper, more affordable housing could also unlock the savings of China's working-class families, unleashing greater consumer demand and helping to bring the global economy in balance.

Outlook

The F&B Sector is one of the better growth stories coming out of China. In 1978, less than RMB 6 per capita was spent on dining in restaurants, but that figure has rocketed to RMB 1250 in 2011 - more than 208 times that of 1978. Though that spending in proportion to per capita food expenditure fell from 54.3% in 1990 to 35.8% in 2011, the higher living standard and urbanization of the country have boosted the absolute volume of food consumption, maintaining an upward trend. It is common for many Chinese to dine at restaurants these days.