Now that KFC and McDonald's have “gone Chinese,” how much uglier will their fight get?

“Going Chinese” is nothing like what people usually mean by “localization.” In short, both chains are now Chinese companies. The people who decide what happens in the China market no longer sit in the United States. They sit in China.

After almost 30 years of brawling, that new identity as “Chinese companies” makes it likely the fight between KFC and McDonald's in China will turn more openly adversarial.

KFC has gone further down this road. Its parent, Yum! Brands, has already spun off the China business, and Yum China listed as an independent company on the New York Stock Exchange on November 1 last year. Its core brand is KFC, which already has 5,300 stores in China.

McDonald's chose a gentler route. Last week McDonald's China celebrated the founding of its new company. Under the terms agreed earlier, McDonald's holds 20% of the equity, Carlyle Group 28%, and the remaining 52% goes to CITIC — which means the owner of the 2,500 McDonald's restaurants on the Chinese mainland and 240 in Hong Kong is now CITIC.

So the two biggest fast-food brands in the China market have both begun the process of “going Chinese” (we'll use that label here, to keep the explanation short).

It is worth stressing that this is nothing like what people usually mean by “localization.” For KFC, long regarded as the more localized of the two, for McDonald's, and in fact for every multinational, the China market has been mainly a sales function: growth numbers mattered most, and the focus was on short-term returns. That was because the decision-makers were always in the United States.

The big difference now is that the decision-makers are here. The brands will be run in China as companies and brands, not treated as a sales channel. Put simply: more freedom to act, and more work to do.

Now that KFC and McDonald's are operating as Chinese companies, expect them to go at each other far more directly. Look at how vicious the fight between Mobike and ofo has been lately and you'll know what we mean.

Marketing: the most direct battleground

McDonald's and KFC both face the same problem — an aging brand losing its pull on young people — and both have ended up reaching for the celebrities with the biggest followings to make noise and win back attention.

KFC does this in its sleep by now. Between April last year and July this year it signed Lu Han, Li Yuchun, Joker Xue and TFBOYS one after another as brand ambassadors, and the practice has become the most important part of its marketing. In the past two weeks alone (August 1 to August 15), KFC's official Weibo account posted 141 times. Sorting those posts by content and comments, 66 of them — 46.81% — were ambassador-related. More than half of those used TFBOYS posters, videos or tie-in events to sell one new product, the Angry Burger.

Starting with Lu Han, in fact, KFC worked out a standard routine for using ambassadors to promote and move product. As soon as a signing is announced, KFC starts pumping out posters and videos of the star with the food, and puts matching life-size cutouts and posters in its stores so fans come in to take photos and buy something. Ambassadors can only appear in person so often, so KFC fills the gap with fan events: “long-distance confessions,” the star's songs played in stores on their birthday, giveaways of autographed items.

Controversial as this is, the posts with the most reposts and comments on KFC's Weibo are almost always the ambassador ones. On the fourth-quarter 2016 investor call, Yum China CEO Micky Pant said one reason for KFC's strong results was online marketing, and singled out Lu Han: surveys showed that choosing him as an ambassador, and moves like it, had made the KFC brand feel younger and livelier.

McDonald's, which had gone a decade without a China ambassador, named Kris Wu in June — widely read as an answer to the pressure from KFC. Posters of Wu selling the “hip-hop snacks” turned up everywhere within days. McDonald's posts to its WeChat official account roughly once a week; three of the last four lead items were that same poster.

Until now McDonald's rarely copied KFC's advertising. Its marketing in China has long been seen as brand-driven, KFC's as sales-driven, because McDonald's kept its marketing in line with headquarters. It also started social marketing earlier, which follows from the US company's attention to Twitter, Facebook and the rest — McDonald's China's PR department has said 70%-80% of its budget goes to social media. The cherry-blossom soft-serve running game it made with Baidu Maps, and its 3.14 Pi Day stunt, spread mainly through Weibo and WeChat. But it has been a long time since we saw a brand idea like that from them.

KFC, for its part, barely used celebrity endorsements in China either. Its TV ads mostly pushed the product, and the people in them were essentially extras. Not until 2014 did it run a marketing vote pitting Original Recipe chicken against Golden Crispy Chicken, bringing in Chen Kun and Kai Ko — and even that was not a formal endorsement. Ogilvy, the agency that planned the campaign, says it drew more than 20 million votes.

Yum China's 2016 annual report doesn't break out KFC's marketing spend, but the company's direct marketing spend rose from US$328 million in 2014 to US$332 million last year.

ACG culture — anime, comics and games — has become a marketing priority for both chains as well. Xu Cong, chief marketing officer of McDonald's China, said in an interview: “From a marketing point of view, ACG fans are already a distinct enough group.” Last August McDonald's worked with NetEase Comics to turn four of its Shanghai outlets into themed stores for four different titles on the platform, hoping to sell young people on its self-order kiosks. This year you can see the results of a tie-up with the animated series The King's Avatar in McDonald's stores — product placement inside the show, themed outlets. For recruitment ads aimed at young people, McDonald's commissioned the studio Muxingshe to draw comics.

KFC answered with a pop-up themed store built around the mobile game Onmyoji, to pull the same crowd in. Over the past year, on the whole, KFC generated topics more often and made more brand noise than McDonald's. That may not hold. Chen Yangzhi, a food-service analyst at the market research firm Mintel, thinks this kind of marketing brings a brand only short-term traffic, but is “still absolutely necessary — without it you don't even get the short term, never mind the long term.”

Opening stores: still the decisive battleground

Along with the launch of the new company, McDonald's announced a new expansion plan. Early this year it said it would open 1,500 new stores on the mainland and in Hong Kong over five years; now it has decided to open 2,000 new stores on the mainland alone in that time, lifting its pace from 250 a year to 500.

It isn't hard to see why McDonald's China's new owners are in a hurry. Worldwide, KFC is no match for McDonald's. In China the picture is reversed. According to figures the market research firm Euromonitor provided to QDaily, KFC's share of China's chain restaurant market last year was twice McDonald's — 11.6% against 5.6%.

With more than 5,300 stores, KFC has already pushed into China's fourth- and fifth-tier cities, and even into the bigger townships. “We believe there is room for many more restaurants in China, and that is the biggest opportunity in this market for us,” Yum China's CEO said in the company's first earnings report, published in February. The report didn't say where those stores would go, but it did return to a point made earlier by Fred Hu — founder of Primavera Capital, which put US$410 million of strategic investment into Yum China, and now the company's “non-executive chairman”: deeper urbanization, the growth of city clusters and the arrival of more transport hubs are all openings for Yum China.

McDonald's has said plainly that its new stores will all be in third- and fourth-tier cities. If the plan goes to schedule, the share of its restaurants in those cities will rise from 35% today to 45%. CITIC's resources will do a lot of the work here: the group holds a portfolio of mixed-use complexes in first- and second-tier cities, plus primary land-development businesses across the country. Zhang Yichen, chairman of McDonald's China and chairman and CEO of CITIC Capital, said CITIC's property business and its property connections have already been grafted onto McDonald's.

The advantage of having CITIC as the owner is already visible. On August 14 McDonald's announced a long-term strategic agreement with Evergrande Real Estate Group: Evergrande will give McDonald's first pick of sites nationwide, and McDonald's will strengthen the retail component of Evergrande's developments. Chang Zhenming, chairman of CITIC Limited, said the deal “will drive a rapid rollout of McDonald's restaurants up and down the country and speed up its move into third- and fourth-tier cities.”

So you will see more McDonald's and KFC outlets in smaller cities, and the complaint that “my city only has a KFC” may disappear. Chen Yangzhi told QDaily that for consumers in third- and fourth-tier cities, location still counts for most when they pick a fast-food restaurant: “If you can grab the key new sites — new shopping malls, say — I think there's real opportunity.” But she also pointed out that to those consumers KFC and McDonald's look much alike; to win over KFC's existing customers, McDonald's will have to give people a reason. Worth noting too: Dicos, with more than 2,300 stores, has most of them in third- and fourth-tier cities.

Food delivery: room to imagine something beyond sales

Both chains are using digital upgrades to freshen their image. In May McDonald's said more than 1,000 of its restaurants had completed what it calls the “Experience of the Future 2.0” upgrade — touchscreen self-order kiosks, mobile payment, food brought to the table. KFC's continuing renovation program likewise leans on digital equipment. Mobile payment and delivery are both central to making these brands feel young again.

According to figures Yum China released, mobile payment accounted for 45% of KFC's sales in the second quarter, twice the share a year earlier, and delivery contributed 10% of sales, up 40% year on year. At McDonald's China restaurants delivery brings in 10% of revenue on average, and at some outlets it reaches 20%-40%.

Neither breaks the numbers out, but the fast growth in both chains' delivery businesses owes a lot to third-party platforms — Ele.me, Meituan Waimai, Baidu Waimai. Both now want to pull those users onto their own ordering apps. As we argued before, third-party platforms deliver handsome sales figures but also mean giving up the consumption data; get users into your own app and you get a better read on their behavior, and more control.

That is why McDonald's and KFC both feel they must have standalone apps.

McDonald's China launched its mobile ordering app in April. When we tried it then, it felt more like a Chinese-language port of a foreign app. It has finally added WeChat Pay, delivery now covers every city where McDelivery operates, and order-ahead-and-collect should roll out nationwide next.

KFC launched its app earlier and designed it closer to a delivery platform. It has worked for years to build a membership system across the app, Alipay and WeChat, and now claims 83 million members.

Both are likely to push their own apps harder from here. KFC's co-branded phone with Huawei, for instance, ships with the KFC app preinstalled, and the company hopes its ambassadors' fans will drive downloads and use. Unlike a third-party platform, an app of your own also leaves room to build a brand experience inside it.

Yum China has gone further on delivery already: in May it bought Daojia Meishihui, operator of the delivery platform Sherpa's, to strengthen its digital and delivery capabilities. A similar investment or acquisition by McDonald's China can't be ruled out.

New products: more and more Chinese flavors

KFC's good start in China came precisely from adapting to Chinese tastes. As early as 2002 it put Fragrant Mushroom Rice on the menu, the first Western fast-food chain on the mainland to sell rice. Chinese dishes followed one after another — seafood and egg-drop congee, youtiao fried dough sticks, shaobing flatbread, rice bowls with toppings. Open KFC's breakfast menu today and nearly half the items are Chinese.

McDonald's, which has long stuck to a global menu and avoided straying from its core, has never been eager here. According to a report in Caixin, McDonald's ran a strict global model in China: supply chain, equipment, even the right to develop new dishes all came from abroad. One investor who took part in the bidding for McDonald's said McDonald's China never had a real China strategy, and that decision-making stayed firmly in Chicago. Only in February last year did McDonald's, “to meet the taste preferences of Chinese consumers,” finally add congee and steamed buns to its breakfast menu.

Since June alone KFC has launched six new products, among them the Chizza — a chicken-cutlet pizza — and a rice bucket with pickled-mustard-green chicken nuggets. That is a new reason to walk into a store roughly every two weeks.

In the same period McDonald's launched the “So Big Chicken Wing” and two flavors of its “So Big Cone.” Its new products have historically stayed closer to headquarters — the Create Your Taste burger it began promoting in 2015, for example, which lets customers assemble a burger to their own taste.

McDonald's China has even denied that putting Chinese food on the menu counts as localization. When it introduced youtiao in 2013, a PR staffer said: “We introduced youtiao because our customers want this kind of dining experience — more choice, food that fits their eating habits better. It isn't some concept of localization.”

Which makes it interesting that on the day it celebrated the new company, McDonald's China put out its first Chinese pastry: dingsheng gao, a pink rice cake, free with any purchase of 8.8 yuan or more. The timing looks rather symbolic.

“The new board understands the McDonald's China and Hong Kong markets very well, so [in the past] we had a lot of educating to do with the Americans, telling them what's popular in China right now. Not anymore — our decisions can be faster,” said Regina Hui, vice president of public relations at McDonald's China. She also stressed to reporters: “That doesn't mean McDonald's is going to start selling noodles or Chinese food after [the deal].”

Employees: new incentives to keep people

In the fight for the market ahead, both the newly Chinese McDonald's and KFC have talked about new ways to reward talent — something they seldom mentioned before. McDonald's China now has more than 120,000 employees; KFC has more than 270,000 in China.

When Yum China listed on the NYSE last year, it announced an incentive plan for restaurant managers: a one-time grant of restricted stock, with 5,000 managers eligible in the first batch. CEO Micky Pant said at the time that the point was to keep every restaurant manager thinking like an owner and keep morale high.

As it happens, at McDonald's China's launch event, Yang Xiangdong said that “after closing, McDonald's China can absolutely adopt a very different incentive structure.” Yang is a managing director at Carlyle Capital and chairman of Carlyle Group's Asia Pacific business, as well as vice chairman of the new company. “The new incentives will be tied to the company's own performance and to individual contribution, and will encourage entrepreneurship and a sense of ownership.”

See — even the talking points match. Both are trying to hold on to people for the expansion to come.

There's no doubt about it: after going Chinese, the fight between KFC and McDonald's will escalate on every front.

Graphics: Feng Xiuxia

Cover image: KFC, Fortune, Flickr