(FROM THE WALL STREET JOURNAL ASIA 12/15/14)
By Alyssa Abkowitz and Laurie Burkitt
BEIJING -- Chinese food chains are aiming to eat McDonald's and
KFC for lunch.
Xiabuxiabu Catering Management Holdings Co. serves Chinese hot
pot, in which customers cook meat and vegetables themselves in a
broth. Xiabuxiabu Catering is seeking upward of 1.14 billion Hong
Kong dollars ($147 million) in an initial public offering of stock
that will help it double its store count in China to nearly 1,000
outlets in the next four years.
Taiwanese company Ting Hsin International Group, which owns the
Dicos fried-chicken chain, rolled out 948 restaurants from 2011 to
2013 and now runs more than 2,000 Dicos stores, according to
market-research firm Mintel. European private-equity firm CVC
Capital Partners earlier this year acquired a controlling stake in
Da Niang Dumplings Holdings, a dumpling chain with more than 400
restaurants, citing a desire to "take the company to the next
level." CVC declined to comment on expansion plans.
Local Chinese dining chains are expanding rapidly in China to
capture a slice of the 560 billion yuan ($90.5 billion) fast-food
and casual-dining market.
They want to attract customers such as Li Xiangye, who says he
doesn't have time to cook. While he dines at McDonald's on
occasion, mostly for breakfast, he prefers Chinese chains.
"Chinese chains have better food," says the 40-year-old from
China's northeastern city of Changchun, adding that he considers
their food to be healthier and to taste more authentic.
The larger and well-funded local rivals mean increased
competition for Yum Brands Inc.'s KFC and for McDonald's Corp.,
which both consider China a core part of their international growth
efforts. The China market share of Yum Brands -- which runs more
than 6,200 KFC, Pizza Hut, East Dawning and Little Sheep
restaurants in the country -- fell to 5.1% in 2013 from 6.4% in
2012, according to data provider Euromonitor International, which
says local rivals took up the slack. Ting Hsin's market share, for
example, ticked up to 1.8% from 1.6% during the same period.
A spokeswoman for Yum says changes in the market reflect
atypical problems -- a food scare at a supplier -- that Yum has now
addressed. "We are confident that our sales in China will continue
to recover as these actions have their intended effect," a
spokeswoman for the company says.
Yum said Tuesday that its same-store sales in China for the year
would be negative on a percentage basis.
The Western brands have run up against scrutiny from Chinese
officials and the local media of their health practices and the
quality of their suppliers. A spokeswoman for McDonald's, which has
more than 2,000 restaurants in China, says the chain remains a top
brand there and that it is "bullish" about growth in China. To
assure consumers of safety, McDonald's says it has set up hot lines
and installed cameras to oversee its supply chain. Yum says it has
cut smaller suppliers to ensure quality control and that it has
overhauled its menus and marketing.
When they entered China more than 20 years ago, KFC and
McDonald's initially prospered in a fragmented market full of
mom-and-pop noodle shops and local dumpling chains. Chinese diners
in the past decade turned to the Western chains for a dining
experience beyond fried rice, to celebrate special occasions and
because the Western restaurants were perceived as safer and cleaner
than local alternatives.
Yang Qiaozhen says she eats at McDonald's a few times a week. "I
like the fries," says Ms. Yang, 19 years old. "I also like the
adventure," she says, adding that she and her friends like trying
out food from other countries.
But in less-developed cities, the U.S. hamburger chain is facing
increased competition from local operators such as Hua Lai Shi
Catering Management & Service Co., which has opened 3,000
stores selling fried chicken and french fries. The company's number
of restaurants nearly doubled from 2011 to 2013, according to
Mintel.
Esther Lau, a research analyst at Mintel, says consumers are
gradually switching to Chinese-style fast food because it is "more
diversified." She adds that Western brands are trying to use their
prime locations and creativity to restore brand image and regain
market share.
Analysts say the biggest challenge facing Chinese chains'
expansion is scalability. Western-style food often entails simple
preparation and fewer ingredients than Chinese food, making
standardization of a meal easier.
"When you need all those ingredients [for Chinese dishes], food
costs are much higher, which could be the difference between being
profitable and having a very low margin," says Sara Senatore, a
senior restaurant analyst at Sanford C. Bernstein & Co.
The complexity of Chinese food explains why the market for
Middle Kingdom chains is highly fragmented, with regional tastes
and varying cooking techniques. Still, that smaller size means some
Chinese chains could customize menus to appeal to increasingly
health-conscious consumers more easily than large-scale foreign
fast-food companies, says Ms. Lau. "In the end, it could prove to
be highly lucrative for them," she says.
A trend that is helping Chinese chains is a greater awareness of
nutrition. Kung Fu Catering Management Co., for example, emphasizes
steamed dishes, which benefits the company in a fast-food market
that is starting to reach its saturation point, says Ben Cavender,
a principal at Shanghai-based consultancy China Market
Research.
Access Investor Kit for McDonald's Corp.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US5801351017
Access Investor Kit for Yum! Brands, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US9884981013
Subscribe to WSJ: http://online.wsj.com?mod=djnwires