Growth in China’s foodservice industry has been slowing for years, causing many to wonder about the long-term prognosis for the world’s largest global foodservice market. Slowing growth, an economy that is reaching the end of its catch-up phase, and increasing competition in chained foodservice have left many operators with a lot of uncertainty when it comes to how best to navigate the market’s new and more difficult conditions.
While many of the concerns regarding growth are true—and it is a fact that China likely will not return to the sky high growth levels seen in previous decades—they should also be interpreted with a full understanding of conditions in China, what this slowdown really means, and what opportunities remain in the market. With that in mind, Euromonitor offers a look at five key insights about future foodservice growth in China—where it’s going, why that matters, and which operators are most likely to reap the benefits.
The Slowdown In Growth Is Real, And It’s Only Getting Slower
As shown below, the continued slowdown of value growth in China is readily apparent in forecasted growth figures. In fact, growth in all foodservice data types, including outlets, value and transactions, will see steady declines over the next five years as chained expansion slows, and growth in transactions slows along with the economy. To put these growth figures in a historical context, value growth in constant terms (for a like-for-like comparison) averaged 4.2% from 2009-2014, a higher rate than is expected during any year from 2014-2019.
But It Is All Relative: Growth In China Is Still Very Strong
However, while the slowdown is in fact very real, it is also often overstated--at least in terms of its significance for chained players. China’s growth levels were so high in previous years that they suffer immensely from that comparison; in fact, when China’s growth is charted alongside that of all other markets in Asia Pacific, growth levels in China are still much, much stronger.
In absolute terms, future growth opportunity in China is even more apparent. From 2014-2019, foodservice in Asia Pacific is expected to see a total absolute value increase of nearly US$200 billion, and 72% of that value will come from China alone. This increase in China represents a larger opportunity in dollar terms than the US, Brazil, India, Spain, Vietnam, South Korea, Indonesia and Mexico combined.
International Fast Food Chains Are struggling, But Not Necessarily Because Of Macroeconomics
As a result of the slowdown, it has been tempting to blame such conditions for the poor recent performances of some of the market’s leading brands. But while a slowing economy definitely has not made things easier for chains like McDonald’s and KFC, it also has not been the primary reason behind each company’s struggles. Rather, both chains have suffered from food safety scandals and other public relations issues, as well as a more general evolution in local consumer preferences—and the local competitive landscape—that has many young consumers in China seeking out other options. International fast food chains are no longer necessarily the primary option for Chinese consumers that are looking for quick, convenient meals in a hygienic environment, and many brands have been struggling to keep up with newer local competitors.
A look at recent performances by the top five chains in China further illustrates this fact, showing that while KFC and McDonald’s have both recorded steep declines in recent years, consolidating at flat value growth in 2014, Dicos, Starbucks, and even Pizza Hut (also operated by Yum! Brands) have all shown much more positive performances. While each of the remaining top three brands has seen recent growth slow in relative terms, all three have managed to sustain consistent double-digit growth based on strategies that more closely align with the preferences of the modern Chinese restaurant consumer.
This Means Opportunities Are There, But They Require Newer, More Effective Strategies
When taken together, this all means that China is simultaneously a very appealing long-term growth target—one that simply cannot be ignored—and one that is rapidly growing more and more difficult to navigate. The strategies that have worked for leading chains for decades are suddenly no longer effective, and consumer preferences are changing as China begins to look much less like an emerging market with limited options, and much more like a mature, higher-income market with sophisticated dining consumers. Most notably, this evolution in preferences and spending power has come with rapidly growing demand for Asian foodservice, as consumers who are able to dine out more often seek out more convenient versions of local favourites. As a result, the categories of Asian full-service restaurants and Asian fast food in Asia Pacific now offer the two largest growth opportunities in the world in absolute value terms—opportunities that are highly appealing to multinational players, yet very difficult for them to tap into.
Local Players Are The Ones To Beat
Moving forward, this means that much of this growth is expected to go to fast-growing local players. In fact, many of the fastest growing concepts in Asia Pacific are local chains rather than multinationals, and nearly all of them are offering modern twists on local cuisines. Dicos for example, a chicken fast food chain that offers a locally owned alternative to Western-style fried chicken, has seen average annual value growth in Asia Pacific of 22% over the last five years, with very similar positioning to the struggling KFC concept. While Yum! Brands was expanding in major cities and focusing on expensive premium locations, Dicos steadily grew its presence in third-tier, fourth-tier, and even smaller cities, building a loyal consumer base with lower prices and a promise of high-quality ingredients from a local chain. Now the chain is using its momentum to push into more premium locations, taking on KFC and other international chains more directly.
This brings us to the final and perhaps most important insight when it comes to China foodservice over the next five years: While the economy poses a significant challenge, the biggest threat to future growth for any chained player is not macroeconomics but, rather, simple competition. The foodservice industry in China still has plenty of room to grow, but every dollar it increases is being divided among an exponentially larger number of players—many of which have a more thorough understanding of the Chinese consumer, and have designed concepts that are better equipped to appeal to larger swathes of the local population.
Analyst Insight by Elizabeth Friend - Senior Foodservice Analyst, Euromonitor International
Euromonitor International is the world leader in strategy research for consumer markets. Global coverage and leading edge innovation make our products essential for companies worldwide. From socio-economic context to intimate detail on the smallest products or markets, we offer unmatched detail and unbiased content for every region, country, category and channel. Euromonitor International market research focuses on industry, country, company and consumer lifestyle research. We analyze companies and markets in more than 200 categories across 80 countries.