Why Western Fast Food Brands Are Winning in China

by: Shaun Rein

This column originally appeared on CNBC

I was interviewing Emily, a twenty-four year old Shanghai girl about her dining habits. As we talked, she kept messaging her friends on her Apple (NASDAQ:AAPL) iPhone 4 when she said, "I love Kentucky Fried Chicken. I go there all the time because the food there is healthy." Her response initially took me by surprise: since when is food from Kentucky Fried Chicken considered healthy?

As I pressed Emily more, she responded, "I know fried food is not healthy in general, but I trust that KFC will use real cooking oil. They won't recycle oil that they salvage from sewers as too many food street vendors do, they won't put cardboard in their batter as some dumpling restaurants do, and they won't use expired or tainted ingredients."

My firm interviewed thousands more Chinese consumers in eight cities about their dining habits, we found that Emily's response was not unusual. Many Chinese consumers consider western fast food brands like Yum Brands (NYSE:YUM), McDonald's (NYSE:MCD) and even Dunkin Donuts (NASDAQ:DNKN) healthy. They all know a healthy food diet should not have too much oil and sugar, but they also trust foreign brands won't cut corners in the production process. They fear tainted ingredients more than fat.

Far too many Chinese view western fast food companies as healthy alternatives to local restaurants, rather than a once in a while greedy indulgence. China's food supply-chain is clearly a mess, and it is a serious problem that needs to be fixed immediately.

In a survey of 5000 consumers in fifteen cities, my firm found that food and product safety was the biggest concern for Chinese consumers, ahead of paying for medical bills or children's education.

Those concerns continue to be top of mind because of regular allegations that food companies and restaurants are using poor quality ingredients. Last week, for example, shares of Chinese noodle chain Ajisen plummeted nearly ten percent when word got out they allegedly use instant broth flavoring rather than stock made from boiling bones as they claimed in advertisements. Before the news broke, consumers told my firm they trusted Ajisen to provide healthy food.

Misrepresentation of product safety can be costly because the Chinese have become unforgiving when it comes to health. A mere allegation is enough for businesses to lose customers, see their bottom lines hit and their share prices decimated.

Few issues bring out such vitriolic reaction among the public as product safety. Parents are extremely concerned that their children could be poisoned by tainted milk. A few months ago, the government shut fifty percent of the country’s dairies because they failed to live up to quality control standards. But far more needs to be done.

Rather than just shutting poor quality food production areas, the government needs to mete out extremely harsh punishments for any food quality problems, going as far as shutting down businesses, even large ones, and jailing unscrupulous executives. The government, after all, regularly sentences officials and businessmen to decades-long prison terms for corruption and other financial crimes.

In the meantime, businesses need to make sure they never do anything to damage their reputation with consumers. Chinese consumers now have access to alternative sources of news, and the sophistication and confidence to demand companies live up to certain standards.

If Ajisen noodles misrepresented their cooking process, they will have to spend more money rebuilding their reputation than they would have in buying the healthy ingredients they claimed in their marketing, in the first place.

As I said good-bye to Emily, she told me she was off to Kentucky Fried Chicken with her friends for lunch.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

About this article:

Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here