Shanghai Street View: Fatal Feasting
A popular restaurant chain called Memory tops the menu of this week’s Street View, with word that the local eatery is living up to its name with a sudden closure that’s sending it into the history books. Memory’s particular form of untimely death is all too common in China these days, usually occurring when an owner abruptly shutters his business and flees after piling up huge piles of debt.
The story was even more personal for me, since I was just introduced to the chain a few weeks ago when a friend suggested it for dinner one evening. I was so impressed by its innovative take on traditional Shanghai cuisine, combined with its nostalgic decor and extremely reasonable prices, that I even went back for a second helping just last week. But it seems the low prices that were one of its biggest draws were also Memory’s downfall, leading to the sudden closure.
As a longtime financial reporter in China, I find this kind of story far too common here, even though it’s far rarer in the west. Restaurant closures are also quite common in my native United States, but that’s not the real issue here. Instead, Memory’s closure reflects the Chinese obsession with market share and a desire to gain customers at any cost, even when it means selling products at a loss.
Western businesses often use similar promotions and gimmicks when they’re getting started. But if profits don’t come within a year or so, usually they’ll cut their losses and close things down. That market-driven reality is often absent in China, where entrepreneurs seem addicted to having lots of customers and gaining market share, even when that often means losing big money for years.
The Memory story burst into the headlines earlier this week, when the chain’s owner abruptly shuttered his 6 Shanghai restaurants overnight. Some angry customers were particularly dismayed, since the chain had offered a series of aggressive promotions just last month, including one that gave 1,000 yuan worth of free dining for buyers of a 1,000 yuan stored value card.
I’m often wary of such promotions that look just a tad too generous, as they do seem to signify a company in desperate need of cash. But of course that’s easy to say in hindsight, and no doubt many duped customers who thought they were getting a bargain are now blaming themselves for not recognizing the generosity as a sign of distress. One such irate customer penned his own notice that appeared in news reports, calling on other victims to join a QQ group to demand the return of their hard-earned money.
Credit Squeeze
The reports say the chain’s owner stopped paying salaries about 2 months ago, and some of its suppliers also said they stopped receiving payments about the same time. They also point out that Memory was doing good business before the closure, and I can personally testify that the restaurant I visited in Hongkou District was bustling during my 2 recent visits. But “good” is a relative term, and simply having lots of customers doesn’t necessarily mean your business is thriving, especially if you’re losing money on each dish that you serve.
This kind of obsession with having lots of business, even if means losing money, seems unique to China’s young market economy. The mentality regularly shows up on a larger scale in many emerging industries, leading to China’s nonstop series of boom-bust cycles that one seldom sees in the west.
The latest of those is now taking place in the nation’s smartphone industry, where dozens of companies have piled into the space in just a couple of years. That’s resulted in lots of phone sales, but also cut-throat competition that has sent most brands into the loss column. I have no doubt that many of those names will also become memories two or three years from now, leaving a much larger mess including thousands of laid-off employees, millions of dollars in unpaid wages and debt, and millions more in wasted investment.
All of that brings us back to our own Shanghai Memory, which is itself one of a growing number of themed restaurant chains here in town targeting value conscious young consumers. Others in that genre include the popular 70s Restaurant, and Grandma’s Home, both featuring similar formats of very reasonably priced food in a homey environment, and often long lines to get a table.
It’s hard to know who is making money among these chains, since most are private and many of their owners undoubtedly share a similar mentality to their peer at Memory, who remains missing at the moment. But if I were advising diners, I would strongly recommend they avoid stored value cards for any of these chains, and to be especially wary when new promotions appear that seem too good to be true.
