U.S. Restaurant Chains Seek Big Returns in China

From octopus Pizza Hut pies to spicy Quarter Pounder hamburgers, U.S. fast food is undergoing major changes in China as restaurant titans like Yum Brands and McDonald's Corp. vie to dominate a market they say could approach or exceed business at home.

For nearly 20 years, McDonald's and Yum Brands Inc.'s KFC chain have been selling burgers and fried chicken in China, the world's most populous nation.

In the last four years, however, China's economic growth has skyrocketed -- to over 10 percent a year -- and its citizens are enjoying much greater spending power.

Add to that cheap food costs and low wages, and U.S. chains say they will be able to open dozens of stores a year and enjoy strong sales and profit increases in China for years to come.

Still, challenges remain. Transporting goods in areas without adequate road systems is difficult, the labor market has tightened, and many Chinese consumers still cannot afford to eat out all the time.

Fu Mei takes her 6-year-old grandson to a McDonald's restaurant in Tianjin -- the third largest urban area in Mainland China -- about once a week. But after spending 14 yuan ($1.79) on a Filet-o-Fish sandwich for the boy, she and her husband cannot afford to eat there themselves. 

"It's expensive," she said.

Chains said they must be vigilant about what they charge for food in China, where incomes are modest compared with the United States.

McDonald's, which saw its sales at established restaurants in China decline slightly last year, recently dropped the price of a small burger, French fries, and a drink to 10 yuan ($1.28) from 12.5 yuan ($1.60).

Yum reexamines its pricing twice a year, according to Sam Su, the head of Yum China, and recently lowered the price of a delivery Pizza Hut pizza so customers would be more inclined to order a pizza -- still a new concept -- as an "everyday" thing. Yum also operates a sit-down Pizza Hut chain in China that is separate from its delivery service.

Coffee chain Starbucks Corp. spokesman Eden Woon said 25 yuan ($3.20) for a medium latte was expensive by Chinese standards but that customers enjoy hanging out in the restaurants, often in the evenings.

Chinese consumers say they like American chains and enjoy spending sometimes hours at a time there because they are often cleaner, better lit, and have friendlier service than local competitors.

"Workers here are well-behaved, and they are always pleased to help you," said beauty products saleswoman Li Yan, 36, while on a recent visit to a Beijing McDonald's. "Moreover, it's much cleaner than some traditional Chinese restaurants."

McDonald's, KFC and Starbucks restaurants in China tend to be more spacious than their U.S. counterparts because Chinese consumers prefer eating in to take-away. To create a more welcoming atmosphere, many older restaurants are being remodeled with sleek, modern decor and bright, shiny displays and menu boards.

Most restaurants also aim to cater to local tastes. A McDonald's Quarter Pounder in China, for instance, comes with cucumbers and a spicy sauce. Pizza Hut serves a wasabi and smoked salmon pizza topped with octopus and other seafood.

Leading the pack in China is Yum, which has nearly 2,000 KFC, Pizza Hut and Chinese-style East Dawning restaurants and earns nearly a third of its operating profit there.

KFC ranks No. 1 among them in part because of Chinese consumers' affinity for chicken, and Yum has said it could one day have 14,000 KFCs here. That's well above the 5,300 KFCs in the United States today.

McDonald's, the world's largest restaurant company, is in the unaccustomed position of being second to Yum in China, where it is growing more slowly and trying to revitalize sales that weakened last year in part due to deep discounting to attract customers.

McDonald's is working hard to differentiate itself from Yum by spending money on promoting its beef menu, and adding more drive-throughs and 24-hour restaurants.

Convenience, after all, is driving how Chinese consumers think about eating out in much the same way it does for Americans, the chains said.

Dong Lixin, 25, an office worker in Tianjin said during a recent visit to a KFC restaurant that he had chosen it simply because it was more convenient than walking an extra block to McDonald's. Otherwise, he thinks the two are "the same."

Unlike Yum, McDonald's has not set a lofty growth target for China but has said it is bullish about the opportunities that lie ahead.

The company has invested in farms and modern distribution centers to create a supply chain whose capacity far outpaces the demand from the 770 restaurants it has here now.

It has also said that in the near term, it is willing to slow its growth and forego the same investment returns it has in other markets "because we are betting on the future."

Starbucks, also, has said it is willing to sustain losses in its 430 store business in China in the near-term as it spends to fuel future growth in what it has said will one day be its biggest market outside the United States. (Source: Reuters )