The COVID-19 epidemic in China is decreasing, and companies are gradually resuming work. However, as the alarm of the epidemic has not been completely lifted, people are still avoiding unnecessary going out. Shopping malls, cinemas and restaurants in different Chinese cities are opening one after another, but they will get very few consumers.
For a service company in China, such as a restaurant, how much money has been lost in the past months?
We interviewed the owner of a small hot pot restaurant in Beijing and got some useful information by comparing it with the financial results of Haidilao, a listed Chinese hot pot chain.
This may help to understand what is going to happen in other parts of the world.
Small restaurants: 70% rent cost pressure
Ah Qiang (pseudonym) owns a hot pot restaurant in Dongcheng District of Beijing, which had revenue of 3 million yuan last year.
When the audit was conducted at the end of the year, it was found that the annual income just exceeded the annual expenditure by a little bit, thus breaking even. But just as its boss hoarded ingredients to make a fortune on the Spring Festival holiday and the wave of rework after the Lunar New year, the COVID-19 epidemic came.
Hot pot restaurants have almost all the features of the tertiary industry: the need to rent stores to operate, the need to recruit service personnel, the need to buy food materials, the need for marketing. Because of the epidemic, guests are unable to enter the store, service staff are unable to get to the post, shops are forced to close down, and food materials that cannot be stored for a long time are wasted.
In Qiang’s view, their daily costs mainly come from four aspects: rent, staff wages, raw material inventory, and marketing promotion.
Last year, the monthly operating cost of Qiang’s Hot Pot Restaurant was about US $32,900, including US $7,200 for rent, US $8,600 for staff wages and accommodation, US $15,700 for raw materials, US $715 for marketing and promotion, and US $715 for miscellaneous utilities.
It can be seen that under normal circumstances, the hot pot restaurant accounts for 22% of the rent cost, 26% of the personnel cost, 47.8% of the food cost, 2.1% of the marketing and promotion, and 2.1% of the utilities. Rent and ingredients are by far the biggest cost of the store.
As a hot pot restaurant, food material is the most expensive part of the restaurant, and Qiang has hoarded a batch of goods, including meat, frozen products and vegetables, before the Spring Festival.
Because of the epidemic, the hot pot restaurant is temporarily closed, and vegetables that cannot be preserved for a long time can only be discarded. As long as the government announces the start of work, he can go to the market to buy fresh vegetables quickly. Frozen meat and other products can continue to be stored in the freezer for a period of time, but it depends on the date of reopening.
As a service company, the cost of personnel is also very high. Before the Spring Festival holiday, most of the employees visited their relatives and returned home, while the hot pot restaurant kept only a small number of its employees in Beijing.
Qiang discussed with his employees before the Spring Festival that their salary in February would be determined according to the number of days they worked in February. Because there is no opening, all the employees are not paid, but Qiang still gives the basic living expenses to the employees who stay in Beijing.
Therefore, in the part of personnel cost, Qiang’s loss is not big.
As for the marketing and promotion fees of the hot pot shop on the online platform, because the rules of the platform will not be deducted without clicks, Qiang basically has no loss in this part.
Now, the biggest headache for Qiang is the rent. Although the government has issued some announcements calling on landlords to reduce certain rents, landlords may also be unable to make decisions because of their own financial pressure. For now, landlords are generally on the sidelines.
Although the expenditure on raw materials, wages, water and electricity and promotion has been reduced, the majority of rent has not been solved. Ah Qiang is looking forward to the end of the epidemic every day, otherwise he will lose about $11000 a month. Without starting work, hot pot restaurants still have to support about 30% of their operating costs.
There are countless service industry bosses who face the same problems as him. But this is not the case for all enterprises.
Large enterprises: different fates
Jia Guolong, founder of Xibei Restaurant, said in an interview with the media on February 4, 2020 that Xibei would close down three months later and called for rescue.
The comments sparked discussion on the Chinese internet because Xibei Restaurant, a large restaurant chain founded in 1988, has nearly 400 stores and 20,000 employees in mainland China. Although it is not a listed company, its annual revenue exceeds 6 billion yuan (about $858 million), comparable to Haidilao, another Chinese catering giant.
Part of the voice laments that if large enterprises like Xibei are unable to cope with the impact of the epidemic, then more small and medium-sized enterprises will close down during the epidemic. Others question that Xibei’s own cash flow management is the root cause of its passive position.
Xibei has been in a stage of rapid expansion in the past five years, and 300 of its existing 367 stores have been set up in the past five years.
Earlier, Jia said in an interview with the media that Xibei will never go public because they prefer to distribute all the corporate dividends to employees rather than shareholders. According to tradition minds, it is the right time for this kind of dividend before the Lunar New year every year. This may be the reason why Xibei does not have enough cash to deal with the crisis.
On February 9, the fifth day after the interview, Xibei Restaurant received a credit of 430 million yuan from Shanghai Pudong Development Bank, of which 120 million yuan was received on February 7, mainly to pay the wages of Xibei’s employees.
After obtaining the bank loan, Jia Guolong said that a number of banks have extended a helping hand, and some investment institutions also hope to buy a stake in Xibei. Alibaba even pre-ordered 50 million yuan of electronic stored value cards, which will be resold to Alibaba users when Xibei resumes business.
Jia also said that he would consider abandoning the “non-listing” principle after the end of the epidemic.
Opposite to Xibei is Haidilao. Also as a large chain catering enterprise, Haidilao lost more than 5 billion yuan in revenue during the epidemic, but there was no emergency financing.
This is partly due to the sound financial management and management strategy of Haidilao.
According to Haidilao’s results for the first half of 2019 released in August last year, Haidilao has a daily operating income of 64.28 million yuan and a revenue of 11.69 billion yuan in the first half of the year.
The average salary of Haidilao employees is 6887 yuan, and staff costs in Haidilao increased from 30 per cent to 31.2 per cent in the first half of 2019 compared with 2018.
In the same hot pot restaurant, the cost of raw materials in Haidilao is also high. The cost of raw materials in Haidilao in the first half of 2019 was 4.9026 billion yuan, that is, the cost of raw materials averaged more than 27 million yuan per day, accounting for 41.9 percent of the total cost. In addition, depreciation and amortization costs 7.1%, water and electricity expenses 3.8%, income tax costs 2.9%, financial costs 0.87%, travel expenses 0.8%, other expenses 3.9%
Why is Haidilao not as dangerous as other enterprises in the face of the epidemic? Because Haidilao hardly pays any rent.
As in the case of Qiang’s Hot Pot Restaurant, the main problem he faces at present is the store rent. Qiang does nothing and has to bear the rent of 50,000 yuan a month, which is his biggest worry. And Haidilao’s financial report shows that Haidilao’s property rent and related expenses account for only 0.8% of the company’s operating costs.
According to the financial report, the property cost of Haidilao also fell from 3.7% in 2018 to 0.8% last year. The reason is directly related to Haidilao’s bargaining power.
Since Haidilao has become the most popular hot pot restaurant in China, almost all newly developed shopping malls in China want Haidilao to move in. Mall owners know very well that Haidilao can not only bring passenger flow, but also bring more passenger flow to other shops because they wait in line for Haidilao, or give up queuing up for Haidilao and entered into other restaurants.
In order to obtain the “brand” of Haidilao, shopping malls will not only let Haidilao rent-free, but some shopping malls will even give out money to attract Haidilao to move in. This negotiation power is beyond the reach of all other Chinese catering brands. Therefore, even if Haidilao has no store income during the epidemic outbreak, the biggest cost is only personnel costs, so they do not have the same huge cash pressure as other restaurants.
With the quelling of the epidemic, China is making efforts to help small and medium-sized enterprises return to work and production, and preferential policies and assistance policies in various places are also under way. For China’s small businesses and self-employed, there will be more and more benefits, but they can only wait patiently before they fully return to work.
Many Chinese netizens have called on the public to go to their favorite places for “retaliatory consumption” after the epidemic is over, to compensate those stores and all people for the losses suffered by the epidemic.