China’s COVID-19 Restrictions Weakened its Consumer Markets and the Food and Beverage Industry

China’s COVID-19 Restrictions Weakened its Consumer Markets and the Food and Beverage Industry
A restaurant in China with no customers. The Communist Party's pandemic control policy has hit China's food and beverage industry hard. (Nicolas Asfouri/AFP via Getty Images)
10/6/2022
Updated:
10/6/2022
China’s zero-COVID policy has negatively impacted consumer buying habits and severely weakened the food and beverage industry. Companies like Taiwan’s famous Bafang Dumpling chain hint they may withdraw from the Chinese market and divert their operations to the United States. Although Bafang has yet to confirm this, it has activated its stop-loss mechanism, closed poorly operating stores in China, and opened its first U.S. store in March of this year.

Bafang and Other Restaurant Groups May Exit China

Headquartered in Taiwan, Bafang Dumpling is a potsticker and dumpling specialty store. In its heyday, the company operated over 100 stores in mainland China, which now generate less than one percent of Bafang’s total revenues. Taiwan accounts for 81 percent of Bafang’s revenues and Hong Kong accounts for 16.9 percent.

Bafang’s sluggish performance in China began three years ago when the Chinese Communist Party (CCP) began its zero-COVID policies to contain the pandemic. The ensuing city lockdowns, power restrictions, escalating prices of raw materials, and higher rents prevented consumers from shopping and devastated the profits of businesses.

Like Bafang, numerous restaurant groups in China have begun downsizing their operations and turning to the United States for expansion. In March of this year, Bafang opened its first U.S. store in City of Industry and a factory in Irvine, both in California. The company said it expects to add an additional eight 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 the demand for China’s domestic products has been unsatisfactory since 2020. He attributed the problem to the CCP’s COVID lockdowns that restricted in-store consumption and severely weakened the restaurant industry. To make matters worse, he said the CCP shows no signs of ending its damaging policies.

Hsu described the Chinese domestic market under the CCP’s zero-Covid policies as “involution fierce,” suggesting the market is continuing to shrink. He said a company is unlikely to grow market share against larger companies if its products are not significantly different from others and not favored by consumers. Under the COVID-19 restrictions, China’s consumers lack income and their buying preferences have switched to low-cost items. For example, high-quality and costly foods are no longer as appealing. People are trying to get by on just enough food. Shrinking of the high-priced foods market has delivered a severe blow to China.

Under the circumstances, Hsu believes it’s reasonable to expect that many Taiwanese food and beverage companies will begin developing their brands in the United States. While China’s market consists of 1.2 billion people, and the United States has less than 332 million, the U.S. average annual income is higher. In the case of Bafang Dumpling, this means the revenue from 100 stores in China can be earned from only 50 stores in the United States, even though the cost of making dumplings in the United States may be twice as high.

China’s Restaurant Industry is Suffering

Chinese media company 36Kr released a report titled “China’s Restaurant Industry Development Report in August 2022,” claiming half of China’s 32 listed restaurant entities experienced cumulative losses of $296 million during the first half of 2022, an average loss of $18.5 million per entity.

The restaurant categories struggling the most included formal Chinese dining, Western-style fast food, braised foods, and hot pot eateries. The significant decline in restaurant net profits thus far in 2022 was attributed to the COVID-19  lockdowns across China and the rising costs of raw materials and labor. In combination, these factors have led to operational difficulties and reduced revenues.

Similar data from the Taiwan Commercial Times confirms that in 2020 and 2021, the number of canceled or revoked stores in mainland China’s restaurant industry totaled over 320,000 and 935,000 respectively. During the first half of 2022 alone, a total of 373,000 restaurants or stores were canceled or revoked, which exceeded all of those in 2020.

During the first half of 2022, Beijing and Shanghai were hit by consecutive epidemic lockdowns that effectively banned in-store dining. Across mainland China, many restaurant entities were forced to shut down due to falling profits and rising costs for rent, labor, and ingredients. Even the big-brand stores were affected.

A high percentage of the restaurant closures that have occurred to date in 2022 were concentrated in Shanghai. After work resumed there in June, the restaurant industry didn’t respond with massive spending to reinvigorate consumer sales. Nor did consumers return to their old habits of wanting high-priced quality brands. Instead, people wanted lower-priced items, which delivered yet another blow to China’s weakened restaurant industry.

Looking ahead at China’s restaurant industry, analysts with Goldman Sachs in China have downgraded their compound revenue growth from 11 percent to 8 percent for the 2021-26 period. Rather than recover swiftly from the epidemic restrictions, they believe the industry will stagnate in 2022 and show only 0.6 percent annual growth.

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