Chang­ing Menus

Amer­i­can fast food chains in china shift to­ward lo­cal­iza­tion to at­tract con­sumers in the face of strong com­pe­ti­tion

ChinAfrica - - PROS AND CONS - By Li Xiaoyu

Bei­jing res­i­dent Wang Lihu, 37, still fondly re­mem­bers the first time he bit into a hot, crispy piece of KFC fried chicken. It was in 1987, the year when the U.S. fast food gi­ant opened its in­au­gu­ral restau­rant in China, on Qian­men Av­enue, nearby Tian’an­men Square. It was the first time he tried what he calls “West­ern cui­sine.”

“My par­ents agreed to bring me to KFC be­cause I was sick. Since then, I have been vol­un­tar­ily ill from time to time. But as soon as I’m out of KFC, the ill­ness is gone,” said Wang, with a laugh. Feel­ing nos­tal­gic, he

re­calls the long line of cus­tomers who used to stand in front of the restau­rant and the smell of fried chicken that made his mouth wa­ter.

Wang’s ex­pe­ri­ence is noth­ing unique. The first Mcdon­ald’s restau­rant in China opened in Oc­to­ber 1990 in Shen­zhen in south China’s Guang­dong Prov­ince. In one month, the out­let reg­is­tered 226,000 trans­ac­tions with a record turnover of 5.88 mil­lion yuan ($882,600). Qian­men’s KFC restau­rant, for its part, was able to re­cover its ini­tial in­vest­ment of 3.75 mil­lion yuan ($562,800) in just one and a half years.

Ob­servers be­lieve that to a cer­tain ex­tent, this was the “golden age” of Amer­i­can fast food chains in China. They en­joyed im­mense pop­u­lar­ity among Chi­nese con­sumers, who found there an af­ford­able way to ex­pe­ri­ence a cer­tain as­pect of the West­ern way of life. In­deed, their suc­cess was driven by the craze for ev­ery­thing ex­otic and for­eign, and had been one of the sym­bols of China’s open­ing up to the out­side world.

Out of mo­men­tum

But as glob­al­iza­tion, re­form and open­ing up picked up speed in China, U.S. fast food out­lets lost their mo­men­tum. “To­day, KFC is noth­ing spe­cial for me. Some­times I do eat there, but only be­cause it’s good value,” said Wang.

In­de­pen­dent food in­dus­try expert Zeng Hui also be­lieves that “while the U.S. fast food out­lets keep putting out new prod­ucts and mar­ket­ing cam­paigns, for Chi­nese con­sumers, one of their most valu­able added val­ues - the lure of cu­rios­ity - has been lost.”

More­over, as Chi­nese pay grow­ing at­ten­tion to what they are eat­ing; con­sumers are shy­ing away from fast food out­lets, whose prod­ucts are seen as con­tain­ing too much fat and sugar.

As if this was not enough, the rep­u­ta­tion of fast food chains in China has also been tainted by a num­ber of food safety scan­dals. In July 2014, a TV re­port re­vealed that a sup­plier of Yum China - owner of KFC and Pizza Hut - used meat out of its ex­pi­ra­tion date. The fall­out was not long in com­ing: Yum China’s sales dropped 10 per­cent in the sec­ond quar­ter of 2015, more than the de­cline of 8.4 per­cent ex­pected by an­a­lysts, ac­cord­ing to mar­ket re­search firm Con­sen­sus Metrix.

But ac­cord­ing to Ben Caven­der, an an­a­lyst with China Mar­ket Re­search Group, the big­gest chal­lenge for KFC or Mcdon­ald’s comes from in­creased lo­cal com­pe­ti­tion, es­pe­cially with the rise of on­line cater­ing ser­vices. Ac­cord­ing to a re­port by Meituan Waimai, a food de­liv­ery firm, the value of China’s on­line cater­ing mar­ket reached 204.6 bil­lion yuan ($30.7 bil­lion) in 2017, up 23 per­cent year on year. Ac­cord­ing to Yang Wen­jie, an ex­ec­u­tive at Meituan Waimai, this growth orig­i­nates mainly from smaller cities, where there has been a faster in­crease in on­line food or­der­ing com­pared to larger cities. This boom has also been boosted by the pop­u­lar­ity of mo­bile pay­ments: About 60 per­cent of Chi­nese peo­ple have paid for meals with their smart­phones, ac­cord­ing to the Chi­nese Cui­sine As­so­ci­a­tion.

Seek­ing a fresh ap­proach

Struck by a se­ries of scan­dals and fac­ing ever fiercer lo­cal com­pe­ti­tion, for­eign chains are bet­ting on “lo­cal­iza­tion” to re­gain lost ground. One of their as­sets is to add some lo­cal spe­cial­ties to their menu to strengthen cus­tomer loy­alty. That is how KFC’S Bei­jing-style chicken rolls and chicken wings with rice came to be. Even Mcdon­ald’s, whose sta­tus as the Big Mac King seems un­budge­able, could not re­sist this trend. In 2013, the ham­burger gi­ant launched four rice-based prod­ucts for the Chi­nese mar­ket. Three years later, the Golden Arches adapted their menu by adding steamed breads and por­ridge, which are in­dis­pens­able parts of a tra­di­tional Chi­nese break­fast.

The lo­cal­iza­tion strat­egy is not just about chang­ing the menu. To re­duce their op­er­a­tional costs, U.S. multi­na­tion­als are turn­ing to the lo­cal mar­ket to en­sure their sup­ply. When KFC en­tered China in 1987, it im­ported al­most all raw ma­te­ri­als from abroad, in­clud­ing salt. Nearly 15 years later, the sup­ply lo­cal­iza­tion rate had al­ready reached 95 per­cent, with more than 1,400 prod­ucts sourced from the lo­cal mar­ket, said Han Ding­guo, then Vice Pres­i­dent of Yum China, in 2003.

In ad­di­tion, the world’s big­gest fast food chains are now ex­pand­ing their pres­ence to small and medium-sized Chi­nese cities, of­ten seen as great driv­ers of eco­nomic growth. In fact, these third and fourth tier cities will have 45 per­cent of Mcdon­ald’s out­lets in China by 2022, ac­cord­ing to a state­ment re­leased by the fast food group in Au­gust 2017.

Mean­while, the group’s man­age­ment con­firmed its part­ner­ship with Chi­nese in­vest­ment firm CITIC Group and U.S. in­vest­ment fund Car­lyle, who will jointly ad­min­is­ter the Mcdon­ald’s Chi­nese fran­chise. An­a­lysts be­lieve that for the Illi­nois-based group, fran­chis­ing all of its ac­tiv­i­ties in China, while keep­ing a mi­nor­ity stake, is a more ef­fec­tive way to de­velop its net­work in the Chi­nese mar­ket - seen as cru­cial - while con­sol­i­dat­ing its prof­its.

Mcdon­ald’s is not the only one look­ing for a new busi­ness model. Yum China also aims at be­com­ing a pure fran­chisor. This shift will sig­nif­i­cantly re­duce op­er­at­ing costs, and be­came im­per­a­tive fol­low­ing the rise of lo­cal com­peti­tors, said an­a­lyst Ben Caven­der.

while U.S. fast food out­lets keep putting out new prod­ucts and mar­ket­ing cam­paigns, for chi­nese con­sumers, one of its most valu­able added val­ues - the lure of cu­rios­ity - has been lost. ZENG HUI In­de­pen­dent food in­dus­try expert

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Chi­nese con­sumers have de­vel­oped an en­dur­ing taste for fast food

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