RETAIL: KFC Coffee Plan Takes Upscale Shot At McDonald’s
Bottom line: KFC’s plan to roll-out a low-cost premium coffee product looks like part of its broader plan to move its restaurants upscale, and could help it regain some momentum it has lost in China over the last 3 years.
It’s been nearly a year since struggling fast food giant KFC (NYSE: YUM) announced a much-needed overhaul for its China restaurants, and now we’re finally getting some details of changes to come with word of an interesting new plan to go upscale that takes aim at McDonald’s (NYSE: MCD). The new plan centers on coffee, with KFC aiming to find a new place at the low end of the premium market.
The move looks smart, since coffee has emerged as a hot and trendy product over the last couple of years in China. It also spotlights the fact that the fast-food market may be close to saturation in China’s largest cities. That means that KFC, McDonald’s and other large operators may be entering a new phase of their development where China looks more like the mature western markets where they are based, and they need to be more innovative to keep growing.
According to the latest headlines, KFC is preparing to roll out a premium, fresh-ground coffee product selling for decidedly downmarket prices starting at 10 yuan ($1.60) per cup. (Chinese article) That compares with around 6 or 7 yuan per cup for the normal low-end, mass-produced product that both KFC and McDonald’s now serve at their main counters. McDonald’s also operates more upscale McCafes in many of its stores, which typically sell premium freshly-ground coffee at prices of 20 yuan or higher per cup.
According to the reports, KFC will introduce the new low-cost premium coffee brand into more than 1,000 of its approximately 5,000 China stores in 20 cities this year. This particular effort comes nearly a year after KFC announced plans for a major overhaul for its China stores. The plan was the first major retrenchment since KFC first came to China, and was sorely needed to attract local consumers who now have many more choices than when the US chain first came the market in the late 1980s. (previous post)
I’m admittedly not a big KFC diner, as I think their food is quite greasy and the atmosphere isn’t that relaxing for anything but a quick meal. But I do look into the restaurants quite regularly, and have yet to see any of the major changes that were announced last June.
Part of the plan was to make KFC’s restaurants more upscale, in a bid to attract bigger spending, more image conscious young white-collar professionals who don’t mind spending 30 yuan or more on a cup of coffee from Starbucks (Nasdaq: SBUX). A highlight of the revamp was supposed to include a “dining room” concept aimed at making the new KFCs feel more like a home rather than a place to eat quickly and go. The new concept was also supposed to offer better wi-fi, a service that tends to attract higher-end customers and encourages people to stay longer.
This news about the low-cost premium coffee seems to hint that KFC may finally be preparing to launch a new wave of retrenched stores later this year, with coffee as one of the centerpieces for attracting a new group of customers. I personally might consider visiting KFCs if they really make such a move, though I really don’t see them threatening Starbucks, which is well positioned as a casual place where working professionals can sit and chat over a cup of coffee.
Instead, it’s probably McDonald’s and perhaps some other local fast food chains that should feel some concern about this new KFC offensive. McDonald’s also announced its own major overhaul plan for China last year, though I also haven’t noticed any major changes in their stories either. At the end of the day, the new year could see some big changes in China’s fast food landscape, with KFC perhaps regaining some of the momentum it has lost in the market over the last 3 years.
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