5 challenges for opening a restaurant in China

China’s fast growing economy has a lot of people dying to take part, and many are doing so quite successfully. Take the food and beverage industry as an example. How many times has the sight of a jam-packed Western restaurant got you dreaming about opening a foreign restaurant yourself? Many expats in China have turned this dream into a reality, while others have failed miserably. Here are five challenges to opening a restaurant in China. You will most likely face all of them, so it is good to be prepared.

1) Ownership and partners

First of all, you have to decide what type of business entity to create. Many foreign investors choose to establish a Joint Venture with a local partner since it is the fastest means of setting up a business in mainland China. However, this may lead to its own difficulties, as Michael Amtmann states in his book, Intercultural Problems Within Joint Ventures in China, challenges can and often do arise when radically different cultures are expected to cooperate.

If not a Joint Venture, many foreign investors choose to set up a Wholly Foreign-Owned Enterprise because it gives the owners greater control over the business and allows them to avoid the challenges of dealing with a local partner. However, people who take this route will face a long and expensive process and will likely be confronted by a multitude of hurdles due structural reforms, weak market structures, poorly specified property rights and institutional uncertainty in China. Furthermore, knowledge concerning government policies, local business practices, operational conditions, and so on, could be difficult for a foreigner to ascertain. Having a local partner is an invaluable tool in facing these challenges, particularly when it comes to reducing political risk and/or achieving political advantages, but if you don’t, then consider hiring a Chinese lawyer to help you.

Whomever you are opening the business with, whether they are local, like-minded and/or a close friend, remember the first several months of a new restaurant will be incredibly stressful and the pressure often leads to arguments and puts serious strain on relationships.

2) Customer base and eating habits

Next you need to think about your customers. Since there are only so many foreigners in China, it is important to consider the local market, because after all, why else would you want to do business here? A lot of unsuccessful foreign restaurants forget to thoroughly consider the Chinese community and fail to satisfy them with their menu offerings. Remember that we can’t rely on the locals to expand their culinary horizons to fit the menu (e.g. I don’t eat dog today and I most likely won’t eat it tomorrow either). The Chinese are relatively conservative when it comes to food even though they seemingly eat everything. I’ve met people in Wuhan who are reluctant to eat Shanghainese cuisine. I’ve dined with Chinese people at an authentic Italian restaurant while they compared each dish to something Chinese. Not only do they compare the taste, but the price as well, because as we all know, Chinese people love a bargain. Why spend 100 RMB on a wood-fired pizza when I can get “the same” Chinese shaobing for a mere 5 RMB on the street corner? In any case, this hurdle can probably be cleared if you take the time to localize your menu, and hope that little by little they will start trying your more unique offerings.

The next point worth discussing is the misconception about the way Chinese people feel about foreign food in general. A crowded McDonald’s, KFC, Starbucks, or Pizza Hut is a common sight, but don’t let it give you false hope. I came across an online comment from a Chinese netizen confessing that she can’t stand the thought of eating steak or cheese or anything else considered to be ‘Western’ in China, but every time her friends ask her to go out to eat she will always choose Western food over Chinese. The popularity of Western food has little to do with the taste and more to do with associated status. In the opinion of some Chinese, dining at a Western restaurant welcomingly labels you as middle class with money to spend. So even though they are really craving local delicacies, they will choose to spend more money on the fashionable Western option that they don’t even enjoy. Because after all, losing face is a big no-no here.

3) The cost factor

Money will always be a challenge when opening a restaurant in China, underestimating this factor will lead to the failure of your restaurant. Not only do you need to consider the initial investment, but you’ll also need to have enough working capital to operate the business in the beginning stages. This will eliminate the need for personal cash injections to cover expenses and unforeseen costs.

You also need to consider your suppliers, as this is an area where a lot of money can be lost, especially for foreigners in China. If you’re paying high prices for high-quality products, be sure what you’re getting is the real thing. You should find someone trustworthy who can read Chinese to double-check the receipt after each delivery and make sure no one is benefiting from your penny. If there are rare ingredients necessary, importing is an option if it is worthwhile and can be done while still keeping menu prices competitive.

Related to the cost factor is the overall size of the restaurant, and this is where a lot of people go wrong. The rent, wait staff, and utility expense required by a big location will make it hard to get ahead. After choosing the location it is crucial to make sure that it can legally be used as a restaurant. This can be a big deal if the investor leases the premises before setting up the business thereby risking becoming trapped in a contract if the location is not suitable. Furthermore, you’ll need to consider the cost of transferring the property into your name if it was formerly a restaurant and the cost of designing and remodeling a new space.

Many successful expatriate restaurant owners emphasize the importance of starting small. The owners of a small cafe-style restaurant in Beijing started with only 60 square meters of space, allowing them to learn the Chinese market as they went without taking on too much at once. They also endured three months of hard labor completing the remodeling work all on their own.

4) Cultural considerations

Operating a business in a foreign country has many inherent challenges that can be managed with appropriate consideration and planning. First off, the language barrier in China will put any foreigner at an overwhelming disadvantage. Even if you have a Chinese partner to assist you with communications, you will always need to rely on translations and could potentially miss out on important discussions and decisions.

The next thing to consider is the involvement of your Chinese employees in the kitchen. They are used to cooking the Chinese way and will find a new style somewhat difficult to learn, but with close supervision they will hopefully pick it up. As Chef Youssef Escobar, owner of Beijing’s Argana Moroccan Cuisine, says when speaking of his experience, “In China you might burn garlic but in Mediterranean food we never do that. I’ve had a hard time getting some people to realize this.”

Another important cultural consideration when opening a restaurant in China is that China doesn't exactly welcome small foreign businesses targeting its consumers. This creates basically an open invitation for people such as landlords, officials, fire chiefs, etc. to come running with their hands out, again bringing up the importance of a Chinese partner and their guanxi. The co-founder of a Beijing cafe puts it simply when speaking of guanxi: “In China, relationships are always first, then your sense of morals and then the law”. Another says very matter-of-factly that it doesn’t matter what you sign, relationships are everything here. However, don’t put all your eggs in the guanxi basket, many businesses have struggled because they relied too much on guanxi without having adequate legal protection to back them up.

5) Legal/visa/business issues

One expat who tried to open a restaurant in China and failed miserably found that his biggest mistake was his lack of experience. If you’re a veteran of the industry who really knows the restaurant business, the city, the supply chain, and the market niche well, and you have the discipline and the energy it requires, you probably won’t have a problem. But for anyone who has not at least managed a restaurant, you will be at a significant disadvantage. Of course ambition is a good first step, but it’s no replacement for experience. As a chef in Beijing puts it, “Just because you are a foreigner doesn’t make you qualified to open a restaurant. Please do us all a favor; if you don’t have any F&B experience then just stay home”.

Legally-speaking, if you abide by the law and avoid cutting corners you should be fine. Just be sure not to leave anything as purely an oral agreement. If you have a solid contract and all agreements in writing, you will be adequately protected should any legal battles ensue.

And as far as visa issues go, it will take more than 3 months to complete the business registration and you won’t be able to apply for a work visa or residence permit before obtaining this. A tourist visa won’t give you enough time without needing to leave the country to extend it, so a business visa is the best choice while you’re setting up shop in China. And after things are up and running, make sure you’re willing to eat, sleep, and breathe your business for awhile. The first couple of years (if you’re lucky enough to make it that far) is going to be filled with long hours and little money, so don’t get too cozy in that seat by the bar.

In closing
Opening a foreign restaurant in China can be an extremely difficult undertaking, but if you have a realistic business plan and are prepared for any setbacks, you’ll hopefully persevere. And if you hit hurdles just remember this advice from a restaurant owner in Nanjing: “gifting cartons of good cigarettes can help speed to up the process.”