Chips With Everything - The Rise of Western Fast Food in Asia
Mark Robinson
Investors Chronicle
July 2, 2010

In his 1974 hit single, The Bitch is Back, Reginald Dwight (aka Sir Elton John) made the prescient observation that “Times are changing, now the poor get fat.” By that time, US diners had enthusiastically embraced the blandishments of Col. Sanders and his ilk, thus propelling the Home of the Brave towards a future dominated by super-sized portions and elasticized waistbands.

Actually, a slightly more accurate take on the situation might have read: “Times are changing, rising disposal incomes have been accompanied by a sharp rise in consumption of refined starches, fats and sugars.”

Nevertheless, the point is clear and it certainly hasn’t been lost on the global food industry: people in growing consumer markets tend to buy more processed and convenience foods as their incomes increase. Let’s face it, the American experience has been repeated here in the UK, and other lardy environs in the western world, so it’s hardly surprising that the food industry is now targeting consumer markets in China, Vietnam, South Korea and India.

It’s also true that convenience foods are now beginning to get a bad name in the west. In May, a number of prominent food and beverage multi-nationals pledged to reduce 1.5 trillion calories from their US product ranges by the end of 2015. This apparently publicly spirited action was obviously a bid to head off any binding federal legislation, but it demonstrates that food processors will have to tread more carefully in the Occident from now on.

Not so in Asia. While companies like Nestle, Coca-Cola and Kraft Foods are making commitments to reduce the calorific content of their products in the west, they have also been boosting capacity in key Asian markets. For instance, US giant PepsiCo recently outlined plans to spend US$2.5bn to develop its food and beverage operations in China for 2011 through 2013. This is on top of the US$1.2bn already invested over the past three years. And two years prior to the Beijing Olympics, McDonald's entered into a strategic partnership with Sinopec, China’s second largest oil and gas company, to install drive-through operations at the most viable of Sinopec’s 30,000 petrol stations. Yum Brands Inc. of Kentucky operates or licenses KFC, Pizza Hut and Taco Bell (amongst others) to Asian markets. Even Krispy Kreme Doughnuts Inc (which is to cardiology what Deepwater Horizon is to wetlands preservation) is successfully hawking its uniquely sweetened form of Americana through operations in Hong Kong, Indonesia and Japan.

The situation bears some comparison with the way in which western tobacco companies identified Asian markets as the key drivers for growth in the early 1990s.

Statistics from US market research company, RNCOS, show the effects of increased urbanization on the Chinese palate. The share of the fast food segment of the total Chinese retail industry is expected to reach 9.3 per cent by 2011 ­ up from 7.4 per cent in 2007. Food retail accounts for 63 per cent of the overall retail sector, while the fast food segment is predicted to have a compound annual growth rate of around 25 per cent during 2008-2011. In other words: what would have seemed a curiosity to Chinese citizens at the start of the millennium is now becoming commonplace.

Meanwhile, traditional domestic fast food businesses are finding it increasingly difficult to retain market share in the face of stiff US competition, as the multi-nationals seek to dominate Asia’s untapped potential. Companies such as McDonald’s have adapted existing product ranges to take account of local cultures, such as the Teriyaki Mac in Japan.

The company also defers to the sacred cows of India by using lamb as opposed to beef in its products on the subcontinent. In fact, fast food chains such as Pizza Hut and KFC are now regular sights in India’s major cities, which is odd given that India has traditionally offered a strong vernacular form of street cuisine. But the lurch towards the western fast food diet has as much to do with aspiration as it does with food. A Chicken McNugget is the food equivalent of an iPod for the fashion conscious Asian consumer.

Although familiar US brands like McDonald’s and KFC are the most visible manifestations of investment in this market segment, other western companies have been quick to secure market share within the supply chain. For example, British Sugar Group, a wholly owned subsidiary of Associated British Foods, operates four cane sugar factories in the Guangxi Province in China, while others such as Kerry Group and Sudzucker have long established interests throughout Asia.

The growth of the global oilseed market in recent years is fundamentally linked to rising demand for fried foods in Asian markets. According to the USDA, China consumes 25 per cent more vegetable oil annually then it did just a decade ago. The demand/supply ratio for edible cooking oils has narrowed sharply as a result, which has rendered associated markets susceptible to extreme price volatility. Producers of vegetable oils have struggled to keep pace with the great Asian fry-up as a result of the financial crisis, which has impacted on existing credit lines, thereby forcing primary producers to cut back on basics such as fertilizer and insecticide. Another supply-side problem exists in that some forms of commonly used cooking oils, such as that derived from the fruit of the palm tree, require long lead-times and significant up-front capital costs. Therefore, it is difficult to ramp-up production even if prices are working in favour of the producers.

Despite the rapid growth of fast food in Asian markets, there is still tremendous upside. Per-capita sales in the US are 50-60 times those of the key Asian markets, while fast food joints account for over 80 per cent of the money that Americans spend on meals consumed outside the home ­ the estimate for Chinese consumers is just 10 per cent. This vast potential has been recognized by McDonald’s, which has chosen to manage the majority of its Chinese operations, as opposed to franchising them out, as is the case for most of its US outlets. This decision has been taken despite the fact that gross margins on many fast foods outlets across Asian markets are rarely better than those achieved in the US, which usually range between 30 and 35 per cent. The Chinese gave us paper, the compass, silk, ceramics and the blast furnace ­ we’re now reciprocating by way of a cheeseburger and chips. Mao would be rolling in his grave, if he weren’t stuffed on public display.

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