(Bloomberg) -- Chinese consumers are cutting back on dining out, dealing a heavy blow to related shares as investors grow weary over the once-strong sector and its impact on the domestic economy.
Hot pot chain operator Haidilao International Holding Ltd., fast food retailer Yum China Holdings Inc. and tea drinks maker Nayuki Holdings Ltd. have each lost more than 20% since the start of April, lagging behind local equity benchmarks. Analysts attribute the underperformance to weak consumption and are expecting softer earnings and sales this year.
“Economic pressures have led consumers to downtrade, with some choosing to eat at cheaper restaurants while others choose to eat at home,” said Morningstar Inc. senior equity analyst Ivan Su.
While China’s food service sector initially benefited from pent-up demand after Covid, it’s now succumbing to a wider macro slowdown as an uncertain job market and property crisis hit consumer sentiment.
The nation’s economy slowed more than expected in the three months to June to the worst pace in five quarters as efforts to boost consumer spending fell short. The catering services sector capped its fourth month of single-digit growth, according to data from the National Bureau of Statistics.
Analysts are slashing their 2024 earnings and revenue expectations for some companies against that backdrop. Consensus net profit estimates are down 80% on year for Nayuki, while revenue projections for the company have slid by more than a third, according to data compiled by Bloomberg.
“As slow economic growth continues to hurt traffic and increases the number of promotions, restaurant operators expect weaker comparable performance in coming months,” said Bloomberg Intelligence analyst Angela Hanlee.
To win back diners who are now stretching every dollar, food and beverage brands are escalating promotions and discounts. Yum China offers a burger, fries and soft drink combo for as little as 20 yuan ($2.75) at KFC. Hot pot stores that sell 19.9 yuan buffets are gaining popularity, while premium brands including Haidilao try to compete with more discounts.
But analysts are questioning whether price cuts are sustainable amid a weakening industry outlook. Promotions and aggressive expansion plans may also add more pressure to profitability.
Macro headwinds could drag on margins this year and next due to prolonged promotional campaigns, Hanlee said. Increased store-opening targets in 2024 could also lead to “diverging earnings prospects.”
Analysts and traders have pointed to other ways food chains could protect sales and margins, including launching high-quality products and services, downsizing store space and headcount, and using cheaper ingredients.
“The impact of the pandemic and other policies on economy have been much deeper than expected,” said Shen Meng, a director at Beijing-based Chanson & Co.
--With assistance from Karen Yang.
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