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Fast Food Restaurants McDonald’s and KFC Doing Well in China

July 19th, 2012 by · Leave a Comment

For companies like McDonald’s and YUM! Brands (KFC, Pizza Hut and Taco Bell), a significant percentage of their growth comes from China. Both operate thousands of restaurants in China, with revenue in the billions, and are growing at double digit rates. What has contributed to their success in China?

For one thing, both companies entered the Chinese market early. KFC opened its first restaurant on Qianmen Street in central Beijing in 1987, and McDonald’s followed three years later by opening a restaurant in Shenzhen in 1990.

Of the 33,510 restaurants worldwide that McDonald’s operated and franchised at the end of 2011, over 1,400 were located in China. The company is planning to open another 225 to 250 in 2012, and has set a goal of 2,000 restaurants by the end of 2013.

McDonald’s has been creative in its efforts to deliver on customers’ menu expectations through products such as the McFlurry and unique delivery storefronts like the dessert kiosks in China, where they are now one of the largest ice cream retailers. Such creativity has been a necessity, as beef is not as popular a meat in China as it is in the U.S.

McDonald’s has also done exceedingly well on the public relations front in China. They have brought in top Chinese athletes like Guo Jingjing and Liu Xiang for their commercials, and have been active in the charity arena. For 2011, Ronald McDonald House raised over 400 million yuan to help kids with heart conditions pay for their operations and medical treatments. These efforts have proven to be quite effective, as the average Chinese person sees McDonald’s as a company that cares about China, and the positive image is very good for McDonald’s business operations in China.

Compared to McDonald’s, YUM has been even more aggressive in its expansion in China. Of the approximately 37,000 units it operates in more than 120 countries and territories, approximately 4,500 system restaurants (around 3,000 of which are KFCs and the rest Pizza Hut) are located in over 500 cities in China.

YUM China recorded revenues of $5.6 billion and an operating profit of $908 million for 2011. Compared to the YUM U.S. operation, where the company has approximately 18,000 system restaurants with revenue of $3.8 billion and operating profit of $589 million in 2011, one can see that YUM China is already more profitable than YUM U.S.

For 2011, Yum China accounts for 44% of the company’s total revenue and 50% of the operating profit; same-store sales grew 19% in China, but declined 1% in the U.S.

Both McDonald’s and YUM have also adapted their menus to local tastes. But KFC seems to have gone further in adjusting their offerings to local tastes than McDonald’s. While its focus remains on chicken, KFC’s menus are almost entirely different from what is offered in the United States. McDonald’s, on the other hand, still offers a core set of items (Big Macs, Double Cheeseburgers, Filet-O-Fish and Chicken McNuggets, etc.) in China that is the same as in its U.S. restaurants.

Both McDonald’s and YUM also make good use of abundance of relatively cheap Chinese labor by offering 24 hours services in many of their restaurants as well as home delivery services.

One difference is worth noting: McDonald’s and YUM have adopted somewhat different pricing strategies in China recently. Several years ago, you could buy a value meal at both McDonald’s and KFC for about 25 yuan ($3.6 at the time). Today that same meal costs about 20 yuan ($3.2) at McDonald’s, but 30 yuan ($4.7) at KFC. The difference in pricing trajectory does not seem to have had an observable effect on consumer loyalties: both McDonald’s and KFC restaurants are packed most of the time.

Despite their differences, both McDonald’s and YUM have done superbly well in China. They present themselves as caring, responsible corporate citizens who care about China and the Chinese consumers. In return, both companies have been rewarded with steady growth in China that contributes significantly to their overall operations, which make their shareholders happy.

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