CHALLENGES FOR F&B INDUSTRY IN CHINA: IT IS OFTEN A MATTER OF REAL ESTATE

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The food service industry is still growing at a phenomenal rate in several major Chinese cities.

Turnover in this industry is high – every week we see several restaurants opening, while several others close their business – meaning that the market is full of potential, but is not yet mature.

New ventures face several challenges in terms of their approach to the market and to consumers. Some of these challenges are indeed related to legal and regulatory issues, most of which are related to real estate.

LOCATION

While it is a well-known fact that having the right location is a key-ingredient for success, in Chinese F&B industry certainty of the location is never to be taken for granted.

We have seen numerous times that successful restaurants have been kicked out of their premises from one day to the next.

This is often due to the fact that some locations do not have the legal qualification to be used for commercial purposes or food service. Since 2006 we have seen many amazing restaurants disappear from the scene, as their location was intended for cultural destination (in Shanghai a whole block of food shops, restaurants and discos in the heart of the French concession have been closed, because the premises belonged to an adjacent university, which was supposed to use the area only for cultural purposes), or other non-commercial purposes (residential, warehouse, etc.).

In other cases, the landlord is a state-owned company which does not have the right to lease the location for private business.  What usually happens is that the non-legitimate status quo is tolerated for several years, until the day that some governmental department, agency or some “internal discipline bureau” of the Party decides to enforce the regulation.

LANDLORD RELATIONSHIPS

Today the field of business leasing is becoming a jungle: many operators purchase or lease properties just to re-lease them or sublease them, without any experience or professionalism.

Sometimes they act recklessly and do not care whether these locations are legally leasable; other times they do not have any experience with F&B business (it also happens to major players: the management of a 70-floor office building might have no idea of the needs as well as the dynamics of F&B business, which leads to lack of flexibility, unreasonable requests, waste of time and money.).

One of the main challenges for F&B businesses are rental costs, which have been skyrocketing in the last few years in China’s major cities. Lease contracts offered by landlords for good locations are usually rather short (1-2 years) and the renewal is often “offered” at strongly higher rates, putting the entrepreneur face-to-face with very tough choices in critical moments (i.e. when there is starting to be a return on investment).

LICENSES

Food licenses are strictly connected to location, meaning that a non-qualifiedlocation will not be allowed to obtain the necessary licenses to operate, for example food service licenses, fire certificates, alcohol service permits, environmental approval, water waste certificates.

There are several categories of food service licenses – based on the restaurant size, on the business mode (fast food restaurant, beverage store, dessert station, catering groups, make-on-site & sell-on-site, canteen, central kitchen). Moreover, each category of license authorizes specific kinds of food only (i.e. hot meals, cold dishes, raw food, pastry products, home-made beverages, etc.). It should not be taken for granted that any category of food license can be obtained in any location – it will depend on the physical and legal features of the location itself.

Still, in practice, we see several businesses which operate restaurant services under food trading licenses or – in the best cases – under food catering licenses of a non-matching category.

To avoid bad surprises with licenses – besides sound due diligence – shopping malls provide a safe harbor (they are brand new and have spaces fully authorized for food services) but at higher rental costs.

If we have a street-level location, we will have to get approval for any decoration on the external façade, while if we consider shopping mall locations, the landlord usually has veto power over almost anything (logo, decoration, etc.).

GREY AREAS

Generally speaking, the food service industry is full of grey areas, and businesses often find themselves in situations where they are allowed to operate but – at least to some extent – without clear legal grounds.

Take – for instance – prime locations in pedestrian areas which are clearly not allowed to have tables and chairs in the public outdoor space: today those outdoor seats teem with enthusiastic customers, but tomorrow authorities might suddenly stop this unauthorized use of the public space.

This is the same for businesses who are only legally allowed to sell pre-packaged food, but which instead provide costumes with sandwiches, salads and freshly squeezed fruit juices.

Grey areas are indeed very tricky: if you do not exploit them, you lose competitiveness; but if you do exploit them, you might never be able to sell your business.

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