Why China Is Just as Important as Breakfast in the Fast-Food Wars
Learn how to invest your IRA or 401k into a franchise penalty-free. ($50k min)
Discussion of the fast food market has been dominated by one thing in recent months: the battleground of the breakfast market. However, given Yum Brands' and McDonald's first-quarter earnings reports, it may be time to pay a little more attention to China.
Yesterday, Yum Brands, the parent company of Taco Bell, KFC and Pizza Hut, reported a 4 percent jump in worldwide sales in the first quarter of 2014. This growth was driven by China, where sales increased 17 percent, with an 80 percent increase in operating profit.
"Given the strength at both KFC and Pizza Hut, we expect to open at least 700 new restaurants in China this year as we further capitalize on our leading position in the No. 1 retail opportunity in the world," Yum Brands CEO David Novak said in a statement.
China has long been a key contributor to Yum Brand's revenue, where the brand has 6,332 total restaurants, including 4,618 KFCs and 1,308 Pizza Huts. When KFC slumps in China – as it did last quarter due to concerns over the bird flu – it drags down the entire brand. And, when the Chinese market flourishes as it did this quarter, thanks in part to the Chinese New Year, the growth drives profit for the entire brand.
Yum Brands isn't planning on slowing down in China. On April 2, the division initiated a restage of the KFC brand with the debut of a new menu, simultaneously launching 15 new products.
Yum Brands isn't the only fast food franchise depending on China to drive growth. McDonald's recently announced plans to revamp Chinese locations and accelerate franchising efforts in the region.
Yesterday, in an earnings call, the burger chain announced plans to open 300 new restaurants in China this year, bringing the chain's total to more than 2,000 restaurants. McDonald's also announced plans to grow franchising in China: currently, about 15 percent of restaurants are franchised, and the chain hopes to have 20 to 25 percent franchised within the next quarter.
To build the brand's appeal in China, McDonald's is revamping restaurants with locals in mind. The burger chain is redesigning restaurants in Beijing, Shanghai and Guangzhou using a local designer. McDonald's restaurants in the region have added green tea ice cream this year and rice dishes last year. The burger chain is even recruiting an American star for China-focused commercials, with an upcoming LeBron James-centered ad campaign.
China's huge and growing middle class makes it a perfect place for fast food franchises eager to enter new markets. While Yum Brands has begun to challenge McDonald's on the breakfast front, McDonald's is just as eager to take a bite of KFC and Pizza Hut's fast food success in China.