Fast food, fast competition

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McDONALD’S AND YUM Brands Inc., KFC's parent company, are looking to add digital options in China that will make their fast food sales even faster and win back business after a rough year in the critical Chinese market.

McDonald’s will start testing mobile ordering and mobile payment in China under a pilot program in the current third quarter. The aim is to speed payment and meet consumer demand as the typical Chinese consumer becomes increasingly digital.

In the opposing camp of Yum and KFC, KFC teamed up with Alibaba in late June to launch mobile-payment services for 700 of its 5,000-plus stores in China. Customers can pay for their in-store orders of fried chicken in a few seconds by scanning bar codes generated by Alibaba’s mobile-payment application Alipay.

The aforementioned moves by the fast food giants are part of an overall process in reacting to the ever-increasing importance of the Chinese market, particularly for Yum as China is one of the only markets in the world where it outperforms its archrival McDonald's. Some 40% of Yum's total operating profit and more than half its revenues come just from its Chinese Pizza Hut and KFC locations.

Despite the recent food quality scandals and the general slowdown of the Chinese economy, the position of Yum and KFC as market leader in Chinese fast food is not as fragile as it seems. KFC is deeply entrenched in China through the sheer amount of brand loyalty built up over the years as well as its strong assimilation to the Chinese market.

The first KFC restaurant in Qianmen, Beijing is symbolic of the entry of Western firms into China. It opened in November 1987 and was a joint-venture between KFC (60% stake), Beijing Tourist Bureau (27%) and Beijing Food Production (13%). Since then KFC has adapted to the Chinese market and, despite its position as the world’s second largest fast food chain, it holds a dominant market share over its main rival McDonald's.

Millward Brown named KFC the most powerful foreign brand in China in 2013, having conducted 60,000 interviews with consumers in 10 Chinese cities.

In all, 13 of the top 20 brands are from the US, two from Germany, two from France, one from Italy and one from the Anglo-Dutch conglomerate Unilever. South Korea's Samsung is the only Asian brand on the list.

Despite the dominance of US companies in the rankings, the list of US companies that have managed to succeed in China is short. One of the world's best known online auction websites eBay is not on that list. Despite boasting 157 million active buyers and reporting US$18bn (£11.4bn) in revenues last year, the difficulties of the Chinese market meant that eBay was forced to shut down its main website two years after it began operations in China in 2004. eBay currently operates through a JV with a local partner to help operate an online auction business in the country, a shadow of its "international self".

Strategies can be gathered from KFC and the other 19 top foreign brands in China. All of the brands in the rankings entered China before 2000 and have been pioneers in their respective industries.

Coca-Cola has been in China since 1927 and by 1948 was selling more than one million bottles a year in Shanghai, making it the biggest city for the company outside the US.

Nike entered China in 1981, VW in 1983, KFC in 1987 and McDonald's followed in 1990, so getting in early seems to be a key factor. eBay certainly wasn't the first of its category with local competitors TaoBao launching in 2003.

Entering the market early, however, does not automatically translate to success. Adjusting to Chinese tastes and the subtleties of the Chinese market is pertinent to successful expansion. It is unsurprising therefore that China is one of the few markets where KFC outshines its rival McDonald's. The KFC menu contains an assortment of rice bowls, Chinese street food such as youtiao (油条) and shaobing (烧饼) as well as congee and various other innovations. Meanwhile the McDonald's menu remains roughly similar to its international menu, with staples of the Big Mac and the Cheeseburger. It is interesting to note, however, that the top selling product of KFC is still its famed Zinger Burger.

When told that Colonel Sanders had sold the business for US$2m, Chinese students at the Tiananmen KFC responded with disbelief. While Sanders died in 1980, he would have never imagined that his Southern specialties would one day lure millions of Chinese customers, thanks to KFC’s not-so-secret recipe of local business knowledge, western association and spicy regional fare.

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