Recently, we visited the U.S. to conduct research on the technology and consumer sectors, and I’d like to gradually share some of the insights we gained, starting with the U.S. restaurant industry.
The U.S. restaurant sector has produced a number of top-performing stocks over the years. In the past, there were Starbucks and McDonald’s, while more recently, companies like Chipotle and CAVA have emerged. Notably, since recovering from its food safety crisis in 2018, Chipotle’s stock has seen a maximum increase of nearly 14 times, with an annualized return of 45%. CAVA, on the other hand, has surged by 230% this year, even outperforming Nvidia in terms of growth.
In comparison, top-performing restaurant stocks in the U.S. tend to exhibit long-term growth, while in China, restaurant stocks are more likely to be short-lived successes.
China's restaurant industry operates in a "hell mode," whereas the U.S. restaurant sector is comparatively much easier. The core reason for this stark difference likely lies in two factors:
China's long culinary history, cultural diversity, regional specialties, and people's deep focus on food make it challenging for restaurants to cultivate consumer habits that lead to long-term repeat purchases.
China’s large and densely populated market lowers the barriers for economies of scale in the restaurant business.
Let's focus on the first point without going into too much detail.
China has a rich culinary history and vast geographic expanse, with each region boasting its own distinct food traditions. For example, Sichuan, Cantonese, Shandong, and Hunan cuisines each have unique characteristics, and the range of flavors and dishes varies significantly from province to province, and even from city to city. China's food culture is deeply rooted in its history and regional diversity, resulting in a wide variety of dishes and ever-changing preferences.
The impact of this culinary culture on the restaurant industry is twofold:
Consumers have too many dining options to choose from.
People love trying new things, making it difficult for restaurants to retain customers and encourage repeat visits.
In contrast, the U.S. is an immigrant nation, and its food culture has been shaped by various immigrant communities. The mainstream dining options in the U.S. include burgers, steaks, and pizzas, while many international cuisines have also been introduced by immigrants. However, compared to the complexity and diversity of Chinese cuisine, the overall variety in American food is much simpler, and the history of food culture is relatively short.
For the restaurant business, this simplicity offers a significant advantage: consumers have fewer choices, making it easier for restaurants to retain customers and encourage repeat visits based on a specific type of food, flavor, or brand.
Customer retention and repeat business are crucial in the restaurant industry. If customers frequently switch to different restaurants after a short period, the business can struggle to maintain its sales unless there is a constant influx of new customers (such as in tourist areas). This pattern can lead to a situation where, after an initial profitable period, the restaurant faces declining sales, eventually leading to closure. In China, the annual restaurant closure rate is around 30-40% (in 2023, it reached 50% due to various factors), which is closely related to this challenge of retaining customers.
Regarding the second point, the relationship between economies of scale and population density:
The population density in the U.S. is much lower compared to China. Although 83% of Americans live in urban communities, out of the 19,502 towns in the U.S., 16,410 have populations under 10,000. If we assume an average population of 3,000-5,000 per town, this accounts for about 15-25% of the population. Moreover, there are only 10 cities with populations of over 1 million, which represent just 8% of the total population. Approximately 70% of the population resides in towns with populations ranging from 10,000 to 1 million.
If we look at population density by state and by county, the areas with higher population density are primarily concentrated along the East Coast, West Coast, and in major cities and their surrounding areas. On a county level, most regions have a population density in the range of 100 to 1,000 people per square mile.
This lower density presents a challenge for the scalability of restaurant businesses in the U.S., as businesses need to rely on a larger geographical area or specific urban centers to achieve economies of scale.
Source of data: Joe Chen, Zhihu, "U.S. Population Density and Growth Map"
Source of data: Joe Chen, Zhihu, "U.S. Population Density and Growth Map"
A rough calculation using a 10-mile radius for the typical area of daily activities yields about 300 square miles. Based on the population densities mentioned earlier, where most counties in the U.S. have a density between 100 and 1,000 people per square mile, the population within this 300 square mile area would range from 3,000 to 30,000 people.
Restaurant operations have some fixed costs, such as rent, labor, and utilities. Looking at representative companies, a typical restaurant’s annual expenses range from $1.2 million to $1.5 million. Considering a typical gross margin of 60-70%, a single store would need to generate around $2.5 million in revenue to break even. With an average ticket price of $10-15 for fast food and $15-20 for fast casual dining, the restaurant would need to sell more than 150,000 orders per year, or about 400-450 orders per day.
In terms of dining habits in the U.S., roughly half of meals are cooked at home and the other half are eaten out (although more than 55% of dining expenses are spent on eating out, due to higher average prices, it's close to a 50/50 split). In a 300 square mile area with a population of 3,000 to 30,000, assuming each person has two meals a day (excluding breakfast), the total potential number of daily dining-out orders is 3,000-30,000. Half of these orders could be for restaurants with a social dining component (full-service restaurants), leaving the remaining potential customer base for fast food or fast casual establishments at 1,500-15,000 orders.
If each restaurant needs around 500 orders per day to break even, and the median potential market size is 8,000 daily orders, a restaurant would need to consistently capture at least 6% of the market share to turn a profit. This demonstrates that the barrier to profitably operating a restaurant in the U.S. is relatively high.
In contrast, China’s population scale and distribution are quite different.
Unlike the suburbanization trend in the U.S., China’s population tends to concentrate in the central urban areas of metropolitan regions, where population density is especially high, ranging from 2,000 to 10,000 people per square kilometer.
In 2020, the total permanent population in China's 33 metropolitan areas was 464 million, accounting for 41.6% of the national population.
Based on population movement data from 2010 to 2020, 21 of these 33 metropolitan areas saw faster population growth in their central cities compared to surrounding areas, while in 12 cities, the population expanded more into the outskirts.
In regions where population density reaches 2,000 to 10,000 people per square kilometer, even with a smaller activity radius of 3 kilometers, the area of activity would cover 30 square kilometers, corresponding to a population of 60,000 to 300,000 people. The threshold to reach the break-even scale for a single store is much lower in China, making it easier for restaurants to achieve profitability.
Agglomeration and diffusion of urban agglomerations from 2010 to 2020
Population density of metropolitan areas in 2020
Data source: National Research Center analysis
In recent years, traditional fast food chains in the U.S. have experienced sluggish growth, while fast casual restaurants have emerged as a rising force. Companies like Chipotle and CAVA are prime examples of this trend.
Compared to traditional fast food, fast casual restaurants offer:
Healthier, higher-quality ingredients with better nutritional balance, combined with a variety of sauces that create "complex flavors," making the food more delicious.
Efficiency: Fast casual dining offers speed comparable to traditional fast food. With a wide variety of ingredients and complex cooking processes, preparing such meals at home would be time-consuming and impractical. While fine dining requires significantly more time—often 1-2 hours unless there's a social aspect involved—fast casual dining bridges the gap by providing a quicker experience. In China, the efficiency of both food preparation and service is highly competitive, so the time difference between eating at a fine restaurant and a fast food outlet is not as noticeable.
Price:1.Compared to fine dining, which typically costs at least $20-30 per person, plus an additional 18-20% in tips, fast casual is more affordable.2.Compared to fast food, which averages $10-15 per person but often involves heavily fried and lower-quality ingredients, fast casual offers convenience and speed, along with tastier and healthier options. Priced around $15-20, it provides better value without being significantly more expensive.
Immigration has introduced new flavors to the American food scene and made them popular among mainstream consumers. For example, the significant growth of the Hispanic population has led to the widespread adoption and appreciation of Mexican cuisine.
Since 1990, the percentage of Hispanic immigrants in the U.S. has increased from 9% to 19%.
Fast casual dining, which represents a healthier, tastier, and more convenient option, still has significant room for expansion, with plenty of opportunities for new chain brands to emerge and grow.
In 2023, there are approximately 300,000 fast food restaurants, while fast casual likely accounts for less than 10% of this total. Among these 300,000 fast food outlets, well-known brands like McDonald’s have around 10,000+ locations, and there are many other chain brands such as Wendy's, Burger King, Taco Bell, Subway, Jack in the Box, and KFC. However, in the healthier fast casual space, the major established brands so far include Chipotle, CAVA, and Sweetgreen, indicating that fast casual still has significant potential for growth.
Looking into the future, the limited-service restaurant market, currently valued at around $400 billion, could grow to $700 billion. The healthy fast casual food market, now worth less than $40 billion, could expand to $150 billion. In this scenario, Chipotle could capture 20-30% of the market, and CAVA could secure 10-15%, leaving $80-100 billion of market space for other chained fast casual brands to fill.
Data sources: Technomic, Euromonitor, NPD Group, etc.
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