In the consumer environment this year, there are few catering stocks that can perform well. Even Haidilao, which maintained the best table turnover rate in the first half of the year, has fallen by 10% year-to-date. YUM China once fell by 30% during the year, not to mention Jiumaojiu, Xiabuxiabu, and others, which have fallen by nearly 60% during the year. Looking at A-shares, the catering stocks that have fallen by 30-40% also form a large portion. Under the large-scale price war, investing in catering stocks is extremely difficult. All companies are lowering prices and sinking, and this round of price war is also accompanied by new phenomena among consumer groups. I. Reversal of high-end consumption in first-tier cities As mentioned in a previous article about Jiumaojiu, as the homogenization of certain categories of restaurants becomes more serious and the number of restaurants focusing on the same category increases, price wars will intensify, such as hot pot, pickled fish, hamburgers, and the like. Specifically, when the overall environment deteriorates and competition intensifies, leading to a decline in table turnover rates and restaurants lowering average spending to attract customers, if income continues to be poor, individual store models approach the breakeven point, forcing catering companies to passively shrink and defend, which may eventually lead to large-scale closures. Taking Jiumaojiu as an example, how to maintain the quality of food products under a price war is the key test for various catering businesses in a downturn cycle. Therefore, the primary condition for survival in this round of price war is sufficient cash flow on the books, a mature supply chain capable of controlling costs, and the ability to expand stores downward, surpassing other smaller restaurants through cost and operational advantages, and ultimately capturing market share. Looking at the pricing trends of restaurants, whether it's Haidilao, Jiumaojiu, McDonald's, KFC, or upscale restaurants like Xinrongji, the overall average price of dining has significantly declined compared to the past two years, with varying degrees of decline ranging from 10-20%, and even greater declines for upscale restaurants. Therefore, expanding stores in a counter-cyclical manner is a high-risk decision, not only considering fierce competition but also the factor of price reduction. Expanding stores for a catering stock may make the market more concerned. For example, Jiumaojiu's continued expansion of high-priced hot pot items did not attract investors, but rather increased bearish sentiment, leading to a further 30% decline after announcing its performance, as existing stores were unable to lower prices and competitiveness weakened, expanding stores could accelerate losses. <img src="https://imageproxy.pbkrs.com/https://cdn-img.capwhale.com/kmc/ueditor/20240905/6e7a53576db94b7eba8ebe1b6332ec37.jpg?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/https://cdn-img.capwhale.com/kmc/ueditor/20240905/6e7a53576db94b7eba8ebe1b6332ec37.jpg"/> It is worth noting that current catering consumption is also becoming more structured, with downgrading of consumption in first-tier cities, while consumers in third- and fourth-tier cities are embracing the expansion of chain giants in the sinking market. The sinking market indeed presents certain expansion opportunities, such as McDonald's, KFC, and other chain restaurants with moderate pricing. Looking at the overall data, according to June social retail data, consumption in the strongest first-tier cities has started to decline, with declines ranging from 2-10%. Especially in Shanghai, the strongest consumer city, there was a 9.4% decline in June, a single-month decline that has not been seen in the past 20 years (except in 2022). <img src="https://imageproxy.pbkrs.com/https://cdn-img.capwhale.com/kmc/ueditor/20240905/55d88572ca7944e6ad87e94344ece042.jpg?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/https://cdn-img.capwhale.com/kmc/ueditor/20240905/55d88572ca7944e6ad87e94344ece042.jpg"/> According to TF Securities' statistics,
In June, the social retail sales in Beijing, Guangzhou, and Shenzhen decreased by -6.3%, -9.3%, and -2.2% respectively. Looking at more detailed data, in the first half of this year, Beijing's catering revenue decreased by 3.5% year-on-year, while Shanghai's accommodation and catering retail sales decreased by 3.6% year-on-year. It's worth noting that the growth rate of catering revenue for the whole society in the first half of the year was 7.9%, but Beijing and Shanghai experienced negative growth, reflecting the dining consumption situation in first-tier cities. Data shows that as of July 21st, the proportion of restaurants in Shanghai with an average consumption of over 500 yuan per person was 0.59%, a decrease of over 1400 establishments compared to May last year. According to Caixin, a high-end Western restaurant in Beijing has not been profitable for two years, with a 30% decrease in the total number of tables served in 2024. In the first half of the year, over 80% of the newly opened catering outlets in Beijing's shopping malls were concentrated in categories with low average spending per customer such as coffee and pre-made meal restaurants. In 2023, the proportion of new leases for affordable casual dining in Shanghai's retail properties increased by over 15%, while the proportion of high-end exquisite dining establishments decreased year-on-year. Why are high-end restaurants struggling more and more? 1. The most direct reason is a decrease in income, mainly due to the downturn in the real estate industry, salary restrictions in the financial industry, and the fact that high-end restaurants are no longer reimbursable, leading to a decline in their turnover. For example, Xin Rong Ji in Beijing, with an average spending per customer of 800 yuan, now also offers lunch sets priced at 400-500 yuan. 2. On the other hand, although high-end restaurants are priced high, lowering prices is not easy. This is because ingredients account for at least 30% of the total revenue, and high-end restaurants generally do not use a centralized kitchen model, making costs relatively higher. This is particularly evident for Japanese restaurants, as after the ban on importing Japanese seafood last year, they had to purchase European and American ingredients, leading to a significant increase in costs. The labor cost of the entire kitchen team also accounts for 30%, and rent accounts for at least 20-30%. When all these factors are considered, the higher the level of the restaurant, the harder it is to make a profit. Therefore, when even high-priced establishments find it difficult to make money, lowering prices would make it even harder to be profitable.Despite the challenges, high-end restaurants are gradually opening lower-priced sub-brands to cater to the market, mainly by reducing store size and staff to lower costs and create room for price reductions in their dishes. According to Caixin, the founder of Yongfu Restaurant stated: &#34;Yongfu mainly has 3 brands at different price points, and the overall revenue of brands in high, medium, and low-end price ranges has declined by 18%. The founder of Yongfu also mentioned that they will not open new stores for two to three years, and will only consider expansion after demand picks up. If high-end dining establishments do not decline by 50%, the entire dining industry will not be healthy.&#34;It can be said that the current situation of high-end dining is even more brutal than that of traditional chain restaurants, with traditional chain restaurants accelerating price reductions to enter the lower-tier market. The Rise of New Players Contributing to Growth in Second and Third-Tier Cities In theory, with consumption downgrading and consumption in first-tier cities starting to decline, the pressure faced by other cities may be even greater. However, the consumption data in second and third-tier cities is showing counter-trend growth, generally achieving growth rates between 5-10%, which is a new phenomenon.** <img src="https://imageproxy.pbkrs.com/https://cdn-img.capwhale.com/kmc/ueditor/20240905/9d9c45b84128426c8dd5211806fcece8.jpg?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/https://cdn-img.capwhale.com/kmc/ueditor/20240905/9d9c45b84128426c8dd5211806fcece8.jpg"/> A new round of expansion of restaurants in second and third-tier cities,
That is, everyone is most familiar with McDonald's, KFC, Starbucks, etc. In terms of performance, Starbucks' same-store sales in China dropped by over 14% in the second quarter. McDonald's net profit in the second quarter also dropped by 10%. Not only is McDonald's in China reducing prices, but pricing for McDonald's globally is also declining. As of the beginning of the year, McDonald's had a total of 5,900 stores in China, with plans to open 1,000 more this year, mainly in lower-tier cities, and is expected to reach 10,000 stores by 2028. From the perspective of the entire industry, according to Caixin's statistics, as of the first 8 months of this year, the growth rate of new restaurants has slowed down. In 2023, a total of 3.2 million new restaurants were opened, but in the first 8 months of this year, only over 1.5 million were opened. It appears that the total number of new restaurants for the year may only be around 2.5 million, approaching the data from 2020, with a decrease of several hundred thousand compared to last year, possibly even close to a million. <img src="https://imageproxy.pbkrs.com/https://cdn-img.capwhale.com/kmc/ueditor/20240905/fe141e0088b5488799913ffa3b3077b7.jpg?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/https://cdn-img.capwhale.com/kmc/ueditor/20240905/fe141e0088b5488799913ffa3b3077b7.jpg"/> It is worth noting that YUM China, which performed poorly last year, actually showed good performance in the second quarter. <img src="https://imageproxy.pbkrs.com/https://cdn-img.capwhale.com/kmc/ueditor/20240905/4411a75394cd44b5a2023c5ec1cacf80.jpg?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/https://cdn-img.capwhale.com/kmc/ueditor/20240905/4411a75394cd44b5a2023c5ec1cacf80.jpg"/> YUM China's second-quarter revenue was $2.68 billion, a 4% year-on-year increase, mainly benefiting from an 8% net increase in stores. Core operating profit was $275 million, a 12% year-on-year increase, marking the second-highest quarterly profit, with a net increase of 401 stores to 15,423 in the second quarter. The operating profit margin was 9.9%, a 0.2% year-on-year increase, and the restaurant profit margin was 15.5%, unchanged from the same period last year, unaffected by price declines, showcasing the advantage of the supply chain in price wars. In the first half of the year, a net addition of 779 stores, YUM China's goal is to add a net of 1,500-1,700 stores this year, with more openings than McDonald's and Starbucks, mainly in 3-6 tier cities. From the perspective of store expansion models, YUM China's model is currently more successful than McDonald's and Starbucks. KFC's main approach is to target lower-tier cities and open KFC, Pizza Hut, K Coffee, and other stores, all of which have small footprints. Previously, KFC may have opened stores of 200-300 square meters, but now they have shrunk to 100-200 square meters, and will continue to decrease in lower-tier cities. There is a misconception here, in fact, single-store KFC and McDonald's in first-tier cities do not make more money. Taking into account the cost of rent and labor in first-tier cities, in the current environment, KFC in first-tier cities can only make a small profit, but the costs in lower-tier cities are much lower, and the profit margins are higher because the economic level of these cities is still good. After McDonald's and KFC lowered prices and expanded to lower-tier cities, consumers saw similar prices and still prefer these big brands
The new KFC payback period is 2 years, while Pizza Hut has shortened its payback period to 2-3 years, with 80% of new stores achieving profitability within 3 months. For example, the investment threshold for KFC's mini-town stores is as low as 500,000 RMB, which is similar to the investment threshold for Tasting in lower-tier cities. Therefore, KFC's expansion in lower-tier cities is even faster. In conclusion, looking at the stock price, after the second-quarter performance, Yum China's stock price rose by nearly 15%. Another factor driving the recent rebound in Yum China's stock price is shareholder returns. From a cash flow perspective, with a net cash balance of 3.1 billion USD, management plans to return around 1.5 billion USD in 2025-2026. This year, they have repurchased 1.5 billion USD, with 1 billion USD already repurchased, resulting in a shareholder return rate of 7.7% and a return rate of approximately 11.5% this year. Compared to other restaurant stocks, clearly in a downturn, maintaining profit margins is a problem, let alone shareholder returns, which is why the market is paying attention again. However, can this be enough to determine a turnaround for Yum China? Obviously, these reasons are not sufficient yet, as the duration of the restaurant price war is still unknown, and Yum China is at least not doing as poorly as its peers.
In the context of consumer downgrading, high-end dining is struggling, while chain restaurants are expanding vigorously in lower-tier cities. The ultimate outcome may be that chain restaurants outlast other small stores and grab market share

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In lower-tier cities, the catering sector is facing intense price wars and new consumption trends, increasing the difficulty of investment. The high-end consumption in first-tier cities is experiencing a reversal. Catering companies that have lowered prices such as Haidilao and YUM China have performed poorly, with significant declines in stock prices this year. Companies need to maintain food quality in price wars, control costs, and ensure sufficient cash flow. The overall average price of catering has significantly decreased compared to the previous two years, increasing the risk of expanding catering outlets

- In the current consumption environment, few restaurant stocks are performing well in the stock market, with significant declines seen across various brands like Haidilao, Yum China, and smaller chains. The intense price wars have led to challenges in investing in restaurant stocks, especially in maintaining quality amidst fierce competition and price reductions.
- High-end consumption in major cities is reversing, intensifying price wars in categories like hotpot and burgers, impacting turnover rates and forcing restaurants to lower prices to attract customers. Surviving this price war requires sufficient cash flow, efficient supply chains, and the ability to expand while maintaining cost control.
- While high-end restaurants struggle due to income reductions and cost challenges, chain restaurants are expanding aggressively in lower-tier cities like McDonald's and KFC. Despite the tough market conditions, Yum China has shown positive growth, benefiting from net store additions and effective shareholder returns, contrasting with the struggles of other restaurant stocks.

Lower-tier cities become the new battleground for the catering sector