Fast food franchise wars in China

Fast food franchising is viewed as a 'golden opportunity' in China's food industry

Hua Ke Duo's black sesame sprinkled buns and chilli pepper flavourings are Chinese, but the hamburgers are bigger than those at McDonald’s. 

That is the promise of plucky Chinese hamburger chain Hua Ke Duo that aims to beat McDonald’s by rolling out franchises across China’s regional cities. With a stylised panda logo, the brand is operated by Jinan Rui Xian Food & Beverage Services Co, based in Shandong province on China’s populous east coast.

Rui Xian, which has hired well-known actor Shi Yan Neng for a major Hua Ke Duo promotion campaign this summer, with billboard advertising in provincial cities, is seeking new franchisees. The firm is marketing itself as a value-priced, but health-conscious fast food option, with marketing material stressing that “no fat frying” is used to cook its burgers, which are priced at RMB15 to RMB35.

Fast food franchising has become a boom industry in China with a wave of new start-ups and brands advertising for franchisees online. Hua Ke Duo charges RMB50,000 to RMB100,000 for a new franchisee to sign up (the sum doesn’t include rent, wages or other capital costs), a sum much lower than those charged by major brands such as KFC and McDonald’s. Outlets are smaller in scale than McDonald’s.

Franchising is a “golden opportunity” in China, according to Zou Liang, a regional franchising promoter of Hua Ke Duo in northern China: he points to a low penetration rate with an average of only 5% of Chinese people eating in a fast food outlet on a daily basis compared to a corresponding 35% in the US and 20% in Japan.

Another new beef-themed chain seeking franchisees is Chu Ke Niu Pai (Beef Steak) which has sought to target newly rich with steaks. “Pork and lamb are for the ordinary people, beef is for nobles,” according to the promotional material for a newly opened outlet opened in Changchun city in northern China. Prices per dish at the quick-service Chu Ke Niu Pai start at CNY28.

A premium dining option for the Chinese when it first opened its stores, McDonald’s has lost much of its novelty and has had to face competition from local brands, particularly in the faster-growing regional cities where it has sought to expand.

Aside from McDonald’s and Yum, other key players are Taiwanese conglomerate Ting Hsin which has opened outlets of its Dicos (a KFC-style chain heavy on chicken burgers) and Master Kong (serving local-style dishes of meat with noodles and rice), a chain with a kung-fu themed logo.

Yum has a combined 8,000 stores in China, while McDonald’s has approximately 3,000, but that number should rise given the company’s Chinese franchising licenser is now a powerful state-owned conglomerate, CITIC; it took a 52% controlling stake alongside US venture capital firm Carlyle (28%) when McDonald’s (with a 20% stake) sold off its franchising licence for China for US$2 billion earlier this year. The new operation plans 1,500 new stores by 2022.

Chinese investors also took significant stakes in Yum China when it spun off its China unit in a listing on the New York stock exchange.

China’s catering sector was worth RMB3.8 trillion in 2017, according to the China Catering Association, an umbrella body. That’s a huge increase on the RMB2.04 trillion spent in 2011, but growth is starting to slow as the sector matures: the sector saw year-on-year growth of 6.5% in 2017, which compares with 16.7% in 2015 and 13.6% in 2012.

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