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Guide to Opening a Restaurant or Café in China
Jan 28, 2012By Pete Cowell, eChinacities.comFor many expats based in China, the idea of owning a restaurant, café or bar is an attractive one. What could be nicer that whittling away the hours in your own establishment, with your own staff to serve you and partying with your friends whenever you choose? If the place is successful, you may even be able to give up your day job; you will soon become lauded as a food and beverage (F&B) success story, with many other foreigners choosing to follow your example. Soon after this, that fantasy of a franchise becomes more and more realistic…
Stop. It doesn’t work that way. Taking on the ownership of a café or restaurant in China is a real challenge, and is beset with pitfalls at every turn. Many ventures turn out to be flops, and it is not uncommon to see a business fail after a mere six months of trading. There are several reasons for this, ranging from running out of money to owners drinking away all the profits. Having managed pubs in both Shanghai and Shenzhen, I am all too familiar with the various pitfalls and oversights that can make or break a business. Careful research and consultation are what is required before any F&B business is attempted in China, so read on.
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Photo: blog.travelpod.com
1) Make a Plan… and Stick to It!
The first thing you need to decide on is what type of establishment you are going to open. There’s nothing wrong with wanting to offer a little bit of everything, but if you are trying to open a place that offers authentic Thai food with great beer on draft, an intimate café atmosphere and an expansive dance floor, then you are probably taking on too much. Take a simple original idea, and stick with it. Franchises like Element Fresh have succeeded because they have remained true to their simple original vision of high quality, healthy fresh food, and they have never deviated from it. Why do you think the world is riddled with Irish pubs? It’s an uncomplicated formula that can be replicated practically anywhere.
2) Lots of Red Notes
Once you have your plan, you need some money. Don’t ever underestimate how basic or obvious this little factor is. It’s not just about paying for construction and initial stock costs. It is essential that you have enough working capital behind your restaurant so that you can pay your staff, cover any unforeseen costs (like accidental kitchen fires) and pay for marketing. Although careful budgeting and planning will help get your café, bar or restaurant off to a good start, don’t expect to break even for at least six months. Make sure you have some emergency cash in the bank otherwise you could end up putting more of your own money into the business each month, just so you can pay the staff. This has recently happened with a popular but beleaguered restaurant in Shenzhen, and the Western owners are now looking for a buyer just to get rid of the place once and for all.
3) Partners
Unless you have hundreds of thousands of RMB to spare, you will probably need to think about taking on a few investment partners. This is always a slightly thorny issue, but it is arguably better not to invest in a business of this sort with close friends as the first stressful six months will inevitably lead to arguments and put pressure on the relationship. It’s better to find likeminded people you know and trust. Furthermore, it might be a good idea (depending upon your situation and how familiar you are with Chinese law) to take on a Chinese partner. They will hopefully be able to guide you through the next challenge, Chinese law. With the bars I ran, the owners paid for lawyers to ensure that this would go as smoothly as possible. If you can afford the services of a Chinese lawyer, it is definitely worth the extra expense.
4) The Law
There are several options when it comes to starting an F&B business in China. You might want to explore taking on a joint venture with a Chinese partner as mentioned above. However, many expats who start restaurants, pubs and cafes prefer to choose the wholly foreign owned enterprise (WFOE) option. This allows you to set up a limited liability company in China, employ staff and pay wages and tax without having to get a token Chinese partner. The most important thing to remember is to abide by the law. By keeping everything legal and avoiding cutting corners, you are sure to avoid nasty visits by the police. This can be as basic as remembering to display your business license in a prominent position in a public area, or putting up all the anti-drug signs that the police give you. Also, you must ensure that every single member of staff has a contract, and that all fire and safety exit regulations are strictly enforced. Ignoring these rules is exactly the kind of thing that can get your beloved café shut down without further ado. For greater clarification on the exact regulations, it is worth contacting a specialist expat business agency in your city. For more information on WFOEs, see this website: www.wfoe.org
5) Location & Suppliers
When you find a spot that you think has potential, approach the agent (there is usually a ‘To Let’ sign in the window) and get them to check that the space is suitable for your intended business. For example, make sure the power supply can cope with all the electricity needed to run a bar, or that there is adequate ventilation for an industrial kitchen. Once you are satisfied, ask them to negotiate the rent with the landlord. When you have agreed on a monthly price, hire a trusted lawyer to check over every detail of the contract before you sign anything. This is an essential step as it will prevent problems like landlords raising the rent by 50% when they realise that you are turning a profit, as happened to a pub in Shanghai I used to frequent.
Once everything is legal and above board, you have plenty of cash in the bank and are happy with your location, you need to find suppliers. The best place to start is to enquire with other local restaurants or bars, including Chinese restaurants. Products like imported beer, coffee and wine can be dealt with by getting in touch with national suppliers like Heineken or Carlsberg, but where restaurants lose a lot of money is by getting ripped off by their local suppliers. It may only seem like a couple of kilos of vegetables a day, but this all adds up. If you are paying top dollar for grain-fed sirloin steaks, make sure that what the supplier gives you is the real thing. If they are changing the price on the receipt, then someone else is benefiting. Make sure you or someone who can read Chinese inspects and scrutinises every fapiao after each delivery.
Owning and running a restaurant, bar or café in China is a huge undertaking. You will have to be on the premises nearly all the time, especially during the crucial first six months. This can have an adverse effect on your personal life. However, if you carefully plan your approach and put in a Herculean amount of hard work, it just might pay off.
Related links
Do You Dare Start a Business in China?
3 Things to Expect When Starting Your Own Company in China
Seizing the Moment: Entrepreneurs in China
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Rule of thumb. 1/3 of all shrinkage (loss of money) happens at the back door. In other words your biggest losses will be on delivery. Linking to what was said about suppliers.
This can be short delivery, lower quality product, your chef accepting wrong invoicing (and taking a cut), over paying without knowing.
Rule of thumb two. Your staff will steal from you. This could be theft of cash or food/booze/cigarettes. You will go mad trying to stop it, you can't. What you can do is control it and keep it at an affordable level. If you clamp down too much you will lose otherwise good staff, as they can get more elsewhere. If they can take a little they are happy. In low wage cultures pilferage is seen as normal by staff.
Rule of thumb three, don't leave others in control. The traditional Chinese way to do this is to employ family in key positions. And even then some families will feel entitled. Control cash yourself, F&B is a cash business and cash is like water (it leaks out). If you have a local wife and a child with her she will control this, as anything the family takes is being directly taken away from your/her child.
Rule of thumb four, but perhaps the most important. Remember that you will have to work like a slave. Long hours for little money in the beginning. And if you are successful, long hour for a bit more money. With F&B you will need to sleep, breath, and eat the job. Unless you really, really, really want to do this and are prepared to sacrifice everything else for the business, don't do it. This is true for any venture, anywhere in the world.
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Great article, great advice and great follow up by shrinkage.
Rule of thumb four is certainly the most important. Don't waste your time doing it if its not what you really really really want to or you will quit within the first 6 months because you'll make little money and work you like a slave and your mind will start to wander.
That goes with being an expat in China in general
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More important than any of these points raised is extra cash you will need for bribes, red-tape and actually getting a license. When locals find out that a foreigner is running a business they will all come running with their hands out. If you don't keep the local fire chief happy he will close you down in a heartbeat stating that you have not adhered to the correct code...or something along those lines.
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every word is worth its weight in gold,
hats off to toy for presenting a true picture of restaurant business
you must have had a first hand experience,
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