0341.HK
Hong Kong’s Café de Coral takes go-slow approach to Mainland dining market

The fast-food chain said its profit doubled in its latest fiscal year, as it makes strong progress in China’s Pearl Delta region, also known as the Greater Bay Area

Key Takeaways:

  • Café de Coral said it would report a HK$330 million profit for its 2024 fiscal year ended March 31, triple the previous year
  • Hong Kong’s leading fast-food chain has posted strong same-store sales growth in Southern China’s Greater Bay Area, as it tries to export its winning formula to the Mainland

 

By Lau Chi Hang

Hong Kong is famous for its rich dining culture, which has brought dishes like dim sum and chow mein to the rest of the world. But that same vibrant dining scene has less to smile about at home these days, hammered by a sluggish economy, depressed tourism and growing local consumer fondness for daytrips across the border to try newer options in nearby Shenzhen.

Against such difficult odds, the city’s leading fast-food chain, Café de Coral Holdings Ltd. (0341.HK), said earlier this month it expects to report a hearty profit for its latest fiscal year through March, defying the odds partly by following its Hong Kong diners to the far larger Mainland China market. After several earlier false starts in different parts of China, the company is finding recent success closer to home in the South China’s Greater Bay Area, also known as the Pearl River Delta. 

According to its announcement, Café de Coral expects to post a profit of about HK$330 million ($42 million) for its fiscal year that ended in March, triple the HK$110 million the previous year, which also included HK$40.9 million in government subsidies during the pandemic. The company’s stock surged 10% in the two days after the announcement.

Café de Coral attributed the strong post-pandemic rebound to higher margins boosted by more branding and marketing activities, better cost controls and improved productivity powered by digitization and automation.

Mainland setback 

Café de Coral noted that its business performed particularly well in Mainland China, reflected by strong same-store sales growth and solid profit margins for the market across the border from its home in Hong Kong. It opened a record number of new stores during the period, with particular success in the Greater Bay Area.

Specific data for its Mainland operation wasn’t disclosed in the profit alert, but will be released when the company discloses its full-year results next month. Some clues on the latest trends can be found in its interim results for the six months through last September. Revenue from the company’s overall Mainland China operation rose 13% over that period to HK$775 million, while the South China segment of that business rose by an even stronger 21% to HK$688 million with 11% same-store sales growth. 

There’s no doubt that Café de Coral’s development has maxed out in Hong Kong, with a population of just 7 million, leaving the far larger Mainland market as its best bet for growth. 

But the Mainland market’s huge size has made it a bloody battlefield, with success by no means guaranteed even for well-run companies. Café de Coral first set foot on the Mainland more than 30 years ago with its first restaurant in Shenzhen in 1992. But that outlet was out of reach for most Chinese at that time, many earning less than 1,000 yuan ($138) per month.

Later it opened more restaurants further north in Beijing, Shanghai and Tianjin as China’s economy took off. But even that wasn’t enough, and the company closed all 11 restaurants in Eastern China in 2017 and turned its focus to the closer Southern China market with more similar tastes. 

It partnered with eight Mainland real estate companies in 2019 to open restaurants in their complexes, only to see the pandemic and weak property market thwart that ambitious plan. Despite all its efforts, Café de Coral had only 160 Mainland restaurants as of last September, about half its 383 Hong Kong shops and just a tiny fraction of the 5,500 outlets for McDonald’s (MCD.US) and more than 10,000 for KFC.

Differing Mainland tastes 

Hong Kong fast food operators are obviously less adept at catering to Chinese palates outside their South China base, which partly explains Café de Coral’s lack of success in Eastern China. Many Mainlanders are fond of heavily seasoned food, whereas Hong Kongers tend to like lighter flavors. McDonald’s and KFC have both discovered the wide variation in tastes, and have rolled out a range of localized products suited to China more broadly and also its many different regions.

The decline of Hong Kong pop culture on the Mainland has also affected chains like Café de Coral, which banked on the city’s trendy image as part of their brands. While “brought to you from Hong Kong” was once a great sales pitch, it no longer resonates as much with a younger generation of Chinese who enjoy their own ample supply of homegrown Mandarin-speaking celebrities.

Hong Kong restaurant operators also tend to stick to tried-and-true crowd pleasers, unlike their more enterprising Mainland counterparts who are more willing to dabble in decorative designs and experiment with more innovative menus. Mainland restaurants have also become more tech savvy than their Hong Kong counterparts over the last decade, using online tools and social media to boost their brands. 

Strict control, fear of franchising 

Scale matters in China’s vast fast-food market, where operators of self-run stores traditionally had little trouble attracting funds to fuel aggressive expansions of their networks. Others chose a more “capital light” route and grew at lightning pace using a franchise model.

But neither of those styles really suits Café de Coral, which has a reputation for prudence, regular dividend payments and rarely bringing in new investors to fund expansion. Café de Coral hasn’t been in any hurry to grow explosively in the Mainland, and more often has pulled out of the market at the slightest signs of trouble. 

The franchising model also isn’t really Café de Coral’s cup of tea. The company has focused on self-operated stores for years, which may explain its longer-term success. The franchising model can be good for a short-term rapid expansion, but can easily lead to problems like inconsistency in food quality and taste, as well as service. Café de Coral’s Chinese fast food is also typically more complicated to prepare than many Western chains, making it difficult for the franchisees to match the quality of self-operated stores.

Earlier this year, Café de Coral announced ambitious plans to operate up to 280 Mainland stores within the next three years, nearly doubling its count from last September. We should probably take the growth target with a grain of salt due to Café de Coral’s conservative approach. After all, the company’s has reached just 160 Mainland restaurants 32 years after it entered the market. At such a slow growth rate, its ability to double the number in just another three years looks like a bit of a stretch.

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