Catering is one of the fastest growing brick and mortar industries but investors should take a long term patient view as catering businesses had better stress on a well-measured stable growth, said a senior manager from China's leading hot pot restaurant chain.

Many industries' net margins and cash flows are worse than the catering industry, which has maintained annual growth of above 10%, said Deng Heng (邓恒), Investment Director of Hai Di Lao Group (HDL), adding that catering businesses valuations are more affordable in comparison with high-tech and Internet startups.

"Catering businesses are valued by their sales revenues so if a restaurant chain's sales is RMB 100 million and profit RMB 10 million, it is valued at RMB 100 million," he said. In contrast Internet start-ups are valued at 20-40 times their earnings even when they have barely started producing and generating any sales.

"Most consumption goods market are hotly contested with investors," so in this respect catering presents a blue sea opportunity for investors, said he, also head of a specialist fund on catering between HDL and Hillbound Capital.

Deng stressed that the catering industry is not for overly speculative investors. "Those that aim at exiting in three to five years should forget about catering because it is hard for catering businesses to gain approval from the China Securities Regulatory Commission (CSRC) for IPO, and thus exit is indeed a problem, so investors must have due patience," he said.

On the other hand, catering businesses should no longer (weave and) promise tales of annual growth of several folds year on year. In fact it is safer to proceed in a well-measured and stable pace in growth, he said, as empirical evidences have shown. Many catering businesses were nudged by their investors to expand geographically aggressively, resulting in loss making and long periods of decline. He compared Shandong Jingya Food Group (净雅食品集团有限公司), his former employer, with HDL, his current employer, in their operational strategies.

Jingya Group received PE funding in 2009 and 2010, and started recklessly opening outlets in Shenyang, Zhengzhou, Qingdao and Linyi, and in 2013 when the government started curbing corruption and wasteful consumption, it suffered tremendously. "Catering businesses should be most wary of expanding into new geographies," he said.

HDL, however, has opened more than 200 outlets in more than 20 years, a pace of expansion that's far too conservative compared with many competitors. "It's not that we are unable to open many more outlets, but we want to maintain steady growth and be in control", he stressed, joining HDL in late 2014.

"We are doing many things to ensure we will grow at this pace for 100 years," by investing in staff loyalty and supply chain, said Deng, adding that the company, now employing over 40,000 staff in China, Singapore, US, Korea and Japan, is implementing Amoeba Management, "by breaking up (ourselves) into numerous small teamsand units, incentivizing them to innovate and outperform one another."

Deng made the remarks speaking at a conference this afternoon that more than a dozen companies share their insight and experience on growth strategies for small catering brands. The conference, held in Fuzhou of East China's Fujian Province, was organised by Hualala (哗啦啦), a SaaS startup for the catering industry, which has offices in Beijing and Shanghai.

An increasing number of small brands are emerging in the catering scene, which forced the top 100 catering giants’s combined market share in China to drop by 0.7 percentage points from that of the previous year to 6.1% in 2016, even though they have continued to gain on strength themselves, said the China Cuisine Association(中国烹饪协会), adding that the small brands tend to present higher margins and faster growth in sales and profit.    ###