It was barely a year ago when everyone was singing the praises of KFC in China. And quite rightfully too. Consumers in China’s cities couldn’t get enough of Colonel Sander’s secret herbs and spices. KFC accounted for 40% of China’s fast food market across almost 4,000 restaurants, and there were another 16,000 planned. The chain had localized the menu sufficiently to appeal to the Chinese palate, but kept the restaurants American enough, giving diners an affordable way to live the ‘Western dream’. At a time when watermelons were exploding, Chinese pigs were pumped full of toxins and local restaurants fried their noodles in gutter oil, food from KFC and other western fast food chains was trusted to be safe – they abided by better-enforced foreign laws. Oh how perceptions have changed in China.
KFC’s sales in China crashed 36% in April. Some of it was due to Bird Flu fears, but sales were falling before the news of H7N9 broke. The discovery of excessive levels of antibiotics in KFC chickens had already harmed the brand’s image of a good safe meal and the novelty factor of KFC was also wearing off for many of China’s consumers, especially those in the big cities. Chinese are constantly bombarded with new, shinier options and many other Western alternatives, if that’s what they fancy. It’s no longer a case of starting a Western chain and thinking it will transport Chinese to the bright lights of Fifth Avenue, or the fresh, exotic air of the Amalfi Coast.
Restaurants, and any businesses for that matter, need to give Chinese consumers the X-factor, ensure great service and constantly evolve with changing tastes and awareness of issues such as the environment and health. The good news for KFC is China’s takeaway and fast food industry is picked to grow 80% in the next four years, bolstered by the rise in wealth of hundreds of smaller cities, where it still is a novelty – for now. As always, this week’s Skinny should give you some good news, views and insights into creating propositions and products that will appeal to the ever-changing tastes and trends of the Chinese consumer. Enjoy!
Half A Billion: China’s Middle-Class Consumers: In 2000, 4% of Chinese urban households were middle class. It’s now two-thirds, and by 2022, it’s expected to be three-quarters, contributing to 630 million middle class consumers. China’s mass middle class – those with household incomes of $9,000-$16,000 a year, make up 54% of urban households. Upper middle class – $16,000-$34,000, make up 14%, however by 2022, they’ll account for 54% of urban households and 51% of China’s overall consumption. Chinese middle class are spending. They bought 50 million flat screen TVs last year, with 68% of upper middle class now owning one. 34% of the upper-middle class have a bachelors degree or higher and 26% can speak and understand English. In 2011, 37% of them spent an average of 25% percent more on education than in 2010. By 2020, consumers born after the mid-1980s will account for 35% of consumption, and will be major purchasers of leisure, personal services, travel and high-end hospitality. Services will account for 50% of spending by 2022, up from 44% today.
China Shoppers Not Spending Enough: Chinese consumers still have the lowest consumption to GDP ratio in the AsiaPac region – 35%. India is 60%, the US 70%, so there’s plenty of room for growth. 2012 saw consumption become the largest contributor to GDP growth for the first time, at 51.8%. Although consumer spending growth is in double digits, concerns over what will happen to the economy and real estate prices are the two biggest drags on consumer confidence.
Finnish Fashion Entrepreneur Eyes Chinese Market: “There are so many people [in China] who no more want to show that I am rich, wealthy and successful, but they rather want to show this is who I am, this is my identity,” – CEO of Marimekko, top Finnish fashion brand who’s opening up stores in Shanghai & Beijing this summer.
China’s Changing Profit Picture: Just 3% of local and foreign businesses in China reported an operating loss, although almost half said margins are lower than two years ago, and most said revenue growth is slowing and costs are increasing. Healthcare was the industry in best shape, with 25.2% EBITDA margins, followed by financial services and technology. Industrial goods were at the bottom of the table.
How China Will Save You: One of the many reasons why last weekend’s Sunnylands Summit between Chinese President Xi Jinping and Barrack Obama is so important to both countries: the effect China is having on US exports and the jobs created from it. In the next decade, Chinese consumers’ discretionary income will grow from the current $1.2 trillion to $3 trillion, buying more American goods than any other country except Canada.
Chinese Shoppers Give Hong Kong The Business: In addition to luxury goods, Chinese consumers are now buying FMCG goods and other daily essentials in Hong Kong as they’re concerned about counterfeit products and safety.
Aging Chinese Face a Bleak Picture: A national survey of Chinese over 60 found 22.9% (42.4m) with consumption of less than 3,200 RMB ($522) a year. 38.1% reported difficulty with daily activities and 40% showed high symptoms of depression. China’s elderly dependents will rise from 11% in 2010 to 42% in 2050.
Fast Food And Takeaways In Chinese Market Hit RMB 1 Trillion In 2012: China’s fast food & takeaway market grew 80% from 2007-2012 to hit 1 trillion RMB ($163 billion). By 2017, it’s expected to grow to 1.8 trill RMB ($294 billion), driven by the economic growth and development in lower-tier cities. The novelty factor has contributed to much of the growth to date, but consumers in Tier 1 & 2 cities are now aware of the health issues and often opt for healthier alternatives such as organic and ‘green’ foods. Just 40% of fast food eaters don’t perceive it as bad for them. 71% of fast food eaters eat it at lunch time. Successful foreign operators have tailored their menus to suit Chinese tastes.
McDonald’s Hopes To Wow Mainland Diners With Rice: McDonalds is following KFC’s lead by delving one step deeper into menu localisation: rice. Chicken & beef rice wraps will be sold in all of China’s 1,700 McDonald’s restaurants. They’re also hoping to develop the 5pm-5am night consumption market. Dinners apparently account for half of foreign food operators revenue, and it’s growing at double digit rates.
A $4,500 Single-Malt Aimed at (Where Else?) China: Ganbei! ¥1,100 ($180) a peg. Macallan celebrates it’s first product launch in Asia, their top market, simply named ‘M’. Yours in a 1.5 litre crystal decanter for a mere ¥27,600.
Champagne Gets Recognition In China: Champagne has been given official status in China, ‘protecting’ the region from imitations. Although Champagne grew 52% in China last year, and is now the world’s 12th largest export market, it still accounts for just 0.6% of the Champagne exports.
U.S. Government Wants Chinese Consumers To Drink More California Wine: The US Government is funding the development of a road map and positioning plan for Californian wines to appeal to Chinese consumers, outside of just Shanghai and Beijing. The budget is $369,000. China Skinny could do it for a fraction of that cost, plus some sample product of course ;-).
France Criticises Chinese Wine Probe: China hits back at EU anti-dumping policies on solar panels, with an investigation in anti-wine dumping from France a day later. It’s not difficult having your thoughts heard when you have a consumer market as large as China.
NZ Formula Draws Bad News In China: New Zealand’s instant formula reputation has taken a hit in China with CCTV reporters finding so-called ‘NZ brands’ sold in China not being sold in NZ and using fake NZ addresses. Many Chinese-linked brands are having products manufactured under license in NZ, from manufacturers looking for a quick buck, potentially risking the overall multi-billion dollar industry.
KPCB Internet Trends 2013: Excellent 117 slides about the state of the Internet today. Not specifically China, although China’s online significance and global contribution comes through. A couple of interesting points – the hockey stick curve of China’s GDP as a portion of global GDP. Although growing fast, it is still has a long way to go before it is back at 1820 levels when it was 16 times the US and 20% more than Europe. It’s currently 79% of the US and 94% of Europe (slide 73). Also fascinating is that 60% of the USA’s top-25 tech companies were started by 1st and 2nd generation immigrants (slide 87).
China’s Smartphone Mobile Internet Users Reach 330 Million: There are now more Chinese smartphone Internet users than the entire US population – 330 million as of February 2013, rising 140m from December 2011. They account for 79% of China’s mobile Internet users. The number of mobile internet users rose by 18.1% YoY to 420 million users as of December 2012, representing 74.5% of overall internet users. On average, they spend 131 minutes a day online on their smartphone. 14.7% paid for apps or content: 63.7% of those had bought games and 30.3% ebooks. Baidu continues as the top for searching and maps. 13.2% had made payments on their mobiles, of whom almost two thirds use 3rd party apps like Alipay, and 39.2% use bank card based mobile payments. 60% surveyed had heard of QR codes, and 38.2% had used them.
Apple Rolls Out China Credit Facility: Apple has introduced a 12-month interest free credit on purchases over ¥300 ($48) for holders of China Merchant Bank credit cards. This should make Apple devices more accessible for lower income Chinese consumers and win back share from Chinese operators who won more than 50% of the market for the first time last year. Apple’s revenue in China grew 83% last year to $22.8 billion.
China’s Daily Deals Market Hits $1.7 Billion In Q1: China’s daily deal sites are consolidating like everywhere else, with the top-10 sites now accounting for 94.7% of daily deal revenue. Total revenue in the industry surpassed 10 billion RMB ($1.7b), with more than half going to local service deals – dining, leisure and lifestyle. Alibaba’s Juhuasuan is number 1, although its share dropped from 47.8% to 33.6% in the quarter. 2nd-placed Meituan’s share grew from 13.3% to 17.8%.
Huge Growth In Online Drug Sales As Demand For Health Products Surges: Online drug sales in China grew more than 300% last year to $270m. Online Chinese viewed medical service and health websites twice a day on average. Online drug sales are predicted to grow to $2.5 billion by 2015 due to a general trend towards online shopping, convenience and better pricing online. Soaring demand for medicine and Chinese healthcare products in general will also contribute. There is plenty of opportunity to grow, just look at the US, where 30% of pharmaceutical sales are online. It’s no more than 1% in China, which has a higher portion of retail spending online overall. Quality, reliability & logistics are the biggest barriers to purchasing online, with 61% worried about authenticity.
My Private Agenda: Agents are organising group trips for Chinese parents to British boarding schools, which are held in high esteem by rich Chinese parents who don’t want their kids involved in “on-campus gun rampages” in the US. Britain’s education system also appeals as it offers courses with independent thinking, debating skills and versatility, which are qualities lacking in China. Nevertheless, it’s not all rosy.
Gamblers Betting $1.6 Million A Visit Aid Macau Casinos: Macau raked in $38 billion in revenue last year, more than six times the value of Las Vegas’ strip. Two thirds come from high rollers from China, many who gamble on credit due to restrictions on taking cash out of China. They’re usually brought in by junket operators who arrange transport, hotels and financing. After a relatively slow 2012, high roller spending is on the up. Sky 32, one of the areas for high rollers, requires a minimum commitment of 10m RMB ($1.6m) per visit just to get out of the lift! Hope they’re serving Macallan’s ‘M’ there.
Big Hand For Duty Cut On Watches: Swiss watchmakers’ Chinese sales have taken a hit lately, but they have a little more reason to smile. The Chinese Government is to reduce tariffs by 60% for Swiss watches over the next ten years as part of the Free Trade Agreement signed in May. HK currently imports 20% of all Swiss watches manufactured, of which 70% are sold to Mainlanders. China accounts for another 7% of imports.
That’s The Skinny for the week!
If you’ve missed earlier news or need to learn more, there’s a stack of information about Chinese consumers in prior China Skinny Weekly’s right here. You can have this delivered to your inbox each week by subscribing for email updates, or if social media is more your thing, please follow us on Twitter, Facebook, Linked In or Google+, or subscribe to our RSS feed. If you have any feedback or suggestions for future articles, please let us know.