Xiabuxiabu shutters stores, cuts prices in bid to stop flow of red ink

Key Takeaways:

• Xiabuxiabu is cutting prices and introducing cheap combos in the face of challenges posed by growing consumer caution and intense competition
• The company warned it will report a loss in the first half of this year, as it closes most of its Shaohot high-end barbecue restaurants just months after opening them

By Lau Chi Hang 

China’s cost-conscious diners, who increasingly see eating out as a luxury, are giving a new case of indigestion to the country’s restaurant operators, adding to headaches for an industry that was already fiercely competitive. That indigestion is popping up in a series of profit warnings from operators at every part of the food spectrum, ahead of a first-half earnings season that looks set to be anything but comfort food for investors.

Last month, Jiumaojiu (9922.HK), operator of a mid-range trendy “sauerkraut fish” chain, issued a profit warning. Ajisen (China)(0538.HK), the Japanese Ramen brand, also warned it lost 20 million yuan ($2.79 million) during the six-month period. Now, Xiabuxiabu Catering Management (China) Holdings Co. Ltd. (0520.HK), known for its “personal hotpot”-style dining, is adding its name to that list, forecasting a loss up to 280 million yuan for the first half of this year in an announcement earlier this month.

According to the announcement, Xiabuxiabu’s revenue fell nearly 16% in the first half to about 2.4 billion yuan. Worse still, it dropped into the red during the period, saying it will report a loss of between 260 million yuan and 280 million yuan, reversing a net profit of 2.12 million yuan in the year-ago period.

After it made the announcement, Xiabuxiabu’s Hong Kong stock fell nearly 8.2% the next trading day, extending its decline to nearly 75% in the past year.

The company ascribed the loss to overall weak consumption, which, when combined with intensifying competition, is causing its customer traffic to fall. As that happens, the company has been closing stores, further fueling its flow of red ink with an additional impairment loss of around 200 million yuan in the first half of the year. 

This year’s dip into the red hardly looks promising, but the reality is that Xiabuxiabu is no stranger to losses. The company has reported annual losses for each of the last three years, including a 293 million loss in 2021, followed by 353 million yuan in 2022 and 199 million yuan last year. If it continues to lose money in the second half of the year at the same rate as the first half, it could eventually report its worst loss in years topping 500 million yuan. 

Bumbling barbecue chain

The company has come up with several tactics to try to reduce its pain, or at least get more consumers coming through its doors. One is cutting prices and introducing value-oriented food combos to attract customers. Second, the company is also trying to squeeze better prices from its own suppliers through bulk purchases. It is also delving deeper into the takeout business by offering popular choices targeting that segment of the market. 

The company is also tweaking its image, attempting to craft a brand that combines the comfortable “home” concept with trendy, young and fashionable vibes, in a bid to win over customers who may increasingly want to save money by eating at home, while still feeling they are being trendy. At the same time, it is using popular online platforms like Douyin, the Chinese edition of TikTok, to attract traffic and bolster its brand. 

The company is also trimming its own costs by closing many of its money-losing stores. While it opened 131 stores last year, it also closed 99. Its net 32 openings for the year made Xiabuxibu something of an outlier, as many of its peers opened new outlets far more aggressively in anticipation of a big post-Covid rebound. 

At the start of this year, Xaibuxiabu trumpeted big plans for Shaohot, its new high-end barbecue restaurant, as Chairman Ho Kuang-Chi vowed to add 30 new stores every year. But that plan may have quickly run out of steam, with media reports pointing out the new brand has already shuttered most of its shops, including its last in Shanghai at a shopping mall.

Massive restaurant closures 

Xiabuxiabu certainly isn’t alone in facing huge pressures as China’s economy slows after years of strong growth, causing consumers to rein in their spending. The dire catering situation is quite evident from data published by China’s National Bureau of Statistics. That data shows the number of catering businesses that de-registered or had their licenses revoked jumped 233% in the first quarter to a hefty 460,000, including 167,000 in January, 112,000 in February and 180,000 in March. Things are hardly likely to improve anytime soon, meaning the catering industry may be staring at a long and cold winter ahead. 

As the slowdown shows no signs of easing and competition intensifies, a new race to the bottom of the food chain has kicked off, complete with relentless price cutting. That’s led to the emergence of a new generation of value-oriented choices dubbed locally as “poor man’s meals,” as well as the emergence of a huge variety of other “meal deals” as the new norm.

Price wars 

The biggest chains are at the forefront of a new generation of such “meal deals” to keep customers coming. McDonald’s MCD is a case in point, unveiling its “1+1 DIY combos” and hamburgers costing just 10 yuan, or about $1.40. One of the most aggressive is the local Nanchengxiang fast food chain, which charges just 3 yuan for a breakfast that includes unlimited refills of seven drinkable selections, from porridge to milk to soy milk. 

As the price war wears on, many restaurants are not making money, and most should count themselves lucky if they aren’t bleeding cash. At such a moment of unrelenting competition, price cuts have become the flavor of the day, as everyone struggles not to be left behind. 

When the dust finally clears, only the healthiest of the group will be left standing and have the chance to resume hiking prices. But no one knows how long the price war will continue, including mid-sized chains like Xiabuxiabu. At the end of the day, more companies will fall into the red as everyone races to the bottom of the barrel, and only the headlines will tell who becomes the next casualty of this drawn-out food fight.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.