China Consumer

Feeling sandwiched

Fast food firm Subway looks to emulate China growth of KFC

Feeling sandwiched

Known locally as Sai Bai Wei

Here’s a slightly surprising statistic: at the end of last year, the sandwich store chain Subway had more restaurants worldwide (33,749) than McDonald’s (32,737).

Subway has achieved its rapid growth, in part, with an unusual property strategy. The company has opened outlets in locations as diverse as an appliance store in Brazil, a riverboat in Germany, a zoo in Taiwan, and a church in Buffalo, New York, says the Wall Street Journal.

But in China, Subway is clearly lagging behind. It currently has 200 stores in the country, low compared with fast food giant KFC, which leads the competition with over 3,200 locations (McDonald’s has 1,100).

While China is now KFC’s largest market, Subway’s China stores only contribute a “tiny” amount to its global sales, Fred DeLuca, the company’s founder and president, admits.

But Subway – or Sai Bai Wei (Mandarin for “tastes better than others”) – is now throwing much greater weight behind its China efforts, in a market it entered in 1995. The company recently announced that it plans to grow the number of stores to 500 in the next five years. And in 10 years, the sandwich store chain wants to match McDonald’s in store count.

Is that wishful thinking? Perhaps, but Subway says China’s middle class is increasingly health conscious and the sandwich chain’s emphasis on fresh eating and low-fat products will likely strike a chord with consumers looking for healthier options.

“People are starting to understand there is a bit of a problem [of obesity]. This may match up with our growth trajectory and put us in a position where we can grow quite fast,” DeLuca told Reuters.

Subway’s expansion in China has been anything but smooth. When the company opened its first store, local customers were put off because they were confused about how to order a sandwich (all those diffeent choices between the different breads, fillings, and sauce flavours). Subway had to put up large signs at stores to explain the ordering process.

DeLuca said it also took Subway a long time to convince Chinese consumers that tuna salad was made from fish because many complained that they couldn’t see the head or tail of the fish in question.

But the major reason for Subway’s slow expansion in China is that sandwiches were not popular fare.

“They were going in with a product that wasn’t very culturally relevant,” Mark Kennedy of Landor Associates told Business Week back in 2006. “And they amplified that by the fact that the fillings they had didn’t have much relevance to the market.”

Yet despite repeated protests from domestic franchisees over the years, Subway resisted changing its menu in favour of more local offerings. However, KFC’s success proved that a little localisation was key to cracking the country’s fast food industry (see WiC53) and Subway recently told China New Times that it too is experimenting with menu changes (things like Beijing roast duck sandwiches and spicy Sichuan sauce). It is also introducing more “hot” sandwiches (i.e. heated up) to appeal to Chinese customers who like their food hot.

“In the medium to long term, it is absolutely part of our future to reach out and blend in with the local market,” says David Keir, Subway’s development agent in Shanghai.

Subway also may need to reconsider its pricing. A standard subway sandwich costs around Rmb20 ($3) compared with Rmb6 for a cheeseburger at McDonald’s. The company says it is looking at lower price options for its sandwiches to attract more customers.

That might help it win new business. A recent study found that 18% of respondents had heard of the sandwich chain and visited at least once, 40% knew of it but had never visited; while the remainder were oblivious to the Subway brand.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.