Fierce competition in China drives push for longer hours, new dayparts

Author: Michael Schaefer

Date published: 14 Aug 2009

With double-digit growth bringing a slew of eager competitors, many of China's largest chained operators have turned to daypart expansion as an avenue for growth, expanding aggressively into the breakfast and business lunch markets, while also augmenting their home delivery capabilities.

Looking to serve a growing population of busy students and office workers, a number of chains have rolled out both set menus for lunchtime as well as breakfast products. While global chains such as McDonald's and KFC have led the way, they have increasingly been joined by local players such as Kungfu and Little Sheep. Though sales continue to expand, rapid outlet growth has kept average transactions per outlet relatively stable, forcing many operators to look to menu and daypart expansion to keep same-store sales growing. This trend is also fuelling further expansion in delivery services, as even fast food chains look to serve consumers at all hours of the day, at home or on the go.

Two routes to the breakfast consumer

The emerging Chinese breakfast market has opened a new front in McDonald's and YUM! Brands' ongoing struggle for market share, with the two companies forging ahead with radically different product strategies—YUM! Brands has emphasised native Chinese items through its KFC and East Dawning outlets, while McDonald's has focussed on a more traditional Western-style breakfast presentation. KFC, in particular, has routinely supplemented its menu with familiar Chinese items in the past, a strategy it is continuing with its breakfast offerings, which include traditional Chinese pastries such as youtiao and shaobing (fried dough and crispy layered pancakes, respectively), as well as congee, a type of rice porridge popular at breakfast time. McDonald's, by contrast, offers a breakfast menu very similar to that seen in other markets, with Egg McMuffins, pancakes, and hash browns. While the chain does offer rice porridge in markets such as Singapore and Malaysia, it has not yet introduced this item in China.

In many ways breakfast is an ideal potential market for fast food operators in China, given that it is widely consumed and, more importantly, widely consumed outside the home, with a large numbers of urban consumers stopping for quick morning snacks at local vendors on their way to work. At the same time, items from local vendors remain significantly cheaper than those meals at KFC or McDonald's, a particularly salient point for KFC, given that many of the items found on its breakfast menu are readily available through street stalls and kiosks throughout China. Nonetheless, the potential for growth is there—McDonald's currently derives around 7% of its China sales from breakfast, compared with 30% in the US and 18 to 20% in Singapore and Malaysia.

Morning, noon, and night

The push to cover every daypart is not confined to breakfast; in response to the growing numbers of office workers, many foodservice operators have launched set business lunches to reach consumers with limited time for a midday meal--Little Sheep, a popular full-service chain, launched a set business lunch in four of its outlets in Shanghai in December 2008. Meanwhile, Pizza Hut has promoted its lunchtime set menus through tie-ins with a popular fashion talk show in Shanghai, while its Pizza Hut Express sub brand has heavily promoted its office delivery program, looking to target workers unable to make it out to lunch. Delivery services, in general, have steadily caught on-- in spring 2008, McDonald's launched a 24-hour home delivery service in Shanghai, with no minimum order value but a charge of RMB7 for each delivery. In May 2009, following the success of the service in Shanghai, the company extended its delivery business to Beijing, Guangzhou and Shenzhen. KFC and Pizza Hut also provide home delivery in selected areas. Likewise, home delivery is an increasingly popular option among high-end full-service restaurants, who increasingly offer the service around major holidays, when entertaining at home is common.

24-hour operation, as well, is beginning to take hold in the largest cities, as operators look to draw traffic from students and late-night revellers. McDonald's now offers 24-hour operation in over 70% of its China outlets, heavily promoted through its “Moon Man” character, while virtually all of the chain's advertising in China makes some reference to 24-hour service.

Fight for every customer

The flurry of new daypart and delivery initiatives is a sign of the continuing evolution of Chinese foodservice. Some of the new programs are examples of adaptation to the Chinese market—home and office delivery, for instance, is a popular service in a country where auto ownership remains limited (drive-through outlets are a small portion of the market, though this is slowly shifting), allowing operators to grow same-store sales in advance of new outlet construction. Other initiatives, such as the push for breakfast menus and 24-hour operation, reflect the extraordinary, and continuing, growth in the chained foodservice space, with multiple well-funded competitors jockeying for share. What this has done, and will continue to do going forward, is to force operators to place far more emphasis on growing sales through existing stores—while outlet growth will remain strong, particularly in the second and third-tier cities which remain relatively underserved, competition for every transaction is projected to further intensify in major urban centres like Beijing and Shanghai, ensuring the push to drive sales throughout the day will continue.