Starbucks and Pizza Huts: Time Has Come for a Rapid Expansion in Mainland China
|A Pizza Hut in Canton|
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|
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
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