New Expansion Patterns in China Consumer Foodservice
Article | 19 Sep 2011
Consumer foodservice in China has seen incredible growth over the last few years, but recent expansion is evolving in some surprising ways.
While global multinationals like Yum! Brands and McDonald's have shifted their focus to second- and third-tier cities, local Chinese operators are widening their reach to include first-tier targets despite the high level of competition. Many such operators are looking to grow from regional brands into national competitors, and they're using a variety of methods—from acquiring smaller players to raising capital through stock offerings or venture capital partnerships—to achieve their goal.
The rise of new growth centres
First-mover Yum! Brands has been building its presence in China since 1987, and the market now contributes more than 40% of the company's total operating profits. The company has focused its expansion so far on the three largest coastal cities (Shanghai,
Beijing and Guangzhou), and as these highly dense, urban areas have the largest concentration of affluent consumers, they've provided fertile ground for rapid growth.
According to the company, Yum! Brands' operating profits from China doubled from 20072010, and it expects annual profits to reach US$1 billion in the near future.
Other US-based multinational operators have followed Yum! Brands' lead, and four out of the market's five top foodservice brands (KFC, McDonald's, Dicos, Pizza Hut, Little Sheep) are now at least partially US-owned. Many of these global competitors have also focused on incredible rates of expansion in first-tier markets—both McDonald's and Yum! Brands have expanded as quickly as one new outlet per day at times—and the consumer foodservice market is becoming increasingly saturated. Furthermore, soaring food inflation in recent years has made fast food prices more accessible to consumers outside the wealthiest urban centres. As a result, Yum! Brands, McDonald's and other multinational operators are now shifting their focus to expansion in second- and third-tier cities, especially in central, northwest and southwest China.
Market-leading brand KFC began expanding to smaller cities in 2009 and has already reaped the benefits. According to the company, more than 500 KFC outlets opened in
China in 2009, and 140 of them were located in central and western regions. Half of the openings were in smaller cities, some of which had previously had little or no penetration from chained consumer foodservice, and as a result the openings were met with considerable consumer excitement. This strategy helped the company achieve a 23% increase in operating profits in China, the company's highest system-wide. Contributing to this increase were the lower costs associated with operating restaurants in lower-tier cities, such as relatively inexpensive rents and labour costs. The former may have been most attractive to the operator, as high rents and stiff competition forced Yum! Brands to close a number of outlets in first-tier locations in 2009.
Domestic players look to expand national reach
As Yum! and its ilk were building their presence in Beijing, Guangzhou and Shanghai,
China's domestic players focused instead on growing in second- and third-tier cities to avoid direct competition with the much larger operators. This strategy resulted in a strong presence among domestic players in areas that are now becoming major growth targets.
Cities in these less developed regions are rapidly expanding, and many of them are seeing increases in government investment on local infrastructure. Notably, China's
National Development and Reform Commission announced in July of 2010 that it would
Page 1 of 3
invest RMB680 billion (US$107 billion) in west China to stimulate economic growth in the region. Making these regions even more conducive to growing foodservice demand, many have growing populations…