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Consumer Foodservice in China: Franchising concept drives outlet expansion
Euromonitor International, May 2004
Consumer Foodservice in China
Stable growth in 2003 despite the SARS outbreak
Over the review period, the Chinese economy experienced steady growth, with a high level of consumer confidence and personal income. The economy also witnessed declining unemployment rate, which resulted in a positive boost for consumer foodservice in China.
Consumer foodservice demonstrated stable, albeit sluggish development in 2003, despite the adverse effects due to SARS outbreak in the first half of the year. Growth was mainly driven by the strong economical performance of China, with China’s biggest economic boom in six years. Foreign investment also accounted significantly to the country’s economic growth. With the outbreak of SARS hitting the region, industries in China also felt the negative impacts, though at a lower extent as compared to other regional countries. Consumer foodservice and hospitality suffered significant losses, given a sharp decline in inbound and domestic tourism.
Sales are expected to continue developing healthily over the forecast period. It should also be noted that per capita expenditure on food is among the lowest in Asia, which provided a good climate for growth.
FSR and fast food sparkling
Over the course of review period, FSR was the largest revenue generator in foodservice, followed by fast food. Growth over the review period was driven by a switch of eating habits among China consumers, including booming tourism spending on dining and eating out more frequently despite the threats of SARS. However, according to industry sources, the maturity of urban sales might lead to intense price competition, which may result in a slight slowdown in value growth in the forecast period.
The introduction of various premium products in fast food, particularly those launched by international chains, offered consumers greater variety in terms of choice. For instance, in 2003, both KFC and Pizza Hut launched new food products to attract those with more traditional Chinese tastes. The introduction of premium products was due to greater customer sophistication and resulted in consumers being yet more discerning and brand sensitive.
Sales stirred by consumption campaign
A significant growth driver for consumer foodservice was the government campaign to encourage people to consume instead of saving, as a way of stimulating the economy. A gradual adjustment to interest rates was implemented to support this initiative, so that there would be less incentive to save. Saving was the traditional financial measure adopted by most Chinese. This boost in consumer spending had a positive effect on consumer foodservice.
Franchised outlets have increasing importance
Throughout the review period, franchising became more important. Franchising was negligible ten years ago, with little emphasis placed on it as an expansion strategy. This trend however, underwent a shift and franchising became players’ vital strategy to expand and upgrade in recent years.
This development of the franchise concept was largely inspired by the huge success of foreign franchisors such as McDonald’s, KFC and Pizza Hut. Local franchisors like Hulian Supermarket Chain in retail were also a proven success in expansion via franchising. With China’s membership in the WTO, the government also undertook aggressive efforts to allow foreign companies to trade in wholesale and retail services subjected to certain restrictions.
The emergence of franchising was especially prevalent within consumer foodservice and retail, as changing consumer attitudes towards eating out encouraged growth, supported by a growing urban middle class with high spending power and a greater number of entrepreneurs. Fast food and casual dining experienced the highest levels of franchising. This enabled much fast food such as ice cream and pizza to grow since 2001. Products become more accessible due to their presence in major retail stores and convenience outlets. Convenience store fast food also witnessed an aggressive expansion in sales from its franchised outlets.
Chains represented the most dynamic distribution channel in China in 2002 and 2003. They are performing particularly well, as they benefit from greater buying power than independent stores and can thus offer a wide range of products at particularly low prices, whilst still offering the same quality service.
Multinationals continue to consolidate their hold on cafés/bars
Due to market maturity of cafés and bars and an entrenched coffee drinking culture among China consumers, international brands have a considerably higher share than their independent counterparts. However, it is still very much characterised by intense fragmentation with no clear leader.
Domestic companies revamp their products' image
Domestic companies such as Xiao Fei Yang and Beijing Quanqude started to rethink their strategies and carried out major facelifts during the review period, in an effort to emulate the products from the multinationals. Some domestic fast food companies were able to maintain profitability over the review period due to the low cost of their products but do not pose as a significant threat to the major multinationals in most areas. These local players often lack in capital and advertising budgets to compete based on brand awareness and expanding their customer reach.
In recent years however, fast food witnessed intense competition and it became increasingly difficult for these local companies to remain stagnant in its operational strategies. Hence, some domestic chains such as the chained bakery, Ganso, took steps to make their products more attractive by re-branding and repackaging.
Further specialisation will boost value sales for FSR
The foodservice industry is poised to enjoy positive value growth over the forecast period. Being a nation with extremely long history, China offers large variety of cuisine to cater to the tastes of all consumers. Further specialisation in FSR will boost value sales and make it dynamic. Marketing activities, through product innovation and further consumer specialisation, is likely to boost overall value sales by 5.5% in constant value terms over the forecast period.
Home delivery a beginner with prosperous future
Though pizza 100% home delivery/takeaway is negligible in 2003, it will probably register higher consumer demand in the next few years. This will result from changes in consumer lifestyles and a more hectic pace of life, which will limit opportunities for people to dine out or cook at home.
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