China’s zero-COVID policy has had a negative impact on consumer purchasing habits and has severely weakened the food and beverage industry. Firms such as the famous Taiwanese chain Bafang Dumpling suggest they may pull out of the Chinese market and move their business to the United States. While Bafang has yet to confirm this, it launched a stop-loss mechanism, closed poorly performing stores in China, and opened its first US store in March of this year.
Bafang and Other Restaurant Groups May Exit China
Based in Taiwan, Bafang Dumpling is a store that specializes in pots and dumplings. During its heyday, the company operated more than 100 stores in mainland China, which currently generate less than one percent of Bafang’s total revenue. Taiwan is responsible for 81 percent. of Bafang’s revenues, and Hong Kong for 16.9 percent.
Bafang’s slow performance in China began three years ago when the Chinese Communist Party (CCP) launched its zero-COVID policy to contain a pandemic. Successive city blockades, power cuts, rising commodity prices and higher rents prevented consumers from shopping and ruined corporate profits.
Like Bafang, many restaurant groups in China have begun to shrink their operations and turn to the United States for expansion. In March of this year, Bafang opened its first US store in City of Industry and a factory in Irvine, both in California. The company said it intends to add eight more stores and a central factory in California over the next two years.
China’s Domestic Market in Rapid Decline
In an interview with The Epoch Times, Taiwanese financial expert Hsu Kow-Huang said demand for Chinese domestic products has been disappointing as of 2020. He attributed the problem to the CCP’s COVID blockades, which limited consumption in stores and severely weakened the restaurant industry. Worse, he said the CCP showed no signs of ending its harmful policies.
Hsu described the Chinese domestic market under the CCP’s Covid zero policy as “fierce involution,” suggesting that the market continues to shrink. He said a company is unlikely to gain market share compared to larger companies if its products are not significantly different from others and are not favored by consumers. In line with COVID-19 restrictions, Chinese consumers have no income and their purchasing preferences have shifted to low-cost products. For example, high-quality and expensive food products are no longer so attractive. People try to keep just enough food. The shrinking market for expensive food has dealt a severe blow to China.
Under these circumstances, Hsu believes it is reasonable to expect many Taiwanese food and beverage companies to begin expanding their brands in the United States. While the Chinese market is 1.2 billion people and the United States less than 332 million, the average annual income in the US is higher. In the case of Bafang Dumpling, this means that only 50 stores in the US can earn revenue from 100 stores in China, even though the cost of making dumplings in the US could be double.
China’s Restaurant Industry is Suffering
Chinese media firm 36Kr released a report titled “China’s August 2022 Restaurant Industry Development Report,” claiming that half of the 32 publicly traded Chinese restaurant entities suffered cumulative losses of $ 296 million in the first half of 2022, which represents an average loss of $ 18.5 million per entity.
The restaurant categories that struggled the most included formal Chinese meals, Western-style fast food, braised dishes, and hot pot restaurants. The significant decline in restaurant net profits so far in 2022 has been attributed to the COVID-19 blockade in China and rising raw material and labor costs. Combined, these factors have led to operational difficulties and reduced revenues.
Similar data from Taiwan Commercial Times confirms that in 2020 and 2021, the number of canceled or canceled stores in the restaurant industry in mainland China was over 320,000 and 935,000, respectively. In the first half of 2022 alone, a total of 373,000 restaurants were closed or canceled or stores, which exceeded all in 2020.
In the first half of 2022, Beijing and Shanghai were hit by another epidemic blockade that effectively banned eating in stores. In mainland China, many restaurants have been forced to close due to falling profits and rising rent, labor and ingredients costs. Even big brand stores were damaged.
The high percentage of restaurant closings that have occurred so far in 2022 has been concentrated in Shanghai. After resuming work in June, the restaurant industry did not respond with huge expenses to the revival of consumer sales. Consumers also did not return to their old habits of waiting for high-quality, expensive brands. Instead, people wanted lower-priced products, which dealt another blow to the weakened Chinese restaurant industry.
Looking ahead to the Chinese restaurant industry, Goldman Sachs analysts in China cut their composite revenue growth from 11 percent to 8 percent in the 2021-26 period. Rather than quickly recovering from epidemic restrictions, they believe the industry will stagnate in 2022 with only 0.6 percent annual growth.