31 July 2014
Chinese Fast Food: Catering to the Masses, Hampered by Inconsistency
With the Chinese fast food sector hugely outperforming Western competition across the mainland, the sector still has to rise to the challenges of standardisation, building consumer loyalty and targetting certain neglected niche markets.
China's fast food sector is set to grow by some 15% industry over the next five years. Despite the fact that many Western fast food outlets are already well-established on the mainland, most industry sources see Chinese cuisine as likely to retain its dominance of the sector, largely thanks to the long-standing cultural preferences of many Chinese consumers.
Outperforming Western fast food
Under the official eight-point public sector austerity initiative, the mainland's fine dining sector has been hit hard, although mass-market dining continues to show robust growth. At present, Chinese fast food sales are worth some Rmb200 billion per year. The sector is also enjoying an annual growth rate of nearly 30%, far surpassing that seen for Western fast food.
A prime example of this success is Home Original Chicken, the largest fast food chain in the southeasterly Anhui province. The business recorded a staggering 80% annual growth between 2007 and 2013. It now has more than 260 outlets, outnumbering the combined total of Kentucky Fried Chicken (KFC) and McDonald's restaurants in the area. Based on this level of sustained growth, some sources estimate that China's fast food industry saw its market value double (to Rmb1,000 billion) between 2007 and 2013, while also seeing an 80% growth in the number of relevant outlets.
Perhaps as a result, a number of formerly high-end mainland restaurant groups have moved into the fast food sector. The Beijing Xiangeqing Group Co Ltd, for instance, acquired a 90% share in the Shanghai Qi Ding Food Development Co Ltd for Rmb135 million. This saw it officially enter the Chinese fast food business for the first time.
Meizhou Cuisine, a subsidiary of the mid- to high-end Meizhou Dongpo Group, has also moved to establish a presence in the fast food sector. According to the annual reports of a number of high-end restaurant companies, the move into the fast food sector by several of their subsidiaries has helped make up the shortfall in revenue from the luxury sector.
The successes here have not gone unnoticed by Western fast food brands. Yum! Restaurants (China) Investment Company Limited, the company behind both KFC and Pizza Hut in China, launched East Dawning (Dongfang Jibai) in 2005, in a bid to enter the Chinese fast food market. East Dawning is designed to combine the KFC business model with distinctly Chinese cuisine.
Over recent years, the Chinese fast food industry has gradually refined its market positioning. During this process, it has also attracted considerable attention from private equity investors. Country Style Cooking Restaurant Chain Co Ltd, subsequent to receiving an Rmb20 million capital financing from SIG Asia Investment and Sequoia Capital China in 2007, successfully listed in the United States in 2010. A number of other Chinese fast food chains, including Kungfu Catering Management Co Ltd, Lihua Fast Food, Old Uncle Fast Food and Porridge Jiahe, have also all secured private equity financing.
Morgan Stanley, the international management consultancy, has predicted that an additional 200 million people will emerge as fast food consumers in the mainland market over the next 10 years. The size of the market is testified to by Zhao Jutao, Chief Financial Officer of the Chinese fast food chain store Home Original Chicken, which has now successfully listed in the US. He says: "The Chinese market is enormous – if you do well in just one province, it is enough to support a public listing."
Chain operation and standardisation: the way forward
Despite the rapid growth of the Chinese fast food industry, its relatively low brand awareness, insufficient standardisation and lack of defined brand positioning are all limiting its future prospects. At present, though, the market share of Chinese fast food continues to expand. As the sector matures, segmentation is clearly taking place, with a number of companies emerging that are targeting specific consumer preferences.
Regardless of these signs of sophistication, the sector is still dominated by small owner-operator businesses. In total, the combined market share of the top 10 chain enterprises is less than 10%. The problem is compounded by distinct regional preferences that undermine any bids for nationwide expansion.
In terms of moves towards greater standardisation, the very nature of Chinese cuisine poses a problem. Essentially, the preparation of Chinese fast food is more complicated than with Western fast food, making consistency harder to achieve. Without such standardisation, though, variations in taste and quality arise, making nationally consistent menus – as offered by KFC et al – almost impossible to deliver. This, though, hasn't deterred a number of companies in the sector from trying.
A case in point here is Kungfu Catering Management. This chain operation specialises in steamed food, emphasising its food's natural nutritional values and its healthy preparation technique. It has now developed proprietary steaming equipment in order to standardise its dishes. According to the company, only standardised procedures can guarantee consistent tastes and flavours, something it sees as essential for the core competitiveness of any Chinese fast food chain store.
In a further problem, many Chinese fast food chain stores lack a clear positioning, resulting in low brand loyalty among consumers. This is partly because many of these operators lack the sophistication to ascertain their actual proposition. It is incumbent upon these operators to identify their core offering and use this to better define their market position and build customer loyalty. Essentially, their menus must target a specific audience with specific flavours in order to establish their own unique proposition.
"Specialty snacks" and "targetting the elderly" trending up
In terms of specific offerings, two clear sectors have emerged that show a distinct potential for growth – specialty snacks and foods aimed at an older demographic. Here Chinese fast food companies can learn a lesson from their Western counterparts.
The fried bread stick sand soya bean milk sold by KFC and the soup noodles on offer at McDonald's show how these brands have sought to localise their menu offerings. "Local", however, is the most important element in many Chinese cuisines. Tasty specialty snacks, such as the rice vermicelli and cold noodles offered by many traditional small stores, are often highly sought after by consumers.
These small stores, though, suffer from a perception of poor food and hygiene standards. In light of this, those chain store operations that combine the availability of popular local snacks with a perception of high levels of cleanliness will inevitably prosper.
One business to go down this route is the Weijia Liangpi Rrestaurant in Xian. This offers "Sanqin cold rice noodles" and "Chinese hamburger" as its flagship products. Together with its "rice congees", "soup porridges" and a variety of cold drinks, all complemented by its modern, simple shop décor and well-supervised management, these have seen the restaurant become hugely popular.
Similarly, the handmade noodles on offer at Dongfanggong Lanzhou in Gansu are served in a tradition dating back to the Qing Dynasty (1644-1911). Here the restaurant capitalises on the traditional skills of making hand-pulled noodles, while also retaining the ambience of the late Qing period, complete with old-fashioned square tables for eight. Its standardised operation, streamlined systems and speedy food delivery are pretty much a blueprint for how a Chinese fast food store should be managed.
Over in Shenzhen, the Runbainian Rice Vermicelli chain store has become synonymous with its own flagship product – The Yan's Mutton Noodles, a dish forever associated with Zunyi in the southwestern Guizhou province. The restaurant adheres to one straightforward proposition – "hot tasty and spicy clear stock". This has proved the key element in its success.
In term of catering to more elderly consumers, there is a growing opportunity to target this expanding demographic. As of the end of 2013, Shanghai had nearly 3.8762 million elderly residents (aged 60 and above), representing 27.1% of the total population. With societal change seeing an increased number of the elderly now living alone, many cities have to contend with the need to feed these unsupported pensioners. Increased infirmity also makes this group more inclined to dine out.
A number of communities have already begun to address this issue with the introduction of community canteens. This government-led elderly care service, however, still generally lags behind demand. At the same time, many fast food players have focused solely on the younger demographic, virtually excluding older diners.
At present, few companies actively target this sector. There are, for instance, hardly any Chinese fast food operators that provide a long-term food delivery service to the live-alone elderly. The upshot of this is that a potentially huge sector of the market remains almost entirely untapped.
Both the niche and the mass market, then, offer considerable scope for investment and development. In light of this, some overseas companies have already begun to aggressively target the sector. In December 2013, for instance, CVC Capital Partners, a Europe-based private equity and investment firm, acquired Da Niang Dumplings Holdings Limited, a mainland restaurant chain. CVC is now said to be considering listing the chain in Hong Kong in the near future.
Ren Yuan, Special Correspondent, Beijing