China Restaurant ; Foodservice Review

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 2 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 d ining 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. 3 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 pote ntial 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 leading Chinese restaurant chains w ill likely continue to expand and achieve strong margins, as scale results in significant advantages in purchasing, operational effectiveness and marketing. 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 Chains F. Conclusions 5China’s Foodservice Industry Has Been Expanding At 13% CAGR in 2003-2009, But Remains At Nearly 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 last 2 years in revenue Source: China Statistics Bureau, AlixPartners analysis 6China’s Per Capita Dining Out Inc reased To About 980 RMB Per Year In 2009, Which Is Less Than 10% Of US Per Capita Dining 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 Dining Out Is Driven By Growing Disposable Income Per Capita (Per Capita Dining Out Has Been Around 6% Of Disposable Income 2004-2009) Source: China Statistics Bureau, AlixPartners analysis 7Chinese People Eat Out Only About 1/3 As Frequent As US People In 2009, As Dining Out Represents 21% Of Total Food Expenditure Average Number Of Times Dining Out 2009 Dining Out As % Of Total Food Expenditure, China vs. USA 204 48% 184 130 22% 72 18% China HK Taiwan USA China 2003 China 2009 E USA 2009 Source: China Statistics Bureau, AlixPartners analysis 8 The Chinese Restaurant Industry Remains Highly Fragmented, With More Than 5. 1 Mio. Outlets And Average Rev enues Of 0. 4 Mio. RMB No. Of Restaurants [Mio. Outlets] Average Revenue 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 †¢ Fast 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 2010 Industry Forecast, AlixPartners analysis 10 Quick Service And Hotpot Restaurants Account For 2/3 Of The Top 100 Restaurants’ Revenues In China Number of companies Revenue % Revenue per company [bn RMB] Comments †¢ Fas t food segment is expanding in China rapidly due to services & quality standardization and relatively low price level †¢ Key players include YUM brands, McDonald’s, Dicos, etc. †¢ Hot Pot 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 young professionals who are seeking places for social activities †¢ Specialty / fine dinning mainly include famous Chinese brands and large restaurant groups, and western fine restaurants Specialty / Fine 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 restau rant revenue, Top 100 vs. Others [% of Industry Total] Chained 8% Chain restaurants Independents †¢ Chain restaurants have grown at a faster rate than independent restaurants, driven by advantages in – Advertising / brand building – Cost and quality control – Operational efficiency Independents 92% 19% 15% 12% 20% 16% 22% 18% 23% †¢ In Hong Kong, chained restaurants account for 28% of total market size by revenue †¢ Going forward, chain restaurants are likely to rapidly win market share 2001-06 CAGR 06 vs. 07 Growth 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 Restaurant Chains F. Conclusions 13 Three Western Restaurant Brands Are Currently Among The Top 10 (KFC, McDonalds and Pizza Hut) No. 1 2 3 4 5 6 7 8 Brand KFC McDonald’s Dicos Little Sheep Xiao Wei Yang Pizza Hut UBC Cafe Xiaotiane Company Yum! Brands Inc. McDonald's Corp Ting Hsin International Group Little Sheep Group Limited Inner Mongolia Xiao Wei Yang Yum!Brands 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 ;gt;2,000 ;gt;1,000 ;gt;1,000 ;gt; 400 ca. 600 ca. 300 ca. 500 ca. 300 9 10 Xiao Tu Dou Malan Lamian Shenyang Xiao Tu Dou Malan Lamian Fast Food QSR QSR 0. 1% 0. 1% ca. 300 ca. 300 Source: Euromonitor, China Statistics Bureau, AlixPartners analysis 14 Major Chinese Restaurant Chains On Average Outperform US Restaurants In EBIT Margins, 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 Coral Beijing Xian Ge Qing Ajisen US Average Asia F;B USA QSR Peers Source: IQ Cap ital, 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 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 McDonald’s Yum! Starbucks Darden Brinker OSI Jack in the Box Burger King Wendy’s Arby’s 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 (both organic growth and through takeovers) Source: Euromonitor, China Statistics Bur eau, AlixPartners analysis 16Solid EBIT Margin and Growth Potential Are Main Reasons For M;A Activity and PE Investments – Increase In Investments Expected Chained Restaurant # of restaurants in 2009 422 Investment size [m US$] N/A Key M;A 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 Today 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 oppor tunities, 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. It’s 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 lamb and hot pot soup †¢ Little Sheep’s revenue rose from RMB 513 millions in 2005 to 1,272 millions in 2008, growing at 35% CAGR †¢ It has 422 restaurants in total 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 requ ire minimal 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 sole franchising model to a mixed franchising ; owned model in 2002, facilitating geographic expansion Franchised vs. Owned Business Model Company-owned model helps Little Sheep enhance 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 capital 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 Se lected Restaurants D. 010 China Consumer Survey Results E. Opportunities for Restaurant Chains F. Conclusions 19 AlixPartners 2010 China Consumer Survey: Overview Date: 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 across key demographics and income ranges Survey Focus: Key areas of focus included: ? Planned frequency of dining occasions ? Expected spending on meals outside the home ? Preferred type of restaurants ? Key criteria for consumer preference in restaurant selectionUS Survey: In March 2010, AlixPartners also conduced a similar study 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 Pay 4% Less Expected average spending per meal [RMB] CHINA USA -4% 82. 6 +10% 79. 2 48. 8 53. 7 Last 12 Months Next 12 Mont hs Last 12 Months Next 12 Months 21 Over The Next 12 Months, Nearly 46% Expect To Spend More Money in Restaurants in China, While Consumers in USA Remain Cautious Planned 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 From Dining 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) Better Quality, (2) Closer 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 friendly environment Expanded menu variety Bigger portion sizes Shorten time to get in and out Offer take out service Other, specify Expanded dessert and/or beverage options Make 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 Focused On Price ; Promotions Than American Diners Food quality Overall service Low prices Healthy menu options Good promotions, discounts, or coupons Updated environment ; decor Big portion sizes Value meals Amenities and atmosphere Range of dessert and/or beverage options 9% 6% 5% 9% 28% 27% 31% 24% 22% 19% 23% 44% 47% 42% 60% 59% 75% 6% China U. S. 16% 34% As a cons umer, 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 Internet 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 China’s Consumers Prefer Chinese Style 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,Chinese style 15% 34% 66% 85% Approxima tely 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% Try 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 Centralized purchasing to implement professional process Purchasing †¢ 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 % †¢ R;D Process Improvement †¢ Develop clear brand position and tailored advertising strategies Marketing †¢ Implement 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 Expansion †¢ 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 Applebee’s Outback Stea khouse # of stores Globally 2,000 900 880 780 # of stores in China 0 100 0 30 RemarksOpened a restaurant in Shanghai 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 Asian 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 Darden’s) One restaurant in Shanghai and two in HK Ruby Tuesday TGI Friday Olive Garden 700 Tony Roma’s 0 0 260 3