China Restaurant & Foodservice Review

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Enterprise Improvement

Corporate Turnaround and Restructuring

Financial Advisory Services

Information Management Services

AlixPartners 2010 China Restaurant & Foodservice Review
May 2010

© AlixPartners, LLP, 2010

www.alixpartners.com

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

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2010 Restaurant & Foodservice Review Executive Summary (1)
Market Trends Industry Structure
 The Chinese restaurant industry has grown by about 11% in 2009 to about 2 trillion RMB. Growth was down from 16% in 2008.  However, despite annual growth rates of 13% since 2003, the Chinese restaurant industry by 2009 has reached only about half the size of the US restaurant industry, as dining out expenditure per capita in China is less than 10% the expenditure of US people.

 Chinese consumers remain substantially more conservative in terms of dining out than US consumers: while in the US, people nearly spend half their food expenditure in restaurants, Chinese people only spend 22% in restaurants.  The number of restaurants in China is vastly higher than in the US (5.1 vs. 0.9 million restaurants) and the industry is significantly more fragmented. Whereas the Top 100 restaurant chains in the US have a 45% overall market share, China’s Top 100 only has a 6% market share in 2009 (down from 9% in 2003).  Western restaurants remain at a very low level in China, and have a market share of only about 1% in 2009. Apart from KFC, McDonald’s 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, profitability 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 solid profitability levels and strong future growth potential for Chinese restaurant chains, it is a highly attractive industry for M&A deals and we are likely to see further private equity investments as well as takeovers by leading chains.

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2010 Restaurant & Foodservice Review Executive Summary (2)
 Per capita expenditure on dining out will continue to increase 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 quality food and market themselves more on an individual basis to consumers. Similar to in U.S., food quality is the most important factor when Chinese consumers determine overall value. Other top factors are price and service  Chain restaurants are increasingly popular in China. 50% of consumers prefer chains over independent 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.  Western restaurants have enormous growth potential. On average, Chinese consumers plan to eat 40% of their meals in Western style restaurants in 2010. This is a substantial contrast to the 1% market share of Western owned restaurants in 2009.

Consumer Survey Results Opportunities

 Consumers preferring Western restaurants cite cleaner environment, better atmosphere and better service as key differences to Chinese style locations.  Western restaurant chains have substantial opportunities in the Chinese market, but will have to develop tailored concepts to the market. Developing a brand position and good quality reputation will be critical for Western chains in the highly fragmented 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...
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