Growth in China to benefit restaurants

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The world’s largest restaurant brands have been growing rapidly in China, but the country’s dynamic growth holds more potential in the coming decades, even for established powerhouses, according to Bernstein Research.

Speaking during a presentation titled, “The Future of Restaurants in China,” Bernstein’s restaurant analyst Sara Senatore said China’s economy has more room for growth, yielding encouraging prospects for Yum! Brands Inc.’s KFC and Pizza Hut chains, as well as for McDonald’s and Starbucks Coffee.

“China is doing what any country does as it ramps up income curves: spending more on discretionary goods like restaurant visits,” Senatore explained. “It’s not until you hit about $15,000 in disposable income per capita that your demand for that starts to flatten out. There’s a long way to go before that happens in China.”

While some pressure on restaurant companies’ earnings could come from inflation of food and labor costs, other positive trends like increasing urbanization, wage growth and development of China’s interior could offset that burden, Senatore said. Overall, as more Chinese consumers report having less time to eat at home — and more money for eating away from home — Yum, McDonald’s and Starbucks stand to benefit from China’s explosive growth.

Senatore identified the following top trends related to restaurant growth in China:

Teatime makes a new daypart

The Chinese tradition of an afternoon teatime holds plenty of potential for Western restaurant brands, especially since beverages have higher profit margins. A tea-and-snack daypart also gives restaurants a chance to sell new items, like indulgent desserts.

“All four chains have really targeted that [afternoon-tea] market,” Senatore said. “For Starbucks, that’s where almost all the traffic is, and they have almost no breakfast daypart. But Starbucks can use that tradition to introduce people to their brand and to coffee drinking, to the point where the morning daypart might become as prevalent as it is in the U.S.”

She added that some chains use that fourth daypart to repackage items they already offer in a bundled meal to improve value perceptions. Pizza Hut, for example, bundles a treat and a coffee for a price point around 15 renminbi, or about $2, which it can advertise as less expensive than Starbucks, she said.

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