Eying mainland markets, duo to share management experience

Xiao Nan Guo Restaurants Holdings Ltd, the Hong Kong-listed mainland catering company, is planning to co-develop cafes and Western-style casual dining market across the Chinese mainland, Hong Kong and Macao with Pokka Corporation (HK) Ltd, in which it has offered to acquire a controlling interest. Xiao Nan Guo (XNG) said in a statement it has arranged to purchase a 65 percent stake in Pokka HK, for HK$195 million ($25.2 million), as part of its multi-brand strategy. Pauline Wong, managing director of Pokka HK will own the remaining 35 percent.

Wang Huimin, chairwoman of XNG said: "As part of Xiao Nan Guo's multi-brand growth strategy, the acquisition will greatly enhance the company's operating experience in Western cuisine. Furthermore, the company will be able to attain several solid brand names, an excellent management team along with a great partner."

"Having operated in Hong Kong and Macao for 20 years, Pokka HK has always planned to enter into the mainland market," said Wong in a statement.

This is the first time for XNG to tap into the Western casual dining sector since its listing in 2012. As of Oct 31, XNG operated a total of 98 restaurants in four self-owned brands, including 78 Shanghai Min restaurants, 4 Maison de L'Hui restaurants and a Shanghai Min's Family Restaurant.

"In the past years, Xiao Nan Guo has made successful steps in shifting from high-end restaurant chains to mid-level brands, and it's very confident in its further expansion in the mass catering market," said Feng Enyuan, vice-president of China Cuisine Association.

The catering industry on the mainland has its problems as well as potentials for growth.

"The main problems are high rents and increasing labor costs, but casual dining business is better equipped to fight these negative factors," said Feng.

In the first 10 months of this year, total revenue of the catering industry climbed 9.7 percent year-on-year to 2.3 trillion yuan ($375.9 million) nationwide, but profitability suffered a 10-percent decline compared with a year earlier due to rising rents and labor cost, according to the statistics from an industry report released recently by the China Cuisine Association.

Targeting bigger market

For example, the average return on sales in Shanghai has fell to 2.5 percent from up to 5 percent before.

Smaller space, longer operating hours, standardized food products and complete supply chain combined to make casual dining business more competitive than regular restaurants, Feng added.

The down market transformation of high-end restaurants has met with limited results while the mass dining markets are keeping the strong momentum for growth.

Restaurants targeting the mass market have become the major force in driving the recovery of the whole industry, said the report.

The casual dining segment will thrive because it is supported by a growing number of business people and young consumers, said Feng.

"The cooperation between these two dining enterprises makes them a perfect pair, as Pokka HK enjoyed mature and experienced management in adapting to the Hong Kong and Macao markets, and Xiao Nan Guo has established its reputation on the mainland as well as understanding the demands of local customers," said Feng.

Pokka HK's Wong said: "Sharing the same operating philosophy, we will strive to increase our market share in the coffee and Western casual dining businesses in the rapidly growing mainland market. Under this strategic alliance, we will thrive by leveraging Pokka Caf's brand advantages as well as Xiao Nan Guo's solid market experience."

As of June this year, Pokka HK owned and operated 34 restaurants under 12 brands in Hong Kong and Macao, offering specialty coffee and a wide range of casual dining collections.

Pokka HK holds the exclusive right to use the trademark "Pokka Caf" on the mainland, Hong Kong and Macao for the next 25 years.

The challenge for Xiao Nan Guo would be how to localize those dining collections with Western elements to satisfy the taste of mainland customers. And for Pokka HK, it would be more advantageous for their business expansion on the Chinese mainland if they get to understand the industry regulation and market practices, said Feng.

As the "bubbles" have been squeezed out of the sector by the government's austerity campaign, Chinese catering industry is also attracting more attention from international investors.

In April, CVC Capital Partners Sicav-FIS SA bought a majority interest in South Beauty Investment Co Ltd, a medium- to high-end restaurant chain in China.

Meanwhile, China's Hony Capital Ltd acquired the UK restaurant chain PizzaExpress Ltd for about 900 million pounds ($1.4 billion) in July this year.

After the deal, Hony will take control of the pizza producer from Gondola Group Ltd, owned by the London-based private equity firm Cinven Ltd.

huangying@chinadaily.com.cn

The fast-growing catering industry on the mainland witnesses a climb in alliance and cooperation from overseas players. Provided to China Daily

(HK Edition 12/12/2014 page1)