By XIAO Fang
Investment in restaurants has dropped a cliff since 2021. The general lack of energy in the economy is one factor, but many investors got in for the wrong reason to begin with. Restaurants are different from mobile apps. A lot of work is needed, even after the first million customers.
Recipe for disappointment
Restaurant chains trying to go public are having a hard time. In August, Home Original Chicken withdrew its IPO application, for the third time in two years. Bama Tea, Lao Niang Jiu (Chinese fast food), and Dezhou Braised Chicken submitted their prospectuses last year but none have made any progress since.
Bubble tea chain Mixue Bingcheng (MXBC), with over 10,000 locations and growing steadily, is considering Hong Kong for a better valuation but is braced for a huge disappointment. The valuation might be only half of its peak, though there is clearly a big difference between he value of something on paper and the value in an actual marketplace.
Venture capitalists have also soured on restaurants. Funding in the first half of this year totaled 21 billion yuan (US$3 billion). It seems like a huge sum but the number of deals hasn’t increased since 2021, and the amount is less than half that of two years ago.
Following fickle youth
Granted, 2021 was a crazy year for restaurant investment. It was said that a chain could get a 100-million-yuan valuation just by opening up in Changsha’s Wuyi Square, emblematic of picky young people with money to spend from second-tier cities.
Coffee shops and bakeries that were quaint little neighborhood haunts three years before suddenly controlled prime real estate all over the country, egged on by venture capital.
Restaurant fervor started in 2018. Investors who made a fortune in the mobile internet boom were looking to replicate their success in another industry and set their eyes on the food business. Restaurants could blast ads online, open stores everywhere, and quickly round up hundreds of thousands of “customers,” the same way mobile apps acquire their “first million users.” At that time, restaurant revenue was growing at 10 percent a year. But only 15 chains were publicly traded. In other words, it was a gold mine.
Craving for more
For a while, it worked. The four-hour lines in chichi malls everywhere were proof of something, though perhaps not what investors wished for. Restaurants do not scale up the same way as mobile apps.
There’s no extra cost to the developer when a new user downloads an app. But every new restaurant has to go through the same drill of renovating, buying stock, hiring, marketing and daily operations. Supply chain management and quality control get exponentially more complicated as the number of locations increases.
This does not mean the marriage between restaurants and venture capital has to be an unhappy one. Investors pushed former mom-and-pop shops to standardize and digitize and saved them from going under during the pandemic, depending on how one interprets saved.
JIA Guolong, who founded the northwest Chinese cuisine restaurant Xibei, once swore that he would never borrow money or go public. The pandemic changed his mind. He once told reporters that outside investment enabled him to weather extreme events while still building his brand.
A question of taste
There are, however, hard lessons learned.
Tiger Attitude Chartered Pastry Bank, a Chinese-style bakery, has become a case study of how venture capital investment can go wrong. Founded in 2019, it closed a US$50 million funding round two years later at a US$2-billion-yuan valuation, on the basis of 20 small stores.
Customers were drawn to its vintage aesthetics and leopard-print cake rolls but soon disappointed by lousy pastries and poor service. Copycats popped up. Sales plummeted. In April, tigers became extinct.
Differing appetites
Arguably, the interests of restaurants and investors are intrinsically different.
Restaurateurs want to give customers food and a pleasant experience investors see only numbers - blast ads, boost traffic, scale up, and go public. Investors have no interest in any need for any expertise whatsoever in hospitality. But winning customers and keeping them takes diligence and patience. Running a restaurant has never been a route to a fast buck.
Last year, restaurant revenue shrank by 6.3 percent and the divorce of restaurants and capital was unavoidable.
Those who are still in are exploring ways to expand and exit. Franchising works only for takeaway restaurants, for example, while sit-down places should refrain from opening too many locations all at once but focus on profitability for each existing one instead.
The IPO is not the only way to recoup one’s investment. Mergers, acquisitions, or old-fashioned partnerships are nice exits too.
Nothing new to be discovered
In a recent food and beverage investor conference, ZHANG Peiyuan of BA Capital raised the notion that the restaurant business is both “cyclical” and “structural.” Yes, revenues are subject to economic booms and busts. But in the very long run, its growth also goes hand in hand with progress in the rest of the economy and society.
Consumers demand healthier and sustainably produced food. The supply chain is more digitized and less wasteful. Retail has become both globalized and localized. These trends do not reverse even in economic downturns but fundamentally shape the future of restaurants.
