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The Perils of Chinese Takeout


Smelling huge profits, US restaurant chains' moves into China aren't guaranteed success -- flexibility is the key.

As acquainted as I've become with traditional Chinese cuisine, the option for a Western fix is quickly becoming more readily available.

In response to a greatly oversaturated domestic restaurant market and idolizing the success of McDonald's (MCD) and Yum Brands (YUM) over the last twenty some years of Chinese operation, US restaurant chains are tiptoeing into China to tap the large base of wealthy and Western-obsessed consumers the country houses.

Among the newly introduced American eateries, Mortons (MRT) unveiled its largest location in Shanghai's financial district last month and California Pizza Kitchen (CPKI) re-opened (after failing at its first attempt) in a newly developed Shanghai area to take another stab at the Chinese market with a lower priced strategy.

Last week, McDonalds, already operating some 1,100 outlets in China, announced that it plans to double its Chinese presence by 2013. Yum Brands stated that China will become the company's top profit generator for 2010 and it aims to eventually open 20,000 locations.

AlixPartners, a global business advisory firm, recently found that young Chinese adults plan to spend 40% of their dining-out budget in Western restaurants. Their study also revealed that Chinese consumers spend just 22% of their food budget in restaurants (as compared to 50% among US consumers). Both statistics indicate promising potential growth.

But the performance of McDonalds and Yum Brands will not necessarily translate into the same lucrative opportunity for other Western restaurants. Both operators have spent over two decades studying the consumer, localizing the aesthetics, marketing strategy, food offerings, and building brand awareness to attain such success.

Walk into a Chinese KFC or Pizza Hut and you'll realize the Chinese aren't exactly experiencing Western fare. When was the last time you ordered rice to accompany your chicken or made reservations for a classy table at Pizza Hut?

While some eateries have the flexibility to alter the menu and dining experience, not all restaurants have that option. For example, it seems unlikely that Morton's can successfully modify the large, rarely-cooked slabs of beef it's so well-known for to appeal to a population fanatical about thoroughly cooked meat due to food safety issues and who traditionally center their meal around rice, not meat.

Earlier this month Starbucks (SBUX) set a target to triple its locations to 1,500 over the next five years, but will likely find itself over-expanded. Many other Western food establishments are set to face similar limited potential in China, due to the inability to modify the experience and menu selection.

Chinese tastes are changing, both in terms of fashionable style and palates. Many are adopting aspects of Western lifestyles, particularly in the tier-one cities. But many do it for "face" reasons, not necessarily because they enjoy the taste or experience. The Chinese culture is still deeply ingrained even in young consumers.

Street vendors selling snacks such as chicken hearts on a stick for US10c crowd Chinese college campuses, making Papa Johns (PZZA) a Western treat rather than a staple as it is in the US. And Chinese businessmen are more likely to do business over a turntable of various small local dishes and rounds of bijo, not filet steaks and high-end wine.

Restaurants have been struggling greatly over the past three years in the US. Looking to China may seem like an easy fix as well as an easy sell to investors. But investors should be conscious that the deep pockets of Chinese consumers chasing certain Western ideas won't necessarily translate into huge growth and profits for all Western restaurants.

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