[Note: below is Chapter 16 from Great Wall of Numbers]
My own experiences with Western fast-food establishments overseas can be summed up best by the rivalry and fortunes between KFC and McDonald’s in China. It was November 2008, when I first arrived in Shanghai (and the mainland) I noticed immediately within walking into the KFC near the Holiday Inn in Pudong that the listed menu items were both visibly different and numerically more. While Americans like to joke that there is a Starbucks at every street corner, the same can almost be said about KFC, especially with train stations in China. No matter where you travel to, you are bound to see the Colonel. And during these subsequent travels I noticed that KFC’s food selection varied from place to place: Guangzhou had different tastes than locations in Hefei, which tasted slightly different than those in Shanghai. Furthermore, while the items offered were typically the same from city to city, relative to US menus there were a number of visibly different choices. For example, KFC served corn as dessert in fruit cups, egg-yolk –filled-cupcakes operated as appetizers and traditional gravy was hard to find.1
In contrast, I rarely saw McDonald’s at every turn of the street. In fact, when I first moved to Bengbu, Anhui in 2008, there were three KFC’s and only one McDonald’s. Why was one more popular than the other? One rumor was that McDonald’s simply imported the food items from the US and used it as the sole menu choice for Chinese customers unfamiliar with hamburger (remember, pork is the most consumed meat in China, not beef).23 But the real story is much more complex and interesting.
KFC and McDonald’s both opened up stores at around the same time in the 1980s. Yet today, there are more than twice as many KFC restaurants as McDonald’s. Harvard Business Review has discussed this case-study in depth,4 pointing out five key reasons for KFCs success:
1) Corporate managers at KFC’s then-new China division led by Sam Su, “infused a Western brand with Chinese characteristics.” As cliché as that may sound, managers at KFC China reworked the menu (expanding it more than 75%) so that it offered a mix of traditional foods as well as local tastes and flavors. Because the parent company (PepsiCo) was relatively hands off, regional managers could continuously introduce, remove and tweak menu’s to better cater to local tastes. The notable example HBR cites is that of spices: Shanghai customers thought food was too spicy and those in Sichuan felt foods were too bland. So local managers were given flexibility to cater to the specific regional tastes.
2) Instead of trying to compete head-to-head with McDonald’s in the largest cities, KFC managers first opened restaurants in smaller cities spread across the country. As a consequence, because they were the first ones in the city, they were able to accomplish the three L’s of retailing: location, location, location. So not only did they manage to win highly-trafficked real-estate but also a distributed supply chain to help “reduce costs” as they scaled. The end result, KFC is now the largest restaurant chain in China, “with more than 250,000 employees and about 40% of the market for fast-food chains.”
3) Starting in 1997, KFC built a distribution network from the ground up. While relatively expensive, the investment paid off because they have supply-chain quality control all the back to the individual suppliers and animal feed companies. As a consequence KFC “now has the most advanced and integrated cold-chain system in China, with 11 full service logistic centers and six satellite centers serving every province except Tibet.”
4) Employee training is an on-going challenge to everyone operating a retailer with ambitious expansion plans. KFC needs “at least 1,000 new managers and 30,000 new members a year” and so it has implemented a sort of rolling team of trainers that move from one new location to another, training each new restaurant team both job skills and people skills so they can provide “excellent customer service.”
5) Unlike how they expanded in the US and other international regions, KFC locations in China are almost exclusively (90%) run by the corporate instead of the franchise model. They did this because of a dearth of experienced entrepreneurial talent available and “to closely control every aspect of their operation, from menu to decor, and to monitor results and the success of new products.”
Since their first store opened in 1987, KFC now operates approximately 5,000 restaurant outlets in 700 cities and is on pace to open one new store everyday of the year – with a goal of opening 15,000 nationwide including 700 more in 2013.5 And despite a food scare regarding antibiotics in chicken suppliers mentioned in Chapter 3, they plan to continue this expansion.6 A large reason why they have been successful is as noted above in the HBR study: adapting to local tastes with foods such as fried dough, sweet potato buns and fishball soup. Furthermore, its parent company, Yum Brands, now operates 5,400 stores on the mainland (including Pizza Hut restaurants); more than double what it had five years ago.7 As a consequence, China now represents for over half of Yum’s operating profit and sales globally.8 In fact, in 2010, KFC China for the first time had surpassed the US market in revenue. In contrast, McDonald’s has a mere 1,464 outlets and 16% of the fast-food restaurant market share.9
How can these tribulations help you?
Before opening a physical store, ask yourself these questions:
- Will my target market want my product as-is, or should it be tweaked and modified to fit their tastes?
- Where should our company set-up shop first? Does it need to be in a higher-profile Tier 1 city or can it take the distributed “long tail approach” that KFC utilized by placing proportionally more stores in smaller cities?10
- Can you locally source your supply chain? If it is inorganic matter, based on the discussion in Chapter 7 will you try to utilize a 3D printer?
- Who will you recruit to fill your management, sales and customer service roles?
- Should you franchise your operations out or manage them from a central location?
Other foreign restaurants and coffeehouses have moved into China as well. By catering to both local and Western tastes, Starbucks now has more than 700 stores and 12,000 employees on the mainland and plans to have 1,500 stores and 30,000 employees by 2015 making it the 2nd largest market behind the US (for comparison Starbucks recently announced it plans to open 3,000 new locations in the Americas including 1,500 more in the US by 2017).111213 By introducing flavors specific to Chinese tastes such as Red Bean and Green Tea Frappuccinos (popular domestic flavors), they have managed to localize their brand.1415 As a consequence, same store sales increased 10% in 2012 from the year before and “Starbucks stores in China now average $886,000 in annual sales, up from $507,000 in 2008.”1617
Their success has seen the entry of Britain’s Costa Coffee, which opened its 100th Chinese store in 2011 and now has 186 as of July 2012.18 And across the straights in Taiwan, 85C, a coffee chain plans to open up 100 more coffee shops by 2017 (it currently operates 366 on the mainland and 347 on Taiwan).19 According to Euromonitor International, coffee shops on the mainland generated $558 million in sales in 2011 and expect sales to triple by 2016.20 In fact, coffee sales collectively rose 20% from 2010 to 2011.21 In other segments of the industry, Subway restaurants (赛百味) also plan to expand from the current 358 restaurants to 900 by 2015.22 Carl’s Jr. opened its first mainland restaurant in Shanghai in 2009 and has plans to add 100 by 2016. And with arguably the most aggressive expansion plan, Burger King plans to open 1000 restaurants by 2019 (up from 63 currently).23 And like KFC before them, these firms are succeeding and hope to succeed by blending both local and Western tastes in a quality-controlled manner.
This localization-first strategy is similarly echoed by mainland experts such as Savio Kwan, former COO of Alibaba who recently told The Wall Street Journal that “Companies need to avoid bringing Western business ideas straight into China. It’s not always transferable.”24 Similarly, Hermann Hauser, cofounder of Amadeus Capital Partners opined that “Overseas businesses need to tailor their products specifically to the Chinese user, and in particular consider the average GDP per person and adapt product pricing.”25 And again, while there is a significant outlier of high-networth individuals at the top, the vast majority of the population earns less than $5,000 a year. What can your firm localize and sell to this price point?
Takeaway: while it would be impractical to transplant your company or business model in place of KFC, you can use the lessons they learned in doing business in China. Hiring teams comprised primarily of local residents has the added benefit of understanding consumer expectations and buying behavior. In contrast, if you attempt to fill your teams with expats and foreigners, they may not fully understand the local tastes, customs or taboos. And arguably one of the most important questions for companies wanting to sell physical goods: as described in Chapter 10, what are the regulations and laws concerning your industry? What kind of guanxi do you need to have with local suppliers, distributors and decision makers? Answering all of these will enable your company to accurately assess strengths, weaknesses, opportunities and threats.
- Western fast-food establishments such as McDonald’s, Pizza Hut and KFC (the latter two of which are both owned by Yum!) are generally perceived as ‘higher-class.’ That is to say that because their food is generally more expensive relative to local restaurants, families treat a visit to McDonald’s, Pizza Hut or KFC as a something “special.” The marketing campaigns and quality control programs at these establishments further reinforces this image of ‘higher-class’ which surprises the typical Western tourist who probably does not view it the same way. [↩]
- See China’s Volatile Pork Industry from the USDA and China rejects U.S. complaint against chicken tariffs from Los Angeles Times [↩]
- Chinese farmers produced 50 million tons of pork in 2012, more than half of the world’s total. See How China’s love affair with pork is creating a pollution problem from The Guardian [↩]
- KFC’s Radical Approach to China from Harvard Business Review, November 2011 [↩]
- Yum Brands Says The Chinese Still Love KFC from The Wall Street Journal [↩]
- See Yum Brands Rebounds From Chicken Antibiotic China Scare from Bloomberg, Yum stumbles badly in China, warns on profit from Reuters and ‘Kentucky Fried China’ no more? from Reuters [↩]
- Yum’s Yuck Factor in China from The Wall Street Journal [↩]
- ‘Kentucky Fried China’ no more? from Reuters [↩]
- KFC’s Big Game of Chicken from BusinessWeek [↩]
- The Long Tail: Why the Future of Business is Selling Less of More by Chris Anderson [↩]
- See Why Starbucks succeeds in China and others haven’t from USA Today and Starbucks opens first India outlet in historic Mumbai ‘shrine’ from Vancouver Sun [↩]
- Starbucks: we love China from Financial Times [↩]
- See Starbucks back on expansion path in Americas, China from Reuters and Starbucks to More Than Double China Staff to 30,000 by 2015 from Bloomberg [↩]
- Neat! Starbucks Asia – Red Bean & Green Tea and Hojicha Frappuccinos from Brand Eating [↩]
- Another niche opportunity may be exporting tea to China. For example, the descendants of Charley Grey (the Prime Minister whose eponymous namesake ‘Earl Grey’ tea comes from) have been successfully growing and exporting tea to Chinese consumers; selling 10 metric tons in 2012. See Earl Grey descendants sell English tea to China from Reuters [↩]
- Starbucks: China to Become No. 2 Market from The Wall Street Journal [↩]
- See the informative two part series: Will China be Starbucks’ Cup of Tea? and Will China Be Starbucks’ Cup of Tea? Part 2 from contextChina [↩]
- Whitbread sales boosted by Costa Coffee growth from Reuters [↩]
- Taiwan cafe chain hits the spot on mainland from South China Morning Post [↩]
- China the new battleground for coffee brands from The Malaysian Insider [↩]
- Starbucks Plays to Local Chinese Tastes from The Wall Street Journal [↩]
- See Subway Aims For 900 Sandwich Restaurants In China By 2015 from China Retail News and Subway eyes further China expansion from China Daily [↩]
- Burger King Plans to Open 1,000 Stores in China from Bloomberg [↩]
- The Do’s & Don’ts of Business in China from The Wall Street Journal [↩]
- Ibid [↩]