US food chains are looking to China for sales growth, despite the trade wars. But the process is by no means straightforward, reports Chris Evans
China undoubtedly holds an allure for food companies due to its size, growth potential, increasing sophistication and digital leadership. The fact that its economic growth has slowed recently also appeals as customers look for cheaper options.
Big brands are literally battling for space in the major Asian country. McDonald’s is planning on opening more than 400 stores in China by the end of this year, as part of a five-year plan to nearly double its store count to 4,500 by 2022.
Others are following suit, such as Popeyes Louisiana Kitchen, which announced a franchising deal to develop 1,500 stores in China over the next decade. KFC already has a strong presence in China with more than 6,000 stores, as does Burger King with over 1,000 stores.
This rapid expansion in the Far East is seen by the experts as inevitable. “The DNA and natural survival instincts for chain restaurants is to grow,” insists Arlene Spiegel FCSI, president, Arlen Spiegel & Associates, Inc.
“The overseas expansion only helps with their fundamental economic model, which is economies of scale. Plus, by having a strong presence in China, it establishes their brand globally and frankly is good for public relations.”
What’s not so good for public relations is the high-profile trade war between the US and China, seemingly sparked in the most part by president Donald Trump. Earlier this month, he threatened another round of tariffs on the roughly $300bn of Chinese goods that had not already been targeted by US levies.
These trade wars are not yet halting the US restaurants’ expansion plans in the country, but they do typically source goods from both their home and the local market, and retaliatory tariffs by China on US goods could result in higher food costs. Plus, there are stories of US goods being stuck at Chinese ports.
Brand and culture
Heading into China also comes with cultural and brand challenges that are important for all food companies to factor in. “In China, consumers [freqeuntly] choose the brand first and the product second. This makes brand equity even more important in China,” argues Karen Malody, FCSI, principal at Culinary Options. “Get your brand story straight and make it a good one.”
Malody also insists companies need to deeply immerse their understanding of the cultural trends and values of the country before entering, especially as it “relates to the features and benefits that you think are relevant in the USA but may not be seen as such elsewhere.”
She speaks from personal experience, having served as menu development director for Starbucks before becoming an independent foodservice consultant. “When I was with Starbucks opening new markets, it was essential to go to the new market, observe, ask questions, listen, understand the culture and adjust food and beverage items accordingly.
“Success in any market requires deep understanding andrespect of the people and culture. Just because you build it – without this understanding – they just might not come.”
Blinded by the prospect of growth in the Chinese market, some companies can underestimate the market’s dynamics, cultural differences, necessary investment, digital infrastructure needs, and the fast evolving tastes of the local consumers.
Early advantages in the territory can be wiped away quickly when trends aren’t anticipated far enough in advance, and countermeasures are brought in too slowly. Local competitors are often on the ball quicker.
Malody insists this is a dilemma for most Western brands in China who have a lack of real-time consumer insights and the unwillingness to invest in the proper infrastructure and tools needed to understand trending consumer issues, topics, and desires as they happen.
Whether the above are a concern for all the big brands looking to expand in the country is a question for their head honchos. But in a conference call recently, McDonald’s CEO, Steve Easterbrook insisted the company is very confident about its future in China. “You’ve seen the pace at which other people are expanding, but it is a huge market,” he told analysts. “The emerging middle class, the greater affordability of the mass population there is heading towards Western [quick-service restaurant] type of average checks and affordability.”
He has been somewhat more concerned by the trade wars though. In July last year, when the battles were at their most intense with each side imposing retaliatory tariffs, Easterbrook said: “The impact within that market on the uncertainty of the trade discussions has hit the markets, which, in turn, hits consumer confidence.”
Trump’s rhetoric doesn’t appear to be changing either, which means food companies need to be wary. “Our (the US) current relationship with China, as a result of his policies and positions, causes any company to pause as to the long-term impact on our international relationships – and the resulting respect our brands are, or aren’t, given,” concludes Malody.