More and More Street Restaurants Are Being Pulled Into Opportunistic Malls — What Problems Will They Face? | 2018's Major Business Events ⑦

Restaurant owners who grew up on the street have been eagerly urged into shopping malls, where they run into an entirely different system and an entirely different crowd. In between, the big restaurant groups have become brokers for both sides.

Some of these events are the product of change already under way — change that will go on reshaping our lives. Some are the intrusion of forces even less controllable into the business world, forcing market players to adjust their strategies again and again. And some come from inside companies themselves: once a company reaches a certain size, how does it square itself with the public, with consumers, with state power, and with everything else around it?

A country gets the companies it deserves. In 2018, as always, the business world changed a great deal. The year's major business events only confirm it.

“What's the advantage of a street-front shop? Right now I can't think of one. The disadvantages I can give you immediately: nowhere to park, wind and rain, you eat at the weather's mercy.”

That is how Ruan Boping, a native of Taizhou, summed up his past year at the end of 2018 — the year he moved his restaurant off the street and into a shopping mall. In January, Zuidong Oriental House, the fashionable Taizhou-cuisine restaurant Ruan runs, opened its second location in Kerry Centre, 2 kilometers from the original, which is tucked above a bakery on Anfu Road.

The space, on the third floor of the north wing, had been a store for the designer label ZUCZUG; it sat empty after the lease ended. Built for retail, it took two or three months of hard work to convert — securing water, gas and power, adding a ventilation system — before it could hold a restaurant. “Their costs are high too,” Ruan said of the mall.

Jing'an Kerry Centre sits in Shanghai's West Nanjing Road district, one of the most fiercely contested pieces of retail property in the city. Since the mall opened in 2013, its retail tenants have turned over constantly: Loewe gave up the second floor of its largest flagship in Asia, and cut its ground-floor space by three quarters. After several rounds of adjustment, the mall's retail positioning has slid from “luxury” to “affordable luxury.”

Jing'an Kerry Centre's rental income reached 1.72 billion yuan in 2017, still up on the year before — and yet in 2018 the retail brands inside it were reshuffled again on a large scale.

“The clothing business is so hard now that a lot of people can't afford a storefront anymore.” Ruan Boping, known in restaurant circles as “Beiping,” spent years in clothing before he opened his restaurant in 2016, so he understands the shift. “Honestly, restaurants aren't easy either. They're just a little better off than clothing right now.”

By bringing in Zuidong — Taizhou cooking plus a bar — Kerry Centre hoped to round out a dining roster that had leaned on expensive Western food and Cantonese. The same wave brought in Heytea, Song Fa Bak Kut Teh (“recommended by the Singapore Michelin Guide”), the Hunanese restaurant Spicy Moment Liuyueban, Peet's Coffee, a Thai hot pot place and others.

As we explained in our earlier report on shopping malls, malls were oversupplied in 2018 and still keen on experience-based tenants, with “first stores” of every kind used as a selling point. People eat more often than they shop, and restaurants don't lose customers to e-commerce, so a dining brand can give a mall a sense of novelty and a flow of foot traffic faster than a retail brand can.

Malls used to dealing with big restaurant groups are therefore looking harder at casual dining that matches how people spend now — above all the well-loved little shops hidden on side streets. Those shops usually have a better feel for the “lifestyle atmosphere” malls now want to manufacture, and they arrive with a name and a following already attached.

The market those restaurant owners faced at the start of 2018, meanwhile, was one killing off more than half of its entrants. In Beijing and Shanghai in particular, the number of restaurants listed on Dianping fell by more than 10% in 2017. With competition that fierce, a mall attached to office towers seemed to promise steady foot traffic and a glossy future for a brand; and for the many owners who had lost the right to run a street shop because of government policy, a mall was the only place left to keep the business alive.

1.

Mall dining used to mean a few large restaurant brands taking an entire upper floor, paired with a Food Republic or some other food court.

After the 2012 eight-point austerity rules hit high-end dining, restaurants moved down-market and shrank — but the sharper competition also shortened their lives. A 2015 study by Zhongshang Data, based on a sample of 100 Shanghai restaurants, found that the average lifespan had fallen from 2.9 years in 2013 to 2.1 years. Meituan's 2018 report on the industry put the average life of the 2.85 million restaurants that closed nationwide in 2017 at just 508 days.

Those numbers convinced Zheng Zheng, assistant general manager of Beijing's Chaoyang Joy City, that he could no longer manage risk by simply signing restaurants to shorter leases.

Dining tenants at Chaoyang Joy City usually sign for three years, already short by industry standards. Short leases let rents step up faster, but they can also leave an owner unable to earn his costs back before the term runs out. “It's hard to use the length of a contract to guarantee a business won't fade. We should be looking for classics instead.”

So Zheng decided to “bring some street shops in.” In May 2017, after three years of planning, Chaoyang Joy City opened a dining quarter called Shijian; four of its 10 restaurants were transplants from Beijing's hutongs.

One of them, Shizhi Liuqi, was a private-kitchen restaurant in a hutong near Andingmen, facing eviction under Beijing's campaign against holes knocked through walls for shopfronts. “I heard they were the best in that world. At first they thought, we're a private kitchen, a mall could never work. So we settled on a compromise: open a noodle shop instead.” Hence Shizhi Liuqi · Noodles, which now draws a lunchtime line every day on the seventh floor of Joy City.

In mid-2018 and again at the end of the year, Chaoyang Joy City opened two more themed quarters — Wutai on B1 and Duke on the ninth floor — both with restaurants.

“A lot of malls now have dining on every floor, even the second,” said Yao Yao, head of research at JLL. “Especially malls built over subway stations. Demand for dining space there is higher, and restaurants get better display positions.”

Chaoyang Joy City, a typical Beijing community mall, went through the same shift in dining tenants as most of its peers. Before all this, the densest concentration of restaurants in the building was Golden Jaguar, on the ninth floor. Golden Jaguar shut in 2016, and the space was broken up among newly recruited brands. Wutai, one of them, is run by Wude Chituoke, a team that stages food markets; the space used to be a children's and family zone. “We leased the whole thing to Wude Chituoke, and of course we have to leave them room to make money. Purely in revenue terms, that's certainly worse than leasing it out myself. But they can sign brands outside our own network — Zanghonghua, Beiping Jiqi — people who wouldn't play with us before.”

Once street shops move in, Zheng said, they have to adapt to the mall's rhythm. “On weekends a huge wave of customers pours in, and that's when you have to drill your team to turn tables three or four times.” As he sees it, the point of recruiting a viral street shop is not the rent but the core customers it gathers. “Anyone willing to pay 60 or 100-plus yuan for a bowl of matsutake noodles is not an ordinary person. It also turns into my publicity engine: people queue up, eat, post photos, and promote my mall without meaning to.” According to Joy City's own data, a customer who has spent money in one of the themed quarters spends four times the average across a year in the mall.

Restaurant owners have been eagerly urged into malls, and what they find there is an entirely different system and an entirely different crowd. Deng Qianwen, who owns Spicy Moment, has concluded the road is a dead end. Spicy Moment opened its first mall location at Jing'an Kerry Centre in November 2017; the original, on Shanghai's Wuyuan Road, had been serving fashionable Hunanese food for seven years.

“Far too many malls have come to me — Swire, Hang Lung, Kerry Centre, Xintiandi.” Deng Qianwen, whose main line of work is stage design and who is known as “Old Deng,” said: “But I have designs to make; I don't have the energy for a second store. The reason I did it last year is that I met Yuanwei Group. They have capital and they have managers.”

Yuanwei Group is the company Wangxiangyuan set up in 2014 to run a multi-brand strategy. Both Spicy Moment and Zuidong, the two restaurants at Kerry Centre, are joint ventures Yuanwei formed after approaching their founders, Ruan Boping and Deng Qianwen.

“Being talked into opening sounded lovely, but doing it turned out to be hard. It's like one group of people watching a stage play and another watching a film. The menu design, the prices, the way you manage — none of it is the same.” After a year of running the mall store, Deng still thinks a mall cannot reproduce the atmosphere he built on the street, and he is not thinking about another location for now.

Zheng's own account more or less confirms that reluctance: “Most of the street shops Joy City talks to have no expansion plans at all when we're negotiating. What we love about them is exactly that they aren't chasing maximum profit.”

2.

Han Yulong, a native of Nantong, was far keener to open stores in 2018 than the year before. The reasons: he had grown more confident in his coffee business; Starbucks opening its Roastery in Shanghai gave him a jolt; and, most important, he raised a round of funding midyear. “A few of the top funds are still chasing us like mad. Next year we plan to get to 200 or 300 stores.”

Two years ago, Manner, the specialty coffee brand Han runs, was a single 2-square-meter window on Shanghai's Nanyang Road. Because it was tiny, cheap and good, it went viral for a while on social media. Manner now has nine stores, half of them in malls.

Han says he still prefers the street, but that putting a store in a mall “is unquestionably how you build a real brand” — it reaches more of the so-called opinion leaders who know coffee.

Electronic payment and a tighter tax system have made restaurant revenue verifiable, which has warmed early-stage venture funds to dining brands, especially the tea, coffee and casual fast-food brands that match the way people spend now. The dining brands — and formats that include dining — that spread fastest through malls in 2018 (Heytea, Nayuki, Luckin Coffee, Super Species, Yao Suancai Yu and the rest) all have serious money behind them.

Over the past year Han has come to see that fame and capital only open the first door. “Take a spot I wanted in an office building. It wasn't zoned for commercial use, you can't get the permit, you can't trade. But Starbucks can. What's the trick? We still don't know.”

In December, Manner was about to open its biggest store yet, close to 100 square meters, in the subway passage at HKRI Taikoo Hui, which doubled the pressure on Han. It could take the spot only because the passage falls outside the exclusivity agreement between the mall and the Starbucks Roastery.

“Rent, fit-out, getting all the paperwork done — the costs are very high, so at this store I'm going to start selling bread,” Han said. “What the mall really thinks is that your average check is too low: can you sell something more expensive? I don't think a mall, or a store, is upscale because of its prices. It's the products and the people who come in that decide that.”

Heytea, now close to standard equipment on a mall's ground floor, has made malls accept an entirely new kind of tea shop — though that is partly because tea suits a mall as a casual add-on, and a ground-floor tea counter does nothing to damage the building's positioning. Even so, when Heytea moves into a mall like MixC or IFS, it designs a “Black Gold” store to match the landlord's upscale image; and if a mall has no bakery, it can consider Heytea Reme, the sub-brand that sells bread.

For restaurants with heavy kitchens, though, moving into a mall means signing a riskier contract: you must remodel yourself quickly to suit the mall's customers, or learn to live with a location you don't much like.

“Business was very hard for the first two months, because nobody knew this place existed,” Ruan said. “Lunch especially. The office workers here already know where the food is in this mall, and they know this spot was never a restaurant, so they wouldn't come over.”

This Zuidong at Kerry Centre is 230 square meters, decorated with a lot of iridescent film, and its opening menu matched the original store: Taizhou cooking, Western food, Japanese food and a bar, mixed together. Three months in, Ruan found that the corporate office workers here ordered Taizhou dishes above all. So he redid the menu fast. The steaks and oysters went; in came dishes like Taizhou rice cake braised with East China Sea pomfret and green crab braised with minced pork belly. Alcohol sales fell compared with the original store.

“The ideal spot would be 300 square meters, with a view, with outdoor seating, where you could smoke and drink and nobody would mind. But there was no choice. When this store first opened, some regulars came by and told me exactly that.”

Every mall now wants to grow a community inside its marble, and to keep customers there as long as possible. Bringing in a restaurant built around a bar, or simply opening a bar, is a way to hold on to the office workers who plan a drink after work.

“Jiuchi Xingzuo is a very famous whisky bar in Shanghai. One reason we brought it in is that more than 10,000 white-collar workers work in the towers here. We have a lot of lawyers and investment bankers, many of them foreigners, and after work they're often under a lot of pressure, so there's demand for a place like that.” Du Yili, deputy general manager of Shanghai's HKRI Taikoo Hui, told QDaily that once Jiuchi Xingzuo opened in the mall it added breakfast and set lunches. Which is why, of the seven Jiuchi Xingzuo bars listed on Dianping, only the HKRI Taikoo Hui one is described as: “The viral mixed noodles really do live up to the hype. Delicious.”

All this puts enormous demands on staff. Han now thinks a mall store asks more of a space, and that his baristas still miss too many details. Old Deng of Spicy Moment struggles to teach new staff what the brand is in a short time, because in the conventional view a Hunanese restaurant serves big portions; without the right service and atmosphere, customers walk out thinking the food was not worth the money.

Ruan, who once ran a clothing chain, is by comparison no stranger to scale and standardization. “What am I short of? A team. If someone comes in and doesn't meet my standard, I can train her.” As he said this, Ruan pointed out that the server settling the bill at the next table came from Wangxiangyuan's team. “At my current level of operating ability, it takes about half a year from opening a new store to letting go of it. Next year I plan to open two more.”

3.

Wangxiangyuan is the example: a big restaurant company that once leased whole floors is now a broker, finding new restaurants for shopping malls.

Wangxiangyuan listed on the New Third Board in 2015. According to a press release from late 2017, its parent, Yuanwei Group, has since the second half of 2016 gathered up eight brands, among them Laxie Yu, Jushuo Haibucuo, Zuidong, Spicy Moment and the fresh-food e-commerce site Wochu.

Owning a brand with a new position means access to new channels. Kerry Centre's leasing manager would not let Wangxiangyuan in. Zuidong, yes.

Some restaurant companies, such as Waipojia and Wang Steak, choose to incubate new brands in-house, or to spin a cheaper line off the main brand to fit what malls want — Chuanyue · Waipojia, say, or Nan Xiaoguan. But “it's easy for high-end dining to make a cheap version, and hard for a cheap one to become high-end,” Zheng said. He doubts that some of these mall-made sub-brands hold up as brands at all. “I only know because I tried it. Take a brand whose average check is normally 80 or 90 yuan. A custom store pushes that to 150, but the people who go there won't order the expensive dishes.”

Others go hunting for new partners on the street or abroad, use financial deals to bring them in-house as their own products, and then “sell” them into the mall channel. Over the past two years International Tianshi, Xiaonanguo's parent, has imported ORENO, the French-Italian restaurant; Boat House, Canada's national breakfast; and Doutor Coffee, among others.

As complexes keep opening and keep clearing space, and put their leasing demands to restaurant groups, the groups have to produce brands fresh enough to satisfy them.

In 2017, BreadTalk Group — the Singaporean company that invented Food Republic — set up an in-house unit called 4orth to “develop strategic dining concepts and products and find strategic dining partners.” In a little over a year the unit has brought Singapore's Song Fa Bak Kut Teh and Taiwan's Wu Pao Chun Bakery into mainland China; in May 2018 it also took the franchise rights for two Shenzhen tea brands, Nayuki and Taigai, in Singapore and Thailand.

The strangest case may be Gather, the “Japanese food collective” owned by the Waipojia group — reportedly four brands that founder Wu Guoping spent two years selecting on repeated scouting trips to Tokyo and Osaka: the fried-food shop Katsu Min, the skewer and kushikatsu shop Jiuzhihui, the Japanese hot pot house Oshimaya and Bubu Ramen. This mini, Japanese version of Food Republic has opened at Hangzhou's Hubin Intime and Shanghai's HKRI Taikoo Hui. Yokocho, the Japanese-style food street run by Fengshouri, works on the same idea.

Some, though, have thought about leaving the mall and going back to the street.

In March 2017, He Guangqi, chairman of Xiabuxiabu, told reporters that Coucou, the group's new hot pot brand, no longer needed mall stores to build its name, and that the plan from now on was to open inside residential communities. “Convenience matters enormously when people eat out, and the community store is the future.”

According to Xiabuxiabu's 2018 interim report, Coucou — Taiwanese-style hot pot plus tea drinks — already accounts for 20% of group revenue. Yet more than a year later, not one Coucou community store has opened in Beijing. Most of the new Coucou stores that did open in Shanghai in 2018 went into community malls in the city's secondary centers.

In 2018 two policies — first-tier cities capping population growth, and social insurance contributions moving to the tax authorities — squeezed restaurant owners from two directions at once, spending power and labor costs. Moving into a mall does at least mean finding a new landlord whose paperwork is in order. Either way, the two sides are now tied together more tightly than before.

“Malls are the trend,” Ruan said, adjusting his verdict back and forth over the course of the interview. “Actually it's not good, either. Look at Hong Kong. That crowded street life is basically no longer realistic, because the cost of managing it keeps going up.” “Hong Kong has its own management problems now — the exhaust pipes point straight at the street, you can smell the cooking oil from the other side, and this is Central! Heavy-kitchen restaurants really don't belong on the street.” He added: “But breakfast places — the kind without cooking fumes — cafés, bakeries, those you still need. Otherwise it would all be too boring.”

Graphics: Zheng Shuya

Cover image from Unsplash