Fast-Food Culture Grows in China

Fast-Food Culture Grows in China

by Tony D’Altorio, Investment U Research
Monday, February 14, 2011

The rapidly growing Chinese consumer class certainly has more spending power these days.

But they also have less and less time to cook at home. Grueling work hours, long commutes in heavy traffic, a later marriage age and smaller families combined give the average Chinese citizen fewer incentives to make their own meals.

That less-than-ideal situation creates a perfect recipe for fast food chains though. And the battle for China’s growing appetite for quick, convenient meals is just beginning to heat up.

The country’s food service industry has recorded double-digit annual growth since 2003. But it’s still only half the size of its U.S. counterpart, which means it has plenty of room to grow.

Estimated at $303 billion in 2009, it should reach around $450 billion by 2014.

Multinational fast food chains such as McDonald’s (NYSE: MCD) and Yum Brands (NYSE: YUM) arrived early in China. And they’ve come to dominate the market for western, quick service meals…

KFC and Pizza Hut Push Yum Brands Ahead of McDonald’s

Yum Brands, which owns KFC and Pizza Hut, opens another new restaurant in China every day. In fact, for the first time ever in 2010, it earned more operating profits there than in the U.S.

And it soon expects to have a 3 to 1 market share lead over McDonald’s, it’s closest rival.

KFC, now the number one fast food chain in China, definitely helped push it there. The traditional American business did so by catering to local tastes with dishes such as rice porridge with pork.

Meanwhile, Pizza Hut remains China’s number one casual dining chain, an image it lost in the U.S. decades ago.

But McDonald’s is investing heavily to catch up with Yum. It took two decades to get to 1,000 restaurants in China, but now expects it needs only four to double that.

The company also says it plans to “re-image” about 80% of its stores by 2013. That will involve European and Australian designs, comfortable seating, warmer colors and amenities such as WiFi.

McDonald’s is also playing catch-up by offering the “McDelivery” service. Chinese burger-lovers have to love the 24-hour option available in major cities, much like pizza-lovers enjoy in the U.S.

Of course, fast food gets cold fast, so McDonald’s is offering another truly American experience. It plans to open drive-through windows at half of its new restaurants in the next few years.

China is now the world’s largest auto market, with a quickly developing car culture. So McDonald’s strategy looks like a good one.

Chinese Fast Food Chains Pose a Threat to KFC and McDonald’s

But as much as KFC and McDonald’s might prefer otherwise, the battle for stomach share in China goes beyond mere fried chicken and Big Macs. Asian fast food chains are becoming increasingly competitive, despite their current low market share.

This is hardly surprising considering how many polls show locals opting for Chinese or Asian food when given the time and choice. And two particular chains are especially eating up that penchant.

Country Style Cooking Restaurant ADR (NYSE: CCSC) was just recently added to the New York Stock Exchange. So far, it has over 100 locations in Sichuan Province and the Chongqing municipality.Then there’s Little Sheep Group (PINK: LSGLF), which Yum Brands partially owns. It currently has over 300 restaurants in China, Japan and the U.S.

Their appearance on the scene, along with other Asian restaurant chains, prove the Chinese market is about more than just convenience. Xia Lianyue, the vice-chairman of the China Fast Food Association, says rising urban salaries and long commutes are driving the all-new “simple meal” market.

That market averages 50-100 renminbi, or about $7.50 to $15.00 per meal per person, a cut above fast food at 30 renminbi or $4.50. This seems to be the new battleground for food companies in China.

Yum Brands seems well positioned in this segment with Pizza Hut. But local competitors could still eat into its market share.

The battle for the Chinese stomach in a hungry market has only just begun… So stay tuned.

Good investing,

Tony D’Altorio

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