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Trouble in China's Foodservice Industry: Who is Losing, Who is Winning, and Why There's No Easy Fix

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Yum! Brands’ flagship KFC went from China success story to cautionary tale in 2012, hit with slowing growth, growing competition, food safety scandals, health scares, and declining public opinion. The company is now facing the challenge of turning business around in one of the most important fast food markets, a complex task that has yet to see results.

This may have been terrible for Yum! Brands, but it has benefitted other players including China-owned chains that are growing rapidly and taking some of KFC’s relinquished share.  Beyond this though, the struggles faced by KFC are indicative of broader shifts in the Chinese market. While there is still plenty of long-term growth to be had, competitive dynamics in major cities are changing, necessitating new strategies that can appeal to evolving Chinese consumers.

Fast food demand in China has moved into a new, more mature phase, where chained branding alone is not enough to guarantee traffic. Instead, operators will have to work harder to appeal to the preferences of modern Chinese consumers, connecting with them on a deeper level the way they might in more developed global chained markets.

KFC Loosens its Grip on the Market

KFC faced a broad range of hardships in China throughout 2013, including an antibiotics scare at the end of 2012, and a later avian flu outbreak that caused consumption of chicken to drop sharply. As a result, comparable-store sales at KFC in China plunged as well, dropping 20%, 20%, and 11% in the year’s first three quarter’s respectively.

This has introduced a complex new challenge for the brand, which has long attributed its success in China to both its foreign cachet – serving as a safer, more hygienic alternative to local independents – and its ability to localise flavours to appeal to Chinese consumers. The former in particular has been a major factor in their success, in a country where a long history of local food safety scandals have meant consumers have little trust for their own domestic products.

Now that the international giants have faced food safety scandals of their own, Chinese consumers are left wondering if KFC, and multinational brands in general, are really the safe haven they have always marketed themselves to be. Similarly, the rise of large, well-funded but locally operated competitors, such as Taiwan-based chicken fast food chain Dicos and China’s own cnHLS, has meant consumers can opt for a brand that’s both local and trustworthy, with a similarly strong branded dining experience. For this reason, KFCs struggles have actually served to benefit locally owned chains, which also offer consumers the enticement of lower prices.

Localisation of menus has also caused some erosion to international chains’ appeal. KFC now caters heavily to Chinese palates, offering rice-based entrees, congee, and even traditional Chinese dishes like chili black fungus. This strategy began as a way to tap into a greater number of potential eating occasions and appeal to local palates, but as these items have grown in popularity, they’ve caused some confusion in terms of KFC’s branding. If the brand’s allure has always been rooted in its ability to offer Western-style fast food and a globally recognised brand experience, then is it a good thing if its Chinese dishes are now among the most popular on the menu?

In addition, Western-style fast food has become more familiar and more readily available from countless other chains, and as such the brand is left in a dangerous middle ground between local and international. When all of what KFC is offering can be obtained elsewhere, at lesser cost to the consumer, and likely from a local brand, then what is left to drive its appeal?

But Can their Problems be Fixed?

None of this is meant to overstate the overall weakness of KFC in China, and the brand still claims by far the largest fast food share; however, China has served as the bedrock of its global growth strategy for over a decade, and the shakeup is forcing the company to rethink that dynamic.  Now that China is no longer the dependable stalwart it once was, Yum! Brands will need to invest in other markets with long-term potential and move forward with a more global approach.

Meanwhile, the brand is working hard in the short-term to rehabilitate its image in China. Yum! Brands has taken on a two-pronged approach, looking internally to improve its poultry supply chain and prevent further scandals in the future, and externally to improve its public image through a quality assurance campaign. The chain has gone as far as inviting consumers to tour its poultry factories, and has also launched new value-based initiatives designed to drive traffic to stores.

One such launch, a half-priced offer on the chain’s popular family sized fried chicken bucket, caused an initial boost in sales which immediately backfired after consumers complained the promotional bucket contained different cuts of meat, and far less chicken, than the original. Chinese consumers take value very seriously, and the uproar only served to further weaken trust in the international brand.

Other Companies are Faring Better, but Struggles are Market Wide

Many competitors to KFC have fared better in China recently, most notably locally owned operators that are finding traction based on a lower-priced positioning and expansion into lower-tiered markets not always served by international chains. Dicos and cnHLS have both benefitted from this in particular, serving as a local alternative to both small independents and large mulitinationals. Many consumers have shifted their loyalty to these chains, drawn by their lower prices and more trustworthy image. It is notable that Dicos, a chain which serves a heavily chicken-based menu, was not nearly as affected by the recent avian flu scares as was KFC, illustrating the role branding has played in the fallout.

McDonald’s has also been working to weather the storm, using heavily value-based meal platforms at breakfast and lunch to drive consumers into stores. These ranges are lower in price to compete with independents, and are very popular with busy professionals who do not have time to prepare their own meals at home. Still, McDonald’s’ comparable-store sales in China were negative throughout 2013.

The bigger picture here is that all chains operating in China are dealing with a new set of challenges. The market as a whole is changing, maturing and growing more difficult to navigate. The consuming population is still growing rapidly, and outlet density is still low compared to fully developed markets, but competition in key cities is fierce and total growth in all industries is slowing. Real GDP growth has also declined to single digits in recent years, and this is expected to continue.

The Only Solution is Starting Over

What all of this means is that foodservice strategies that have been successful in China for decades need to be updated. The market has changed, as have its consumers, and operators will need to be ready to adapt. Much like the upheaval that has occurred in the US fast food over recent years, it is likely that the competitive landscape, and the public perceptions of various brands, will look very different in China in a matter of years. Many of the same brands will assuredly find success, but they’ll have to find it in new ways.

China’s cities in particular are coming to more closely resemble those in relatively mature markets, where consumers have many options, and preferences are rapidly evolving. Brands that may have felt novel and aspirational to previous generations are now familiar and less exciting, and continued brand loyalty will have to be earned. Yum! Brands has not given up on China, nor should they, but they’ve been forced to accept that attention should also be paid to other growth markets like India, the Middle East, Africa, and Latin America. This new focus on other long-term opportunities is a key takeaway from the last year in China fast food results: Everything in global fast food cannot simply be about China anymore. The best global operators are looking further ahead and taking on a broader, global view, and these operators will be most successful in the end.

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