A Deep Dive into the Fast Food Industry

More than three decades ago, in the midst of China’s economic reform, many of the household names in the fast food industry saw the potential of the budding economy and jumped at the chance to enter the Chinese market. KFC opened its location in 1987 in Beijing and McDonald’s and Pizza Hut followed closely behind, entering China three years later in 1990. Today, KFC has over 5,000 locations in the country, followed by McDonald’s with 2,500 and Pizza Hut’s 1,900.

But the fast food market in China is slowing down, with an expected CAGR of just 2% from 2018-2022. With changing consumer preferences and habits in China, as well as the rise of local Chinese brands, many of the first-mover brands are no longer as aspirational and are fighting hard to keep their initial cache. In this article, we will discuss the emerging trends in China’s fast food market, and what foreign brands need to do to stay relevant.

Initial Successes: The Localization of Foreign Brands

For KFC, McDonald’s or Pizza Hut, the direct ‘copy and paste’ from the U.S. has hardly been the strategy. Instead, localization has been an essential part of the growth story. Of all the global brands, KFC remains the most notable success story in China – the country houses the most KFC locations worldwide and accounts for 27% of global KFC sales.

Part of the reason why KFC has enjoyed so much success in China is due to its “Go Global, Act Local” expansion strategy, which mainly focused on tweaking its menu items to become compatible with the Chinese diet and appeal to local tastes. While fried chicken is still a staple, it also offers everything from rice porridge, milk tea, soybean milk, “sushirritos”, and egg tarts, adding a Chinese flair to the menu. Other chains like McDonald’s and Pizza Hut have similarly adapted their menus with localized flavor and offerings.

Not only do menus need to be localized, but foreign brands also need to rethink their retail experience in China. For many, fast food restaurants are the “third place” – an environment where consumers can relax, be comfortable and socialize with others. Therefore, Haagen Dazs Ice Cream, for many years, primarily operated their own ice parlors in China to drive and meet the consumer desire to express and experience status and sophistication. Similarly, Starbucks’ average store is 40% larger than the average format in the U.S., with the goal of becoming the favorite destination of new generation of upscale professionals.

While this localization strategy has initially worked out pretty well for these brands, it is no longer enough to keep them competitive.

The New China Context

The same trends that are shaping and sparking new growth of many categories in China can also be observed in the fast food category: premiumization, personalization, hyper-convenience and the prevalence of mobile first and online to offline (O2O) total experience. The combination of these factors is increasingly crowding out the QFS market and making it harder for household names to stay relevant.

Changing Consumer Preferences and Habits

With the increased sophistication of the Chinese middle class, consumers are expecting more exploration and diversity in their food choices. They are also looking more ‘craft’ to their dining experience and are demanding more authentic and fresh cuisine, even in the context of fast food.

Taco Bell, who re-entered China in 2017, is a good example of this. In addition to introducing staple Mexican food items such as burritos, quesadillas, nachos and tacos to the mainstream, the chain is also pushing for a healthy and fresh positioning. Most of the menu combos come with salads and juices, and customers can also see their food being prepared live by employees behind a window near the checkout counter. Taco Bell’s prices are also more in line with casual restaurant dining rather than quick-service restaurants, reflecting the consumer’s desire for higher quality fast food. Yum! China, the exclusive franchisor of Taco Bell as well as KFC and Pizza Hut, plans to open 1,000 Taco Bell locations across the country by 2022.

In addition, millennials and Gen Zs in China now seek “Instagrammable” moments and actively search for food and restaurants that are aesthetically pleasing (颜值). They also place more emphasis on the exploration and discovery of new taste and concepts and desire exclusive brand experiences of what is hot and trendy in not just China, but San Francisco, NYC, Seoul, Berlin, or Paris.

This presents a huge opportunity for niche brands to enter the more premium side of the QFS market. For example, new market entrants like Shake Shack brings the U.S. east-coast burger experience to China, but maintains a higher price point and provides a unique store design that elevates the restaurant environment. With the right balance of exclusivity and novelty, brands can capitalize on the social currency they provide to the consumers.

The Rise of Local Brands

When China first opened its economy to the world, many western brands were perceived to be more trustworthy compared to their Chinese counterparts. Novelty aside, foreign brands became a kind of an exclusive experience. Largely limited to the affluent middle class who resided in Tier 1 cities at the time, foreign brands became a status symbol. While parts of this sentiment still remain in the public consciousness, homegrown brands are growing in their reputation and credibility.

For the first time ever, the majority of the top 50 most relevant brands all categories were Chinese in Prophet’s latest Brand Relevance Index™ 2018. This is not only a reflection of Chinese consumers’ increasing preference for Chinese brands, but also the result of many Chinese brands being increasingly better at delivering on the four fundamental dimensions of brand relevance: Customer Obsessed, Distinctively Inspired, Ruthlessly Pragmatic, and Pervasively Innovative.

With food delivery apps like Eleme (饿了么) and Meituan Waimai (美团外卖), Chinese consumers are expecting their dining experiences to merge seamlessly from O2O. From payments to menu selection, in-store ordering and pickup, home delivery to loyalty programs and coupons, consumers expect to exert minimal effort while reaping maximum gains on their dining experiences.

Luckin Coffee (瑞幸咖啡) is a perfect example of an agile, trendy and millennial-focused local Chinese brand. Orders are placed only via its app and consumers either pick up their coffee at one of the many Luckin Coffee locations, or have their orders delivered by the premium courier company SF Express.  Frequent promotions and coupons are also sent directly to the consumers Luckin account. Not only does Luckin Coffee master the O2O offering, but also directly addresses the major weak points of foreign coffee retail chains like Starbucks: high prices and inconvenience.

Final Thoughts

In conclusion, the big players in fast food can no longer rely on the novelty factor. To stay competitive in the ever-evolving Chinese market requires more than just localizing menus. This is especially true when homegrown brands in China are ahead of the curve when it comes to offering a better digital, O2O experience to their customers.

To succeed as a local player or international brand entering or at play in China, use data and power of observation to know and adapt to the fast-changing consumers’ taste and expectations. Create and enable total experiences that go beyond product and retail – integrating O2O to deliver personalization, hyper-convenience and self-expression. Be restless, always-on and experiment to keep up with the China market pace.

Learn how to create an impactful customer experience.

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