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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

Comments

  1. Interesting post. "the real estate price has grown up more than 300%" - My goodness for such a short time within 10 years. I think the chain restaurants will continue to grow but I will feel bad for the local restaurant businesses. Will the local businesses can keep up their high costs in rent or will they be force to shut down for not able to keep up?

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    1. This time when I visited China. Many old restaurants have closed, but there are also many new restaurants replacing the old ones, with more expensive menus. The living expense is definitely much higher than before. I really worry about the country now --- how can the working class afford to live these days?! I mean, the average working class only earns a little more than $300 a month. Let's say even if a person makes $1,000 a month, how long can this person pay off a small two bedroom condo that costs $200,000+ (let's assume this person does not eat and drink at all). In big cities like Beijing and Shanghai, a small two bedroom condo in the city center can costs up to $600,000+, not any cheaper than midtown Manhattan, right? But people living in Midtown might have to earn $10,000+ a month in order to afford an apartment there. Honestly, I cannot even understand myself how many Chinese manage to live in such an "expensive" place sometimes.

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    2. Wow, that's unbelievable! However, I still do not get it since China is a communist country.

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    3. It seems that the wealthy and their increased spending habits have caused an increase in costs for all. Pizza Hut and Starbucks have established themselves in these areas and will benefit from any new disposable income. Are they counting on an increase in the number of customers with this discretionary spending to counteract their increased operating costs? I think that they will expand in order to make themselves more accessible to those outside the urban areas. Susan Miller

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  2. It seems to me that less people will be able to afford these restaurants with their increasing prices. Their products are too expensive compared to their income. Customers may cut back on non necessary expenses such as eating out. The restaurants will have to make some changes if they would like to continue to have customers coming in. They might have to expand or consider lowering prices if possible. If not, they could soon be in trouble. Ali Pregent

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  3. I agree with Ali Pregent. I think that with the low income of many people in China, the likelihood of those people spending money on coffee at an inflated cost is unlikely. I think that these businesses have placed themselves in a more urban, business oriented area, where lots of tourists would likely end up. Visitors from other countries might make what they feel is a "safe" choice by going to a Starbucks or Pizza Hut. I think that more restaurants will continue to expand to countries like China. I think Pizza Hut and Starbucks will stick around in China, they just might have to adjust their prices and menu items to accomodate their new audience.

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  4. I do not think that the popularity of Starbucks and Pizza Hut will increase in China. In America, we see both restaurants as a necessity and a part of our culture. Overseas, however, it is not the same idea. As Americans we are willing to spend obscene amounts of money on coffee and gourmet drinks, but China is not at an economic advantage to do so. Also, with increased prices for Pizza Hut, they will not do the business that they are doing here. By making a fast food restaurant into a sit down dinner causes customers to be less attracted to the business. The consumers in China are not willing to pay the increased price for Pizza Hut because they are aware that it is cheaper and more convenient in America. I think these businesses will have to adjust prices, like Kayleigh said, because the markets are not doing well when it comes to Starbucks or Pizza Hut. Hopefully additional fast food restaurants that enter China are aware of the different market that needs to be accounted for when determining prices and a target audience.
    - Kayla Cord, NSD 314, Spring 2013

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  5. I am from China too. I dont think these restaurants are the major part of our eat out choices. i went back to Beijing this winter break and my friends and families dont even want to eat in these restaurants and what they prefer are Chinese restaurants that full of Chinese food culture and backgrounds. I think the reason why many people think that these restaurant attract large amount of people is the Chinese population. As the total population is large, the amount of people that go to each restaurant would e larger, but not because of we like these restaurants.

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  6. In my opinion, I really feel that Starbucks has more con's than pro's, due to the recent changes and other factors. First of all, due to my recent experience abroad in italy-- I saw the potential of Starbucks booming in this country absolutely failing. Why you ask? Because of the qualities the american coffee from Starbucks offers offer might not be well favored as a product due to the interruption of the country's food culture. From what I believe, China is a more tea based country rather than coffee. Also, due to the still low prices of salaries, with the (as mentioned before) rise in real estate costs, the coffee than becomes less of an important commodity to purchase. Therefore, I wouldn't be surprised if Starbucks doesn't receive that much growth potential in countries like China

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  7. To be honest I believe Starbucks will do well wherever it is locate. Granted some Starbucks will do better in specific locations, but I don’t believe it will ever not be successful. In locations such as China the growth will be significantly slower than in America, Canada, etc. It all has to do with cultural values. If tradition is important to that culture Starbucks development will be significantly slower than in a culture that values progression, modernization, and globalization. As stated in a previous post Starbucks wouldn't do well in a place like Italy because part of their culture is the artistry of coffee. And let’s face it Starbucks coffee isn't what it’s cracked up to be seeing as though half the time you are getting burnt muddy water, and overly sweetened sugary beverages. Starbucks is part of the American cultural identity, no the Chinese. Yes, Starbucks will always do well among the tourist because it’s a familiar logo and concept. It will of course for that reason help that country’s economy. However, to the locals it is nothing more than another way to Americanize a culture, in which it is not always welcomed.

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