Written By Song Xiangqian (Alan Song)

The pandemic is undoubtedly a black swan event, but we cannot blame external factors alone. The catering and service industries fundamentally lost to themselves, falling short in terms of management and operational capabilities. I know that stating this may offend some people, and it might make many uncomfortable, but facing the truth is the right starting point.

Two years ago, I said, "2020 may be the toughest year, but it could be the best year in the next decade."

The catering and service industries have embodied this statement. On one hand, the industry faces rapidly rising supply-side costs, coupled with a shrinking demand and weakened expectations, along with the impact of changes in consumer behavior and habits caused by the pandemic.

The rapid increase in supply-side costs is evident in several aspects: soaring rents and escalating labor costs. Wages in the service industry five years ago might have been less than half of what they are now, and in the next five years, labor costs in the service industry could be more than double the current rates. This structural cost impact is a result of the slow variable of demographic changes. Simultaneously, market-oriented cost increases in production factors such as water, electricity, gas, carbon emissions, and the "peak" in resource consumption have impacted the cost structures of all industries. Additionally, the implementation of social security contributions, the Golden Tax Phase IV project, and the emphasis on increasing the proportion of initial distribution for laborers in the common prosperity drive are not favorable for China's labor-intensive catering and service industry.

At the same time, there is a trend of shrinking consumer demand, coupled with weakening expectations for future income improvement. People are not very confident about future income levels and per capita income growth. In the past, people were willing to spend, but now a habit of precautionary savings has formed, especially under the influence of the pandemic. Precautionary savings have grown rapidly in recent years, significantly squeezing effective demand. Changes in population structure, aging, declining birth rates, and fertility levels are also causing a weakening of consumer spending power, and the supply-side cost curve is changing rapidly.

In summary, with multiple factors at play, the era of high economic growth in China is gone, and future economic development is not favorable for traditional labor-intensive industries. In this situation, the catering and service industry, as a hardworking and prosperous sector, finds itself facing unprecedented challenges, exacerbated by slow industry progress.

For China's economy to truly and successfully undergo transformation, it not only must but also should firmly rely on consumption, especially domestic demand stimulation. The impetus for this must come from the consumer service industry, with the catering sector being a pivotal component. As the saying goes, "Food is the first necessity of the people." Only the catering industry and the modern service sector can absorb employment on a large scale. Reliance on advanced manufacturing, artificial intelligence, and the metaverse alone cannot absorb the scale of employment.

Without the development foundation provided by consumption and the modern service industry, lacking their stabilizing and supporting roles, China's economic transformation and growth will face unprecedented pressures and challenges. Moreover, there is a lack of strategic determination and sufficient fiscal capacity to support the development of the technology industry and the industry's advancement towards the upstream of the value chain. Simply emphasizing technological progress in this context is not only unrealistic but also unattainable. In a sense, the discourse on technology has become overly heated, with insufficient emphasis on the foundation of driving demand and the critical role of the livelihood system. There is an inadequate awareness of the stabilizing and supporting roles of consumption, and the emphasis on these aspects is insufficient.

The catering industry is a traditional sector, with official statistics indicating a total economic output of 47 trillion yuan and nearly 60 million people employed in catering. Considering small family-owned businesses and unaccounted individual entrepreneurs, the total economic output is estimated to be between 55 trillion to 60 trillion yuan, employing nearly 80 million people. In terms of output scale and employment, it is already the largest sector in China. However, this industry is traditional and lagging, dominated by a "chef mentality." Modern management science and corporate systems have not been fully introduced, and the workforce lacks high qualifications. The introduction of systematic corporate governance, supply chain science, brand awareness, and standardized production is severely lacking. Modern corporate systems are only just beginning to take root in this industry, not to mention the formation of digital operations and the intellectual assets of enterprises and brands. Many investors are now turning to niche products, such as noodle shops, and some smaller product categories, fundamentally lacking a deep understanding of the industry. This industry requires investments in management, standards, and systematic operational capabilities. To some extent, investing in people is even more critical, focusing on the personal growth and learning ability of individuals. The magnitude of the challenges that the traditional catering industry will face in the future is unknown. It is a sector facing a critical turning point and is of vital importance. If it does not move towards modernization and standardization, this industry is destined for drastic changes and low-level repetitive construction. It is well known that the pandemic is an unexpected factor, a black swan, but fundamentally, the industry lost to itself, losing in terms of management. Even companies with relatively modern management, such as Haidilao, are currently closing 300 stores to make corrections. Ask yourself (for non-headline brands), are you Haidilao? Are you Xicha, Cha Yan Yue Se? Even companies that are absolute leaders are struggling, so how will other companies fare?

For an industry to digitize, it must adopt an industrial Internet mindset, empowering enterprise development and efficiency through digital transformation. The first step is to understand the needs of the end consumers (C-end), the second is to understand the business clients (B-end), and the third involves addressing the challenge of improving the efficiency of the entire industry chain. This relies on modernizing management, with digital operations being a crucial means.

The pain point in this process is that the catering industry has a long industrial chain, spanning from fields to dining tables, and involves integrated processes of procurement, production, inventory, and sales. It requires mapping out all value chain links and nodes, reengineering company business processes, and identifying business processes using digital methods—achieving online business and organizational operations. Truly realizing the digitization of business data and the transformation of data into business actions is a formidable task. It's akin to deconstructing and reconstructing a company, representing an iterative rebirth and a phoenix-like transformation. However, those who emerge from the ruins are the true heroes. Harvest Capital is committed to being a strategic partner, advancing Chinese industrial development with a mindset of empowering others. We are dedicated to making steady progress, contributing to the industry, and achieving lasting success.