The highest Pizza Hut in the world is perched on the 24th floor of a skyscraper in Xiamen, a city (population: 3.5 million) in the Chinese province of Fujian. There’s often a wait for seats; calling in for reservations is highly recommended.
Unlike in the States, there’s much more to the experience than just pizza. Pizza Hut in China has a full wine list and a three-course menu complete with dessert. The menu is expansive, with pizza and pasta, salads, steaks — there’s even a brunch menu with bacon and scrambled eggs. Pizza toppings include Beijing duck and seafood. Risotto comes studded with mushrooms; clam chowder is served under a pastry puff cap. There’s a spectacular view of the glistening harbor and the adjacent island. In Fujian, the chain that’s struggling to survive in the U.S. is a popular date-night spot that attracts couples dressed to the nines.
Pizza Hut isn’t the only American company to completely rebrand in China. Further up the country’s eastern seaboard in Shanghai is the world’s largest Starbucks. The 29,000-square-foot monolith opened in December 2017 and still draws a line out the door; it’s a massive operation that has the capacity to serve 6,000 to 7,000 customers each day. Beans — some of which are grown in the southwest province of Yunnan — are stored in a 40-ton copper cask. One of the coffee bars spans 88 feet and is touted as the longest in the world. Craft beer and nitrogen-brewed tea are readily available, and the food and baked goods are provided by Rocco Princi, a famed Milanese baker.
The coffee chain is wildly successful in China, where it sells itself as an authentic taste of the West (unlike at KFC, the menu at Chinese Starbucks locations is largely the same as it is in the U.S.). But “one of the things that the Chinese like about Starbucks is that there’s always a seating area. In most urban environments in China, you can hardly find a seat,” says Arthur Dong, professor of strategy and economics at Georgetown’s McDonough School of Business. “Starbucks is a place where you can sit down and have a coffee and chat with your friends.”
Starbucks stores in China are up to 40 percent bigger than even their largest U.S. counterparts, according to Quartz, a smart tweak that allowed the brand to stand apart from other American concepts trying to attract Chinese customers. “If you have brands in a virgin market like China,” says Dong, “You can rebrand, go upscale, and do something completely different from your traditional model.” And that’s precisely what American brands have been doing in China over the last three decades.
The rise of American chains in China is as remarkable as it is almost incomprehensible in its scope. According to a report from IBIS, the fast-food industry in China generated roughly $150.9 billion in 2017, up 9.6 percent from 2016. Over the past five years, industry revenue has grown at rate of 11.2 percent annually, compared to 3.1 percent in the U.S. over the same period.
Today, a Starbucks store opens in China every 15 hours, and on a recent earnings call, the brand said China will surpass the U.S. as its largest market within a decade. McDonald’s plans to open 2,000 additional restaurants in China, which will make China the company’s second largest market after the U.S. And China is the biggest earnings driver for Yum Brands, which owns Pizza Hut and KFC; it announced plans to add more than 15,000 restaurants in the next 15 years.
But how did American companies get to this point in a country where, just 30 years ago, foreign businesses were mostly prohibited? The answer is a mix of timing, adaptation, and marketing ingenuity.
“The thing about China is that it’s a very large market,“ Dong says. In addition to being the world’s most populous country, Dong points out that “the population is highly concentrated across the eastern seaboard of China from Beijing, back to Guangzhou, and Shanghai in the middle” — and Western brands have been especially proficient at securing prime real estate in these cities, especially at iconic historical sites. KFC’s first location was on the southern edge of Beijing’s Tiananmen Square. Starbucks has an outlet near the Great Wall of China.
Locking in real estate at heavily trafficked hot spots has been at the core of these companies’ development plans. “You can have a semi-captive audience when you’re next to tourist sites,” Dong says. “And when you’re next to tourist sites you have foreign and domestic customers. After opening in some of these major cities, [an American chain restaurant] can then slowly expand its footprint into the more inward regions of China.”
KFC was the first American fast-food chain to touch down in China. Opened in 1987 in Beijing, it was quite the affair in a world where folks still wore Mao-style tunic suits and got around primarily by bicycle. A massive crowd showed up for opening day, and the store sold over 2,200 buckets of fried chicken, raking in $83,000 USD in just 24 hours. For many Chinese, it was their first taste of the Western world; the food was exotic and the experience felt a tiny bit illicit.
McDonald’s opened not long after that, in 1990. Today, KFC and McDonald’s are the top-grossing American fast-food chains in China, with KFC consistently leading ahead of McDonald’s.
“Fried chicken is a bit closer to the Chinese palate than hamburgers, so KFC has had a greater opportunity to expand,” Dong says.
But, at least in China, KFC is far more than just a fried chicken specialist. Proving that it knows how to cater to Chinese tastebuds while maintaining its American brand identity, the chicken purveyor also serves pork chops, curry, congee, deep-fried crullers (a Chinese breakfast staple), and the most authentic Portuguese-style egg tarts in all of China. (In the 2000s, KFC bought the recipe directly from the ex-wife of the progenitor of the egg tart and they have had a cult following ever since.)
McDonald’s has had a more difficult time catering to the Chinese palate. Though options like rice bowls and bubble milk tea fill out the menu, the Chicago-based company hasn’t been as bullish on adapting its dishes for the Chinese consumer. But it’s trying: In 2017, McDonalds sold an 80 percent stake in its China and Hong Kong operations for $1.7 billion, announcing that it would expand while focusing on menu adaptation.
Adapting to local tastes has been integral to the success for American brands, but the embrace of American chains in China goes far deeper than just good food.
“There’s a trust arbitrage in China,” Dong says. “The Chinese consumer doesn’t trust anything. They don’t trust their food, they don’t trust their water, they don’t they trust the air they breathe. They don’t trust the medicines because almost every other day there’s some kind of scandal about tainted food: used cooking oil, gutter oil, and adulterated meat and vegetables that have loads of pesticides on them.”
Over the years, China has become infamous for its domestic food scandals, including tainted baby formula, fake eggs, and mislabeled meats. While American brands are not infallible, there’s a pervasive belief in China that American companies hold themselves to much higher standards than their Chinese counterparts.
“When it comes to food integrity, consistency is very important. [Chinese consumers] feel that American companies won’t cheat in the way that Chinese companies will cheat,” says Dong. “You have open kitchens and fairly decently maintained dining rooms. There’s a systematic approach to food service that American companies are very stringent on. They will hold their store managers accountable. They also have ghost shoppers to check on the stores.”
Quality is accomplished by establishing independent supply chains. McDonald’s notably brought its own french fry vendor, Simplot, to China to grow its own potatoes.
Even so, American chains are not immune to their fair share of scandals. In 2015, Simplot was fined for water pollution. And in 2012, KFC and Pizza Hut owner Yum Brands was hit with allegations that its suppliers had injected hormones and drugs exceeding food safety limits into their poultry.
China opened its economy to the outside world 30 years ago, sparking a natural curiosity towards Western culture and brands.
“You’re dealing with a civilization that pretty much closed itself off to the outside world for the greater part of the post-World War II period,” Dong says. “And even before WWII, they did not have a lot of exposure to the West. So as a result, there was a huge fascination with foods that are completely foreign to the Chinese palate.”
Chains like Pizza Hut and Häagen-Dazs have been able to leverage the Chinese intrigue and trust of Western brands and rebrand themselves completely. Häagen-Dazs markets itself as a premium brand and often decks out its stores in gold accents and posh red furniture to target the higher-end consumer.
“Until recently people bought foreign products solely as a status symbol, so the more expensive the better,” says Antonio Graceffo, an economics PhD and MBA at Shanghai University. As a result, it’s able to charge three times as much in China: A three-ounce serving of Häagen-Dazs ice cream commands the equivalent of $14.29 in China, compared to $4.87 in the U.S.
But that desire for American “status symbol” dishes might be fading. In recent years, as China’s economy has soared and the middle-class has grown, market share for these classic American companies is decreasing as more Chinese companies enter the scene.
Although Yum Brands still controls more market share, domestic companies like Hua Lai Shi and Ting Hsin International Group (which owns the burger chain Dicos) are slowly catching up. Both brands are American fast-food copycats, with menu items like chicken nuggets and burgers. The biggest difference is that they tend to be cheaper and are better at meeting Chinese food preferences, with options like tuna salad bagels with corn, fish fillet burritos, and a hamburger with a deep-fried shrimp patty smothered in XO sauce and sandwiched with a rice patty.
While these dishes may seem odd to the average American, Chinese consumers do not have predisposed biases as to what hamburgers, bagels, and burritos should taste like, allowing for more creativity.
Despite the increased competition, Dong says American companies don’t seem to be slowing down their Chinese expansion plans. Even smaller brands are getting into the game: NYC-based burger chain Shake Shack recently announced it will open in Shanghai in 2019.
“The numbers are still holding up well and these American companies are still announcing that they’re opening up more stores,” Dong says. “That’s a signal that they have confidence in the market and are not pulling back.”