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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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