China Daily (Canada) - - SHANGHAI -

Faced with stern com­pe­ti­tion from lo­cal ri­vals, a slow­ing China econ­omy and healthy din­ing trends, McDon­ald’s and its fiercest ri­val Yum Brands have been forced to re­think their strate­gies in the world’s largest fast food mar­ket hewei@chi­nadaily.com.cn

Found at al­most ev­ery ma­jor street cor­ner across thou­sands of cities in China, McDon­ald’s and fast food out­lets un­der Yum Brands such as KFC and Pizza Hut have long en­joyed a run of su­per-sized growth as lo­cal con­sumers craved a taste of Amer­i­cana.

The two fast food gi­ants used to de­fine China’s fast food seg­ment, with the du­op­oly ac­count­ing for more than half of the mar­ket share in a coun­try that has the world’s largest food ser­vice in­dus­try.

It is hence un­sur­pris­ing that both com­pa­nies have now de­cided to shed their once lu­cra­tive Chi­nese as­sets at a sim­i­lar tim­ing, leav­ing peo­ple won­der­ing whether their dom­i­nance over the past two decades has in­evitably faded.

Af­ter a pro­longed strug­gle to at­tract buy­ers, McDon­ald’s an­nounced in Jan­uary that it would sell 80 per­cent of its shares in the Chi­nese main­land and Hong Kong to Chi­nese in­vest­ment con­glom­er­ate CITIC Group, CITIC Cap­i­tal and Car­lyle Group. The move will give the buy­ers a con­trol­ling stake in the brand’s chains in the re­gion.

Phyl­lis Che­ung, CEO of McDon­ald’s in China, said the move would help un­lock more cap­i­tal as part of the com­pany’s turn­around plan. She sees the fran­chise model as an ef­fec­tive way to spur growth po­ten­tial in China’s third- and fourth-tier cities, and im­prove flag­ging per­for­mance in ex­ist­ing stores.

“Fi­nan­cial strength” and “un­matched un­der­stand­ing of the lo­cal mar­ket”, said Che­ung, were the rea­sons the fast food gi­ant de­cided to pick the CITIC-led con­sor­tium.

“CITIC’s real es­tate net­works and strate­gic al­liances with de­vel­op­ers in­clud­ing Vanke and China Re­sources may po­ten­tially open up more op­por­tu­ni­ties,” said Che­ung.

Mean­while, Yum has also de­cided to sep­a­rate its Chi­nese en­ti­ties, al­beit us­ing a dif­fer­ent ap­proach: ini­tial pub­lic of­fer­ing. In Novem­ber, the fast food gi­ant spun off its China busi­ness in a New York Stock Ex­change list­ing, with Yum China be­ing a li­censee of its par­ent com­pany.

The float­ing plan would give Yum China, which man­ages 7,500 KFC, Pizza Hut, Lit­tle Sheep and East Dawn­ing stores, the flex­i­bil­ity to re­act to the fast-chang­ing mar­ket, said CEO Micky Pant.

De­spite their siz­able busi­nesses, both firms have felt the pinch as sales stag­nate in a coun­try that once boosted the bal­ance sheets. Bloomberg data showed that Yum’s China unit had ac­counted for half of the com­pany’s global sales by 2012, but growth has since stalled.

For McDon­ald’s, its thirdquar­ter op­er­at­ing in­come in high-growth mar­kets, which in­cludes China, reg­is­tered less than 15 per­cent of to­tal sales in 2016, ac­cord­ing to its fi­nan­cial state­ment.

Yum’s mar­ket share had also dropped pre­car­i­ously from 40 per­cent in 2012 to 23 per­cent in 2015. McDon­ald’s share slid as well, from 16.5 per­cent in 2013 to 13.8 per­cent in 2015, said a con­sul­tant at Euromon­i­tor In­ter­na­tional.

Mean­while, up­start ri­vals have been quick to wrest mar­ket share by an­swer­ing the call from con­sumers for fresher and health­ier food in Asian fla­vors. Ac­cord­ing to mar­ket re­search firm Min­tel, tang­bao (steamed dumplings), Ja­panese noo­dles and steamed-rice meals are quickly gain­ing pop­u­lar­ity in China.

Min­tel also fore­cast that in­de­pen­dent brands will ex­pe­ri­ence a com­pound an­nual growth rate of 10.4 per­cent while fast food chains will reg­is­ter only 4.7 per­cent. It at­trib­uted this to the fact that in­de­pen­dent out­lets are able to faster adapt to the healthy din­ing trend.

The eco­nomic slow­down in China has com­pelled the pair to re­po­si­tion their strate­gies. Be­sides hav­ing iden­ti­fied break­fast of­fer­ings and dessert kiosks as a growth cat­a­lyst in fast-paced cities like Bei­jing and Shang­hai, the two fast food gi­ants also have their sights trained on China’s hin­ter­lands which they be­lieve are piv­otal to fu­ture growth.

McDon­ald’s is ex­pected to de­pend on its Chi­nese part­ners to pen­e­trate the low­ertier cities, with a goal of adding 1,500 stores over the next five years.

“Ex­pan­sion re­quires a lot of re­sources, in­clud­ing find­ing suit­able lo­ca­tions, ne­go­ti­at­ing the rent and find­ing the right type of land­lord. CITIC Bank’s 1,400 branches across China would be able to bet­ter share re­sources and help with the ex­pan­sion,” said Zhang Yichen, chair­man and CEO of CITIC Cap­i­tal, who will chair McDon­ald’s China busi­ness.

Yum is rolling out an even more am­bi­tious plan to open 600 new stores yearly over five years. Pant said that the main fo­cus of this ex­pan­sion will be on lower-tier cities and transportation hubs like rail­way sta­tions and air­ports.

Qi Xiaozhai, a senior busi­ness con­sul­tant for the Shang­hai Mu­nic­i­pal Com­mis­sion of Com­merce, said that quick ser­vice restau­rants still have much room for growth in lesser de­vel­oped cities and town­ships in China be­cause they are still a nov­elty. In con­trast to big­ger cities where con­sumers see fast food out­lets as a quick­fix for hunger, quick ser­vice restau­rants in lower tiered cities are still pop­u­lar venues for so­cial­iz­ing.

“We have de­cided to in­clude more play­grounds for chil­dren in our restau­rants in lower tier cities as we’ve

de­liv­ery plat­forms me.

“Chi­nese con­sumers are pam­pered by the faster, wider and cheaper choices of food in China. Mean­while these sites also have health­ier op­tions which are be­com­ing more pop­u­lar among all de­mo­graph­ics to­day,” said Rein.

like ele.

For the past two decades, fast food was seen as hip, fash­ion­able and for­ward­think­ing, but this is no longer the sen­ti­ment as an in­creas­ing num­ber of con­sumers are jump­ing on the healthy eat­ing band­wagon.

A McKin­sey sur­vey last year showed that Chi­nese cus­tomers’ adop­tion of Western fast food had dropped from 67 per­cent in 2012 to 51 per­cent in 2015. The con­sump­tion of car­bon­ated soft drinks and ice cream had also fallen by 21 per­cent and 7 per­cent re­spec­tively.

Zhang Jianchen, 34, an in­sur­ance bro­ker in Shang­hai, said that she can­not even re­mem­ber the last time she stepped into a KFC or McDon­ald’s.

“I won’t eat ham­burg­ers or fries if there’s an al­ter­na­tive. Just think about the calo­ries these foods have,” said Zhang, who ex­er­cises three times a week and re­frains from con­sum­ing fried food.

In this age when con­sumers are de­mand­ing more in­for­ma­tion about in­gre­di­ent sourc­ing and food prepa­ra­tion, greater trans­parency will be cru­cial for fast food out­lets to main­tain their mar­ket share, said in­dus­try ex­perts.

“For fast food brands, em­brac­ing the trend of healthy and ex­pe­ri­en­tial din­ing is the key to growth in the near fu­ture. In the mean­time, stay­ing in­no­va­tive can help to win over young con­sumers,” said Sum­mer Chen, re­search an­a­lyst at Min­tel.

To this end, the new Taco Bell store in Shang­hai fea­tures an open- con­cept kitchen that puts its in­gre­di­ents and food prepa­ra­tion pro­cesses in full view of the din­ers.

Yum and McDon­ald’s will face strong com­pe­ti­tion from their lo­cal ri­vals. East Dawn­ing, a fast-food chain un­der Yum known for its health­ier, Chi­nese-style of­fer­ings, saw its pres­ence shrink to just 15 stores across China, ac­cord­ing to its IPO prospec­tus. In con­trast, its main ri­vals Zhen Kungfu has 603 out­lets while Da­ni­ang Dumpling has 465.

Rein be­lieves that the likes of McDon­ald’s and Yum can still ex­pe­ri­ence solid growth in the years to come, though it won’t be as pro­lific as dur­ing the 1990s. He pointed out that chains like Star­bucks prove that the ma­tur­ing mid­dle class in China will al­ways seek out au­then­tic Western din­ing ex­pe­ri­ences.

“Chi­nese con­sumers want to try some­thing dif­fer­ent and feel like they are so­phis­ti­cated and part of the global elite. That’s what Star­bucks gives them. That’s what Western brands need to tap into,” he said.


Health­ier Asian foods such as steamed buns have won over Chi­nese con­sumers as lo­cal din­ers seek out food with­out un­de­sir­able in­gre­di­ents like preser­va­tives.

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