Hong Kong's catering operators have started to feel the pinch as the slowing mainland economy has taken its toll on their operations across the border, with Hop Hing Group Ltd seeing weaker growth momentum.

Hop Hing, which operates Yoshinoya and Dairy Queen in north China, recorded same store sales growth at Yoshinoya restaurants of 13.1 percent in the first half of this year, compared to an 18 percent growth a year ago. The growth rate at the Dairy Queen stores was only 1.8 percent, significantly slowerfrom the 9.2 percent in 2011.

"We can feel that the retail market on the mainland has slowed down...as our industry is closely related to the economic environment," Marvin Hung Ming-kei, president at Hop Hing, said in announcing its interim results at a press conference in Hong Kong on Friday.

Hung pointed out that its Dairy Queen stores, which mainly sell ice-creams, are more sensitive to the economic environment than Yoshinoya restaurants.

"During an economic downturn, people are more likely to cut their spending on ice-creams rather than on foods," he said.

Hung said that currently, 75 percent of its total stores are located in Beijing, and according to official statistics, the sales growth of food and beverage during the first seven months in Beijing has slowed down to 8.2 percent from 18.4 percent a year ago.

"It could be challenging for us to maintain the same pace of our same store sales growth in the second half, as the economic growth in China is unlikely to rebound significantly during the period," he said.

Although the growth momentum in the retail market is weak, the company has no plans to slow down its expansion.

Huang said that the firm plans to open 90 new stores in 2012, of which, 51 new stores have already opened in the first half. On June 30, 2012, the company had 239 Yoshinoya restaurants and 129 Dairy Queen stores in operation.

He said that the cost to open a Yoshinoya restaurant is between 1.2 to 1.8 million yuan ($283,532.4), and it takes 400,000 to 700,000 yuan to open a Dairy Queen store. The company's total capital expenditure is 150 million yuan for the year.

Sunny Kwok, analyst at Guotai Junan International, said that along with people's income growth, there is still great potential for the food and beverage industry to grow on the mainland market, and he believes the rising demand in Beijing and other first-tier cities can support more food-chain restaurants.

"But the industry is facing difficulties in the short-term," said Kwok, adding that the industry's revenue growth in the second half could be rather difficult due to the slow economic growth.

He also warns that the gross profit margin for the food and beverage industry in China may be squeezed in the second half, as the cost of raw material is likely to rebound after having decreased a great deal in the first half, while the cost of labor and rent would not decrease.

In the first half, the gross profit margin of Hop Hing Group is 48.7 percent, 0.2 percentage point higher than it was a year ago.

sophiehe@chinadailyhk.com

(HK Edition 09/01/2012 page2)