Subway has plans to almost double its outlets in China by 2015 to capitalize on the growing fast-food market. Provided to China Daily

With many of their markets saturated, overseas companies are tucking into China

In the fast-food industry, speed is obviously one of the key ingredients. Nevertheless, Tomaz Hladnik is amazed at how rapidly foreign fast-food producers have developed in China over the past decade.

"When I first came to China in 2001 not many people ate hamburgers or sandwiches," says Hladnik, 30, a Slovenian who has overseen the operations and development of Subway in the Greater China region since last year.

"But it (is) now (a) regular choice for a lot of locals. It is interesting to see how things have changed which means great (opportunities) for foreign fast-food chains like us."

Developed markets such as the United States and Europe are satiated with fast-food chains, and as they continue to chug sluggishly on, some big fast-food players are shifting their focus to China, where the industry continues to display a gaping appetite for growth.

Yum! Brands Inc, owner of the Pizza Hut and KFC, said in April that its first-quarter revenue rose 28 percent year-on-year in China at $1.23 billion, out of its total of $2.74 billion.

The company maintained its rapid expansion during the quarter, opening 297 new restaurants, with 168 in China.

"Restaurant growth overseas has been a key driver for the profit growth of Yum!, and our China business continues to fire on all cylinders," David Novak, Yum! chairman and CEO, was quoted by Reuters as saying.

Yum! entered China in 1987 by opening its first KFC store. It now has more than 4,600 restaurants under brands including KFC, Pizza Hut and East Dawning in China.

Last year Yum! booked $1.82 billion in operating profits, half of that in China.

Analysts say the fast growth of foreign fast-food chains in China is an offshoot of the blossoming health of the Chinese catering industry and of changing dietary habits.

According to China Venture Group, China's catering sector has enjoyed year-on-year growth of about 20 percent over the past 30 years. Sales totaled about 2 trillion yuan ($314 billion, 251 billion euros) last year, and that figure is expected to double by 2015.

"The fast-growing Chinese catering industry offers fertile soil for the development of fast-food here," says Wan Ge, an analyst with China Venture Group. "As the pace of life in China speeds up, customers are often in a hurry but demand good hygiene standards. Fast-food has become the first choice for 85 percent of Chinese city dwellers when they want to eat out."

Bian Jiang, deputy secretary general of the China Cuisine Association and head of the organization's fast-food department, says that with the acceleration of urbanization, growth in the fast-food industry will continue for the next five years.

China's fast-food market is worth about 700 billion yuan a year and has grown by 12 percent in each of the past five years, he says, and the market is expected to be worth 1.4 trillion yuan by 2015, the China Cuisine Association says.

Luo Juan, a catering industry analyst with Forward & Intelligence Co Ltd of Shenzhen, says the top five foreign fast-food companies in China are KFC, McDonald's, Burger King, Subway and Pizza Hut. Yum! Brands, owner of KFC and Pizza Hut, leads the foreign fast-food market with a 30-percent share in China, and McDonald's is second with 5.56 percent.

To gain greater market share many companies have adopted aggressive expansion plans.

Yum! plans to open 600 restaurants in China, Novak of Yum! said in a recent lecture at Fudan University.

Subway, which is also an American company, aims to more than double the number in China over the next five years.

"We now have 36,500 stores all over the world, but just 320 outlets in China," says Hladnik of Subway. "There is great potential for us to dig out in this market. We will open more than 100 outlets across China this year to gain more market share. And it is expected that by 2015 there will be more than 600 Subway outlets in China."

Hladnik says average store revenue for Subway in China grew more than 15 percent year-on-year in 2011 and the growth is expected to gather pace over the next two years.

However, although the prospects for the foreign fast-food giants are promising, development paths are never smooth.

Gao Chao, an analyst with Zero2IPO Group, says: "As the costs of raw materials, property, labor and transport have increased, foreign fast-food chains have raised prices of their products to keep the profits, and they will lose customers because Chinese are quite price-sensitive."

McDonald's added 1 yuan to the prices of four breakfast and lunch set menus last month. It was the company's second price rise this year. Earlier it added 0.5 yuan to 2 yuan to the prices of its Big Mac burger, soft drinks and pies, citing the pressure of rising costs. KFC also raised prices in September and again in October.

"Because of rising labor and food costs, and the appreciation of the yuan, how to keep the prices down is also a big challenge for every fast-food chain," Kenneth Chan, chief executive officer of McDonald's China, was quoted by Fortune as saying.

McDonald's can overcome these problems with its competitive supply-chain strengths, he said.

But the companies face other hurdles too. One criticism often leveled at them is that they are accomplices in the scourge of obesity because of the high levels of fat in the food they sell.

To address the issue the chains have introduced items likely to appeal to the health conscious, which aims to make them more popular with Chinese customers, who have begun to put a higher premium on their health.

For instance, cups of corn as an alternative to French fries and 100 percent orange juice are available in McDonald's restaurants. And Subway, which mainly produces sandwiches, promotes its products as healthy since they never fry their products.

Foreign fast-food chains have also enriched their menus and introduced Chinese-style dishes to attract local customers.

For instance, KFC has added some porridge and rice to its breakfast and lunch choices. Subway has also begun to produce sandwiches with a local touch, including ones with roast duck.

"All of these indicate that the foreign fast-food chains want to become more localized, capitalizing on China's huge urbanization program and the fast-growing catering industry," says Gao of Zero2IPO Group.

International fast-food chains are also keeping a close eye on smaller Chinese cities in the quest for growth.

"Pizza Hut will speed up its development in China," says Perter Kao, brand general manager of Pizza Hut and Pizza Hut Delivery of Yum! China.

"We will invest more than 700 million yuan and open at least 150 restaurants in those cities this year."

But expansion plans in the less-developed areas face challenges from local players. Some Chinese companies that sell Western food, some of it similar to that of KFC, have already won a customer base and have a head start in third-tier and fourth-tier cities.

Pala Hamburger, a Chinese brand that was started in central China's Wuhan city in 1999, now has about 1,400 stores across the country, about 1,000 of them franchises and the rest direct-sale stores. This year the company plans to open about 460 stores.

Ke Zhaoyan, marketing manager of Pala Food Service Manage Co Ltd, says Chinese fast-food chains' biggest advantage over foreign players is their lower prices.

"For example, a hamburger in KFC costs more than 10 yuan, but the price of a Pala hamburger is usually about 7.5 yuan," Ke says.

"Low prices help Pala open stores in small towns and remote areas that big Western brands haven't covered."

Luo Juan of Forward & Intelligence says that both foreign players and local chains enjoy their own advantages and there is little competition between Western fast-food makers and domestic players.

"Foreign fast-food chains have a developed franchise program, high brand recognition and good marketing skills, which help them expand quickly and stably in China. Chinese fast-food makers lag behind in these sectors but have price advantage, which helps them develop fast in the less developed areas.

"As the fast-food industry expands rapidly, demand is definitely growing faster than supply. Every company can benefit from the expanding market. There is no cut-throat competition now, and there won't be in the near future."

Contact the writers at huhaiyan@chinadaily.com.cn and chenyingqun@chinadaily.com.cn

(China Daily 06/15/2012 page10)