Hong Kong - The Future of Foodservice to 2021

06/11/2017 - 16:25
Hong Kong is a high income economy. Wealth distribution is, however, highly unequal, with a significant proportion of consumers only able to eat out semi-regularly. The high cost of living and ever-increasing consumer prices have impacted consumers’ disposable incomes, resulting in a relatively high level of price sensitivity.

Consistently with most Western European and North American countries, the city’s population is growing slowly and aging rapidly. Hong Kong does, however, have a high migration rate, and immigrants from Mainland China are expected to be the key driver of population growth in the next thirty years.

Tourism is forecast to grow ahead of the wider economy, benefitting the foodservice industry.

Profit sector summary

Revenue generated across the foodservice profit sector grew at a CAGR of 3.8% between 2014 and 2016, and is forecast to keep rising at a similar rate to 2021.

The Hong Kong foodservice market is highly globalized, with both western and Chinese influences. A wide variety of cuisine and outlet types are available, and many International operators choose the city as a launchpad for expansion into the region.

High rents on commercial property have impacted the profitability of operators and have contributed to a high rate of outlet churn. Food trends come and go quickly in the city, and consumers are keen to seek out new experiences.

To 2021, cross -channel competition is set to intensify, as trends toward ultra- convenience, all-day dining and premiumization further blur channel boundaries.

Quick service restaurants summary

QSR is the second largest channel, accounting for 19.4% of total profit sector revenue in 2016. Sales value in the channel rose at a CAGR of 4.5% between 2014 and 2016. Outlet number growth has remained weak, with the bulk of growth driven by an increase in average transaction values. The channel is home to Hong Kong’s largest foodservice operators, including both global chains and locally-grown brands.

The channel offers a relatively wide range of cuisine types, although western and Hong Kong-style fast food options dominate. Strong growth in average transaction values is a testament to operators’ ability to encourage consumers to purchase new and original products in the channel. The strong growth of hot drinks’ OBP value in QSR is a key example of consumers embracing new product options in the channel.

Delivery provision and takeaway transactions are common in QSR. Value generated from delivery takeaway transactions is set to experience strong growth to 2021, at a forecast CAGR of 5.4%, which is ahead of value growth in the wider channel.

The QSR channel is frequently visited by convenience-seeking consumers and has long been the go-to channel for quick meal occasions, often at unconventional times. A rise in delivery provision and all-day dining across the profit sector, and notably in the coffee and tea shop and FSR channels, poses a threat to QSR operators’ position as the ‘default option’ for consumers seeking a convenient meal solution.

To mitigate against this intensifying competition, QSR operators can increase their convenience provision with wider deployment of delivery and focused outlet placement. Offering a premiumized range of products can also tempt consumers who are less price-driven to the channel, thus raising transaction values and keeping trade away from higher-cost channels that are typically perceived as offering higher quality.

Full service restaurants summary

The FSR channel is Hong Kong’s largest foodservice profit sector channel by far, accounting for 64.8% of total sector revenue in 2016. Sales value in the channel grew at a CAGR of 3.5% between 2014 and 2016, and this growth is forecast to accelerate slightly to 2021. The FSR channel has a number of larger chain players, but the vast majority of channel value remains generated by independent operators.

The FSR channel is the 'go-to' channel for out-of-home food consumption in Hong Kong. As a result, the channel has wide appeal amongst a broad range of consumer segments. Visit occasions are varied, and include social outings with friends and family, as well as romantic dates, which drive a high visit frequency to the channel.

Although impulse visits are common, they are not as frequent as in the QSR channel.

Although a wide variety of cuisine types are available in the FSR channel, Chinese dishes dominate, chosen by nearly 50% of surveyed FSR consumers during their last visit. Consumers are, however, keen to try new products and will actively seek out novel and varied operators. Trends evolve quickly in the channel, and Hong Kong has seen a high incidence of international operators locating in the city, often as a ‘launch pad’ into Mainland China or the wider region. As a highly globalized channel, FSR are expected to benefit from increased tourism in Hong Kong.

Since 2014, the channel has seen a rapid rise in delivery provision, mostly driven by the growth of delivery services such as FoodPanda and Deliveroo. The provision of delivery has enabled FSR operators to compete more effectively across channel boundaries for convenience-driven occasions, which had typically been monopolized by QSR. To 2021, this channel line is expected to become increasingly blurred.

Coffee and tea shops summary

The coffee and tea shop channel is relatively small in comparison to the FSR and QSR channel. Sales value in the channel, however, grew significantly ahead of the wider profit sector, rising at a CAGR of 6.6% between 2014 and 2016. Revenue growth is forecast to further accelerate to 2021, at a CAGR of 7.1%.

The channel is dominated by two key operators. Starbucks, which is operated by Maxim's Catering in Hong Kong, accounted for 29.2% of total channel revenue in 2016, and Pacific Coffee Company accounted for a further 14.6%. The dominance of these two chains has made the channel hostile to new entrants and has colored consumers’ expectations of the channel.

Coffee, tea and light food options are commonly consumed in the channel. Iced tea and coffee beverages have also seen strong growth, driven both by Hong Kong's warm climate and sharing on social media.

The channel is notably popular amongst younger demographics, who are more likely to be in full-time employment. These hurried consumers often visit the channel for a break from work, or to collaborate with colleagues. Consumers typically display a preference for outlets that can provide a quiet atmosphere and comfortable surroundings for these visits.

Although longer, sit-down visits are popular in the channel, value from takeaway transactions and drinks-based occasions is growing ahead of the channel, as consumers continue to demand a higher level of convenience. Flexibility is therefore key for coffee and tea shop operators, which are increasingly required to offer a range of products that can appeal to both convenience and relaxation seeking consumers.

Pubs, clubs and bars summary

The pub, club and bar channel accounted for 1.7% of profit sector revenue in 2016. Value growth in the channel was roughly in line with the sector average, with overall revenue rising at a CAGR of 3.9% between 2014 and 2016. The pub, club and bar channel saw relatively strong outlet growth between 2014 and 2016, and was one of just three channels to see its number of outlets increase at a CAGR of over 2.0%. The channel is dominated by independent operators, with no chain controlling more than 1.0% of channel revenue in 2016.

The channel is driven by the consumption of alcoholic drinks, with the majority of pub, club and bar visits made for a drink-based occasion. Beer is the most popular beverage in the channel and is becoming increasingly premiumized by operators, as interest in both locally-brewed and international craft beers rises. Food-based occasions are, however, also popular with a notable share of consumers, and are key to raising and maintaining high average transactions. Atmosphere and proximity to home or work are key factors driving outlet choice in the channel. After-work pub and bar visits with either friends or colleagues are also common in Hong Kong, and can be further encouraged by the offer of group deals and ‘Happy Hour’ discounts.

High rents are impacting profitability in the channel, with most consumers drawn to outlets in high traffic areas. Consumers are, however, willing to track down and travel to operators that can offer a unique product or experience. Pubs, clubs and bars that offer an enhanced experience can therefore lure consumers away from high traffic areas and mitigate against high rents. Looking forward to 2021, the channel is expected to become more experiential because of these factors.

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