The Recipe to Win China’s Fast-Food Market

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The fast-food industry in China has witnessed substantial growth in recent years, driven by factors such as an increasingly urban population, an expanding young consumer base with a busy lifestyle, and evolving dietary habits.

Further fueled by Beijing’s active and continuous efforts on market liberalization, China’s fast-food segment presents vast foreign investment opportunities.

This article provides an analysis of China’s fast-food market trends and sector prospects for individual investors and businesses.

Origin and expansion of the fast-food sector in China

Western fast-food was introduced into China in the 1980s when KFC opened its first outlet in Beijing.

Since then, the sector has experienced substantial growth, with other international brands, such as McDonald's, Subway, Domino’s Pizza, and Pizza Hut, joining the market.

• In 1987, KFC opens first outlet in Beijing.
• In 1990, McDonald's enters the Chinese market, opening its first restaurant in Shenzhen.
• In 1990, Pizza Hut enters the Chinese market, opening its first restaurant in Beijing.
• In 1995, Subway enters the Chinese market.
• In 1997, Domino Pizza enters the Chinese market.
• In 2005, Burger King enters the Chinese market, opening its first restaurant in Shanghai.
• In 2016, Taco Bell enters the Chinese market, opening its first restaurant in Shanghai.

As of April 13, 2023, KFC has maintained 9,650 outlets in China. Meanwhile, McDonald’s has 5,746 outlets, Subway has 718 outlets, Domino’s Pizza has 613 outlets, Burger King has 1,494, and Taco Bell has over 50.

On the other hand, in the early 2000s, domestic fast-food chains began to emerge, offering Chinese-style fast food with a modern twist. For instance, brands such as Dicos and Yonghe King offered Chinese-style breakfast options, while Ajisen Ramen introduced Japanese-style ramen noodles to the Chinese market.

Initially considered a luxury item for a select few, fast-food has become increasingly accessible and affordable for a broader segment of Chinese consumers as the economy has grown and disposable incomes have risen.

As a result, China's fast-food market is among the largest in the world, demonstrating a continuing upward growth trajectory.

In 2023, the market size of China's fast-food industry is estimated to reach RMB 3,687.8 billion (US$536.33 billion).

Competitive landscape

Global players hold a prominent share of China’s fast-food market. However, the industry remains highly fragmented, with numerous players.

The competition has intensified in recent years as local fast-food chains have risen in popularity and challenged the dominance of international chains. One of the reasons for the rise of local chains is the growing preference among Chinese consumers for food that is more reflective of their culture and tastes. This has led to the emergence of successful local fast-food chains, such as Real Kung Fu, Dicos, and Hua's Restaurant. These brands offer a range of options, from traditional Chinese dishes to fusion cuisine, which combines elements of both Chinese and Western food.

In addition, China has also witnessed the swift emergence of localized Western fast-food brands due to market expansion efforts made by several food and beverage companies. This trend has somewhat diluted the competitive advantages of Western fast-food, which historically enjoyed a ‘Western food’ dividend in terms of market appeal. In contrast, Chinese-style fast food has gained greater popularity and has emerged as a more formidable challenger in the market. For instance, Hua Lai Shi already has over 20,000 main stores, highlighting the exceptional success of localized Western fast-food brands in the country.

That said, international players continue to lead the market. Indeed, three out of five top brands in China’s fast-food market are multinational companies: Yum! China (owning brands such as KFC, Pizza Hut, Taco Bell, etc.), McDonald's Corp, and Restaurants Brand International (owning brands such as Burger King and Tim Hortons). These fast-food giants have achieved considerable success in the Chinese market owing to their established brand recognition and reliable product and service quality.

• KFC, with over 9,000 restaurants in 1,100 cities across China, is the most dominant fast-food chain in the country. It has captured a significant share of the Chinese fast-food market with its strategic expansion and the popularity of its products. Its success in China is also attributed to the incorporation of local flavors into its menu and adapting its service to the local culture, including adopting mobile payment methods that are popular in China. The popularity of KFC has been further reinforced by its extensive marketing campaigns and sponsorship of high-profile events in China.
• Burger King has been expanding rapidly in China, opening new locations across the country.
• Starbucks has also been expanding its offerings beyond coffee to include more food options, such as pastries and sandwiches, in an effort to capture a larger share of the fast-food market.

As competition continues to intensify, companies are focusing on differentiating themselves through unique menu items, quality ingredients, and innovative technology to improve the customer experience.

Consumer preferences and behavior

In 2021, hamburgers emerged as a top contender in the Chinese fast-food market, particularly in the online ordering segment. They ranked third in popularity among the top 10 categories of online food and beverage orders in 2021, just behind milk tea and rice combo meals. Notably, domestic hamburger brands that cater to the lower-tier market and offer lower per capita prices are also experiencing rapid growth, with brands like Dicos, Pailahamburg, and Tasting Burger already boasting thousands of stores.

Furthermore, the boundaries between various culinary genres, such as main meals, fast food, Chinese cuisine, and Western cuisine, are gradually blurring, leading the catering industry to adopt a new era of integration. For example, Chinese brand Xi Bei has launched a new fast food sub-brand called Jia Guolong Wine-Air Buns, which offers a unique spin on traditional Chinese-style hamburgers by utilizing specialty buns from Tonglu, Zhejiang Province. Xi Bei, traditionally known for its main meal offerings, has been making inroads into the fast-food market in recent years. By introducing the easily standardizable ‘Chinese-style hamburger’ as a breakthrough point, they are poised for rapid replication and expansion in the fast-food market.

According to recent data from iiMedia Research, more than half of surveyed Chinese consumers often choose to dine at Western-style fast-food restaurants, while 40.4 percent of respondents prefer a blend of Chinese and Western-style fast-food. Thus, as Western-style fast-food becomes increasingly popular and consumer preferences become more varied, restaurants that offer a fusion of Chinese and Western-style fast-food are more likely to appeal to customers in China.

According to the same survey, when choosing a Western-style fast-food restaurant, over 70 percent of surveyed consumers prioritize taste, while food safety is also an important consideration. Analysts believe that the younger Chinese demographic is the main force behind new consumption trends with their demand for diversified food options; this means that Western-style fast food companies need to continuously enhance their food varieties or menu offerings to meet consumer expectations.

Trends driving changes in China's fast-food market

Emphasis on healthier options and sustainability

With growing concerns over health and sustainability, the fast-food industry in China is placing more emphasis on providing healthier options to consumers. Many fast-food chains are offering more vegetarian and vegan options, as well as reducing sodium and sugar in their menu items. In addition, some chains are incorporating organic and locally sourced ingredients into their menus to appeal to health-conscious consumers.

Furthermore, sustainability is also becoming a key consideration for fast-food chains in China. Many are implementing eco-friendly practices, such as reducing packaging waste, using renewable energy sources, and promoting recycling. This not only appeals to environmentally conscious consumers but also helps fast-food chains to reduce costs and improve their overall brand image.

Advancements in technology

The fast-food industry in China is rapidly evolving with advancements in technology. Many chains are adopting digital ordering systems, self-service kiosks, and mobile payment options to improve efficiency and enhance the overall customer experience. Moreover, some chains are experimenting with automation and artificial intelligence (AI) to further streamline operations and reduce costs. For instance, some restaurants have implemented robots to prepare and serve food, while others are using AI to analyze customer data and personalize menus based on individual preferences.

These technological advancements not only enhance efficiency but also provide valuable data insights for fast-food chains. By collecting and analyzing data from digital ordering systems and customer interactions, chains can better understand consumer preferences and make data-driven decisions to improve their overall operations and customer experience.

Growth of delivery and online ordering

The rise of delivery and online ordering platforms has hugely impacted China’s fast-food landscape. Many consumers now prefer to order food online and have it delivered to their door, rather than dining in fast-food restaurants. This has led to a surge in delivery and online ordering services, with many fast-food chains partnering with these platforms to reach more customers. Moreover, some chains are even developing their own delivery platforms to compete with third-party services.

As the market for delivery and online ordering continues to grow, fast-food chains in China are adjusting their strategies to capitalize on this trend. Many are investing in digital marketing campaigns and optimizing their menus for online ordering, while others are improving their delivery logistics to ensure timely and accurate delivery of food. These efforts are crucial in maintaining a competitive edge in a market that is rapidly shifting towards online and delivery channels.

Lessons for foreign investors

Location has notoriously played a key role in guaranteeing the success of Western fast-food brands in China, as they have excelled in securing prime locations in China's top-tier cities, particularly in iconic historical sites. For instance, KFC's first restaurant was located on the edge of Tiananmen Square in Beijing. Acquiring real estate in heavily trafficked areas has been a crucial strategy for these companies. When fast-food restaurants are located next to tourist sites in China, they can attract both foreign and domestic customers. Expanding into the inland regions of China, especially tier-3 and tier-4 cities with a growing middle class, could also be a profitable venture.

On the other hand, experience has shown that adapting to local tastes is vital to the success of foreign brands in China. KFC is the best example of a fried chicken specialist that understood how to capture Chinese tastes while maintaining its American brand identity. Fast-food restaurants in China offer pork chops, curry, and Chinese staples like congee and youtiao. In this respect, KFC demonstrates exceptional cross-cultural adaptation in China.

Indeed, while McDonald's was able to achieve success in China relatively quickly, nowadays it does lag behind KFC in terms of both market share and overall presence in the country.

For more specific guidance on how to navigate China’s food and beverage market, please refer to our dedicated article.

Key takeaways

All in all, China's fast-food industry has witnessed impressive growth over the past 40 years, driven by a variety of factors, including an expanding young consumer base with a busy lifestyle, an increasingly urban population, and evolving dietary habits.

There has been a remarkable growth of localized Western fast-food brands in China, with their penetration rate steadily increasing. The preference for online orders and fusion cuisine has seen several brands making changes to their market strategies besides investing more in technology across their operations to be cost-effective, achieve higher customer satisfaction, and extract valuable data insights.

With the rising number of Chinese consumers joining the middle class, foreign fast-food chains are poised to experience significant growth opportunities. This is particularly true in under-tapped and previously unexplored markets in fast-developing Tier-3 and Tier-4 cities. However, as consumers in Tier-1 and Tier-2 cities become increasingly sophisticated and health-conscious, it is essential to embrace Chinese culture and customize products and marketing strategies to better cater to this specific audience in order to succeed in the Chinese market.