Trade Advice
Many expats in China at one point or another have dreamed about opening up their own restaurant, café, or other sort of food and beverage operation. Away from home too long, perhaps, their sensitive palates will start to miss the tastes of home, inspiring them to invest in China’s food service market. The largest in the world, China’s food service market offers many exciting opportunities for foodies and savvy business people alike, but foreigners can be daunted by the often bureaucratic process of establishing a business in China. In this article, we provide a step-by-step guide to the process involved.
Step 1: Finding the Right Location
The first article of business is to find the location for the food and beverage operation. This can be particularly tricky, as the investor must lease the restaurant premises before starting the registration process for the food and beverage business. In order to avoid renting out a location that will be denied business registration, investors should take extra precautions to find a business location that can pass inspections. It is often possible to ask for consultations from the Environmental Protection Bureau, Hygiene Bureau, local department of the Ministry of Commerce and the Administration of Industry and Commerce (AIC) to verify certain requirements, like whether the location will be able to obtain a license for the disposal of waste water.
It is often safer to find a location that is currently in use as a food and beverage operation. This will require the investor to pay a transfer fee to the current leaser. The fee will vary by location, but it is usually at least RMB 100,000. If investors instead choose a space that was not previously used as a food and beverage operation, they will need to remodel it to make sure it passes inspections. This option can be more risky, and costly too – redecoration companies tend to charge a service fee of around RMB 10,000 per sq. meter, on top of the costs of materials. Even if the investor acquires the necessary permits and certifications, if residents in the area find the food and beverage operation to be disruptive in the community, the business license can be revoked.
Step 2: Licensing and Registration of the Food Business
Company Name Registration
Before applying for any licenses and permits, it is necessary to apply to register the business name at the local AIC. The AIC will issue a “Notice of Company Name Reservation” after they double check to make sure that the company name has not previously been used anywhere else in the province.
Health and Food Hygiene Licenses
After obtaining a company business license, investors then face the task of health and food safety inspections for their food and beverage operations. For businesses involved in the food and beverage industry in China, there are three main types of food and beverage licenses, and some businesses may require more than one license depending on the scope of their food and beverage business operation:
A Catering License (餐饮服务许可证) is required for catering service providers, both individuals and organizations that are involved in the provision of group meals (food stalls and providers of semi-finished food products are not required to carry this license). If an entity provides catering services in different locations, it must apply for a license for each location.
A Food Production License (食品生产许可证) is required in order to ensure that businesses comply with standards pertaining to manufacturing capabilities and environmental regulations. All staff involved in food service must undergo training approved by the China Food and Drug Administration (CFDA), and there should be a health management system in place in order to ensure the health and hygiene of personnel. The state-level General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) is responsible for the nationwide administration of the food production license.
A Food Distribution License (食品流通许可证) is required for businesses engaging in the sale of food items and is administrated by the AIC. Any entity, both individuals and organizations, that is involved in food distribution (including retail and the wholesale distribution of pre-packaged food and bulk food) is required to acquire a Food Distribution license. However, sometimes when an entity holding a food production license sells food products on the premises of production, it can get around the requirement to hold a food distribution license.
Alcohol Permit Registration
For food and beverage operations that will be serving alcohol, an alcohol permit is required. The permit will be issued after the business license, tax registration permit, and food licenses are acquired, but the intent to sell alcohol should be clearly stated within the application for the health and food hygiene license.
Environmental Protections Approval
Before any catering service can began operation, it must get approval from the local Environmental Protection Bureau. This will include an evaluation of the indoor and outdoor surroundings of the site in order to ensure that the location complies with standards listed in the Directory for the Management and Classification for Construction Items and Environmental Influence.
Step 3: Establishing the WFOE or JV Entity
The steps for establishing the business entity will ultimately depend on how the food business is being registered. In China, foreigners are not allowed to be the sole owners of the restaurant or food business, but they are able to open it as a limited-liability Wholly Foreign Owned Enterprise (WFOE) or through a Joint Venture (JV) with a Chinese citizen as a business partner. In addition, some foreign investors may choose to let the Chinese partner(s) open the business to simplify the registration process, but investors should be aware that this will not allow them to have any legal rights.
The business project will be approved by the Ministry of Commerce, which will issue an approval letter and an approval certificate that can be taken to the AIC to register the company business license.
Risks and Challenges
Investors should also brace themselves to be ready to battle China’s often volatile real estate market in order to develop their business operation. While most restaurants in global cities like New York City and London operate on at least 10 year leases, leases for food and beverage operations in China are often five-year leases, some even just three years. In addition, restaurant owners in top tier cities like Shanghai pay a much larger percentage of their profits on business leasing than they would in other parts of the world. In a survey on restaurant leasing fees conducted by SmartShanghai, it was found that paying 15 percent of restaurant earnings on rent is the norm, with most restaurant owners paying between 10 percent and 20 percent on leasing. In contrast, restaurant owners in some of the world’s most expensive cities, like New York City, pay around 10 percent of their profits in rent. High rental costs can often be reasons why food and beverage businesses go out of business, especially in the beginning, when changes to business strategy sometimes have to be made.
In addition, after signing the lease investors should be ready to spend at least 2 to 3 months in order to acquire all the required licenses and permits to open the food and beverage business. It is sometimes possible to negotiate with the landlord to have a rent-free period of 1 to 2 months after signing the lease, which will be helpful in case the investor encounters delays in obtaining all the appropriate licenses necessary to start operation.
By Kimberly Wright, Asia Briefing
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email china@dezshira.com or visit www.dezshira.com
Aug 28, 2015