Foreign food and drinks brands get a taste of success in China

The food and beverage industry is one of the most active growth areas in the country with more foreign brands joining the mix.

December 10, 2018

Hollywood star Mark Wahlberg has plans to break into the China market in a big way this year – but through food rather than films.

His blockbuster hit is Wahlberburgers, a casual food chain he co-founded, which will be opening its first three outlets in Shanghai, Wuhan and Hangzhou.

Wahlburgers’ entry follows the high profile opening of Taco Bell in Shanghai last November. The Texmex joint returns to the Chinese market after withdrawing eight years ago, betting that the brand will take off this time due to changing demographics.

There is now a massive and growing middle class in China, including a significant group of Millennials who account for 45 percent of consumption and are more inclined to try new cuisines and dishes.

Taco Bell’s food has also been adapted to local taste buds – for instance, warm melted cheese is used instead of shredded cheddar as the Chinese prefer their food hot. Although it’s still very much in its early stages, Yum China, the company behind Taco Bell as well as KFC and Pizza Hut, tells the Wall Street Journal it hopes “to test the waters for a possible nationwide rollout”.

Real world applications

China is becoming increasingly attractive for foreign food and beverage (F&B) brands. According to a recent report, Foreign F&B Expansion in China, from JLL China in partnership with retail data collection specialist, LocalGravity, the F&B industry is one of the most active areas of growth in the country.

Expansion rates for 32 well-known international chains ranging from fast food giant KFC to cafes like Starbucks registered year-on-year increase of over 20 percent in 2015. In particular, brands in the cafes segment – those selling coffee, tea and ice-cream – were the most active, expanding 30 percent year-on-year in 2015.

Take the trajectory of Starbucks in China: the coffee chain entered in 1999 and now has more than 2,100 outlets in 102 cities, which includes Tier 3 cities such as Wenzhou in the east of China and Foshan in the south. Late last year, it announced that it aims to more than double its number of stores to hit 5,000 by 2021.

“There are several reasons why cafes do well – on the demand side, consumers really like the idea of afternoon tea, so there is a taste factor,” says Steven McCord, Head of Retail Research, Asia. “And rather than a peak at two meal times, customers visit these establishments all day long and also come and go quickly, which means more customers and therefore healthy rents for the mall operators.”

Room for growth

James Hawkey, Head of Retail for JLL China, agrees that there is “enormous room for growth” in China. “The China F&B market is now one of the world’s largest and fastest moving, but it is still quite fragmented,” he adds.

This means that growth is not always linear for foreign F&B companies. Different types of eateries expand differently and at a difference pace. Brands catergorized as “dining” and “casual dining”, such as Domino’s Pizza and Tsui Wah (an upmarket Hong Kong chain of tea houses), showed the least progress in reaching the smaller cities, due to fewer middle class consumers with the means and the appetite for such brands to do well.

Different cities within China are also at different stages of development. “Some cities are not that actually that urbanized and consist of a lot of small towns with a spread out population. Also, not all provincial capitals are created equal, with some much less wealthy than others,” says McCord.

Regional bias also has a significant role to play in a brand’s expansion plans. Casual dining chain Café de Coral and Taiwanese tea chain Gong Cha, for example, are significantly more concentrated in the south than they are in the east – even though east China is now the country’s most developed region with the highest retail potential. Indeed, South China has more F&B stores per capita compared to other regions, largely due to its proximity to Hong Kong. For many Western brands the city served as the gateway to the mainland Chinese market and offers easy access to established distribution networks and partners. To a lesser extent, some Korean and Taiwanese F&B chains established a strong presence in the north and east of China due proximity to their home markets.

However, this strategy can also curtail a company’s ambitions. “Being too closely attached to the Guangdong region near Hong Kong can lead F&B brands to overlook other high-potential areas,” says McCord. “There is a lot of unexploited potential in other parts of the country for many brands, starting with the smaller cities of the mega-city regions like those in the Yangtze River Delta.”

With China’s huge population, growing prosperity and economic development, the country’s huge appeal for foreign F&B brands will only grow. Yet in a fragmented and fast-changing market, the challenge for brands with a long-term vision is to provide a compelling mix of quality products, competitive pricing and a sophisticated image to draw in the modern Chinese consumer.