INDUSTRY OVERVIEW ABOUT THIS SECTION. General

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1 The information that appears in this Industry Overview has been prepared by Euromonitor and reflects estimates of market conditions based on publicly available sources and trade opinion surveys, and is prepared primarily as a market research tool. References to Euromonitor should not be considered as the opinion of Euromonitor as to the value of any security or the advisability of investing in the Company. Our Directors believe that the sources of information contained in this Industry Overview are appropriate sources for such information and have taken reasonable care in reproducing such information. Our Directors have no reason to believe that such information is false or misleading or that any material fact has been omitted that would render such information false or misleading. The information prepared by Euromonitor and set out in this Industry Overview has not been independently verified by our Company, the Sole Sponsor, the Joint Lead Managers, the Joint Bookrunners, the Underwriters or any other party involved in the [REDACTED] and neither they nor Euromonitor give any representations as to its accuracy and the information should not be relied upon in making, or refraining from making, any investment decision. ABOUT THIS SECTION General Euromonitor is an independent professional market research company with extensive experience in their profession. Euromonitor was commissioned to conduct an analysis of and to report on the casual dining full-service restaurant market in Hong Kong. The payment of this fee does not affect the fairness of conclusions drawn in the report. Information set forth in this section was extracted from the Euromonitor Report. About Euromonitor Established in 1972, Euromonitor is the world leader in strategy research for both consumer and industrial markets. Comprehensive international coverage and leading edge innovation make Euromonitor s products an essential resource for companies large and small, national and global. With offices around the world and analysts in 80 countries, Euromonitor is a leading provider of global market intelligence. Euromonitor s products and services are held in high regard by the international business community and it has 5,000 active clients including 90.0% of Fortune 500 companies. Research Methodologies In compiling and preparing the Euromonitor Report, Euromonitor used the following methodologies to collect multiple sources, validate the data and information collected, and crosscheck each respondent s information and views against those of others: Secondary research, which involved reviewing published sources including Census and Statistics Department of Hong Kong, industry reports, company reports such as annual reports and audited financial statements where available, independent research reports, and data based on Euromonitor s syndicated Passport database. Primary research which involved interviews with a sample of leading industry participants and industry experts for latest data and insights on future trends and to verify and cross check the consistency of data and research estimates. Projected data were obtained from historical data analysis plotted against macroeconomic data with reference to specific industry-related drivers. Review and cross-checks of all sources and independent analysis to build all final estimates including the size, shape, drivers and future trends of the casual dining fullservice restaurant market and prepare the final report. 53

2 Forecasting Bases and Assumptions Euromonitor based the report on the following assumptions: The Hong Kong economy is expected to maintain steady growth over the forecast period; The Hong Kong social, economic, and political environment is expected to remain stable in the forecast period; There will be no external shock, such as financial crisis or raw material shortage that affects the demand and supply of the consumer food service market in Hong Kong during the forecast period. MACRO-ECONOMIC ENVIRONMENT IN HONG KONG Economic performance remains robust albeit growth contraction In the period under review from 2012 to 2016, the Hong Kong economy grew moderately at a compound annual growth rate (CAGR) of 5.1% with total GDP rising from HK$2,037.1 billion to HK$2,489.1 billion. After the negative impact in 2011 of the Eurozone debt crisis, US fiscal uncertainty and the weak recovery of advanced economies and Asian markets, Hong Kong s GDP climbed back to a steady growth rate of above 5.0% year on year, reaching 6.1% in However, in 2016, growth was curbed to 3.8%, partially due to Hong Kong s increasing dependence on China s economy, its external trade, and declining tourism from the mainland visitors. In 2016, GDP per capita rose at a CAGR of 4.4% from HK$284,720.0 in 2012 to HK$338, According to the Hong Kong Trade Development Council, the labour market continues to be tight with the seasonally adjusted unemployment rate standing at 3.3% in the 3-month period ending February 2017, compared with 3.4% in Low unemployment factors into relatively stable income growth among workers while a rising GDP per capita supports private consumption. Monthly household income rises slightly in 2016 Based on the latest statistics provided from the Hong Kong Census and Statistics Department, in 2016, per capita disposable income in Hong Kong stood at HK$346, This was a 4.6% increase year on year from HK$331,157.2 in 2015, showing a slight decline in growth compared to previous years. The figures, however are mild in contrast with the monthly household income of HK$21,100.0 registered in 2012, which grew at a CAGR of 4.3% to HK$25,000.0 in Monthly household income growth was in similar ranges of per capita disposable income in 2013 and 2014, however in 2015, the growth rate almost halved to 3.0% in 2015 and continued slowing to 2.5% growth in Given the clear inequalities in Hong Kong, it has been reported by the South China Morning Post ( SCMP ) that the Gini coefficient for households rose from 0.4 in 1976 to 0.5 in 2011, while for economically active individuals it rose from 0.4 in 1976 to 0.5 in According to SCMP, higher income inequality for households is almost entirely due to the changing structure of households. Hong Kong now has more low-income households because there are more households comprising single parents, young working adults, and non-working elderly than in the past. Furthermore, in parallel with this change in household finance, household debt has been rising rapidly, according to the Legislative Council Secretariat of Hong Kong. On average, each household bore a non-mortgage debt of HK$192,500.0 at the end of 2015, more than twice the HK$72,900.0 debt a decade ago. According to findings by the Census and Statistics Department, average household spending rose markedly by a cumulative 46.0% during the past decade to HK$27,600.0 per month in 2015, faster than the 37.0% rise in overall consumer prices. This means an improvement in living standards in real terms on the one hand but a larger burden of household expenditure on the other. Food is the second largest 54

3 consumption category for an average household in Hong Kong, taking up 27.0% of the monthly household spending in Two-thirds of these expenses went to meals away from home, presumably due to long working hours. Inflationary pressures expected to remain stable Inflationary pressures in Hong Kong are expected to remain mild in the short term. In his budget speech, Financial Secretary Paul Chan said that the headline inflation rate for 2017 as a whole is expected to be 1.8% with an underlying inflation rate at 2.0%. The headline inflation rate for 2016 was 2.4%. Netting out the effects of the government s one-off measures, the underlying inflation rate came in at 2.3% in 2016, the fifth consecutive year of easing. Inflation rate in Hong Kong has averaged 4.5% from 1981 until 2017, reaching an all-time high of 16.0% in October of 1981 and a record low of -6.1% in August of Food inflation in Hong Kong averaged 4.3% from 2009 until 2016, reaching an all-time high of 8.2% in November of 2011 and a record low of -0.6% in November of In February 2017 the cost of food in Hong Kong increased 0.4% over the same period in the previous year. The food consumption behaviour in Hong Kong has altered largely due to the significant narrowing of the cost of preparing meals at home and the cost of dining out. As a result, consumers have cut spending on food eaten at home while increasing expenditure on dining out. Table 1 Macro-economic indicators in Hong Kong, Historic ( ) and 2016 as available Unit CAGR Total GDP GDP growth rate HK$ mn % 2,037, ,138, ,260, ,398, ,489, % GDP per capita HK$ 284, , , , , % Population Million % Monthly household income* HK$ 21, , , , , % Monthly household income growth rate % Per capita disposable income HK$ 285, , , , , % Per capita disposable income growth Number of tourist % arrivals , , , , , % Tourist arrivals growth % Census and Statistics Department of the Government of Hong Kong, Hong Kong Tourism Board * based on data published for last quarter of each year OVERVIEW OF FULL-SERVICE RESTAURANTS IN HONG KONG Hong Kong has long been a famed culinary capital in the Asia Pacific. Although it is composed mainly of ethnic Chinese in population, its history as a British colony and an international trading centre has enabled it to produce a wide variety of cuisines which persist today. Chinese food chiefly Cantonese, Beijing and Shanghainese continues to dominate restaurant menus overall followed by Japanese, Korean, and Thai with Vietnamese on the rise. In the non-asian category, Italian food is the most popular with American and French being next. The most prominent foodservice formats are: Restaurants (e.g. fine dining, casual dining, full-service, quick service) Fast food shops Bars Other eating and drinking places (e.g., coffee shops, desserts shops, ice cream houses, fruit juice shops, tea shops, takeaway shops and other foodservice formats.) 55

4 Restaurant industry in Hong Kong HK$ million 110, , ,000 95,000 90, , , , , , outlets Value of restaurant receipts in Hong Kong Number of food establishments in Hong Kong The Census and Statistics Department of Hong Kong; Report on Quarterly Survey of Restaurant Receipts and Purchases From 2012 to 2016, total sales receipt by restaurants grew from HK$93,748.0 million to HK$107,374.0 million at a CAGR of 3.5%. This, however, was not matched by growth in outlet numbers, which shrank from 14,170 in 2012 to 13,550 in 2015, a decline of 1.5% CAGR. The industry struggled with rising rental and wage costs. The industry experienced some recovery in 2010 and peaked in 2012 in the immediate aftermath of the global financial crisis due to increased consumer confidence and spending. There has since been a decline in tourist arrivals and spending in restaurants. Across restaurant types, fast food outlets grew steadily driven by value-for-money meals, convenient locations and quick service, all of which fit the busy lifestyles of Hong Kong consumers. Restaurants also showed moderate growth over the same period, but bars have reached a saturation point according to trade sources. Independent full-service restaurants offering diverse cuisines and ambience make up the majority of the market, while casual dining chains offering value-for-money meals have gained more popularity among young consumers. Consumers in Hong Kong show a zest for new dishes and specialty outlets. They increasingly value the decor and atmosphere of restaurants they choose while at the same time are mindful of the pricing on the menu. Hence, casual dining concepts are being widely embraced by many full service restaurants, fast food outlets and cafes. OVERVIEW OF CASUAL DINING FULL SERVICE RESTAURANTS HK$ million 25,000 20,000 15,000 10,000 5, ,034 2,103 Casual Dining Full Service Restaurants in Hong Kong 2,241 2,325 2,425 10,166 10,567 10,836 11,540 2,546 12,440 13,596 2,686 14,940 2,847 3,032 16,440 18,134 3,244 20, F 2018F 2019F 2020F 2021F 3,500 3,000 2,500 2,000 1,500 1, outlets Foodservice value sales (in RSP) receipts Number of establishments Passport Data Consumer Foodservice 2017 Edition 56

5 Full service restaurants include all sit-down establishments where the focus is on food rather than on drinks. They also have table service and generally a higher quality of food compared to fast food. Casual dining full-service restaurants are differentiated by its ambience, price, and outlet image. Casual dining price points are lower than fine dining, and the atmosphere tends to be more relaxed. Also, casual dining full-service restaurants in Hong Kong are often themed restaurants which can be part of a chain or franchise that have a distinctive, deliberate, and consistent image. In 2016, casual dining full-service restaurants constitute 11.6% of the overall restaurant industry foodservice value sales in Hong Kong, and have seen stronger growth compared to other types of food service establishments. Between 2012 and 2016, the number of casual dining full-service restaurants grew at a CAGR of 4.5% from 2,034 outlets to 2,425 in Sales volume rose in the same period at a stronger CAGR of 5.2%, from HK$10.2 billion to HK$12.4 billion in These figures are estimated to be even higher between 2017 and Over the forecast period, restaurant numbers are expected to grow at a CAGR of 6.2% from 2,546 outlets to 3,244 in Total sales receipt will hit a double-digit CAGR of 10.2%, rising from HK$13.6 billion to HK$20.0 billion in INDUSTRY DRIVERS AND CONSTRAINTS Dining-out culture and tourism are core drivers of casual dining market The wide range of cuisines that exists in Hong Kong has encouraged the development of a dining-out culture that is a major appeal to both tourists and residents. Business travellers contribute most to high-end restaurants while tourists form the main clientele for full-service restaurants in shopping malls and around tourist attractions. Mainland Chinese who visit Hong Kong usually stay a day or two and have largely contributed to the revenue growth of full service restaurants, particularly the casual dining ones offering Chinese cuisine. Given the ready accessibility and affordability of food in Hong Kong, this trend has caused the development of large mass foodservice segment often comprising large chains that operate many outlets. These restaurants not only provide fast service, and are conveniently located near commercial and residential areas, but offer value for money products. Industry sources say that higher growth is thus to be expected in this fast service segment, a trend boosted by the shrinking size of the family and the increase of two-person households. Softer rentals offer chance for restaurants to undergo transformation Foodservice will also see dynamic changes as restaurant operators take advantage of softer rentals to undergo transformation of outlet formats, menus, and strategic locations. For example, in 2013, a casual dining, full-service, Italian restaurant from Japan offering Italian food at low prices started swiftly expanding from 7 to 22 outlets within three years. The restaurant chain managedtomaintaincustomersatisfactioninterms of food and services while keeping costs and prices down. As a result, the restaurant substantially benefited from the frequent dining habits of Hong Kong people, and the strategic locations of the 22 restaurants recorded high traffic on average compared with other full-service restaurants. Consumer sophistication will see demand for novel dining experience As consumers become more sophisticated in their dining preferences, many Hong Kong residents and tourists are expected to demand value-for-money dining propositions ranging from novel dining experiences, to food quality, to world-class customer service. Experience such as good ambience, authenticity of cuisine, use of the latest technology, and novelty of place are some of the desirable characteristics of a restaurant that consumers look for. Restaurants will be compelled to meet this growing demand or risk losing their customers to competitors that are able to provide the desired experience. 57

6 Labour cost continues to squeeze operators profits In 2015, the Hong Kong government revised the territory s minimum wage upwards from HK$30.0 per hour to HK$32.5 per hour. The increase had an immediate impact on the foodservice industry, especially fast-food chains and mass-market Chinese restaurants that hire low-skilled workers at minimum wage. Foodservice operators had to absorb the wage hike adding to their operating costs. Casual dining restaurants have been compelled to squeeze their margins as labour costs continue to climb. The average wage for cooks, waiters and waitresses and dishwashers has all grown significantly, of which, wages for dish washers has grown the fastest at a CAGR of 8.1% between 2012 and As a result, the industry is seeing a trend of outsourcing dishwashing tasks to specialised companies. Many industry players are also adopting central kitchens in order to decrease their costs and increase operational efficiency. In addition, technology has been introduced to help absorb the impact of higher wages. Some restaurants now use apps to take customers orders or reservations, which help decrease a restaurant s reliance on workers. Monthly Wages HK$ 18,000 16,000 14,000 12,000 10,000 8,000 6,000 Average monthly salaries of selected occupations ( ) 17,350 13,926 12,427 10,363 12,206 8, Cook Waiter/ Waitress Dish Washer Census and Statistics Department Hong Kong KEY FACTORS OF OPERATIONS Manpower shortage a major constraint on full-service industry Manpower shortage and high staff turnover have been among the major problems plaguing full service restaurants, with some restaurants commenting that high worker turnover is their biggest headache. As customer service within the foodservice industry is seen as an unglamorous occupation in Hong Kong, restaurant operators are forced to look for workers from mainland China. But this is made difficult by tightening cross-border labour restrictions, adding to their problem of trying to balance a high staff turnover due to competition in staff recruitment. This problem is acutely felt by the lower-end to mid-scale restaurants as premium full-service restaurants generally have the means to pay more to retain staff. Increased MPF contribution raises operating costs The MPF is a compulsory pension fund intended as a major protection scheme for the aged and retired residents. Employees and employers who are covered by the MPF system are each required to make regular mandatory contributions calculated at 5.0% of the employee s relevant income to an MPF scheme. The Hong Kong Government has recently raised the maximum relevant income level to HK$30,000.0 per month in conjunction with employer/employee contributions to the Mandatory Provident Fund (MPF); while the minimum level remains at HK$7, The move is expected to increase the payroll expenditure of employers. 58

7 Workers unions demanding minimum wage review every year The Hong Kong government requires employers to conduct salary reviews for low-wage employees once every two years. This has been disputed by workers representatives as inadequate, proposing that the minimum wage should be reviewed annually instead as wages have failed to keep up with inflation, having increased by 42.0% from while inflation had increased by 44.0%. The contentious minimum wage law is expected to result in continuing pressure on operating costs for the casual dining full-service restaurant industry. This will in turn depress profit margins and potentially put smaller, low performing restaurants at risk of closing their business. Rental prices for retail locations continue to dip after 2015 In tandem with the heated property market, retail rentals experienced consistent year on year increases peaking in 2012, when the rise in the average per meter square rental rate went up by double digits. However, in 2015 the general economy slowed down, giving restaurant operators some respite. Rental rates fell marginally for the first time within the Hong Kong Island and Kowloon regions by -0.8% and -1.0% respectively. In 2016 retail property prices continued to decline by -7.2% and -13.1% on Hong Kong Island and Kowloon regions respectively, in line with a weakening economy, declining retail sales and tourist arrivals, and stagnant real household income growth. Some casual dining restaurant owners interviewed by Euromonitor feel that there has been no major drop in rentals since 2015, and that the property market seems to be rising again. The decline did not really help them as most have signed long-term contracts with their landlords, usually one to three years and some up to 6 years, and the contracts have yet to expire. They say seasoned landlords use professional teams to look after their portfolios who predicted the drop before it actually happened. Some landlords extended their usual contract period from two to three years or even longer during the peak of the rental market in 2014 and forced many restaurant operators to continue to pay high rates for the following few years. The decline in rentals benefited only new players who entered the market during the past two years. Private Retail Average Rents ( ) 1,800 HK$/sq m 1,600 1,400 1,200 1, ,496 1,239 1,320 1,291 1, Hong Kong (Island) Kowloon New Territories Rating and Valuations Department of Hong Kong, Property Market Statistics GOVERNMENT REGULATION AND LEGISLATION Hong Kong is often considered one of the freest economy and most business-friendly cities in the world in terms of laws and regulations. This encourages business start-ups in most industry sectors including foodservice. Corporate taxes are capped at 16.5%, comparing favourably with Singapore (17.0%) and mainland China (25.0%). Regulated by the Food and Environmental Hygiene Department (FEHD), the licences required to operate a foodservice business depends on the nature of the food outlet. Where applicable, these would include a general restaurant licence ; light refreshment licence ; or food factory licence. These licences are valid generally for a period of one year, and subject 59

8 to payment of the prescribed licence fees and continuous compliance with the requirements under the relevant legislation and regulations. Restaurants which intend to sell liquor/ alcoholic beverages for consumption on premises must also obtain a liquor licence issued by the Liquor Licensing Board. This license usually takes approximately two to three months to process. Apart from the licencing requirements, other compliances applicable to full-service restaurants include: Environmental regulatory compliance Restricted food permit Demerit point system (for violations of food hygiene/safety standards) Hygiene manager and hygiene supervisor scheme Employees compensation Occupational safety and health Prevention of Bribery Ordinance (POBO) Smoking ban for indoor places (including restaurants) SUPPLIER RELATIONSHIPS AND INGREDIENT PRICES Price movements of raw ingredients influenced by import prices Full service restaurants depend heavily on food ingredients such as seafood, meat and poultry, and vegetables. With the exception of rice, all the ingredient groups listed in the table below displayed a general increase in prices from 2011 to 2016, as reflected with the rising CPI. The prices of other fresh sea products rose the most over the review period at a CAGR of 10.3%, followed by poultry products at 7.1% and beef products at 6.8%. Only the price of rice has declined in the past 5 years, registering a 1.3% CAGR decline. The CPI levels are closely linked to the import prices of these ingredients since they are mostly imported from overseas. Mainland China is the leading supplier of fresh produce to Hong Kong. The upward trend of the CPI on the food ingredients for the most part of the review period would affect the cost of living in Hong Kong as well as the business cost of full service restaurants. Rising raw ingredient prices often lead to restaurants passing the cost on to consumers through higher menu prices. However, the intense competition in the restaurant industry may limit how much that could be done. Hence, the increase in operating cost is mainly absorbed by restaurant operators. Operators prefer flexibility of multiple suppliers Interviews with restaurant operators and food ingredient suppliers suggest that restaurants obtain their ingredients from multiple suppliers depending on the food type. That gives the restaurants more options and flexibility to partner with the best fitting suppliers in Hong Kong. Each restaurant business has a different operating model. Some will source from local distributors, some from overseas distributors and some even import their own ingredients. For example, vegetables, fruits, fresh meat and fish are usually sourced from local market distributors. Frozen meat is usually sourced from the major distributors who import from overseas. Wines may be bought directly from the importers, and other alcoholic and nonalcoholic beverages usually from beverage dealers who provide all kinds of beverage as one-stop beverage suppliers. Credit lines mainly offered to big restaurant operators Depending on the bargaining power of the restaurant operators, suppliers generally do not accept credit payment for small or single restaurant outlet purchases. Suppliers are increasingly cautious when extending credit lines to the average customer due to the high-risk nature of the 60

9 restaurant business in Hong Kong. But they are amicable when interacting with large restaurant chains or restaurant groups. Credit lines are usually only available to the larger players. The typical credit period for large restaurant operators is two months or 60 days. No long-term contract between restaurant operators and suppliers According to trade sources, restaurants do not typically engage in legally binding long-term contracts with suppliers. Long-term contracts are not widely practised in Hong Kong due to the abundance of suppliers. Restaurant owners also prefer to have greater flexibility with their suppliers in hopes of securing the best price for premium produce for their customers. In spite of the informal nature of the supplier-restaurant relationship, restaurants that do engage in long-term informal partnerships with their regular suppliers rarely switch supplier so as to get the first pick at fresh produce, and ensure quality ingredients on their customers plate. Table 2 The Consumer Price Index for Certain Food Ingredients in Hong Kong (October 2014 September 2015 = 100) CAGR * Salt-water fish % Fresh-water fish % Other fresh sea products % Pork % Beef % Poultry % Frozen meat % Fresh vegetables % Bread, cakes, biscuits and puddings % Rice % The Census and Statistics Department of Hong Kong * Euromonitor will include the relevant 2016 historic datasets if they are found to be published by the relevant source during the course of the research BARRIERS TO ENTRY Sufficient capital required for operators to survive The pro-business regulatory environment encourages new players to enter the food business. However, trade sources say that only 10.0% to 15.0% of all newly opened restaurants each month will survive the first two years. After that they still need sufficient funding from private or public stakeholders to ensure their continued survival in the subsequent years. Management of major cost and manpower issues vital to new entrants The many challenges facing the restaurant industry go beyond menu design and dining concepts to keep the customer happy. They often involve revolving issues of cost such as staff s wages, increase in rentals and prices of food ingredients. Industry players say that salary and rent have been the most significant cost for the restaurant industry for a long time. Other problems faced by restaurants concern severe manpower shortage and a high staff attrition rate. Chains likely to dominate industry given economies of scale Industry sources say that current market conditions tend to favour chained operations, which have better resources than independents. Chains have bigger budgets and greater human resources. For example, they have head offices and usually a management team to oversee the different business aspects of the entire group. They have a sufficient budget for marketing and advertising, and can achieve better public relations mileage as a group with regard to coverage by the media. Chains are also better able to attract talent and to pay higher wages. They have great bargaining power with suppliers and landlords. During low rental periods chains may have the opportunity to even aggressively expand, and in a bad economy may be able to share the 61

10 overhead costs among their member outlets. In addition, chains usually revolve their foodservice operations around a central kitchen that affords cost efficiency as well as maintaining consistency in standards in all their outlets. FUTURE OPPORTUNITIES AND CHALLENGES Marginal growth expected for full-service restaurants The outlook for full service restaurants is slightly optimistic, with rental cost on the down trend and slower pace of new entrants to the market. Leading foodservice operators responded swiftly in their strategies to the sluggish economy and retail sales performance in 2015 and are generally optimistic about the prospects in Hong Kong. Many full-service restaurants have transformed themselves into casual dining concepts in order to cater for a growing number of cost-conscious consumers, just as innovative menus and unique dining experiences are also expected to be introduced. Asian restaurants continue to drive industry growth The Asian full-service restaurant segment will continue to dominate the foodservice industry due to the ethnic Chinese majority in Hong Kong. The segment is expected to reach a total sales volume of HK$54.1 billion in Non-Asian restaurants are also expected to continue growing but at a slower pace, and to reach a sales volume of HK$15.8 billion in Non-Asian full service restaurants will be the main driver of the ongoing food globalisation effect, spearheaded by operators who offer new and exotic foreign cuisines to excite consumer interest, and to carve out niche markets offering unique dining experiences. The introduction and reinvention of non-asian cuisines by premium full service operators will further appeal to the average, well-travelled and educated Hong Kong consumer desiring novel dining experiences. Weak tourism outlook continues to limit growth of full-service restaurant revenues Despite the Hong Kong Tourism Board s efforts to diversify its tourist portfolio, reliance on travellers from mainland China will persist over the next few years. Severe competition from other travel destinations such as Japan, South Korea and even Europe will continue to divert Chinese tourists from Hong Kong. On the other hand, the slowing Chinese economy also means that Chinese tourists are less prone to big spending in Hong Kong. As a result, tourists restaurant bills will continue to bolster marginal growth in the near future. According to Hong Kong Tourism Board, tourists spending on meals outside hotels grew at only 0.8% in 2015, a sharp decline from 7.3% in Labour shortage continues to hinder staffing operations Shortage of quality customer service staff is expected to continue daunting restaurant operations in Hong Kong. Customer service within the foodservice industry is perceived as a lowly occupation by the locals. This forces operators to rely on hires from mainland China subject to tightening cross-border labour restrictions, even as operators try to cope with high staff turnover due to a competitive recruitment environment. Though staff replacement remains a key challenge to foodservice operators, premium full-service restaurants are relatively sheltered from it as many are willing to pay more to retain good service teams. According to figures from the Census and Statistics Department of Hong Kong for December 2016, the accommodation and food services sectors had 13,360 vacancies, or a vacancy rate of 4.7%. This was the highest out of 14 industries for which official data were available. 62

11 User generated reviews pose as double-edge sword to restaurant s reputation Social media platforms have transformed the nature of word-of-mouth marketing to become a double-edged sword. Independent restaurants could become overnight sensations through viral marketing while established chains with international brands could be scoffed by a misstep. The development of online advertisements, mobile applications and rise of amateur gourmet blogs has helped to raise and maintain the overall popularity of full service restaurants. However, restaurants who are disengaged with the online community risk being labelled as untrendy or obsolete. Overall, full service restaurant operators say they have benefited from social media and believe that both chained and independent operators stand to gain in the short and long term. COMPETITIVE LANDSCAPE A highly competitive and fragmented industry The casual dining full service restaurant industry in Hong Kong is highly competitive and fragmented numbering 2,425 outlets as of 2016, with the top five leading operators commanding 173 outlets, or only 7.1% of the total outlet count. This demonstrates the scale of fragmentation of the casual dining industry, consisting of both chained and independent restaurants, having to compete for a very small share of the market. However, the estimated combined sales of these top five operators casual dining restaurants are un-proportionally larger, having a combined market share of 30.1%, supporting the trend of chained restaurants tending to do better in the industry. With more resources, chained restaurant operators are able to reap economies of scale, standardise management processes, and further invest in branding, marketing and decor of the restaurants. Market leaders reap benefits from scale and central kitchen The leading competitors in the casual dining scene in Hong Kong are usually operators with multiple chain restaurants, focused primarily on a relaxed dining atmosphere with low to midprice points to target the broader mass market, and usually have at least one chain that serves Chinese cuisine followed by different cuisine types across the different chains. The size of the operators would mean that they have more capital and resources to be moved between outlets, as well as availability of investment in technology to increase productivity and reduce dependence on the constant labour-related concerns. Hong Kong well positioned for franchises to enter the market Hong Kong is well positioned for franchising in joint-ventures between international franchisors and local companies. Franchising is very popular for international brands as a way to enter the Hong Kong market through partnerships with local franchises. At the end of 2015, the Hong Kong Trade Development Council held a trade event to create opportunities for the development of international foodservice brands in Hong Kong, and to help build franchise partnerships. Many popular chained restaurants from the region and international brands showed much interest in expanding into the Hong Kong market. Nevertheless, foodservice franchises face increasing challenges in maintaining the consistency of food and service quality, as well as in combating the high rental and labour costs in Hong Kong. 63

12 Table 3 Ranking of Leading Casual Dining Full-service Restaurant Operators in Terms of Foodservice Value in Hong Kong, 2016 Historic Ranking Restaurant operators Listed or Private Company Number of outlets of casual dining restaurants Brief competitor information 1 Operator A N 65 Established in 1956, the company operates a few chains of Chinese, Asian and European restaurants. 2 Operator B N 19 Established in 1986, the company now operates a few chains of Chinese and Japanese restaurants and cafes. 3 Operator C N 30 Established in 2004, the company operates a few chains of Japanese restaurants. 4 Operator D Y 18 Established in 1991, this company operates a few chains of Chinese, Japanese and Western cuisine restaurants, cafes and bakeries. Estimated Foodservice value in 2016 (HK$ mn) Market Share of Casual Dining Full-Service Restaurants 1, % % % % 5 Operator E N 41 The first restaurant opened by this % companyinhongkongwasin1981, and now the group operates a chain of western cuisine restaurants among other businesses. Others 70.0% Total 100% Passport Data Consumer Foodservice 2017 Edition Note: audited data if available is usually not market/service specific and includes other products/services. Leading market players ranking will therefore be estimated on publicly available data and the trade opinion survey (not just the companies themselves). The Group is strong in the casual dining scene with advantages of chain restaurants The competition among restaurants are tough in Hong Kong with thousands of outlets in the casual dining scene, leaving the Group to hold an estimated 1.1% market share of the casual dining full service restaurants segment in Hong Kong based on the interviews and revenues provided by the Group. However, the Group has several advantages over smaller operators similar to their larger chain restaurant competitors, such as having multiple chains in different cuisine types, a substantial outlet count and a centralized food processing kitchen among others. These advantages give the Group several benefits to be successful in this tough industry environment, by gaining bargaining power with landlords to control rental costs, achieve consistent food quality and reap productive efficiencies with a central kitchen. Typical challenges that are likely to be faced by all industry players will include the weak economy, declining tourism arrivals, high rental costs and turnover rates. The Group having a strong foothold in the casual dining industry is an advantage over other segments in the restaurant industry, as when the economy weakens, consumers tend to spend less on fine dining restaurants, and shift to more affordable casual eateries. Also, with the Group s restaurants focused on local mass market consumers, majority of the outlet locations are in places with high local traffic in Kowloon and New Territories region, rather than tourist areas. These chosen outlet locations have double benefits, being cheaper in rental costs compared to Hong Kong Island, and the issue of declining tourism will not pose as a major challenge to the Group s business due to the lower ratio of tourist customers. 64