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Growth Opportunities Restaurants

Growth Opportunities Restaurants

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G r owt h O ppor t uni t i es i n C hi na for C hai n

G r owt h O ppor t uni t i es i n C hi na for C hai n
R est aur ant s and t hei r Suppl i er s
R est aur ant s and t hei r Suppl i er s
Presented by
Steven H. Ganster
Managing Director, Technomic Asia
April 2006
Technomi c Asi a--Chi na Of f i ce
Room 502, Ji n Tai Bui l di ng
58 Mao Mi ng Road (Sout h),
Shanghai 200020, Chi na
Tel : + 86-21-6473-2588
Fax: + 86-21-6390-6659
sganst er@t echnomi casi a.com
www.t echnomi casi a.com
Technomi c I nc.
Sui t e 1200
300 S. Ri versi de Pl aza
Chi cago, I L 60606 USA
Tel : + 1 312 876-0004
Fax: + 1 312 876-1158
rpaul @t echnomi c.com
www.t echnomi c.com
page 2
Agenda
• Why China?
• K ey Country Characteristics—economic development, business environment, demographics
• I mportant Regional Dif f erences
• Chinese Diet
• China’s Restaurant Market—comparisons to U.S.
• Eating Out Habits
• Popular local and f oreign chains
• Brief ing on Technomic’s China Restaurant multi-client program
• Contact I nf ormation
• Q & A
page 3
Why China?
China remains the most dynamic economy in the world…
• Population: # 1 in the world at 1.3 billion
• Urbanization: there are more than 170 cities with over 1 million population
• Trade: 3rd in the world in total trade -> $1 trillion annually
• Growth: Since 1993, GDP has increased more than 600%
• Web users: # 2 behind the US in internet subscribers
• B-School Grads: 86 in 1991 up to 10,000 in 2004
• MN C participation: Of the global top 500 multinational companies, about 450 have invested in China,
with some setting up regional headquarters in China;
• Cell phones: More than 300 million subscribers
• Autos: I n the last f our years, annual car production has increased f rom 230,000 to almost 3 million
• Economic Impact:: China’s economy has grown ~ 9 percent a year f or more than 25 years
o The f astest growth rate f or a major economy in recorded history.
o Moved 300 million people out of poverty and quadrupled the average Chinese person's income.
page 4
China’s Economic Development
From a business standpoint, China is a newcomer to the world market and is still in an
early and dynamic state of evolution.
0
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500
1000
1500
2000
2500
Inward Direct Investment (US$Mn) Nominal GDP (US$Bn)
The “Gold
Rush” Period
page 5
+
High economic growth
Signif icant f oreign investment
WTO participant
Low labor rates
Burgeoning middle class
Olympics in 2008
World Expo in 2010
Major exporter/ importer
-
“ Dif f icult to make money”
Overcapacity/ price wars
Corruption
Poor inf rastructure
Protectionism/ nationalism
I ntellectual property inf ringement
Weak legal system
Looming banking crisis
Unpredictable risks (e.g. SARS)
C hi na C hi na’ ’ s oppor t uni t y-r i sk scal e s oppor t uni t y-r i sk scal e
China’s Schizophrenic Profile
page 6
Key Demographics
57%
43%
Rural Urban
20%
69%
11%
0-14 15-59 60+
51%
49%
Male Female
• Since 1978 China has adopted a one-child
f amily planning policy –i n the coming
years, the proportion of people over 60 will
go up sharply.
• Rural residents have been migrating to
urban areas to f ind jobs while more and
more rural areas are being developed into
industrial areas—spurring continued
urbanization.
• Rural Chinese tend to pref er male babies
who are expected to support the f amily
when grown-up.
page 7
Guang zhou Guang zhou
Shang hai Shang hai
Bei ji ng Bei ji ng
• Language: Mandarin dominated
• Personality: Extroverted, less
entrepreneurial
• Climate: 3 seasons, dry (North Eastern
USA)
• Food: Flour-based f ood, like noodles,
dumplings, buns, etc; Limited variety of
cuisines
• Language: Thousands of dialects -- some major like Cantonese, Shanghainese, etc.
• Personality: I ntroverted, hard-working, entrepreneurial
• Climate: Wet, tropical in South (South Eastern USA)
• Food: Rice-based; more variety of cuisine: South-western f ood is known f or spicy; Shanghai
f ood tends to be sweet; Cantonese f ood highly varied (eat anything).
Wide differences in terms of culture -- N orth and South divide by Yangtze River:
Regional Difference
page 8
China’s Diet (basic profile of urban resident)
• • Typically 3 meals a day Typically 3 meals a day
• • Daily visit to farmers Daily visit to farmers ’ ’ market to buy market to buy
fresh vegetables and meat fresh vegetables and meat
• • Salty food more popular than sweet Salty food more popular than sweet
• • More chicken/ pork than beef and fish More chicken/ pork than beef and fish
• • Preference for food with good taste, Preference for food with good taste,
smell and color instead of nutrition smell and color instead of nutrition
• • More emphasis on dinner and least More emphasis on dinner and least
about breakfast -- employees usually about breakfast -- employees usually
have fast food for lunch have fast food for lunch
Breakfast
Lunch
page 9
China’s Diet Breakfast
Fried Braided-
Bread (You
Tiao)
• A meal costs around 0.25-0.60 U.S. cents
• The menu tends to be high in calories (~ 950)
• Now some young f amilies begin to include milk and
bread in their menu
Typical Breakfast Menu for Urban Residents
Wet Bread w/
Fillings ( Bao
Z i)
Congee (Z hou)
Combo Meal (
Shaobing Youtiao)
I n South (Canton area), people tend to spend hours
f or breakf ast in nice restaurants with reasonable prices.
I n other markets, young people tend to skip breakf ast.
White-collar employees buy breakf ast f rom dirty street
stands as well, though some pref er to eat at home.
page 10
China’s Restaurant Market
83%
17%
Full Service Quick Service
China’s restaurant market* reached an estimated US$110 billion in 2005 and is expected to
maintain double digit growth through the end of the decade.
• Key drivers…
- General economic growth
- Increasing disposable income
- Continued urbanization
- Changing consumer habits
• Quick service restaurants showing
20% per year growth as both local
and foreign chains expand
* B asi cal l y ful l and l i mi t ed ser vi ce r est aur ant s
page 11
China’s vs. U.S. Restaurant Markets
~ 7% 15-20% Growth Vector
$314 $110 Total Revenues (US$bn)
13,673
$24.4 bn
# 1
600
$454mm (E)
# 3
McDonald’s
• Outlets
• Revenue
• Rank
5,525
$5 bn
# 7
1,200
$1.2bn (E)
# 1
KFC
• Outlets
• Revenue
• Rank
184,000
(top 500 only)
~ 7,000 N umber of Chain Restaurant Outlets
$594,000 $33,000 Average Revenue per Outlet
529,000
~ 3.5 million
(> 4 mm in 2005)
Total Restaurant Outlets
USA China (2004 data)
N ot e: F ul l and l i mi t ed ser vi ce out l et s--appl es-t o-appl es compar i sons ar e “ r ough” est i mat es
page 12
Overview of China’s Chain Restaurants
Developed Regions in China
• The average growth rate of
chain restaurant industry in
recent years is ~ 20%
• About 70% of the chain
restaurants are located in the
developed regions on the East
Coast
• L argest chains are f oreign – K FC and McD onalds have 25-30% of all chain out let s
- 75-80% of chain rest aurant s are local -- but t heir average number of out let s is much less
• Famous local chain brands include:
- ¸|¨ (Lit t le Sheep/ X iao Fei Yang, # 1 local brand, est ablished in 1999 in I nner Mogolia, specialized in H ot Pot self -
cooking mut t on f ood, over 700 out let s, annual sales of US$ 541 mm in 2004)
- ¸;¸¸¸ (X i ao Tu D ou/ Lit t le Pot at o, est ablished in 1989 in Shenyang, Li aoning, specialized in noodles as well as sea
f ood rest aurant s, t ot aling over 170 out let s, wit h annual sales of US$ 230 mm in 2004)
- _¸¸¦ (Ma L an La Mian, Chinese f ast f ood rest aurant , est ablished in 1995 in Beijing, specialized in noodles, over 440
out let s, wit h annual sales of US$ 60 mm in 2004)
- ·j,(¸, (D a N iang Shui Jiao – est ablished in 1996 in Changzhou, specialized in dumplings, over 200 out let s, wit h
annual sales of US$ 33 mm in 2004)
page 13
Typical Quick Serve Restaurants
page 14
Typical Quick Serve Restaurants
page 15
Eating Out Habits
• 80% of eating out occasions are f or
dinner--budget typically…
– < 3 US dollars per person f or low-
end restaurant
– 3-5 US dollars per person f or mid-
end restaurant
– 5 - 12 US dollars per person f or
high-end restaurant
– 12 US dollars or above f or
superior/ 5 star.
T ypi cal mi d end ur ban qui ck ser vi ce
r est aur ant s
About 70-80% of people eat out for work lunch -- typical price around 1 US dollar.
N ot e: Based on T echnomi c sur vey of 100 mi d-hi gher i ncome r esi dent s i n Shanghai
page 16
Popular Local Chains
Famous bean curd
soup/ fried bread
Milk tea -- mid-high end
Rice noodle for
lunch-dinner
N oodle lunch
page 17
Eating Out Habits—Chain Restaurants
• Social gathering and convenience are the top reasons f or people to eat out
• Food type/ taste is the dominant restaurant selection criterion (50%)
– Cost, convenience and saf ety are highly considered as well
• Over 80% learn of the desired restaurants through word-of -mouth.
• Over half the respondents expect to eat out more in the f uture due to higher disposable income,
desire to socialize and “ get out of the house” .
– Underlying desire f or more enjoyment out of lif e
• Consumers tend to be conservative in trying out a new restaurant
– Friend’s recommendation has a lot of weight
– And curiosity
N ot e: B ased on T echnomi c sur vey of 1 0 0 mi d-hi gher i ncome r esi dent s i n Shanghai
page 18
Western Chains
For the quick service restaurants, over 50 % go to western chains-- KFC, Mc Donald’s and
Pizza Hut were by far the top chains mentioned by consumers.
Positives
• Good hygiene
• Atmosphere
• Convenience
• Good taste
N egatives
• Simple menu
• Expensive
page 19
Western Chains
KFC’s congee
page 20
Western Chains
• The reason to go to a f ull service restaurant is to try new f ood types and is due to its reliable, clean &
hygienic environment. Many people would love to try but their concern is the expensive price.
• Among the western cuisines, French and I talian are well known and very attractive.
• Atmosphere was valued most in selecting a western f ull service restaurant.
Full service western restaurant chains are limited to date in China…
N ot e: B ased on T echnomi c sur vey of 1 0 0 mi d-hi gher i ncome r esi dent s i n Shanghai
page 21
Entry Considerations
• Timing—not too early or too late
• Addressable/ target market
• Value proposition versus cost
• Scale of operation
• Localization of supply chain/ management
• Protection of brand/ I P
• Value of local partnership
• Owned versus f ranchise
• Geographic coverage/ pace of rollout
page 22
Technomic’s Multi-Client Program
• Overview of the scope and nature of China’s economic development
• Characterization and present structure of China’s restaurant industry
• Position and activity of major chain restaurants
• Presence and position of f oreign chain restaurants
• Characterization of consumer eating out behavior and interest in Western chain restaurants
• I ndustry supply structure (f ood, disposables and equipment)
• Regulatory environment and major constraints
• K ey success f actors
• Overview of entry/ expansion considerations
• Proprietary China management workshop (China Readiness Assessment)
The overall objective of this common sponsor program is to present a detailed and strategic
view of China’s chain restaurant market. The overall goals of the program cover the
following main areas:
page 23
Technomic’s Multi-Client Program
• Review of the sponsoring company’s C hi na R eadi ness Pr ofi l e (see www.chinareadycompany.com )
• Discussion of potential opportunities in China
• I dentif ication of possible strategic responses
• Review of next step initiatives f or consideration
The deliverables of this report will provide the foundation on which a China entry or
expansion strategy can be built.
Each sponsor will participate in a workshop to take the next step in processing the market
findings and leading to a tangible response.
Charter sponsors will also be able to contribute to the research’s design and list of issues
(including the consumer research module)
page 24
Technomic’s Multi-Client Program
The core methodology will be a series of in-depth, face-to-face interviews with major players
in the restaurant value chain. Effective interviews of this type in China are done personally
and in a probing, open-ended manner.
1600 TOTAL
A cross section of consumers in 7
key cities
1500 I n-depth, personal interviews with
consumers
I ncludes interviews with distributors
and product suppliers
50 Probing Channel I nterviews
Focus on major chains, both local
and f oreign, including headquarter/
China management
50 Probing Operator I nterviews
Description
N umber of
Completes Research Target and Type
page 25
Technomic’s Multi-Client Program
For a complete proposal, please contact:
Ronald Paul
Technomic I nc.
Suite 1200
300 S. Riverside Plaza
Chicago, I L 60602
Tel: 312 876-0004
Fax: 312 876-1158
E-mail: rpaul@technomic.com
THANK YOU!

Agenda
• • • • • • • • • • Why China? Key Country Characteristics—economic development, business environment, demographics Important Regional Differences Chinese Diet China’s Restaurant Market—comparisons to U.S. Eating Out Habits Popular local and foreign chains Briefing on Technomic’s China Restaurant multi-client program Contact Information Q&A

page 2

page 3 .Why China? China remains the most dynamic economy in the world… • • • • • • • • • • Population: #1 in the world at 1.000 to almost 3 million Economic Impact:: China’s economy has grown ~9 percent a year for more than 25 years o The fastest growth rate for a major economy in recorded history.000 in 2004 MNC participation: Of the global top 500 multinational companies. with some setting up regional headquarters in China.3 billion Urbanization: there are more than 170 cities with over 1 million population Trade: 3rd in the world in total trade ->$1 trillion annually Growth: Since 1993. GDP has increased more than 600% Web users: #2 behind the US in internet subscribers B-School Grads: 86 in 1991 up to 10. Cell phones: More than 300 million subscribers Autos: In the last four years. o Moved 300 million people out of poverty and quadrupled the average Chinese person's income. about 450 have invested in China. annual car production has increased from 230.

70000 60000 50000 40000 30000 20000 500 10000 0 0 2500 The “Gold Rush” Period 2000 1500 1000 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Inward Direct Investment (US$Mn) Nominal GDP (US$Bn) 2005 page 4 .China’s Economic Development From a business standpoint. China is a newcomer to the world market and is still in an early and dynamic state of evolution.

China’s Schizophrenic Profile China’s opportunity-risk scale “Difficult to make money” Overcapacity/price wars Corruption Poor infrastructure Protectionism/nationalism Intellectual property infringement Weak legal system Looming banking crisis Unpredictable risks (e. SARS) + High economic growth Significant foreign investment WTO participant Low labor rates Burgeoning middle class Olympics in 2008 World Expo in 2010 Major exporter/importer page 5 .g.

• Rural Chinese tend to prefer male babies who are expected to support the family when grown-up. 69% 0-14 15-59 60+ 43% 57% • Rural residents have been migrating to urban areas to find jobs while more and more rural areas are being developed into industrial areas—spurring continued urbanization. the proportion of people over 60 will go up sharply.Key Demographics 11% 20% • Since 1978 China has adopted a one-child family planning policy –in the coming years. Rural Urban 49% 51% Male Female page 6 .

less entrepreneurial • Climate: 3 seasons. Shanghai food tends to be sweet. Cantonese food highly varied (eat anything). Shanghainese. buns. dumplings. • Personality: Introverted.Regional Difference Wide differences in terms of culture -. page 7 . tropical in South (South Eastern USA) • Food: Rice-based.some major like Cantonese. dry (North Eastern USA) • Food: Flour-based food. etc. like noodles. hard-working. etc.North and South divide by Yangtze River: • Language: Mandarin dominated Beijing • Personality: Extroverted. more variety of cuisine: South-western food is known for spicy. entrepreneurial • Climate: Wet. Limited variety of cuisines Shanghai Guangzhou • Language: Thousands of dialects -.

employees usually have fast food for lunch Lunch Breakfast page 8 .China’s Diet (basic profile of urban resident) • Typically 3 meals a day • Daily visit to farmers’ market to buy fresh vegetables and meat • Salty food more popular than sweet • More chicken/pork than beef and fish • Preference for food with good taste. smell and color instead of nutrition • More emphasis on dinner and least about breakfast -.

25-0. White-collar employees buy breakfast from dirty street stands as well.S. cents • The menu tends to be high in calories (~950) • Now some young families begin to include milk and bread in their menu page 9 . In other markets.60 U.China’s Diet In South (Canton area). though some prefer to eat at home. people tend to spend hours for breakfast in nice restaurants with reasonable prices. Fried BraidedBread ( You Tiao) Breakfast Typical Breakfast Menu for Urban Residents Wet Bread w/ Fillings ( Bao Zi) Congee ( Zhou) Combo Meal ( Shaobing Youtiao) • A meal costs around 0. young people tend to skip breakfast.

General economic growth .Continued urbanization .Increasing disposable income .Changing consumer habits 83% Full Service Quick Service • Quick service restaurants showing 20% per year growth as both local and foreign chains expand *Basically full and limited service restaurants page 10 .China’s Restaurant Market China’s restaurant market* reached an estimated US$110 billion in 2005 and is expected to maintain double digit growth through the end of the decade. 17% • Key drivers… .

2bn (E) #1 USA $314 ~7% 529. U.000 600 $454mm (E) #3 1.000 184. Restaurant Markets (2004 data) Total Revenues (US$bn) Growth Vector Total Restaurant Outlets Average Revenue per Outlet Number of Chain Restaurant Outlets McDonald’s • Outlets • Revenue • Rank KFC • Outlets • Revenue • Rank China $110 15-20% ~3.525 $5 bn #7 page 11 Note: Full and limited service outlets--apples-to-apples comparisons are “rough” estimates .5 million (>4 mm in 2005) $33.China’s vs.S.4 bn #1 5.673 $24.200 $1.000 (top 500 only) 13.000 ~7.000 $594.

over 440 outlets. with annual sales of US$ 230 mm in 2004) (Ma Lan La Mian. specialized in noodles. specialized in Hot Pot selfcooking mutton food.but their average number of outlets is much less • Famous local chain brands include: (Little Sheep/Xiao Fei Yang. specialized in dumplings.Overview of China’s Chain Restaurants Developed Regions in China • The average growth rate of chain restaurant industry in recent years is ~20% • About 70% of the chain restaurants are located in the developed regions on the East Coast • Largest chains are foreign – KFC and McDonalds have 25-30% of all chain outlets .75-80% of chain restaurants are local -. established in 1995 in Beijing. Liaoning. with annual sales of US$ 60 mm in 2004) (Da Niang Shui Jiao – established in 1996 in Changzhou. with annual sales of US$ 33 mm in 2004) page 12 . annual sales of US$ 541 mm in 2004) (Xiao Tu Dou/Little Potato. totaling over 170 outlets. Chinese fast food restaurant. specialized in noodles as well as sea food restaurants. #1 local brand. established in 1999 in Inner Mogolia. over 200 outlets. over 700 outlets. established in 1989 in Shenyang.

Typical Quick Serve Restaurants page 13 .

Typical Quick Serve Restaurants page 14 .

Typical mid end urban quick service restaurants • 80% of eating out occasions are for dinner--budget typically… – <3 US dollars per person for lowend restaurant – 3-5 US dollars per person for midend restaurant – 5 .Eating Out Habits About 70-80% of people eat out for work lunch -.typical price around 1 US dollar. Note: Based on Technomic survey of 100 mid-higher income residents in Shanghai page 15 .12 US dollars per person for high-end restaurant – 12 US dollars or above for superior/5 star.

Popular Local Chains Rice noodle for lunch-dinner Milk tea -.mid-high end Famous bean curd soup/fried bread Noodle lunch page 16 .

desire to socialize and “get out of the house”. – Underlying desire for more enjoyment out of life • Consumers tend to be conservative in trying out a new restaurant – Friend’s recommendation has a lot of weight – And curiosity Note: Based on Technomic survey of 100 mid-higher income residents in Shanghai page 17 . Over half the respondents expect to eat out more in the future due to higher disposable income. convenience and safety are highly considered as well Over 80% learn of the desired restaurants through word-of-mouth.Eating Out Habits—Chain Restaurants • • • • Social gathering and convenience are the top reasons for people to eat out Food type/taste is the dominant restaurant selection criterion (50%) – Cost.

KFC. Mc Donald’s and Pizza Hut were by far the top chains mentioned by consumers. over 50 % go to western chains-.Western Chains For the quick service restaurants. Positives • Good hygiene • Atmosphere • Convenience • Good taste Negatives • Simple menu • Expensive page 18 .

Western Chains KFC’s congee page 19 .

Western Chains Full service western restaurant chains are limited to date in China… • • • The reason to go to a full service restaurant is to try new food types and is due to its reliable. French and Italian are well known and very attractive. Many people would love to try but their concern is the expensive price. Among the western cuisines. Atmosphere was valued most in selecting a western full service restaurant. clean & hygienic environment. Note: Based on Technomic survey of 100 mid-higher income residents in Shanghai page 20 .

Entry Considerations • • • • • • • • • Timing—not too early or too late Addressable/target market Value proposition versus cost Scale of operation Localization of supply chain/management Protection of brand/IP Value of local partnership Owned versus franchise Geographic coverage/pace of rollout page 21 .

Technomic’s Multi-Client Program The overall objective of this common sponsor program is to present a detailed and strategic view of China’s chain restaurant market. disposables and equipment) Regulatory environment and major constraints Key success factors Overview of entry/expansion considerations Proprietary China management workshop (China Readiness Assessment) page 22 . The overall goals of the program cover the following main areas: • • • • • • • • • • Overview of the scope and nature of China’s economic development Characterization and present structure of China’s restaurant industry Position and activity of major chain restaurants Presence and position of foreign chain restaurants Characterization of consumer eating out behavior and interest in Western chain restaurants Industry supply structure (food.

com ) Discussion of potential opportunities in China Identification of possible strategic responses Review of next step initiatives for consideration Charter sponsors will also be able to contribute to the research’s design and list of issues (including the consumer research module) page 23 . • • • • Review of the sponsoring company’s China Readiness Profile (see www.chinareadycompany. Each sponsor will participate in a workshop to take the next step in processing the market findings and leading to a tangible response.Technomic’s Multi-Client Program The deliverables of this report will provide the foundation on which a China entry or expansion strategy can be built.

including headquarter/ China management Includes interviews with distributors and product suppliers A cross section of consumers in 7 key cities Probing Channel Interviews In-depth. Effective interviews of this type in China are done personally and in a probing. open-ended manner. Number of Completes 50 Research Target and Type Probing Operator Interviews Description Focus on major chains.Technomic’s Multi-Client Program The core methodology will be a series of in-depth. personal interviews with consumers TOTAL 50 1500 1600 page 24 . both local and foreign. face-to-face interviews with major players in the restaurant value chain.

IL 60602 Tel: 312 876-0004 Fax: 312 876-1158 E-mail: rpaul@technomic. please contact: Ronald Paul Technomic Inc. Suite 1200 300 S.com THANK YOU! page 25 .Technomic’s Multi-Client Program For a complete proposal. Riverside Plaza Chicago.

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