CHINA- According to consultancy firm China Market Research Group (CMRG), American fast food chains are aggressively expanding into China’s less-developed cities as a response to the country’s stagnating economy.
According to the consultancy firm’s report, sales have declined in top-tier cities (Tier I and II) because the market is saturated. However, CMRG revealed there is a huge growth potential for these regions.
These cities are attractive because core costs like rent are lower, and customers appear more optimistic.
Although fast food brands like McDonald’s and KFC are considered cheap food options, they are premium options in lower tier cities. They are therefore more willing to save and try Western food offerings.
Yum China, which operates KFC and Pizza Hut in the country, revealed plans to open 5,000 outlets in the next two years. Over half of these new outlets will be located in lower-tier cities, where labour costs and rent are cheaper.
McDonald’s has also revealed plans to increase its store count in China from 6,000 to 10,000 by 2028, with more than half of these locations in Tier III & Tier IV cities.
These expansion plans were announced despite mixed to poor performance of the fast food giants in the past year as China’s economy appears to stagnate.
According to an analysis by the Financial Times, foreign investment by Western firms has reduced by 90% in the past year, indicating firms have lost faith in the Chinese market.
Yum China’s stock, for example, has slumped 43% in the past year after a significant reduction in sales.
However, QSR giants are pegging the expansion plan on the 330 million people living in lower-tier cities, equivalent to the total US population.
Fast food giants predict that these lower-tier cities will birth the next generation of the Chinese middle class.
CMRG also revealed expansion during a sluggish economy makes sense for fast food brands, which are considered recession proof in markets where they are viewed as premium eating options. This is because local restaurant options are almost always cheaper.
The consultancy firm reiterated the strength of large US QSR chains in China lies in their ‘barbell strategy’ of offering a diverse menu selection of both cheaper and expensive options.
The size of KFC’s chicken product line in the Chinese market is 50 items per menu compared to 29 in the US, reflecting this strategy.
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