Recently, the pre-made food industry has been the subject of intense discussion again. First, Hema announced it would make pre-made dishes a first-level department, viewing them as a future growth point. Then, Gouquan Food, a hotpot ingredient supermarket, is about to sprint for a Hong Kong IPO, which is also seen as an important development milestone for the industry. In addition, many places across the country, such as Foshan, Liuyang, Shishi, and Laiyang, are stepping up efforts to develop the pre-made food industry, hoping to seize the opportunity as the industry takes off. I've talked about this topic once before, when I said that pre-made dishes were leading a "de-chef-ification" in the catering industry. Now, two years have passed, and pre-made dishes are no longer just a trend in the catering industry but are entering every aspect related to "eating." So, in this issue, I want to systematically discuss the pre-made food industry and why so many companies and regions are so optimistic about it.
The definition of pre-made food is very vague. Many people think pre-made food is just the meal packs used for food delivery, while others believe it's no different from instant noodles, self-heating hotpots, and other convenience foods. Moreover, even food industry professionals and investors haven't given a clear definition. The common saying is that food that has been processed and cooked to varying degrees in an industrialized way can be called pre-made food. But with this definition, we can't have a meaningful discussion. For example, the compound seasonings we usually eat, like hotpot base, fermented soybean chili sauce, or curry oil and Lao Gan Ma, also fit this definition. Additionally, the fried peanuts and melon seeds we eat as snacks, and the potato chips and spicy strips from the supermarket, also fully fit. If we really call these pre-made dishes, then I think Mixue Ice City and Coca-Cola are also pre-made dishes, right? So, I want to define pre-made food from a different angle. I think instead of looking at "how pre-made food is made," we should study "what needs pre-made food is meant to satisfy." There are two core needs of pre-made food users: when used in restaurants, it's to help improve efficiency and standardization; when sold directly to consumers, it's to simplify the cooking process. Only products produced to meet these two needs can be called pre-made food. Additionally, pre-made food should at least be a dish, or its purpose should be to recreate a dining product. So, although compound seasonings can also improve kitchen efficiency, they can't be considered pre-made food. At this point, we can basically give a definition: Only food that recreates dining products through industrialized production, simplifies the cooking process, improves kitchen efficiency, and achieves standardized meal output can be called pre-made food. So, when we discuss pre-made food, we basically only discuss semi-finished dishes, or more broadly, pre-made rice and noodles, and pre-made (hotpot) ingredients.
Let's first talk about the demand for pre-made food in restaurants. Generally, the three main costs in the catering industry are raw materials, labor, and rent. According to the "2022 China Catering Industry Annual Report" by the China Hotel Association, raw materials account for about 40% of a catering company's costs, rent about 10%, and labor about 20%, totaling over 70%. Among these three, rent and employee wages face continuous upward pressure. Coupled with the low entry barrier and intense competition in the catering industry, the profit margin is actually not very thick, with an average net profit margin of less than 10%. Moreover, there is a reshuffling rate of over 30% each year, meaning a large number of stores are closed. Given this situation, catering companies have a strong desire to improve their survival conditions and enhance their ability to resist risks.
Let's talk about labor first. Last year, the internet industry popularized the term "cost reduction and efficiency enhancement," which, in nicer terms, means improving labor efficiency, and in harsher terms, means layoffs. The same applies to catering companies. Those familiar with Chinese restaurant kitchens know that to improve meal output efficiency, chefs have different stations. In the most general division, the kitchen can be divided into three parts: the cutting and preparation station handles raw ingredients, the "dahe" station handles the transition from cutting board to stove, and the stove station finally cooks the dishes. Of course, depending on the scale and cuisine, there may be more detailed divisions. The introduction of pre-made food has the greatest impact on the cutting and preparation station, and to some extent, it will replace some of the work of the "dahe" station. The kitchen only needs to complete the process of heating and cooking the dish. With simplified processes, the demand for professional operators like chefs decreases, and labor costs can be reduced. This is the biggest motivation for catering companies to use pre-made food. According to the "2021 China Chain Catering Industry Report," introducing pre-made food can reduce labor costs by 45%. Calculating this, labor costs can save more than 9%.
Moreover, the reduction in kitchen labor will bring another change: an increase in reception capacity. Traditionally, the kitchen area determines the ceiling of a restaurant's reception capacity. This is determined in two ways. First, a larger area means more chefs, which increases meal output capacity, reduces customer waiting time, shortens dining time, increases table turnover rate, and thus allows more customers to be served. Second, with a constant total area, an increase in kitchen area means a decrease in dining area, which also determines the store's reception capacity. By using pre-made food to reduce kitchen labor and process steps, you can use a smaller kitchen area to produce more dishes faster. This achieves a dual improvement in table turnover rate and dining area, greatly enhancing reception capacity and thus improving store efficiency. From this perspective, pre-made food can also indirectly save rent for the store.
Finally, there are raw materials. There's an old saying in the catering industry: If customers can order anything and you have it, your restaurant is not far from closing. This means that if the menu has too many varieties, exceeding the kitchen's capability, it becomes a burden on costs. The more varieties, the more ingredients need to be purchased, but not all dishes are ordered every day, so fresh ingredients can easily exceed their shelf life, and the input-output ratio becomes very poor. Moreover, specific dishes may require specific processes and equipment, so trying to be comprehensive inevitably sacrifices efficiency. But consumers naturally have a demand for comprehensive choices, so for many restaurants not known for a single category, waste is inevitable. Combined with uncontrollable factors like weather and wrong orders, according to the "China Catering Report 2019," the average waste rate in the catering industry is 10%-20%, and can reach as high as 30%. Considering that raw materials are the largest cost component, accounting for over 40%, even a slight optimization in raw material waste can save a significant amount of money.
Thus, pre-made food becomes a viable option. As mentioned earlier, pre-made food simplifies the cooking process, thereby reducing ingredient waste during the process. Additionally, many pre-made foods are processed and have a longer storage period, making them very suitable for optimizing ingredient allocation in restaurants. So, from labor to rent to raw material costs, pre-made food can indeed bring tangible cost reduction and efficiency improvement to catering companies, enhancing their ability to resist risks.
But that's not all. The improvement in risk resistance for catering companies also lies in the chain rate. I've talked about chain operations many times before; it's an inevitable trend in China. Especially with Luckin joining the "10,000-store brand club," the industry generally predicts that there will be about 20 brands with 10,000 stores in the future Chinese catering market. But currently, the chain rate in China's catering market is still relatively low. According to data from Meituan's New Catering Research Institute, as of March 2022, there were about 11.72 million catering-related enterprises in China. But among these over ten million enterprises, the vast majority are small individual businesses. Chain catering, meaning enterprises with more than two stores, accounts for only 19%, and the CR5 (concentration of the top five enterprises) is relatively low, taking only 2% of the market share. Although the chain rate has improved rapidly from 12% in 2018 to 19% in 2022, compared to the chain rate of about 50% in the US and Japan and a CR5 of about 15%, there is still significant room for improvement.
For catering companies, the biggest advantage of chain operations is risk resistance. According to data released by the China Hotel Association, comparing the first quarter of 2021 with the first quarter of 2019, the total number of catering stores nationwide decreased from 9.056 million to 7.601 million under the impact of the pandemic, a reduction of nearly 20%. However, chain catering formats only decreased by 6% during the same period, with a much lower store closure rate than the overall market. Generally, chain catering companies have more sufficient capital reserves than ordinary small stores and have more ways to deal with crises. Especially in special situations like the pandemic, individual restaurants often close silently, but chain restaurants may suffer for a while, close some stores, and then recover and even expand again once the difficult period passes. So, from the perspective of risk resistance alone, chain catering companies are much stronger than individual businesses.
But to achieve chain operations, one problem that needs to be solved is standardized meal output. In terms of standardization difficulty, Chinese food is much harder than Western food. Although KFC and McDonald's brought central kitchens and pre-cut vegetable distribution to China as early as the 1990s, Chinese food chains just couldn't take off, and the reason lies in standardization. Baking and frying are much simpler than the complex stir-frying, deep-frying, braising, stewing, and simmering in Chinese cuisine. It wasn't until the emergence of Kungfu that electronic and standardized production was achieved in the single process of "steaming." Since then, the standardization of Chinese food has continued to develop, and Chinese fast-food chains have gradually risen. But even now, this rise is not complete. In China, the brands with the highest degree of chain operations are still largely those with foreign origins, such as coffee, milk tea, bread, baking, fried chicken, and burgers. The chain rate for formal dining and Chinese specialty cuisines is relatively lower. This is a matter of inherent nature; it's like that when the culinary culture is too profound. The development and popularization of pre-made food will greatly enhance the standardization and chain rate of Chinese cuisine. In fact, leading catering companies are already making efforts to use pre-made food. According to the "2021 China Chain Catering Industry Report" released by the China Chain Store & Franchise Association, the proportion of pre-made food used by leading chain catering companies is already high, with Kungfu, Yoshinoya, Xibei, and South Beauty having pre-made food ratios of over 80%.
Moreover, for these large catering companies, they are not just using pre-made food; they are specializing in it. Generally, large chain catering companies with more than 30 stores need to start building their own central kitchens for standardized production. But with a large number of SKUs, it's impossible for all products to be completed by their own central kitchens. So, their central kitchens often focus on the core processing of core ingredients. For example, offal products for hotpot brands, and marinated meat for barbecue brands. For most non-core and general products, they may not even produce them themselves but purchase or customize them from other pre-made food companies. For instance, milk tea and fried rice in hotpot restaurants, and pastries in stir-fry restaurants, can all be done through procurement. Moreover, on the procurement side, brands can find pre-made food brands that specialize in specific categories. For example, if I need to procure pre-made dishes from the Jiangsu-Zhejiang cuisine, I can find Weizhixiang. If I need pre-made rice and noodle products, I can find Qianwei Central Kitchen. What brands need to do is manage their core categories well and integrate their supply chains, even achieving what KFC has done: leveraging a strong supply chain to play their own game in new product development and marketing. However, in China, the pre-made food industry currently has a scale of only 400 billion yuan, and compared to the four to five trillion yuan catering industry, the penetration rate is less than 10%. The industry generally believes this penetration rate can reach 30% in the future. As a hundred-billion-level track with three times the growth space, this is why local governments and catering companies are so optimistic about the pre-made food industry.
Having discussed the catering industry, let's talk about the C-end, which is selling pre-made food directly to consumers. Retail pre-made food in China accounts for only 18% of the overall pre-made food market, and sales are about 30% of Japan's and 15% of the US's. In a word, it hasn't developed. There are two reasons for this lack of development. One reason is too many choices. If I pursue convenience and speed, I can order food delivery. If I pursue low cost and health, I can cook myself. If I pursue consumption upgrade, I can go out to eat; after all, many restaurants outside also use pre-made food, so why buy it and cook at home? Pre-made food seems to meet many needs, but it doesn't excel in any aspect, so it can't become the first choice for consumers.
The other reason is a problem that industry insiders generally avoid: industrialized production inevitably harms taste. Although I occasionally keep some pre-made food in my fridge, I must admit that it's not as delicious as food made from fresh ingredients from scratch. Additionally, I personally think that, even with the same pre-made food, what restaurants make is still much tastier than what you make at home. I guess there are two reasons: one is the difference in stove firepower, and the other is that the pre-made food in restaurants is less processed; often it's just pre-cut vegetables. But what you buy at home is almost a meal pack. When I cook that dish, I feel like I'm playing kitchen cosplay. The taste of what I make can't compare to what's outside. Furthermore, even setting aside taste, pre-made food at the C-end doesn't align with Chinese people's aesthetic of food. In Chinese food culture, a very important point is "people." This is the same as why Chinese food is hard to standardize, as mentioned earlier. Because it's complex, it's hard to standardize, so "people" play a significant role. The chef's seasoning habits, control of heat, selection of ingredients, and rapport with diners all affect the consumer experience. Why do we often say that mom's cooking tastes the best? Why do some diners only recognize the chef, not the restaurant? It's because our food culture places great emphasis on the human factor. The concept behind pre-made food is one that views the human factor as an uncertainty that needs to be removed. Can pre-made food be delicious? Of course, with technological progress and a better understanding of Chinese tastes, pre-made food will become increasingly delicious. But can you call it gourmet food? I think it's hard, because gourmet food is not just about taste; it's also a cultural concept, and pre-made food happens to be incompatible with Chinese food concepts.
However, the pre-made food retail business, though not big now, doesn't mean it can't grow in the future. In my view, there are at least three opportunities for the development of pre-made food. First is the evolution of kitchen infrastructure. I mentioned earlier that pre-made food sold directly to consumers is meant to simplify the cooking process. And simplifying the cooking process is actually a good business. Look at how well small kitchen appliances like air fryers sell; you can see that young people today actually have a desire to cook well at home. It's just that either they don't have time or their cooking skills are poor, so they rely on foolproof products like air fryers. If you study the history of Japan and the US, the two major pre-made food countries, you'll find that the takeoff of the pre-made food industry in both countries was accompanied by kitchen evolution. The popularization of products like refrigerators and microwaves in households brought frozen food into thousands of homes, combined with the increasing demand for efficiency from urbanization, which drove the development of pre-made food. So, similarly, if pre-made food in China can seize the scenario of small kitchen appliances, it's not without opportunity.
The second opportunity is the miniaturization of families. Single young people, or couples/roommates living together, are becoming more common in big cities. Families are shifting from the past three-generation households and nuclear families to smaller units. And the miniaturization of families inevitably raises the per capita cost of cooking. Therefore, pre-made food is needed to simplify the cooking process, improve efficiency, and prevent cooking from becoming a burden.
The last opportunity is the duration of staying at home. The past few years have proven that many professions do have the possibility of working from home, and the cost of working from home is indeed very low. In the future, working from home, or even remote collaboration, will become a major trend in the workplace. And according to data from the past few years, the consumption of pre-made food is closely related to the duration of staying at home. There are some very clear consumption nodes for pre-made food. For example, during weekends and holidays, the consumption of pre-made food increases significantly. When there is a resurgence of the pandemic in a certain place, the sales of pre-made food will see an explosion. And the most important sales node for pre-made food is the Spring Festival. When people spend more and more time at home, it means there are more scenarios for cooking at home, and they are more likely to buy pre-made food.
At this point, the reasons why many people are optimistic about the pre-made food industry are obvious. But in the final analysis, pre-made food is a product of urbanization and efficiency-first ideology. In the process of urbanization, all spaces are priced expensively, and time has become people's most precious production factor. Everyone hopes to exchange limited time for more money. Therefore, pre-made food has the soil to grow. And big cities have profoundly changed our dining patterns. In the process of urbanization, our dining consumption is gradually dividing into enjoyment-oriented consumption and functional consumption. When we just want to fill our stomachs, refresh ourselves, or get nutrition to keep working, we can accept those very convenient, standardized-tasting foods with no novelty or characteristics. Only at certain specific moments, when we want to enjoy the pleasure of food, do we turn to enjoyment-oriented consumption. Only then do we abandon efficiency, convenience, and extreme standardization, trying to get some surprises from food. However, as urbanization increases, the surprises that food can provide us are becoming increasingly scarce and expensive. Pre-made food, as a tool to improve efficiency, is eroding those hard-won moments of enjoying food. On the fifth and sixth floors of large shopping malls, in chain restaurants, food is gradually becoming like the city behind it: a standardized product of reinforced concrete and glass curtain walls, an efficiency machine crisscrossed by elevated roads and subway lines. This wave has come too fast, and we don't even have the option to refuse or accept. And when we miss those non-standard, unexpected, and uncertain things, we find that we can no longer afford their price.
References: "How to Save 30% of Restaurant Waste?" - Restaurant Boss Insider; "If Customers Order Anything and You Have It, Your Restaurant Is Not Far from Closing" - Meal Planning Officer Talks Catering; "The Pre-Made Food Storm Sweeps the Catering Industry: Merit or Fault?" - Chutian Media; "2022 China Pre-Made Food Industry Development Trend Research Report" - iiMedia Research; "2022 China Catering Industry Annual Report" - China Hotel Association; "The Big Business on the Tip of the Tongue - In-Depth Report on the Pre-Made Food Industry" - CITIC Securities; "Weizhixiang, Anjoy, Huifa, and Guangzhou Restaurant Latest Financial Reports Released: Mixed Fortunes" - Hongcan.com; "The First Stock of Pre-Made Food Is Not 'Fragrant'? Shareholders Complain: 'Where Does Your Confidence Come From?'" - Hongcan.com; "Benchmarking Giants, Industrial Scale to Be Improved - Pre-Made Food Industry Analysis Report" - Zhongyuan Securities.