High Rents Allow Profits for 10% of China's Restaurants

Only 10% of China’s restaurants are profitable as the industry struggles with surging rents and rising labor and food costs, according to Shanghai’s First Financial Daily.

The biggest hurdle to restaurant profitability is rents which have risen to over 50% of total operating costs, said Chen Xurong, chairman of the International Catering Association. Due to high rents, in China’s first-tier cities a restaurant must achieve a gross profit margin of 60% before it can hope to turn a profit. Even in second- and third-tier cities the margins have to hit 50% to produce a profit.

High rents are putting pressure on even major publicly-traded restaurant chains like Ajisen (China) Holdings which must devote 30% of its total cost to rent.

In Shanghai rents as a share of total business revenues have risen from about 8-10% before 2006 to about 15% today.

Gross profits are also being pressured by rapidly rising food and labor costs. Food inflation was raging at around 9% for much of 2011 while the cost of labor has doubled in the past three years.

Consequently only 10% of restaurants were profitable, while about 60% were only able to break even and nearly 30% suffered losses, according to data from the Shanghai Restaurants Association. The percentages aren’t expected to improve given current trends in the city’s rental rates.

One example cited was a restaurant selling Southeast Asian food. A year after opening its rent rose 100,000 yuan ($15,740) to was 1.5 million yuan ($236,000). Its food and labor costs also surged, with the salaries of chefs doubling since three years ago. Meanwhile, the restaurants revenues remained flat.

New restaurants continue to open, but they face economic realities that will require a higher percentage of them to close without any hope of seeing a profit.