American fast-food giants are going big on a China wager, betting they can get the country’s new middle class to love them back

Yum China also runs Pizza Hut and owns a combined 15,000 pizzerias and chicken shops in the country.

In April — as the national economy still struggled to gain momentum — Yum China said it planned to open another 5,000 stores in two years. That’s the third time it’s doubled its expansion rate in the last decade.

“It took us 25 years to build the first 5,000 stores in China, 8 years to build the next 5,000, and just 4 years for the last 5,000,” the company wrote in a note to shareholders.

McDonald’s, which has 500 stores in Shanghai alone, hopes to raise its store count from 6,000 locations to 10,000 by 2028.

According to state media, about half of these McDonald’s stores are already in third- and fourth-tier cities.

Hopes for a new middle class in China

Cities in China are unofficially grouped into tiers according to their status, size, and wealth. Beijing, Shanghai, Guangzhou, and Shenzhen comprise the most prestigious first tier, while others like Chengdu and Chongqing trail closely.

But optimism is plummeting in these hubs, even after zero-COVID ended in 2022. Multinationals and investors are leaving in droves, concerned about financial restrictions, a poor economic outlook, and the looming threat of conflict with the US.

Consultants like Rein believe the cities below the second tier — think lesser-known places like Nanyang or Anshan — present more opportunity for an upswing.

“We’re telling most of our clients to look at third, fourth, fifth-tier cities,” he said.

Yum China says it’s preparing itself to ride that boom, building restaurants at highway rest stops in 20 provinces amid an expected surge in Chinese car ownership numbers,

McDonald’s did not respond to a request for comment from Business Insider.

Chinese KFC has nearly doubled its menu items

Expanding during a sluggish economy might make sense for fast food brands, which are often classified as recession-proof as consumers downgrade their spending.

Fast food’s low-cost identity may be fading in the US due to price hikes, but in China, McDonald’s and KFC never held the reputation of the lowest-cost food. Local shops and restaurants were almost always cheaper.

Malmsten said KFC’s strength in China lies in its “barbell strategy” of offering consumers both cheaper and more expensive options, such as wagyu beef products.

“The rich are comfortable to spend, while the middle class chooses cheaper options,” she said.

The size of the chicken chain’s Chinese product line is monstrous, typically numbering 50 items per menu compared to 29 per menu in the US.

Yum China rolls out a new product roughly weekly, from spicy noodles to beef wraps to congee.

Malmsten said an expanded product range could be a unique boost for KFC and McDonald’s in smaller cities.

“In lower-tier cities, these chains might be the only option for a Western meal while still having Chinese breakfast options like congee and youtiao,” she said, referring to traditional fried dough sticks sold by both McDonald’s and KFC.

Analysts from Yonder Consulting said that American fast-food brands have a track record of being first-movers in China, snagging prime locations in its first-tier cities ahead of mainstream demand decades ago.

“Now, they are doubling down further on this strategy by expanding into the inland regions of China, especially Tier Three and Tier Four cities with a growing middle class,” they told BI.

Both brands will likely be assisted in these new territories by the Chinese internet, with free advertising from the deluge of Crazy Thursday and McMen memes in one of the world’s most online countries.

In an analysis of the Crazy Thursday trend, Daxue Consulting said it’s likely the meme’s emergence in 2021 contributed to a post-pandemic rebound in KFC’s annual revenue to $7.2 billion in 2022.

Rein noted that American fast food is often seen by Chinese consumers as safer to eat because its ingredients are typically standardized — a major boon in a market riddled with food scandals.

“They’ve got a good reputation for good tasting, affordable food. That’s something that’s needed in the weak economy,” said Rein.