In China, McDonald’s and KFC are fighting for a larger slice of the domestic pie

After nearly three decades of fighting, the competition between KFC and McDonalds in China is likely to heat up, because of its newly gotten “Chinese” identity.

On November 1, 2016, KFC’s parent company Yum! Brands spun off a new company – Yum! China, and was listed on the New York Stock Exchange. Its core business is KFC, which already has some 5,300 stores in China.

In January, McDonald’s Corp. agreed to sell a controlling stake in its China and Hong Kong operations. McDonald’s will hold 20% of the shares, but U.S. private-equity firm Carlyle Group will hold 28%, and the rest of the 52% is owned by Chinese state-backed conglomerate CITIC. That means CITIC is now the new owners of the 2,400 McDonald’s stores in mainland China and 240 stores in Hong Kong.

The two largest fast food brands in the Chinese market have entered what is known as the process of sinicization – or rather, to learn how to be a brand that takes on Chinese characteristics. They will have to operate as a separate company/brand in China, rather than merely act as a sales channel. It is expected that McDonald’s and KFC will wage a fierce tit-for-tat battle.

Here are some ways they’ll duke it out.

Marketing: The most direct

Age-old brands McDonald’s and KFC are losing attention from millennials. Because of that, they are using the star power of mega celebrities to stir up a buzz and increase popularity.

Celebrity endorsement has been an important part of KFC’s marketing strategy. From April 2016 to July 2017, they’ve been using stars like Lu Han, Li Yuchun, Joker Xue, and TFBOYS as their spokespersons to form a set of persuasive video and advertising campaigns. KFC also frequently releases products associated with their spokesperson, including life-sized standees, posters and collectibles in order to attract fans.

At a 2016 Q4 investor conference, Yum! China CEO Micky Pant said one of the reasons for KFC’s good performance was its online market. He specifically pointed out Lu Han, adding that surveys showed how using his image made the brand younger and more dynamic.

(Lu Han)

As for McDonald’s – which has gone without a spokesperson for ten years in China, the fast food giant finally signed Kris Wu as a spokesperson in June, a move recognised as pressure on KFC. Wu’s posters and campaigns for “hip hop snacks” are rapidly appearing across all platforms. To put this competition into context, both Lu and Wu used to be Chinese members of EXO, a popular Korean pop band.

(Kris Wu)

Furthermore, the world of anime, comics and games are now a huge marketing point for both McDonald’s and KFC, following the rise of millennial spending habits. Since last year, McDonalds collaborated with online web comics illustrator on an advertising campaign to involve young people in its future advertising campaigns. Meanwhile, KFC worked with “Yin Yang Master”, another prominent online illustrator, to create a pop up store.

Store openings: The most critical

There are plans for McDonald’s now to expand the brand with some 2,000 new stores within the next five years in the mainland, with about 250-500 new stores a year.

It’s not difficult to understand why the new stakeholders are keen on expansion. According to market research firm Euromonitor International, KFC’s market share was twice that of McDonald’s, at 11.6% and 5.6% respectively. .

With more than 5,300 stores in China, KFC has even penetrated into the country’s fourth and fifth tier cities like and even smaller towns. “We believe that it’s possible to open even more outlets in China and it will be the biggest opportunity for the market’s future,” said Yum! China’s CEO in this February’s earnings report.

McDonald’s has plans to expand mostly in third and fourth tier cities, and if successful, the proportion of outlets in those areas will hit 45%, up from its current 35%.

CITIC’s resources will play a significant role in this accelerated expansion, with a number of ongoing projects in first- and second-tier cities and a nationwide and development business. According to McDonald’s China’s chairman and CITIC’s CEO, CITIC’s real estate business and resources have been grafted to McDonald’s.

Delivery: Thinking out of the box

According to data from Yum! China in the second quarter of this year, 45% of KFC’s sales were from mobile payments, twice from the same period last year. Delivery consisted of 10% of its sales, an increase of 40% year-on-year. McDonald’s China saw an average of 10% from delivery sales, with some specific stores hitting 20%-40% of total sales.

McDonald’s and KFC’s fast-growing takeout business is benefitting from third-party delivery platforms, such as Ele.me, Meituan, Baidu Delivery. These third-party delivery platforms can provide beautiful sales data. But for the fast-food companies are trying to pull consumers to their own apps in the near future, in order to understand user data and have a better grasp of consumer behaviour.

McDonald’s in April this year pushed out their own app, allowed access to WeChat payment, and implemented its own delivery service. Its next step is allowing consumers to order through their phones nationwide.

KFC had its own app much earlier than McDonald’s, and its user interface is similar to many third-party delivery apps. For a long time now, KFC has been trying hard to garner its own user base through mobile payment apps like WeChat and Alipay. Currently, KFC boasts about 83 million people.

McDonald’s and KFC both in the future might spend more time and energy in development their app. For example, KFC’s collaborated with Huawei to have its app pre-downloaded on its phone, hoping to gain more users. The difference between these fast-food giants and third-party delivery platforms is that these giants have the capacity to think out of the box to offer a brand experience and go beyond just deliver services.

New products: A “Chinese” flavor

By adapting to local Chinese flavors, KFC is off to a good start. In the early 2002s, the it launched a winter mushroom rice bowl, becoming one of the first western fast food brand to push out a rice bowl. Today, when you take a look at its menu, you’ll see that half of features Chinese-style items.

In contrast, McDonald’s took a long time to localize and avoided any deviation of their menu. It was only last February that they had porridge and buns on their breakfast menu in order to meet the tastes of Chinese consumers.

What’s interesting is, McDonald’s launched a celebratory Chinese-style cake to celebrate its new company in China. Customers could get it for free as long as they spend more than 8.80 yuan – a symbolic figure in Chinese culture.

The new board of directors is well aware of the market in China and Hong Kong. Previously, we had to a lot of content that we needed to communicate with the US side, and to tell them what’s trending in China. Now there’s no need for that and our decision making process is a lot faster,” said McDonald’s China’s vice president of PR Xu Yingting. “But this does not mean McDonald’s will be selling noodles or Chinese cuisine.”

Employees: Using incentives to retain talent

Currently, McDonald’s had 120,000 employees across China, and KFC’s number exceeded 270,000. As for future market competition, McDonald’s and KFC both have mentioned a new strategy towards talent retention and incentives – one that’s rarely talked about before.

During Yum! China’s NYSE’s listing last year, the company put forward a plan for its restaurant managers: To award the first 5,000 managers shares in the company. CEO Micky Pant said this was to give managers a sense of ownership, and also to keep morale high within the company.

Coincidentally, during one of McDonald’s China’s conferences, vice-chairman Yang Xiandong, said the company can take on a very different incentives strategy. He is also the Managing Director of Carlyle Capital and the Chairman of the Asia Pacific Region of Carlyle Group. He also said, “the new incentive mechanism will be linked with the company’s own performance and personal contribution, in order to encourage entrepreneurship and a sense of ownership.”

There is no doubt that this new KFC and McDonald’s will now engage in stiffer, more sophisticated competition.