How KFC and McDonald’s conquered China’s consumers – Ashley Dudarenok

 

Ashley Dudarenok

In the early days, KFC and McDonald’s tried to conquer China’s consumers with a standard US menu. Now diversification and localization have become a key feature in the success of both fast-food chains, although the road has not been without bumps,  says marketing expert Ashley Dudarenok to the Panda Daily.

The Panda Daily:

While these food items may seem too peculiar to appear on the menus of these major US chains, they could signify a broader adjustment in strategy from these food giants, said analysts who spoke with Pandaily.

“These are diversification strategies, trying to seize other markets such as the breakfast market,” Ashley Galina Dudarenok, long-time author on Chinese marketing strategies and founder of social media agency Alarice and marketing training company ChoZan, told Pandaily.

The total consumption of breakfast food by Chinese consumers is expected to increase from 1.3 trillion yuan ($201 billion) in 2015 to 1.9 trillion yuan in 2021, according to marketing intelligence agency Mintel. By 2021, sales of breakfast food are expected to exceed 840 billion yuan.

In early 2008, KFC added youtiao, or fried dough sticks, its first Chinese street food snack to its menu. Soon after, other breakfast items, including tofu, congee, rice balls, egg rolls and tea leaf eggs were included. In fact, KFC’s congee is the chain’s number one seller at breakfast in China, according to Harvard Business Review.

McDonald’s followed closely, attempting to also capture the breakfast market. In addition to youtiao, soy milk, and congee, it also offers steamed bun burgers.

“These strategies have been relatively successful,” Dudarenok said, but increased competition in the breakfast market has prompted McDonald’s and KFC to go hyper-localized, a targeted form of marketing that focuses on reaching local, motivated buyers — hence roujiamo and hot dry noodles.

While McDonald’s has been accused of butchering the Shaanxi street-food staple due to inconsistencies between what was advertised and the actual product — with angry net users flooding Weibo with photos of two dry buns with a less-than-generous filling, KFC’s 7 yuan hot dry noodles have really resonated with people, Dudarenok said.

“KFC’s take on the Wuhan delicacy has really expanded consumer expectations. As breakfast food providers, KFC and McDonald’s are not only chasing hot trends, but also launching new products regularly, attracting consumers to keep coming back to try new things,” she added.

More at the Panda Daily.

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How the trade war can turn sour for American brands - Shaun Rein

Shaun Rein

McDonald's, Starbucks, KFC and Burger King are some of the American consumer brands in China who can get burned as the trade war heats up further, says business analyst Shaun Rein, author of The War for China's Wallet: Profiting from the New World Order, to the South China Morning Post.  

The South China Morning Post.

China is a prime market for US empires like Starbucks, KFC and McDonald’s, while Burger King recently announced plans to expand its presence there. 

“There is a huge risk in general for American brands, but especially for iconic ones like Starbucks,” said Shaun Rein, managing director at China Market Research Group. “With increased competition, combined with nationalism, and the trade war as a back drop, it is very possible Chinese consumers will boycott McDonald's and Starbucks and instead go to Chinese brands.” 

KFC makes up China’s largest network of restaurants, with 8,200 outlets and is the largest fast-food brand. It had a 5.2 per cent share of the market, worth US$6.63 billion, last year. Illinois-founded McDonald’s was in second place with a 2.4 per cent market share worth US$3.14 billion, and Florida-based Burger King was fourth, with 0.6 per cent, according to market research provider Euromonitor International... 

In April, messages emerged on Chinese social media urging people to boycott American firms. Little impact has been seen so far, said Rein, but “if this trade war gets worse I could very easily see the government targeting Western brands.” 

“So far in this trade battle the Chinese government have been very measured. They have criticised Trump but not American companies,” he said. “However, we have started to see in the last two weeks more Chinese getting angry at America because they view this is as no longer a trade war but a containment strategy – that Trump is using it as an excuse to contain China’s long-term economic rise, rather than iron out trade issues.

“These companies could come in for a rough time.” 

Florida-based hamburger restaurant Burger King has big plans. Daniel Schwartz, CEO of parent company Restaurant Brands International, recently said they plan to focus their global expansion on China. They intend to open more than 150 branches of the Canadian coffee chain Tim Hortons, for the first time. 

“It is unlikely timing for them, but the reality is that you have to plan five to 10 years down the line. The hope is that the trade war will pass over the next six to 12 months and you need to go where the growth is,” said Rein.

More at the South China Morning Post.

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How brands can overcome political problems - Tom Doctoroff

Tom Doctoroff

Cartoon Peppa Pig was the latest to get into China's political crosshairs, but it was not the first and will not be the last, says branding expert Tom Doctoroff. For Mumbrella Asia he gives a quick overview of those problems, and some tips to avoid them, and limit the damage when you get caught.

Tom Doctoroff:

But, once anger abates, normalcy returns. Chinese consumers are even more pragmatic than nationalistic. Superior value always wins the day. 

That said, there is no room for complacency. 

The best armor is a compelling and well-defined brand purpose, a consistent long-term relationship between consumer and brand that underpins all subsequent engagement with that brand. It articulates a brand’s calling and how it contributes to consumers’ lives. 

SK-II overcame its scandal by elevating the brand’s purpose from functional anti-aging to an emotive “power to change your destiny.”  It resolved a conflict between women’s desire to both conform to conventional standards of beauty and escape the confines of societal expectations. The brand’s efforts were multidimensional. For example, it created a social movement to arm “left behinds” – unmarried women over the age of 27 – with the confidence to be beautiful at any age. 

Brands must also be “customer obsessed”. 

In an era of consumer empowerment fueled by technology, experience is king. From a delivery app that reveals courier location to facial recognition that generates tailored menu recommendations, KFC occupies a high ground of “seamless personalisation” within the quick service restaurant category. 

Starbucks has overcome media brouhahas about tainted meat and price gouging. But business is booming – there are more than 3,000 stores across the PRC – because the brand offers inspired customer experience, not just coffee.

More in Mumbrella Asia.

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Why the Chinese censor might not like my book - Shaun Rein

Shaun Rein

How to make money in China, and how the country works as a powerbroker are the key subjects of The War for China's Wallet: Profiting from the New World Order by author Shaun Rein. For NPR he tells what companies are doing well, but also why the Chinese censor might ban his book, as they did with previous ones.

NPR:

Brancaccio: Now, international companies have a huge stake in figuring out how to crack this, and which companies are doing better do you think, Shaun, which are doing worse in understanding where China is going? 

Rein: I think you see companies like Starbucks are doing really well. Apple's also doing very well. For both companies, China is their largest market out of the United States. Another great example would be KFC — over 50 percent of their global revenue comes from China. So these companies are keeping their core brand DNAs, but they are localizing to fit the needs of the Chinese consumers. So for instance, with Starbucks, in the United States, I believe about 80 percent of their sales are takeout. In China, about 80 percent of their sales are dining in, because Chinese like to go feel part of an American culture, feel like they're part of a globally sophisticated elite, and they're able to do that by having coffee. Luxury in a cup. 

Brancaccio: Before we go, I want to bring up something Shaun, I don't know if it's a sore subject, but I remember a couple of books ago, you wrote the book "The End of Cheap China." That was not embraced in China, that book. 

Rein: That book was actually banned in China. The Chinese government didn't like it because it talked about local corrupt officials that were protecting the red light districts and really stealing from everyday Chinese. So that book was banned in the country. 

Brancaccio: Getting any feedback on the new one? 

Rein: The state-owned media has gone quiet on me. When they first heard that I was writing this book, "The War for China's Wallet," they wanted to interview me and profile me. After they saw the advance media copies, they stopped returning my calls. So I'm expecting that this book is going to get banned, too. And I'll get a little bit of heat in the coming months. 

Brancaccio: What do you think, what's so controversial from the Chinese perspective about what you've just been talking about? 

Rein: I think that the government doesn't want people to know the framework that they punish other countries and companies if they don't follow what they want. So I mean, if you look at it, when Liu Xiaobo won the Nobel Peace Prize, China blocked imports of salmon from Norway. Overnight, that dropped from about 80 percent market share down to zero percent.

More in NPR. Shaun Rein is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

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How to make money in China - Shaun Rein

Shaun Rein

Business analyst Shaun Rein, author of The War for China's Wallet: Profiting from the New World Order explained at the Hong Kong Foreign Correspondents Club how foreign companies become winners and losers in China. The “methodical, systematic plan” to garner support for the One Belt, One Road initiative was the result of a “divide and conquer” strategy on the part of the Chinese government, he said.

The Hong Kong Foreign Correspondents Club:

“China is no longer a cheap place to do business. The cost of doing business is crazy high,” he said at the December 12 club breakfast. 

Rein pointed out that foreign brands including KFC and Starbucks make a huge profit in China. But he warned that multinationals were increasingly adhering to the political goals of Beijing in order to operate there. Publicly backing the One Belt, One Road initiative – President Xi’s development strategy to establish trade routes between Eurasian countries – is one way of staying in favour with the Communist Party. Those who speak out against China, said Rein, risk economic punishment or outright banishment. He gave the example of the Philippines, whose mango imports to China were blocked after an international tribunal on territorial disputes ruled in favour of the Philippines. The block was lifted once Rodrigo Duterte came to power in the Philippines and declared allegiance to China over America. 

“The theme of the book is that China punishes and rewards countries,” Rein said. But he added that now China has also started punishing foreign companies for the actions of their countries’ governments, citing South Korea’s Lotte Group, which provided land in South Korea for the U.S. THAAD missile system. 

Rein said the “methodical, systematic plan” to garner support for the One Belt, One Road initiative was the result of a “divide and conquer” strategy on the part of the Chinese government. 

He predicted that multinational financial services would continue to suffer in China, but that foreign insurance companies would flourish, as would wealth management.

More at the website of the Hong Kong Foreign Correspondents Club.

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McDonald´s also sells its China operation - Ben Cavender

Ben Cavender

In line with expectations, McDonald´s has sold a controlling stake of its China and Hong Kong operation to private investors, after competitor Yum did the same last year. With the new financial resources, the China operation can improve fast, says Shanghai-based retail analyst Ben Cavender to Bloomberg.

Bloomberg:

Oak Brook, Illinois-based McDonald’s and rival Yum China Holdings Inc., which owns the KFC and Pizza Hut brands in the mainland, are combating rising domestic competition as they fight to retain middle-class Chinese consumers who increasingly demand high-quality and healthier dining options. The fast-food giant is also looking at further deals in markets such as South Korea, Japan and Southeast Asia as it streamlines its sprawling global operations. 

“Citic and Carlyle’s resources will allow McDonald’s to expand rapidly and refurbish old restaurants, which is expensive to do,” said Ben Cavender, a Shanghai-based analyst at China Market Research Group. “Given that McDonald’s lags behind KFC in terms of store count in China, we can expect them to expand aggressively and invest heavily.” 

Yum China Holdings and Starbucks Corp. plan to add about double the number of stores -- as many as 3,000 in China -- over the same period. 

Under the deal, Chinese state-backed conglomerate Citic and Citic Capital Partners will jointly take a 52 percent stake, while Carlyle will hold 28 percent. 

While Citic and Carlyle are paying a “substantial price,” for 20-year franchise rights, the food and beverage chains are “cash machines,” Cavender said. In contrast, Yum China licensed the KFC and Pizza Hut brands from Yum! Brands Inc. for 50 years, with automatic renewals that could make it possibly indefinite.

More in Bloomberg.

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China spin-offs can add much value to share-holders - Shaun Rein

Shaun Rein

Yum spinning off its China operation attracted most attention, but the model of selling a well-established China operation is a model that can generate a lot of value, at least for the share-holders, says business analyst Shaun Rein in Bloomberg.

Bloomberg:

Yum China has issued 386 million shares at $24.36, which puts its valuation at around $9 billion, according to New Jersey-based research firm Edge Consulting Group. 

“When their China operations get so big and are clearly catering just to the China market, splitting off could unlock a lot of value for shareholders,” said Shaun Rein, Shanghai-based managing director of China Market Research Group. “If I were an activist hedge fund investor, I would be looking at carving out brands within large conglomerates that are China plays.” 

Doing so allows Yum’s management of the China business to tailor its operations and products more swiftly to changing local conditions, such as the menu preferences of diners in different parts of the country, mobile-based payments systems, hiring and other factors. It also helps tap Chinese investors willing to pay high premiums for a stake of an international brand’s China operations. Yum sold a combined $460 million stake in its Chinese business to Primavera Capital Group and an Alibaba Group Holding affiliate, Ant Financial Services Group, in September. 

In recent years, Yum has ceded market share to local competitors because it was slow to react to market changes, said Rein. 

“They didn’t make corporate decisions quickly enough, such as in adopting mobile payments, or adapting to consumers wanting more premium offerings,” said Rein. “Their ability to deal with the more complex environment here was held back by the lack of knowledge, the slowness of the U.S.”

More in Bloomberg.

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Why Yum, Starbucks are lagging in China - Shaun Rein

Shaun Rein

Getting traction among China´s picky consumers is one thing, keeping it up is another. Larger foreign firms like Yum and Starbucks have been slow in picking up consumer trends in China, says business analyst Shaun Rein to Bloomberg, for example in their adoption of fintech developments.

Bloomberg:

In recent years, Yum has ceded market share to local competitors because it was slow to react to market changes, said Rein. 

“They didn’t make corporate decisions quickly enough, such as in adopting mobile payments, or adapting to consumers wanting more premium offerings,” said Rein. “Their ability to deal with the more complex environment here was held back by the lack of knowledge, the slowness of the U.S.”... 

Starbucks stores in China still do not accept Alipay or Wechat, only Apple Pay, a decision which costs them 5 to 10 percent of sales, estimates China Market Research Group’s Rein. 

Starbucks launched its own mobile payment system in China in July, allowing customers to pay with pre-loaded Starbucks Gift Cards via their mobile devices, according to the company. 

As China’s consumer market continues to grow, more overseas companies may consider following Yum down the path of segregation.

More in Bloomberg.

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KFC slumps under anti-US sentiments - Shaun Rein

Shaun Rein

Yum´s KFC has lost substantial turnover, as anti-US protest turn against the fast food chain caused by the tension in the South China Sea, says business analyst Shaun Rein to Reuters. The stores have become a lightning rod for nationalistic feelings and lost sometimes up to 25%

Reuters:

Some analysts questioned the extent of the impact of the sporadic protests in China, where Yum is also battling tough competition and a weak economy. 

But Shaun Rein, managing director of Shanghai-based China Market Research Group, said Yum’s KFC, with more than 5,000 stores across China, was a lightning rod for anti-U.S. protests. 

“We estimate sales dropped 15 to 25% in some of the cities because a lot of the protestors were looking for a big American brand to attack, to protest against. So they did have to shut a lot of stores in North-east China,” he said. 

“The big challenge for them is, will there be lingering anti-American sentiment?”

More at Reuters.

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Youngsters: more nationalistic - James Roy

James Roy

American companies and stores like KFC and Apple faced angry crowds after an international court ruled against China on its South China Sea policies, even smashing their iPhone's. A protest that went even too far to China´s government. It is mostly the younger who are more nationalistic and patriotic, says retail analyst James Roy to AP.

AP:

"This is not the right way to express patriotism," the state-run Xinhua news agency wrote on Wednesday. The slightly more independent China Daily called the device smashing "jingoism that does a disservice to the spirit of devotion to the nation." 

"The Chinese public, as optimistic and positive as they are, are deeply patriotic and nationalistic, especially people who are younger," said James Roy of the research firm China Market Research Group. Apple is one of the brands that is "just very closely associated with the United States, and you are seeing people picking the closest symbol they can think of to demonstrate against," according to Roy.

More in AP.

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Yum: selling fast food in a contrary market - James Roy

James Roy

Yum, with brands like Pizzahut and KFC, had a hard time because of food scandals. But worse is, says retail analyst James Roy to Bloomberg, is that increasingly heath-conscious consumers do not want their food anymore.

Bloomberg:

“They’ve made progress in China but that’s really from hitting rock bottom a couple of years ago after their food safety scandal,” said James Roy, a senior analyst at China Market Research Group. “They face a larger issue in the market with Chinese consumers becoming more health-conscious and moving away from fast food.”

More in Bloomberg.

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McDonald's shutters stores as diet changes - Ben Cavender

+Benjamin Cavender 

McDonald´s used to be one of the winners in China´s emerging fast food market, but - together with KFC - losing market share and actually closing stores. Scandals and changing diets take their toll, says retail analyst Ben Cavender in the China Daily.

China Daily:.

Analysts said customers in China have been slow to forget recent food scandals, one of which involved a major supplier of meat to fast-food companies including McDonald's and Yum, which was shut down for allegedly violating numerous safety regulations, including mixing in chicken and beef parts that were well beyond their expiration date. 

Yum has launched several initiatives to attract more customers in China including a high-end restaurant Atto Primo in Shanghai, and providing quality coffee in 1,300 restaurants across 10 cities. 

Ben Cavender, principal of the Shanghai-based China Market Research, said he expected both brands to continue to struggle in China and internationally. "This is due to changing consumer tastes and an overall shift toward either more healthy foods or niche brands," said Cavender. 

He said in China specifically both brands continue to feel the effects of the scandal, and a slowing economy, and any company running a huge number of stores might be faced with having to close some. 

"Coffee sales may be boosting KFC a little bit," he said, "but I don't think they have it fully implemented yet and they also have a lot of competition in that space."

More in the China Daily.

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Yum tests upscale restaurant in Shanghai - Ben Cavender

Ben Cavender

You might know Yum mostly from KFC and Pizzahut, but in China it has started to test the upscale market. Retail analyst Ben Cavender looks at a test-kitchen at Shanghai´s Bund. From Reuters.

Reuters:

Overlooking Shanghai's iconic riverside Bund and rubbing shoulders with the city's most expensive venues, the restaurant is what Yum calls a "lab" where it studies Chinese diners as it looks to bounce back from a lengthy slump in its top market. 

"A high-end test kitchen will let Yum test the waters with new menus and concepts and get feedback from more sophisticated diners - helpful if you want to go a bit upmarket," said Ben Cavender, principal at China Market Research Group. 

Yum's same-store sales at its nearly 7,000 restaurants in China, the firm's biggest market for revenue and profit, fell 16 percent in the last quarter of 2014, dragged down by back-to-back food scares, rising local competition and a sense its main KFC brand may have fallen out of touch with China's consumers.

More at Reuters.

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Fast food chains struggle for the Chinese customer - Ben Cavender

Ben Cavender

When US fast food chains entered the China market, they mostly kept rigorously to their American diet. But now they are struggling to gain share of the US$100 billion market by experimenting frantically with tastes and flavors, tells retail analyst Ben Cavender in CNNMoney.

CNN Money:

There's just one problem: double cheeseburgers and pepperoni pizzas aren't exactly typical Chinese cuisine. As a result, the chains are constantly looking for ways to appeal to the local population, while keeping signature items on the menu.

"The trick is, they want to keep as much of their DNA as possible in terms of having core menu items that are recognizable in any market, but also figuring out what the hero products for the specific market are going to be," said Ben Cavender of China Market Research.

McDonald's in Hong Kong, for example, serves noodles, fresh corn and lychee punch. KFC offers rice with its fried chicken meals....

 

Pizza Hut offers lobster bisque and mussels stewed in white wine. The restaurant is a popular spot for teenagers to spend a romantic evening.

 

These are "nicely-decorated sit down restaurants," Cavender said. "In most cases, people going tend to be white collar -- comparatively speaking, these restaurants are still quite expensive compared to a street corner noodle shop."

More in CNN Money.

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The struggle of food companies to stay clean - Ben Cavender

+Benjamin Cavender 

A large number of retailers and restaurants from 7-Eleven to Starbucks to McDonald´s had to cut ties with their meat supplier in Shanghai, as authorities forced to close its operation. Retail analyst Ben Cavender explains in the WSJ what it takes to keep supply chains clean.

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McDonald´s and Yum hit by new meat scandal - Ben Cavender

+Benjamin Cavender 

An all-American meat scandal has hit Shanghai, as McDonald´s and Yum´s KFC banned their Chicago-owned supplier after authorities found out it used out-dated meat. Retail analyst Ben Cavender expects a long-term damage to both restaurant chains, he tells in the China Daily.

The China Daily:

Ben Cavender, an analyst at Shanghai-based China Market Research, said the new allegation is going to have a lasting impact on both brands despite their responses to make consumers feel better.

But Yum will take more of a hit due to food safety problems in the past, which indicates the company is less likely to control its suppliers well, he said.

Even if they were only indirectly responsible, in the eyes of consumers their brands are going to be hurt, said Cavender.

The allegations have once again reminded consumers of recent food scandals including baby formula laced with melamine and fox DNA found in donkey meat.

"In China, food safety concerns are so strong, even more than other markets," he said.

More in the China Daily.

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