It is a natural tendency to explain current events based on the past experience. However, the current global economy is unprecedented and is navigating into grey territory especially in emerging markets. Thus, we always have to keep in mind that the fundamentals of, for instance, American and China are essentially different, both historically and contemporarily.

　　For QSR industry, hasty globalization and the eagerness of the international companies for new market have created a new playing field and set high bar for market entry in many emerging markets. This phenomenon is historical and unprecedented, and the consequence of its ongoing impacts is too early to tell. With so many x-factors, there would be many trial-and-errors even for the most established ones. In China, McDonalds and KFC are exemplary and taking the leads in almost all frontiers.

　　McDonalds and KFC are two largest restaurants companies in China. They intend to double their outlets in three years, and their financial and managerial depth is second to none. It literally turns China’s QSR market into a two men’s race. Their ability to stay aggressive and inventive is outstanding in context of their gigantic size. Unlike their business model in the US and most of other markets, the majority of their stores are company-owned, which means

　　1.       these companies have more flexibility to make audacious moves and changes;

　　2.       their major revenues derive from stores-sales instead of franchisee fee, real estates, and other traditional income sources;

　　3.       they need build a strong local management entity and also are more autonomous for their business development, which is particularly true in KFC’s case.

　　In spite of many superficial similarities, two companies take rather different approach to China’s market. 

 

　　[b]1. Menu[/b]

　　For QSR market per se, China’s market doesn’t have hundreds of brands as America does (included these demised during decades of Darwinist competition), and is unlikely to have anytime soon. In America, because of laissez-faire market and strong competition, the market tends to specialize from very beginning. Dunkin Donuts is for breakfast and coffee; Taco Bell is Mexican; Starbucks is coffee; Burger King and McDonald’s are burgers; KFC is fried chicken, and so on so forth. On the contrary, when the entire QSR chain industry in China is thin in brands and peer competition, to specialize to survive is not as mandatory and necessary as in America. Furthermore, when a foreign brand enters China’s market, it already has an established product, such as burger or pizza, without clues if there is a suitable market for this product or not. Thus, to them, it is not a customer oriented strategy but a product first approach, from donuts, coffee, pizza to fried chickens and burgers. All these products are very much new to Chinese. Secondly, these foods are foreign to Chinese, so are their raw materials, which mean the production costs are high because a lot of their ingredients have to be imported or have higher processing costs.

　　KFC is a fried chicken restaurant chain. In America, even though its market shrinks fast, its menu have not drifted away from its core. In order to enhance the competiveness, some of KFC stores bundle with other brands such as A&M and Taco Bell. In a highly competitive and specialized market such as America, KFC has little chance to make drastic changes.

　　On the contrary, KFC China (so is Pizza Hut China) is rather experimental, especially in its core menu. First, it started add burger and French fries; then, it adds Chinese breakfast and soymilk as a regular offerings; and now it adds Chinese rice dishes. 

　　McDonald’s is the most faithful to its menu, burgers and French fries. History proves that burger and French fries is more universally appealing than other food segments. In order to increase the revenues, McDonald pushes its breakfast menu such as English muffin with sausage and so on. China was not given a special treatment, and its menu is pretty much identical to its American one. It is likely Chinese will soon adopt burger as a regular food simply because of McDonalds. McDonald’s breakfast menu is likely to gain more success in China than in America because China has no chain specialized in breakfast such as Tim Hortons or Dunkin Donuts in North America. 

　　KFC China is taking a more interesting road. When the competition is timid, it will continue to enjoy success. However, with such diversity in its foods menu, its long term evolvement is obviously challenging. It risks brand identity, operation simplicity and long term development in exchange for hypothetical larger consumer base and more revenues in order to meet its fast expansion.

　　KFC China is facing a typical corporate dilemma. They are more capable to improve and make changes within current setting than to take entrepreneurial approach to start new type of business. It doesn’t mean it didn’t try. Yum Group (KFC’s parent company) started a Chinese food brand East Dawning, but went on quite unsuccessfully. It missed the opportunity to buy a successful Chinese food chain, Yonghe King, in 2003 when there are not many other brands worth of buying at the moment. Probably, with its financial and management strength, Yum may consider itself to act more as an investor than as an operator in China’s market.

 

　　[b]2. Price[/b]

　　The inflation in China is high, younger generation of Chinese shows strong appetite to buy, and the salary increases fast. 

　　McDonald is an old guard of American business. It sticks with its business essence in the past half century. Sometimes, we would be amazed by how well a company can keep its tradition to provide true values to its customers.

　　In the last half year, McDonald has started a market promotion – a breakfast combo for 6 RMB (little bit under $1), which includes an English Muffin Sandwich with a drink (coffee, orange juice or milk). Its price is so competitive that it can challenge the prices of many local street vendors. McDonald knows how to take advantages of its buying power and how to attract consumer with its brand. It is an outright success, and will have long-lasting effect to the market as a whole. As said in previous articles, QSR restaurants have capability to change people’s eating habits. Chinese are not well-known to be coffee lovers. A cup of coffee (free refill) at McDonald is 6 RMB (already one of the lowest in China, about 1/3 price for the same cup of coffee if you buy in a regular coffee house in China). When the combo also sells at 6 RMB, Chinese start to love coffee. It wouldn’t be surprised that half of beverages sold in breakfast combo is coffee. If McDonald can continue its breakfast menu price at this level, China’s coffee sector will likely become the unintended beneficiary of McDonald’s promotion.

　　As the other half of this two men race, KFC China follows the suit, and starts its own 6 RMB breakfast but in traditional Chinese foods. Again, it seems to show problems. Chinese foods are infamous for unsuitable for take-out. It requires much effort to make it works. It is hard to be done at a corporate level. For a 6 RMB breakfast combo, we can expect half of the consumers do take-out. In addition, the competitors of Chinese food at this price level are very strong, the costs are transparent to the consumers, and the consumers are very picky for the taste they are familiar with. Instead to introduce American fast food concept, KFC China is eager to localize. When Americans somehow lose appetite for Colonel Sanders’ secret recipe, it seems to have stronger impact on KFC China’s operation.

 

　　No matter what their strategies are, McDonald and KFC will continue to perform well in China because there are no other alternatives. There are many reasons that domestic companies are unlikely to take the leadership in developing QSR market in the near future, which is the topic for another article. For now, we can learn more about China’s QSR market through studying the strategy and the development of McDonald and KFC, which not only show the insights of these two companies but also the market as a whole. 

 

(paul.wang.ck@gmail.com)