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Fast-Food Restaurants: Just What Eastern China's Consumers Ordered
By Jack Marr and Alcinda Hatfield
The number and diversity of fast-food restaurants across east China has mushroomed in the past several years with no end in sight. From wonton to pizza to east China's favorite C fried chicken C fast-food and chain restaurants are popular, partly because they are more affordable than other types of restaurants to a great number of Chinese.
As recently as 1993, Chinese consumers had few fast-food choices. Restaurant food was limited to five-star hotels, traditional Chinese restaurants and street-side wonton, pulled noodle and tea-egg vendors.
Fast-food restaurants in east China can be defined as Western-style or those specializing in Chinese food. Another important category is chain restaurants.
Kentucky Fried Chicken (KFC) leads the way with 140 restaurants in the People's Republic of China, followed by McDonald's, Japan's Mos Burger and local Western-style fast-food chains such as California Fried Chicken, Ronghua Fried Chicken and Hong Kong's Cafe de Coral. Chain restaurants are emerging led by Pizza Hut and Gino's. California Beef Noodle King and Doujiang Dawang lead a wide variety of Chinese fast-food restaurants. Japanese fast food is becoming more popular. Over the next few years, an even larger number of both familiar and new establishments are expected.
KFC Is China's Favorite Fast Food
Kentucky Fried Chicken has combined a popular mid-priced menu, featuring fried chicken, some of which is adapted to local tastes. Its modern atmosphere and marketing target Chinese children. KFC offers chicken wings, nuggets and sandwiches, all flavored either spicy or mild.
KFC sources chicken parts domestically. Its expanding needs are met through contracts with new operations in Shandong, the poultry production center of China, and Shanghai. The downside to using Chinese suppliers is that domestic producers supply their export accounts first in the event of a product shortage. To get around this problem, KFC buys from a variety of domestic poultry producers.
In addition to some spices, KFC uses two main products from the United States, french fries and corn-on-the-cob. KFC added french fries to its Chinese menus in August 1995 and has used U.S. fries exclusively, advertising them heavily during the product introduction phase in late 1995. KFC's main suppliers are Simplot, Ore-Ida and Lamb Weston. French fries have become a popular item at KFC, and KFC's American fries are considered to be better quality than Simplot's Beijing-produced fries used at McDonald's in northern China.
In late 1996, KFC introduced a full-sized, sweet corn-on-the-cob, imported frozen from the United States. Previously, KFC had offered a small corn-on-the-cob in many combination meals, but now diners can choose the full corn-on-the-cob as a separate item to eat as a snack or to complement their meal. This item appears to be gaining in popularity despite its price of 7.5 yuan or US$0.90 C roughly the same price as the lowest priced chicken sandwich.
KFC has a presence in every major Chinese market, including the three main markets of Beijing, Shanghai and Guangzhou and the most prosperous provinces of Liaoning, Jiangsu, Zhejiang, Sichuan, Fujian and Guangdong.
Pepsico Restaurants International (PRI) owns KFC and Pizza Hut restaurants in China. PRI China has nine product distribution centers. For items such as french fries, PRI uses competing, local importers and distributors for about 80 percent of its needs. The remainder are purchased directly by PRI China. Distributors make deliveries to distribution centers as storage at each restaurant is very limited.
McDonald's is KFC's primary competitor, even though many Chinese fast-food restaurants also feature chicken. Sixteen of its current 120 restaurants in China are located in Shanghai. McDonald's has an ambitious goal of opening 200 more stores across China by the end of 1997.
Worldwide, McDonald's operates 19,700 restaurants. Last year, McDonald's international surpassed the number of McDonald's restaurants in the United States, underscoring its experience in the area of internationalization. Along with internationalization comes a greater use of local ingredients and labor, allowing McDonald's to use its large capital resources and economies of scale to develop specialized local factories.
McDonald's still depends on imports for french fries (in southern and eastern China) and for more specialized ingredients such as ketchup, sugar and sweet and sour sauce.
Japan's Mos Burger offers a slightly different view of the fast-food restaurant. With 1,400 restaurants in Japan and Singapore and 16 in east China, Mos Burger has plans to expand further into east China next year, focusing on teriyaki chicken, chicken breasts, fish and its standard hamburger. Along with offering polite service, Mos Burger has adapted well to east Chinese tastes.
Mos Burger uses more U.S. ingredients than its U.S. counterparts, depending on Tyson Alaskan fish patties, Schuss french fries, Jubilee food service chocolate and popcorn. Beef is provided by a Sino-Holland joint venture, and only Japanese soy sauce is used. Mos Burger also has a joint venture to open a restaurant in each of Japan's new Yaohan stores.
Ronghua Chicken is the leading local KFC-type spin-off with 11 stores across east China. Ronghua claims to sell American-style fried chicken with Chinese characteristics. Pricing is on the same scale as KFC and other fast-food outlets, as are the food offerings. Imported ingredients include U.S. french fries and ketchup.
California Fried Chicken (CFC) is similar to Ronghua with seven stores. CFC intends to provide fast food at affordable prices. It uses U.S. french fries and coffee. CFC is expanding quickly and moving into some interesting markets, such as the Lake Taihu Water World Amusement Park and Recreation Area in Suzhou, offering fast-food convenience within an attraction.
Cafe de Coral serves a wide variety of fast food, most of which is served sizzling on a single serving personal iron skillet. Prices per customer are higher than the average price per meal at KFC or McDonald's. Cafe de Coral uses Idaho french fried potatoes, Tyson chicken thighs and U.S. corn-on-the-cob. It has 128 stores in Hong Kong.
Tieban Steak restaurants are also opening around east China, offering foods similar to Cafe de Coral. This restaurant is in many ways a fast-food version of a traditional Chinese favorite served at most restaurants. The Chinese market should have great potential since Tieban Steak is the most popular form of fast food in Taiwan (led by Sizzler). However, due to high tariffs on beef, selling high-quality meat at a reasonable price in China is a challenge, even for Taiwan companies.
Chinese-Style, Fast-Food Restaurants Growing
In addition to Western-style, fast-food restaurants, those specializing exclusively in Chinese food have been experiencing phenomenal growth as consumers demand sanitation and convenience.
California Beef Noodle King leads this category with 100 restaurants countrywide and 15 in east China. As the name implies, California Beef Noodle King specializes in Chinese-style noodles and other staple Chinese foods, such as dumplings and wonton. Prices are significantly lower than Western-style, fast-food restaurants. It does not use any imported ingredients and is only related to California in that the owner is a Chinese Californian.
Doujiang Dawang has 12 stores in Shanghai and four opening soon in Beijing. This restaurant specializes in Doujiang, a soybean milk drink served either sweet or salty, cold or hot, along with an assortment of staple Chinese fare. Doujiang Dawang is the only fast-food restaurant offering 24-hour service. It does not use any imported ingredients, except for Taiwan soy sauce. The average customer spends about 20 yuan or US$2.41.
Chain Restaurants Are More Expensive
Chain restaurants are in many ways similar to fast-food restaurants: both use large amounts of specialized, standardized ingredients, and both need to establish brand recognition across a wide area. The only difference is that chain restaurants are more expensive than fast-food restaurants and often charge a 10-percent service charge. Thus, chain restaurants have a smaller absolute market share.
Pizza Hut, with 25 outlets in China, opened its first Shanghai restaurant in 1996 and continues to expand. The Pizza Hut chain offers a menu similar to its U.S. counterpart with various deep and thin crust pizzas along with pastas, bread, beverages and a salad bar. One notable difference is its seafood pizza topped with squid or tuna. Prices tend to be higher C an average meal for two totals more than 90 yuan or US$10.85. Pizza Hut has a quieter, less frenzied atmosphere than other fast-food outlets in Shanghai and tends to attract young professionals aged 18-35.
Chalon is a new entry in China's chain-restaurant category. It is a large chain based in Japan (where it is open 24 hours a day) and provides typical American-type fare such as salads, burgers and hot sandwiches along with a selection of Japanese favorites such as sukiyaki. Many ingredients are imported, and the menu is standardized. Prices are reasonable at about 35 yuan or US$4.22 per person.
Hartz Texas-Style Chicken Buffet opened its first restaurant last fall in downtown Shanghai with 500 seats. It hopes to open 12 more restaurants in Shanghai before the end of 1997. The Hartz franchise of Houston, Texas, was purchased by a Chinese-managed Indonesian company, which established the Wendy's franchise in Hong Kong in 1990.
Hartz is an all-you-can-eat style buffet with hot and cold salads, breads, beverages, ice cream and every imaginable variety of chicken C from rotisserie to fried to spicy gizzards. Hartz currently attracts near-capacity crowds at a reasonable price of 38 yuan or US$4.58 on weekdays and 48 yuan or US$5.79 on weekends. Hartz uses imported spices, sauces and french fries.
Gino's Pasta-Cappuccino specializes in Italian-style cuisine, premium coffee drinks and desserts. Managed by a Burger King distributor in Taiwan, it has four stores in Shanghai with plans to open two more next year. Food offerings include an Italian menu, including pasta with bolognaise, carbonara and pesto sauces and pizza. Many food ingredients, such as tomato sauce, pasta and cheese, are imported from Italy. French fries and Tabasco sauce are imported from the United States.
The average consumer at Gino's spends about 50 yuan or US$6.03 for an entree, soup or salad, drink and dessert. Gino's has also taken the lead with couponing in Shanghai, aggressively offering two for one discounts on pizza and pasta, bringing the price of an Italian meal for two to an affordable 60 yuan or US$7.23.
Swensen's Ice Cream from the United States is at the upper end of the chain restaurant pricing scale. It plans to open a total of six restaurants in Shanghai by 1998. Swensen's offers ice cream along with an assortment of American fare, including gourmet hamburgers, salads, soups and steaks. A wide variety of imported ingredients are used, including USDA choice steaks and all the basic ingredients for ice cream, which is further processed in China.
Average consumer spending is 50-60 yuan or US$6.65 or more than 150 yuan or US$18.08 for those who eat steak. If the "Real American Steaks" advertisement in Chinese outside the restaurant is any indication, Chinese consumers appear willing to pay a higher price for quality U.S. beef at the upper end of the market.
Methods of Entry Into East China
Fast-food and chain restaurants in China source their food ingredients in several ways: direct import of finished food products, direct import of unfinished food products and local sourcing and processing.
Direct import of finished food products. A large number of U.S. products enter China as finished food products, particularly condiments, flavorings and seasonings that are neither widely available nor widely used in China. Directly imported finished products range from ketchup to chili sauce to canned cherries. Because these products are so specific in nature and flavor, this market is less affected by the increasing scale of economies of the larger chains.
The finished-foods market for fast-food restaurants is neither competitive nor very large in scale. Each chain tends to use its own idiosyncratic products, which are often distributed exclusively for that chain. Unlike many Japanese products, which are often available from a single supplier, U.S. imported food products require dealing with a plethora of different wholesalers and suppliers. This is particularly true for finished additives and condiments.
Additionally, many smaller restaurants often have no idea where to purchase the ingredients they want. If a single distributor were capable of supplying all the necessary products, doing business here would be more convenient and profitable for everyone involved. Hence, the key to success in this market is to either make connections with a major fast-food chain, such as McDonald's, KFC or Mos Burger, or master local distribution networks to make products more widely and easily available to smaller restaurant chains and individual restaurants.
Direct import of unfinished food products. It is essential that fast-food restaurants ensure a constant supply of high-quality basic ingredients to meet uniformity, taste and quality requirements. Ingredients usually include beef, chicken patties, french fries, orange juice and fish fillets. These form the basic menu of most fast-food restaurants. Products are imported in containers, distributed to warehouses by the restaurant chain or its importer and then processed and prepared by the restaurant into finished food products.
The biggest names in this large category are Tyson chicken and Ore-Ida frozen potatoes, which dominate the chicken fillet and frozen french fried potato categories, respectively. Both have well-established import capability and distribution networks within east China.
Because many unfinished food products are frozen, more sophisticated and supervised distribution channels are needed. Thus, larger and more professional importers are favored who can ensure quality control throughout the frozen chain.
Imported food products can be expensive due to high tariffs, pushing many fast-food operations to quickly look for local sourcing even though it would be preferable to continue to rely on U.S. finished and unfinished imports for quality reasons. Conversely, products that were once imported but are now produced locally are improving in quality thanks to the capital and technological investment made by foreign fast-food companies.
Local sourcing and processing. The more necessary the product is to a restaurant's operation, the higher the trend toward local production. Beef has moved into local production the fastest, due to high tariffs and acceptable local quality.
One exception is U.S. frozen french fried potatoes, which are used almost exclusively by all major fast-food chains. Due to climate and agricultural differences, the Russet-Burbank potato cannot be produced in China, making the U.S.-grown product the standard.
Local sourcing has been taken a step further by large companies that invest in restaurants, factories and warehouses, in addition to local production and management. Local sourcing creates good relations with the local community, which can be profitable to a business.
The larger the scale of the business, the more it can afford to invest in China. But such scale economies must be developed slowly and require a large capital commitment. Therefore, U.S. exporters can expect start-up restaurants to offer opportunities for some time to come as they continue to enter the east China market.
Tariffs and Subsidies C The Bane of Exporters
Tariffs are a major reason why large-scale businesses turn to local sourcing. In areas where U.S. foods would otherwise be competitive in the fast-food industry, tariffs are the most prominent barrier preventing expansion into local markets.
In addition, many countries, particularly those in the European Union, heavily subsidize their agricultural industries, enabling their agricultural products to be sold to export markets at great profit. This also makes U.S. agricultural products expensive.
To level the playing field, U.S. companies should explore various options. For example, investigate different distribution channels or link up with a powerful importer who has developed an established relationship at the port of entry. Different importers pay different tariffs at different ports and powerful importers often pay less than the published tariff rate due to their connections.
Marketing Tips
Other advice includes investing time and energy in market research and testing. Various consultants and agents, both international and domestic, make Shanghai their home. Market research is particularly important when introducing foods that are completely foreign to Chinese consumers. It is particularly important to work with experienced agents who understand the needs of the local market and can help plan a Shanghai market entry strategy.
In addition, exhibitions and trade shows offer U.S. companies an excellent opportunity to have a look at the state of the industry. Interested companies can either set up a booth to introduce or further promote their products, or simply visit and meet with other key industry contacts. For example, the Shanghai Food Expo is held every year in September and provides a good opportunity for market exposure as it is consumer-oriented and open to the public. This year's food expo is scheduled for September 2-6, 1997.
At the local government level, the city of Shanghai (perhaps more than many other Chinese cities) actively promotes foreign trade and has created a fairly good business climate. Investments are encouraged to help facilitate foreign importation. Finally, U.S. exporters should focus their sights on emerging markets where the greatest potential lies. Many fast-food restaurant categories in east China remain virtually untouched, particularly ethnic (Mexican, Thai and Italian for example) and other categories, such as coffee shops, sandwich shops, buffets and breakfast restaurants. These restaurants will need imported ingredients until they can reach the kind of scale necessary to invest vertically across the production chain.
With the east China market still far from developed, the fast-food industry is expected to continue to grow. For the near future, China offers great potential for U.S. companies willing to enter this dynamic and ever-changing market. P
Jack Marr is a freelance marketing consultant working in the People's Republic of China and Alcinda Hatfield is a marketing specialist with the Foreign Agricultural Service's Agricultural Trade Office in Shanghai, China. Tel. (011-86-21) 6279-8622; Fax (011-86-21) 6279-8336.
Need More Information?
For further information about China, contact:
U.S. Agricultural Trade Office, Shanghai
American Consulate General
ATTN: Scott Reynolds, Agricultural Trade Officer
PSC 461, Box 200
FPO AP 96521-0002
Tel: (011-86-21) 6279-8622
Fax: (011-86-21) 6279-8336
E-mail: atos@public.sta.net.cn
Web site: http://www.atoshanghai.org/
U.S. Agricultural Trade Office, Guangzhou
American Consulate General
ATTN: Ralph Gifford, Agricultural Trade Officer
Department of State
Washington, DC 20521-4090
Tel: (011-86-20) 8666-7553
Fax: (01186-20) 8666-0703
A complete copy of the market brief on which this article was based is available from:
Trade Assistance and Promotion Office
AgExport Services/FAS/USDA
Ag Stop 1052
1400 Independence Ave., SW
Washington, DC 20250-1052
Tel: (202) 720-7420
Fax: (202) 690-4374
For more information about upcoming trade shows, contact:
Trade Show Office
AgExport Services/FAS/USDA
Ag Stop 1052
1400 Independence Ave., SW
Washington, DC 20250-1052
Tel: (202) 720-3623
Fax: (202) 690-4374
For supplier lists and foreign buyer lists:
AgExport Connections
AgExport Services/FAS/USDA
Ag Stop 1052
1400 Independence Ave., SW
Washington, DC 20250-1052
Tel: (202) 720-7103
Fax: (202) 690-4374
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