[PharmaDrMan]

90% of China's restaurants not profitable: report

Staff Reporter
2012-07-03
17:03 (GMT+8)



The renown of Chinese food is no match for skyrocketing rental prices in judging quality of life. (Photo/Xinhua)

90% of China's restaurants and catering enterprises have failed to make profits in the past two years, reports Shanghai's First Financial Daily.

With higher rents caused by surging property prices, many catering enterprises are facing in a dilemma as to whether to continue to operate. "Most of them have chosen to withdraw from the market," Jin Peihua, deputy secretary-general of the Shanghai Restaurants Association, told the newspaper.

A man surnamed Zhou who had operated a Japanese restaurant in Hangzhou said that when he opened his restaurant about six years ago, the rent accounted for 30% of the total cost. As soon as the prices rose more, he had to give up the business.

Zhou said he was happy to have left the market earlier because in 2006 rent began a new round of increases. According to Jin, from 2006-2010 rent increased 100-200%. Since the terms of rental contracts last 6-10 years, most contracts expired during the past two years.

Chen Xurong, the chairman of the International Catering Association, said that currently rents account for more than 50% of the total operating cost of restaurants. For instance, the gross profit margin of restaurants in a first-tier city will need to reach 60% before becoming profitable, while that for those in second- and third- tier cities will need to reach 50% before seeing a profit.

Even listed companies also face mounting pressure from high rents. Ajisen (China) Holdings rent accounts for 30% of its total cost. The rental cost of restaurants in Shanghai accounted for about 15% of their business revenues. Before 2006, the ratio was about 8%-10%.

According to statistics compiled by the Shanghai Restaurants Association, only 10% of enterprises in the industry were profitable, while about 60% could only make ends meet and nearly 30% suffered losses. With declining revenues of restaurants and catering companies this year, losses are only expected to go up.

A chef at a restaurant offering Southeast Asian food said that one year after the restaurant opened, its rent was 1.5 million yuan (US$236,000), a rise of 100,000 yuan (US$15,740) over the previous year. While the restaurant did not register growth in its revenues, its food and labor costs have surged. The personal salary of chefs has doubled compared with three years ago.

Under the pressure of rising rents, a large number of catering enterprises have withdrawn from the market each year. Despite this grim reality, new entrepreneurs are still flooding the market, though only a small number will succeed, Jin noted.