Industry Overview

South Beauty is currently engaged in competition in China’s restaurant industry, focusing on the niche market serving the upper middle class. This segment has become particularly attractive in recent years with the global expansion from foreigners into China and stable growth in the economy’s disposable income. As Chinese urban consumers’ disposable income has increased, they have spent more on meals in restaurants (Hitt, Ireland, Hoskisson 2011). In fact, the annual expenditure per capita on restaurant meals increased 49.8% in just three years from 2004 to 2007.

Due to this increase in spending, thousands upon thousands of new restaurants have begun to appear in the market as this industry has very low entry barriers. Specifically the local government in Shanghai has made investment in the restaurant industry more appealing by lowering the barriers to entry with the elimination of regulations (Rentz & Xu 2010). However, it would appear that the industry has been over-extended with the lacking service quality, subpar hygiene levels, and unsatisfactory managerial capabilities that have come to be realized. This is an area where South Beauty can capitalize on their already established reputation as a clean, high quality, innovative establishment.

The bargaining power of suppliers in this industry is relatively high mainly due to the number of players in the market. On average in 2006, raw material costs accounted for about 43.6 percent of total revenues (Hitt, Ireland, Hoskisson 2011). South Beauty should have a slight advantage over new entrants in this category because of their already established supply chain. However, with the wide range of raw materials and the varied consumption of dishes per meal, costs are sure to fluctuate as the suppliers continue to use their bargaining power to its full benefit. Furthermore, the atmosphere, location, and food quality allows South Beauty to be able to charge premium prices, which helps to offset rising food costs.

China’s restaurant industry is typically divided into four subcategories: dinner, hot pot, fast food, and teahouses. Although these segments aren’t always competing directly with one another, there is certainly some degree of an interrelationship in the customer bases. With the rapid development of restaurant chains expanding quicker than the rate of economic growth, consumers in this industry have the ability to choose from a wide range of selections. This makes the job of the restaurateur even more difficult with the increasing bargaining power of consumers.

The threat of substitute products in this industry is very high. Many of South Beauty’s competitors are already copying the Group’s dishes; however, Zhang Lan has made it the company’s R&D initiative to focus on the continuous innovation of new dishes in order to stay ahead of its followers rather than worry about being copied (Hitt, Ireland, Hoskisson 2011). South Beauty has the core competencies in place and has built a reputation amongst its clientele that should allow for this threat to become a non-factor so long as they continue to focus their core competencies on the innovation of new dishes.

Competitive rivalry within the restaurant market is inherent in the nature of the business. As already noted, competitors do not hesitate to copy a dish if it is shown to be a good seller. The rapid expansion of chains in the industry along with the thousands of new entrants that have arisen with the hope of capitalizing on the economy’s growth further support this statement.

Industry Priorities

The customer base in the mid to high end of this industry has a high demand for more variety with consistent quality along with a broader selection of dishes (Rentz and Xu 2010). Selecting a talented management team to guide South Beauty in a direction of expanding with the growth of the industry will be a top priority in order for them to achieve success. A focus on improving their brand awareness along with diversification of their business to meet the desires of other segments should be at the top of the list for the management team. Finally, consolidation of in-bound and out-bound food deliveries at what the industry refers to as a ‘central kitchen’ will play a major part in facilitating growth and ensuring a standardized quality of their dishes.

Organizational Structure and Corporate Management

A strong management team will be vital to the success of South Beauty. They have already established a strong team in their current system, but if they plan to go public, ensuring the stability of that environment is a key. Typically, a chain restaurant will need to incorporate into their structure departments for purchasing, R&D, finance, business development, and human resources. An organizational chart depicting this layout can be seen in Table 2 Appendix A.

R&D and Purchasing

The R&D and purchasing departments will need to have extremely close collaboration in order to ensure that the desired dishes that the R&D department creates are able to be procured. In reverse, the purchasing department may also be able to find cost savings for the company and request that the R&D department create a dish out of the acquired ingredients. Assigning an executive chef a team of experienced sous-chefs to assist in the R&D process and transfer the steps of the preparation process to the restaurants is fundamental to the R&D department and essential to establishing a competitive advantage over the competition.

Diversification and Brand Awareness

South Beauty has already established a strong favorable reputation with the upper-middle class consumers in the mid-to-high end segment (Hitt, Ireland, Hoskisson 2011). The competitors in this segment typically rely on word of mouth to spread their reputation with minimal costs in advertisement. South Beauty may want to consider an increase in its marketing expenditure if funds from an IPO are significant enough to do so, which would create added awareness over its competitors; especially if it is their intention to expand abroad. There is no doubt that catering the 2008 Olympics will be of great benefit in relation to this initiative.

Diversifying its span of business into other segments is of great importance if it is the desire of South Beauty to generate above average returns. Through the development of a new brand in either the high or low-end segments, South Beauty could capitalize on the growth in these segments as well increasing their revenue. It does make the most sense for South Beauty to expand into the high end segment since that is where their core competencies already exist, and they would be able to charge premium prices for their dishes.

Central Kitchen with a Focus on Quality and Food Safety

A central kitchen has become a must for chain restaurants (Rentz and Xu 2010). Although it is a concern of the head chef, pre-packaging ingredients into single-serving size portions will create consistency in quality, quantity, and safety without revealing any secrets of the preparation. The cost savings that are realized from this process are paramount to achieving economies of scope. With the rising cost of labor and real estate, the reduction in kitchen space and kitchen staff will play a major role in increasing profits as a percentage of sales, which has been stuck at about 10% across the industry.

South Beauty has already taken steps towards ensuring food safety in its restaurants, which is a major concern for this industry. The establishment of a central kitchen will further this initiative. Also, the use of out-bound logistics to track all deliveries and guarantee quality to its customers will add to their favorable reputation.

Market Concerns

Nearly all managers in the restaurant industry have cited increasing operational costs as their primary concern. To put further upward pressure on labor costs, there is an anticipated labor shortage in the coming years (Rentz and Xu 2010). It is likely that restaurants will need to pay higher salaries in order to recruit qualified and talented staff in the future, as the restaurant industry is not considered to be an advantageous career path.

Competition in the Mid-to-High End Segment

Among the top 100 restaurant companies in China in 2007, ten of them were competing in the mid-to-high end segment (Hitt, Ireland, Hoskisson 2011). South Beauty was one of these companies coming in on the rankings at number 72.

While South Beauty is competing with other restaurants in this segment of the industry, each of its competitors tends to focus on a different style of Chinese cuisine. Out of the seven other restaurants in the top 100 that cater to the mid-to-high end segment, South Beauty is the only restaurant focused on serving a Sichuan cuisine. Since people are likely to select the cuisine that they are in the mood for before selecting a restaurant, South Beauty’s positioning as the only restaurant serving a Sichuan cuisine, out of the top 100 restaurants in China, is very favorable.

Because of the outstanding reputation that South Beauty has established as a safe, clean, and chic restaurant with delicious dishes, the biggest issue that they have had with “competition” is that of imposters using their brand name as a means of generating increased footfalls. South Beauty needs to combat this issue using all means necessary. They have run into some resistance using legal means to eliminate the copy-cats, so they will need to utilize advertisement or similar means to communicate their concern to their client base. Establishing a website with their legitimate locations detailed by city will allow their customers to easily determine the true South Beauty locations versus the imposters. They also may want to consider adding preventative verbiage to their receipts, including a phone number to call with suggestions, complaints, or any other feedback. In this manner, they can also benefit from distinguishing between true complaints, and complaints from imposter restaurants.

Customer Base

The average price per person at mid-to-high end restaurant chains is around 150-200 RMB ($22.05 - $29.50). In general, this segment of consumers includes middle to upper-middle class businessmen, young professionals, government officials, and families (Rentz and Xu 2010). Because of the booming economy in China, the business meals had higher potential than the other segments because they could absorb the higher prices (Hitt, Ireland, Hoskisson 2011).

South Beauty needs to continue attracting clientele to their restaurants through the added ambience that they have incorporated into their restaurants, since the target customers they are marketing to enjoy the elegant atmosphere. At the same time, it would appear that some improvement could be made to their dishes, with them scoring the lowest on the ‘taste’ section of the most recent customer ratings, shown in Table 3 Appendix A. The establishment of a central kitchen should certainly help to curb this shortcoming assuming that customer feedback will be incorporated into the R&D and preparation of new dishes.

Fusion dishes, a blend of serving Chinese food in a Western manner or incorporating Western ingredients, is becoming a major trend in the industry (Rentz and Xu 2010). South Beauty is already on the leading edge of this trend and will do well to continually utilize customer feedback in order to further their expertise with this style of dish. The current ambience and brand image is sure to capture the hearts of consumers, as demand for the type of atmosphere that South Beauty provides is increasing. South Beauty needs to be diligent in maintaining a properly run R&D department and improving the quality and consistency of their dishes, as the competition is not likely to allow them to ride on their ambience and atmosphere forever.

Table 1 Appendix A Annual Per Capita Food Expenditures in 2008 (RMB) |

Source: Shanghai Statistical Yearbook 2009/ATO Shanghai |

Table 2 Appendix A

Source: ATO Shanghai Interviews |

Table 3 Appendix A

Additional Ideas:

In the future, South Beauty may want to consider diversifying into the low-end segment with fast-food establishments since the largest growth is in that segment. They could then have the potential to capture revenue from the same clientele at lunch and dinner.

References
Ramakrishna, S. Leiping, Xu. (March 14, 2011). Case Study: South Beauty Group. In Business Focus: Business Schools. Retrieved March 29, 2012, from http://www.koreatimes.co.kr/www/news/nation/2012/02/342_82990.html.

Rentz, Wesley, & Xu, Freddie. (June 24, 2010). The Rise of Mid-to-High End Chinese Restaurant Chains in Shanghai. USDA Foreign Agricultural Service Gain Report.