Starbucks and Pizza Huts: Time Has Come for a Rapid Expansion in Mainland China

A Pizza Hut in Canton
The first Pizza Hut restaurant in mainland China opened in 1990. Yet, the Pizza Huts in China look nothing like the ones in the U.S. In China, customers will be greeted and seated by a hostess. They will then be served by young and good-looking waitresses or waiters. Back then, not many Chinese could afford to eat in a Pizza Hut because the average check per person was around 150 RMB (close to $20 at that time) while most Chinese were only making 1,500 RMB per month (less than $200 per month). With 150 RMB, people were able to purchase a whole week of food for two at home. As a result, most Pizza Huts opened in selected locations (e.g., in big business districts).    

Different from Pizza Huts, the Starbucks in China copy the U.S. concept with very few modifications and entered the market in 1999. The stores, menu items, and prices look almost the same as the ones in the U.S. A cup of latte, for example, costs about 35 RMB (about $4.5 back then). Without question, Starbucks used to be a place for the rich and in-bound tourists because 35 RMB could buy a quick lunch for two persons in a budget restaurant. Starbucks were usually located in large shopping malls and five-star hotels.    

Since then, many changes have taken place in mainland China. I actually experienced some of those changes myself during my recent visit to Canton and Hong Kong. Those changes seem to do more good than harm to the U.S.-based restaurant chains. Based on my observations, I even expect an exponential growth for both restaurant chains, i.e., adding more stores close by the old ones in major metropolitan areas and building new stores in suburban areas or secondary cities. Am I too optimistic?


According to a recent report by CNN, the average disposable income of urban Chinese households rose to $3,000 per capita in 2010. That means $9,000 disposable income for a family of three (two parents with one child).  Back in 2000, the average income (NOT the disposable income) was only $760 per person. It becomes obvious that more people can afford a cup of coffee that is worth 35 RMB, especially in a country with a population of over 1.3 billion. No wonder the Wall Street Journal report showed no worries for Starbucks’ performance in China/Asia Pacific either (as shown in Picture 3).  

Besides, the price index for commodities in China has increased dramatically in the past decade. Ten years ago, a dim sum breakfast for two cost about 40 - 60 RMB in a budget restaurant. Now, it costs around 100 RMB in similar establishments. Yet, the price for Starbucks coffee or a pizza in Pizza Huts remains relatively stable. Comparatively, a cup of coffee becomes less expensive and “all of a sudden” seem affordable to many people.

Last but the least, the low exchange rate of the U.S. dollars greatly benefits the U.S.-based companies. The exchange rate was $1 ≈ 8.5 RMB ten years ago and is $1 ≈ 6 RMB today. Accordingly, even if a restaurant makes the same amount of profit in RMB today as it did ten years ago, the company can pocket more U.S. dollars today than before. For example, a net profit of 12 million RMB equals to $1.4 million ten years ago and $2 million today (divide 12 million with the exchange rates of 8.5 and 6 respectively). Now that the U.S. dollar is pushed to continue its depreciation against RMB in the future, the U.S.-based companies will always be the winners even if their businesses in China remain stable.   

A Starbucks Store in Canton
Are there changes that may do harm to the restaurant chains? Absolutely, they also face the challenges of higher food cost, higher labor cost, new competitions, and the difficulty of managing their human capital in mainland China. On top of that, the real estate price has grown up more than 300% as compared to 10 years ago, which could mean higher costs in rent for some restaurants or a huge gain in capital for those who had invested in real estate before.  

I am optimistic because I see the opportunities outweigh the challenges. What do you think? Do you expect restaurants like Starbucks and Pizza Huts will expand rapidly or will slow down their development in China? For what reason(s)?

To check out more pictures in the album of “Food in Canton and Hong Kong,” please visit http://ow.ly/gsPjO 
To check out more pictures in the album of “Life in Canton and Hong Kong,” please visit http://ow.ly/gsPss  

Relevant discussions:

References:
Jargon, Julie (2012, December 28). Starbucks in Europe imports U.S. tactics. The Wall Street Journal, B4. Also available online on http://on.wsj.com/10KifLM 
Censky, Annalyn (2012, June 26). China’s middle-class boon. CNN Money. http://cnnmon.ie/WdhMu7

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