Yum Brands, the corporate parent of the KFC, Pizza Hut and Taco Bell brands, was the first major Western restaurant company to set up shop in China and for a long time it was an exemplar among the foreign-business successes there.  But in the last several years the company has been hit hard by a string of problems and is now in the process of hiving off its China operations into a separate corporate entity.  Indeed, the sum of its misfortunes forms a cautionary tale for other foreign consumer-oriented businesses in China.

Yum has been particularly besieged by the food-safety scandals plaguing China as a whole.  But damage has also come from self-inflicted wounds, including failures to discern changing consumer preferences and adapt to increasingly competitive local brands.  As the Financial Times reports, KFC’s cachet has faded after three decades in China and the outlet “is no longer viewed as a dining-out venue for the aspiring middle classes.”

In contrast, other foreign brands like Apple, Nike and Starbucks are still perceived as aspirational in nature and remain popular with the growing consumer class.  One observer explains the success of Starbucks this way:

It’s not a place to grab coffee to go in China. Each $4.70 grande latte is a status symbol worthy of sharing on social media, and each cafe is a refuge for lingering with friends in megacities where apartments are tiny.

A related challenge for Yum is posed by increasingly competitive local dining chains and online food-ordering companies.  Yum is not alone on this front.  Last year, the CEO of Unilever, the Anglo-Dutch consumer-goods powerhouse that has been present in China since 1986, noted he was most worried about the threats from fast-growing local companies throughout the world.  “We don’t see Procter & Gamble as our toughest competitor,” he stated.  “People still have this framework – that you compete with these three [global] companies – it’s just not true anymore. Most of our competitors in the emerging markets are regional players.”

Fleshing out this point, a Wall Street Journal report this past summer noted how a much smaller Chinese cosmetics rival used creative marketing strategies to steal a march on Unilever.  And a new Bain & Company study of Chinese retail shopping trends finds that foreign companies are increasingly losing ground to local brands, especially in China’s biggest cities where they previously were competitive.  Local players were able to accomplish this by building premium images amid evolving consumer preferences.

“Chinese consumers no longer want multinational brands just because they’re foreign,” notes one commentator. “The days of easy growth are over. The game has gotten trickier precisely because China’s consumers have gotten savvier.”

China’s booming e-commerce sector has further shifted the business landscape for foreign companies.  Yum, for example, is being challenged by app-based food-delivery startups that have attracted urban consumers by offering discounted dishes, free delivery, and a vast range of choice of local restaurants.  According to the Wall Street Journal, these companies are backed by major financing from the country’s Internet giants and are “getting economy of scale by teaming up with tens of thousands of food outlets across China.”  Food sales by such startups reached $15.7 billion last year, up 54 percent from 2013.

Unilever was slow in crafting a robust Internet presence and has faced difficulty in adapting to the massive migration of Chinese consumers to online portals, a development fueled by the phenomenal speed of smartphone penetration in China.  In 2013, the country overtook the United States as the world’s largest e-commerce market and per the Wall Street Journal online sales totaled $453 billion last year.  In fact, more than 460 million Chinese consumers are now shopping online – a ten-fold increase from just eight years ago.  A recent survey found that nearly half of Chinese shoppers are already buying groceries online, twice the level of global consumers as a whole.  Moreover, Amazon has reported a huge increase in online sales in China.

Yum and Unilever are in a big boat when it comes to China.  According the chief financial officer of Nestle, the Swiss food giant, consumer-products companies in general have been “too slow to react to the changes in the [Chinese] marketplace.”  Procter & Gamble’s CFO has the same lament, acknowledging that in China:

… we have not fully accessed the opportunity that the market is presenting in terms of growth in the premium price tiers as consumers look for better, more differentiated solutions, and frankly, higher product quality. We are bringing those items to market now, but our absence in those price tiers has, frankly, hurt us fairly significantly.


(UPDATE, December 17: New data from market research firm eMarketer provides more detail about the significant growth in China’s online retail industry.  The company expects total online sales to soar 133 percent from $672 billion this year to $1.6 trillion in 2018.  By that time, China will account for 83 percent of total online sales in Asia and half of the global e-commerce market.)


Analysis by David J. Karl, Geoskope’s Chief Knowledge Officer, and Victoria Hsieh, Geoskope’s Junior Associate for China.


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