China Consumer

Fast food nation

KFC could be the first big brand to make more money in China than the US

Fast food nation

Join the finger-licking queue: KFC is opening restaurants in smaller cities

It was the biggest restaurant opening of the year: locals lined up for hours before the doors were finally flung ajar; security guards had to be brought in to help manage the chaos.

“I took my whole family on the third day of the Lunar New Year and we waited for more than half an hour before being served,” says one of the patrons. She added that she has never experienced such a bustling scene in the city.

It was the grand opening of a new KFC in Chuzhou, a city in Anhui province. Such enthusiasm is fairly typical when the US-based fast-food chain turns up in town. “This happens every time KFC opens a new store,” a KFC Chuzhou manager told New Century Weekly.

After flooding the country’s largest urban cities with KFC outlets, the chain is now on an expansion drive in the hinterlands, counting on smaller cities like Chuzhou, which has a population of less than half a million, to deliver growth.

According to a report by KFC’s parent Yum! Brands, which also owns Pizza Hut and Taco Bell, of the 500 new KFC outlets opened in China in 2009, more than half were in relatively small, so-called fourth- to sixth-tier cities. Even a few rural villages got new KFC outlets.

“We’ll have three restaurants in a city before McDonald’s even gets there,” David Novak, Yum’s chairman, explains.

The first-mover strategy has worked well for the US fast food chain in the past. KFC was the first foreign fast food company to enter the Chinese market, opening an outlet in Beijing in 1987, three years ahead of the Golden Arches. Since then, it has left McDonald’s in the dust. By December, Yum! had about 2,900 KFC outlets in China, compared to 1,137 McDonald’s.

The company has also been quicker at adapting to local palates. While McDonald’s tried to convince Chinese consumers to eat hamburgers, KFC has given a Chinese twist to its menu by adding dishes like Golden Butterfly Shrimp and Chicken Congee to suit mainland tastes (see WiC Focus: From Made in China, to Made for China).

Today, KFC is China’s top restaurant operator, and the country accounts for 36% of global sales, just behind the US. It reported 2009 revenues in the Chinese market jumped 18% year-on-year, to $3.68 billion. If the growth continues at this pace, KFC could become the first big American brand to make more money in China than in the US.

McDonald’s is trying to keep pace and plans to open 175 new mainland restaurants this year. The chain will also refurbish some of its older restaurants and offer free WiFi.

It is also trying to undercut its rivals, accepting coupons issued by KFC and Burger King to purchase pairs of McWings – something observers say is rarely seen in the industry. With the coupons, its McWings cost just Rmb4.5 ($0.65), versus Rmb8 at KFC for a similar chicken snack.

“Legally I don’t think McDonald’s did anything wrong, as long as it did not make the price too low,” says Zhang Huiqing, who specialises in consumer law with the Shanghai Wongliping Law Firm.

McDonald’s move comes at a time when competition in the fast-food industry is heating up. Burger King, a relative late entrant to China, is also aggressively opening new outlets. Babela Kitchen, a Shanghai-based Italian chain is also expanding after an investment from US private equity firm Carlyle Group.

KFC, however, is unfazed. “What the customers care about the most is quality,” says a company PR manager surnamed Bai.

Judging from the crowd outside Chuzhou’s KFC, he’s probably right.

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