AAEAAQAAAAAAAAsnAAAAJDMzMjg3ZjRmLTU5MjktNGZiZC1iMmM5LTcxNWU2ODZiMGNkNg

Taco Bell China Is Great – Better Than In The West. But That May Not Be Enough.

Facebooktwittergoogle_pluslinkedin

So it’s been +6 months since Taco Bell officially returned in China, re-opening in Shanghai approximately nine years after they closed their last China branch in 2008. Their one outlet in Liujiazui is now humming along. And as a long time Taco Bell fanboy, I felt it was high time for a visit. My assessment is the following.

Point 1: It’s really great – better than Taco Bell in the USA by far.

I am a pretty big Taco Bell fan. I grew up near an outlet in Concord, California. And in the past 1-2 months, I have been to outlets in Shanghai, New York and the Dominican Republic. So I’m not an expert but I’m definitely overly knowledgeable.

Overall, the Shanghai outlet is a long overdue re-imagining of Taco Bell and its menu. Yum! China has done what it does best. It has completely re-thought the restaurant and tried lots of new creative things. There is the avocado and shrimp burrito. There is the volcano chicken burrito, the grilled chicken avocado meal and the California sunshine meal. You can see similar creativity in their menus at the China KFCs and Pizza Huts. Plus Yum! China moves fast (required for the China market) and they are pretty bold. Note: This is the team that added escargot and quail eggs to the Pizza Hut China menu. Here’s a past article on some of their crazier menu additions.

After this re-imagining, Taco Bell Shanghai has little left of the standard Western menu. There is no rice or beans. There are no Burrito Supremes. And they have added juices, deserts, beer, mojitos, salads, waffles and lots of other stuff.

Overall, the food at Taco Bell in Shanghai is great. In the USA, I wouldn’t go to Taco Bell more than once or twice a month, as it’s a bit too much like fast food. But I would eat at the Shanghai outlet all the time. It doesn’t seem like fast food, which leads to Point 2.

Point 2: They have transformed Taco Bell into “healthy and fresh” food.

They are pushing “fresh and healthy” food, which is a big deal in China these days. On the signs outside, you can see the words “fresh, healthy” (right next to the phrase “Naked Summer”, more on that below). Most of the menu combos come with salads and juices. Although they do have “coated fried”. And prominently displayed near the counter is a window into the kitchen where you can see the food being prepared by employees, all wearing masks and gloves. And behind them on the wall are (fake) vegetables and fruits.

This “healthy and fresh” positioning is not a big surprise. There is a broader trend toward healthier living and eating in China’s middle class. It also plays to a strength of foreign brands. They are trusted far more in terms of food quality. Fresh and healthy, whether in restaurants or supermarkets, also tends to go along nicely with premium pricing – which leads to Point 3.

Point 3: They have re-positioned as “California” cuisine – and are pricing closer to casual dining than QSR.

You can’t miss the fact that they do not mention Mexican food or Tex-Mex anywhere. In fact, the only mention I could find of either was the word “mas” in the “Live Mas” logo (see photo above).

Instead, they have re-positioned as “California food”, which Chinese are more familiar with. It says California on the wall and “Founded in California” on the cups. There are surfers and guitars painted on the walls (see photo below) and surfboards hanging from the ceiling. The restaurant has no waitresses in sombreros or maps of Texas.

AAEAAQAAAAAAAA02AAAAJDQ4NmQ4ZmM4LWFjMzgtNGNlMC04NGNmLTE1MmU0NmYxNmUyZQ

Note the surfer on the front window

A sign outside also shows pictures of the Hollywood sign and the Golden Gate Bridge. And this California positioning is also what that phrase ‘Naked Summer” is about.

AAEAAQAAAAAAAA1kAAAAJDg0ZDk5MDhiLWYyZDktNGYxZS05OTE4LTZlMzM2NjUzNjBkNQ

The prices are in line with upper middle class casual dining in China. A meal goes for 40-50 rmb per person, with deserts and special drinks at 15-30 rmb. This is similar to Pizza Hut China and above KFC (which is traditional quick service). And they are well above Chinese QSR outlets like Yong He Da Wang, which are closer to 20 rmb per meal.

All of this is pretty smart. Yum! China did exactly what you would expect them to do. The completely re-thought and upgraded Taco Bell for China. And they did a great job. Kudos. I like it 3x more than Taco Bell in the West.

However…(you knew it was coming)

How much do Chinese consumers actually like tacos and burritos?

Ultimately, this is the key question. You can get all the ancillary menu items right and have a really nice outlet, but what Taco Bell is ultimately offering Chinese consumers is 3-4 core menu items: burritos, quesadillas, nachos and tacos. And my question from last year when this project was announced was: how much do Chinese consumers actually like these items? My concern was not that they would dislike them. It was that on a scale of 1-10, they would all come in at around a 5. Just sort of so-so.

What do you do if the response to your core menu is just so-so? You can re-imagine them. You can discard the less popular items, like bean burritos. But what if nothing in the core menu is really that popular?

Compare that scenario to the tremendous popularity of KFC in China. According to CEO Mickey Pant, KFC’s friend chicken is the single most popular menu item in all of China. On a scale of 1-10, it’s like an 11. And Pizza Hut’s pizza is also pretty popular (probably around a 7-8. Just a guess).

So how much do Chinese consumers actually like tacos, burritos and quesadillas?

After 6 months, Yum! China now knows the answer to this question – and they are acting conspicuously. In the second quarter of 2017, they opened 90 KFC and Pizza Hut outlets in China. But they have not opened another Taco Bell (to the best of my knowledge. Perhaps they are under development?).

Compare that to the recent explosive growth of popular hot pot restaurants. Or in home delivery right now. When Chinese consumers discover something new they like, it usually takes off like crazy. Taco Bell China doesn’t look much like that situation.

One phrase from the latest Yum! China 10-Q did catch my attention. It was “…we have had the exclusive right to operate and sub-license the KFC, Pizza Hut and, subject to achieving certain agreed-upon milestones, Taco Bell brands in China…”. I wonder what the “agreed-upon milestones” are for retaining the Taco Bell rights. I would be surprised if opening one or more Taco Bell outlets in China by a certain date was not one of those milestone. So maybe they had to get at least one open in 2017 just to keep the rights? Just a guess.

Last point: China restaurants are particularly difficult businesses

I have been involved in the opening three restaurants. It was not fun. It’s a hard, operationally-intensive business with few big advantages if you’re the operator (being a franchisor is a lot better). My experience is you have to do a thousand things right every week (staffing, supply, ops, renovating, marketing, etc.) but it really comes down to two big factors: the popularity of your core menu (against changing consumer preferences) and management ability and speed. You can get some scale advantages as you get bigger, but these two factors are still the most important.

For twenty years, Yum! China has had two very popular franchises in China (KFC and Pizza Hut) and an awesome management team, led by Samuel Su and now Micky Pant. They are doing great and have a long runway in front of them. Plus they are doing great in loyalty programs and delivery these days.

But their spectacular success in is a big exception in the China restaurant business. Most of the market is highly fragmented with literally millions of restaurants competing like mad against each other. Most foreign brands don’t dominate this way. It’s a brutal market. In my best written but least read book (the One Hour China Consumer Book), I called China restaurants an “operational marathon”. It is a never-ending race with few advantages and ongoing challenges – including ruthless competitors and constantly changing customers. My standard advice remains: you don’t go to Kenya to compete in long distance running and you don’t go to China to compete in restaurants.

I’m waiting for some new moves by Taco Bell China. But it’s a really good place to eat. Yum! did a great job. But in China restaurants, that may not be enough.

Thanks for reading, jeff

——-

I write (and speak) about how rising Chinese consumers are disrupting global markets. (#ConsumerChina). This also includes work on:

  • China 2025″ – what a region transformed by Chinese consumers, companies and capital is going to look like. (#China2025)
Facebooktwittergoogle_pluslinkedin

Comments are closed.