Zhenkungfu, Yoshinoya, Yonghe King, Ajisen Ramen… Why Are All These Fast-Food Chains Stuck in Such an Awkward Spot?

Neither big nor small in scale, neither high-end nor low-end as brands — how did these chains, glamorous not so long ago, end up here?

"Competition in the restaurant business is intensifying. A high rate of store openings and a high rate of closures have become the industry's new normal… At the same time, the industry has entered an era of diversification, marked by fast-fashion cycles, a focus on health, and smart technology."

That is how Ajisen Ramen summed up the market it now faces, in the interim results it released last week. Revenue and same-store sales are both still falling, down 2.5% and 2.2% year-on-year.

Most chain fast-food brands are in the same position, which also explains why KFC, 30 years after it entered China, has opened its first sub-brand, KFC Pro. Today KFC held the official launch for the new restaurant, which has been in a two-month trial run at Hangzhou's MixC mall.

Fashionable industrial decor, a fully transparent ordering area where you can see every ingredient, salads, a crayfish-and-chicken panini, Asahi beer and an assortment of cold-pressed juices: KFC Pro, positioned as a green, light-meal restaurant, shows no trace of KFC at all. That is why it drew so much attention when it appeared two months ago. It is read as a sign of KFC upgrading its brand image, and as a new "entry point" for reaching younger customers.

Almost every chain fast-food brand is upgrading. Refitting stores, adding digital equipment, refreshing the visual identity, putting healthier dishes on the menu — all of it is now routine. "The restaurant industry is going through this wave [of skewing younger]. Design, how the food looks, service — everything has to adapt to it," Fan Hongjuan, head of CBRE's East China advisory and transaction services, retail, told QDaily.

Their scale, and above all the history behind their brands, has left McDonald's and KFC better able to absorb the shock. Add the work both have put into digitization and into appealing to younger customers in recent years, and their results have returned to steady growth. As we analyzed in a recent article, the competition between the two will also escalate now that both have been "localized" in China. KFC Pro is seen as the boldest thing KFC has tried in the Chinese market since taking investment from Ant Group.

Chains like Ajisen Ramen, Zhenkungfu, Yoshinoya and Yonghe King are in a more awkward place. If you had to sum them up: neither big nor small in scale, neither high-end nor low-end in brand influence. Each of them arrived at the right moment, and each had a genuinely glorious stretch. Now they are the ones the youth wave is hitting hardest.

Yonghe King's founder, Lin Youao, once hoped his company would become "China's McDonald's." Zhenkungfu, founded in 1994, wanted the same thing. Both are further from that grand plan than they have ever been.

These Chains May Already Have Drifted Out of Your Daily Orbit

When did you last eat at Yonghe King or Ajisen Ramen? Probably at an airport or a train station, or when you just wanted something quick and happened to spot one — near home, near the office, or on a delivery app.

You may have noticed that these chains have drifted further and further from your daily orbit. It isn't a feeling. Nearly all of them stopped expanding three years ago, or five years ago, or longer.

Ajisen Ramen is the only listed company among them. Its results have been sliding since 2015. In March that year, founder and CEO Pan Wei was still talking up the "1,000-store plan" the company had announced in 2010: 70 new stores in 2015, and 1,000 stores within five years. Ajisen added four stores that year. Today it has 649.

Jollibee, the Philippine restaurant group that bought Yonghe King outright in 2007, planned for it to reach 1,000 stores by 2017. Yonghe King's expansion stalled around 2013, and it now has 312.

Cai Dabiao, then Zhenkungfu's chairman, likewise said in 2011 that the chain would grow to 800 or 1,000 stores within three years. Zhenkungfu's website today puts the number at 602.

Beijing Yoshinoya Fast Food Co., which runs the Yoshinoya outlets in Beijing, Tianjin, Hebei and elsewhere, once meant to expand fast in partnership with the Ting Hsin Group. In the end its core market stayed Beijing, where its stores account for 54.99% of Yoshinoya's mainland total — which makes it, in substance, a regional brand.

The "1,000-store plans" that Yonghe King, Ajisen Ramen and Zhenkungfu drew up on their way to becoming national brands all turned out to be bubbles.

When they were the up-and-comers, they served young white-collar workers. Now they have drifted further and further from the city centers where spending power is strongest, and their reach into consumers' lives has weakened with the distance.

The leasing plans for the South and North Towers of Joy City, the mall on North Tibet Road near People's Square in Shanghai, show the problem plainly. Yao Ying, Joy City's leasing director, told QDaily that the South Tower, whose restaurants were signed in 2010, is dominated by chains, while the North Tower, leased from 2014, went for young, trend-driven dining brands. Traditional chain fast food, in other words, is already out.

In 2010, group-owned chain fast food was still thriving. KFC's first China store, opened in 1987, marked the start of the country's fast-food boom, and KFC and McDonald's, which arrived two years later, together set the price of a chain fast-food item at 17.5 yuan.

They showed Zhenkungfu, Yonghe King and the rest how it was done. Zhenkungfu, the first to standardize Chinese fast food, grew quickly from a chain in Guangdong's second- and third-tier cities into the largest Chinese fast-food brand. Ajisen Ramen, built around Japanese ramen, also used standardization and systems to become the first mainland Chinese restaurant company to list overseas.

But at a press conference last June about its brand upgrade, Zhenkungfu chairman and president Pan Yuhai pointed out that traditional fast-food companies like his were making less and less money. In 2011, fast-food companies among the country's top 100 restaurant firms earned a profit margin of about 8.52%; by 2015 it was 2.8%. The main reason, he said, is that "consumers have changed."

Young white-collar workers are always the most sensitive group of consumers, which is why malls always chase what is young and current. Today this group wants a meal to be both enjoyable and presentable — at a business lunch as much as on a day off.

Traditional fast-food chains have plainly fallen behind. "From a leasing point of view, no mall today wants these [traditional] fast-food brands. They used to take them because there wasn't much choice. Now their audience is shrinking too, and malls no longer see the need to have one," Kui Ran, director of retail property at JLL, told QDaily.

Kui Ran added that by 2020, in Shanghai, about 50% of people will earn more than 100,000 yuan a year. The 50-yuan white-collar lunch now treated as a consumption upgrade will by then be the entry-level price. This group will inevitably look for restaurants with better quality and a fresher feel.

As Brick-and-Mortar Retail Fades, Malls Leaning on Restaurants Are All Chasing Difference

Giving restaurants more floor space has become the industry's unspoken route out of trouble. In Shanghai, total mall revenue rose 10.2% year-on-year last year, while mall dining grew at a compound annual rate of 21.2% over six years. According to the China Catering Report White Paper 2017 from Meituan, dining's share of malls has risen from around 10% to roughly 40%.

Even Shanghai's Jing'an Kerry Centre, which is positioned at the high end and keeps its distance from cooking smoke, has raised its dining share from 26% to 28%, and expects to reach 30%, according to figures its general manager of operations, Deng Rushun, gave QDaily.

"Every mall is trying to be different. If the brands can't make you different, then the content inside the brands has to," Fan Hongjuan said.

Wu Wenli, leasing director at Jing'an Kerry Centre, confirmed it: difference is the frame for everything they sign. When they plan the mix, they look at who is nearby — Réel department store already has a mass-market food court, Plaza 66 has the luxury restaurants. "So we position ourselves as affordable luxury and lifestyle."

When Jing'an Kerry Centre puts its restaurant mix together, it balances names people know against names they don't. When it works with big restaurant groups, it has restaurants made to order to meet that requirement for difference — a different name, different decor. In Deng Rushun's view, a one- or two-location specialty restaurant may be short of capital or supply-chain strength next to a group; this approach solves that while keeping the character.

Joy City, which aims younger, has gone further still with restaurant groups. Yao Ying said they have "tasted the sweetness" of trying out new brands. During leasing, they negotiate with restaurant groups to launch brands with a "clear fit" with Joy City's early planning and its projections. Which means those brands would struggle to open in another mall, because "every mall has its own positioning."

"Chains actually run very tight operations once they mature, but not every chain can adapt and improve as fast as dining is changing right now. We lean toward brands that have that strength and can also be customized to fit the mall," Yao Ying said. That leaves traditional chain fast food in an awkward position in a mall with a sharply defined theme, though she still thinks these chains have value.

The chain fast-food brand Joy City ended up choosing was Burger King. "The others are all fairly dated. Burger King is one of the fast-food brands still on the way up."

Jing'an Kerry Centre has no fast-food brands at all, but it does have a boutique burger restaurant, Charlie's Burger, where the cheapest item costs 40-odd yuan and the priciest 98 yuan. Wu Wenli said that over the next two months Jing'an Kerry will open eight more restaurants, four of about 300 square meters and four smaller. One is an "upgraded" fast-food brand, though she would not say which.

What Is Replacing Ajisen Ramen and Yonghe King?

Figures cited in Ajisen Ramen's interim report show that in Beijing, Shanghai, Guangzhou and Shenzhen, the surge in new restaurants has come with a far faster turnover: about 10% of restaurants close every month, a compound annual closure rate above 100%. Malls have grown alike, so they pull in less foot traffic and restaurants run short of customers. According to the China Catering Report (White Paper 2017), 10 of 15 cities — including Beijing, Shanghai, Guangzhou, Shenzhen, Nanjing, Qingdao, Chongqing, Chengdu, Wuhan, Hangzhou and Xi'an — had mall dining opening rates above 30%.

When the South Tower was signing restaurants in 2010, Yao Ying said, what customers cared about most was the setting, and taste came second. Today the order runs taste, health, setting, then service and privacy. Upgrading fast food is not only a matter of price; much of it is about refreshing the category, and healthy light meals are a shared direction.

Wagas is one of the casual-dining chains riding that current. Mid- and high-end malls all want it, and although it is still small, it often sits right next to Starbucks, in the prime spot of a mall or an office building. We looked closely at why young consumers like it in an earlier article.

As a category, salad is the clearest case of all. Several chains have already come out of it, and salad is fast food by nature.

In early 2015, when Da Kai Sha Jie opened its first store in Shanghai's Yangpu district, CEO Xiao Yu still doubted that customers would accept "salad as a main meal." Knowing the calorie count of a dish was a new idea then, too. The restaurant used chips that stood for dishes so customers could build their own salads, and after paying they could scan a QR code on the receipt to see the calories and fat in what they had ordered.

"At the start a lot of people came for the fashion of it," Xiao Yu told QDaily. "Now everyone's calmed down about it." Da Kai Sha Jie's average check is 40 to 50 yuan, and it aims at "young white-collar workers with a certain level of income."

Xiao Yu had not expected the first month's takings to top 160,000 yuan, or to keep climbing every month after that, reaching close to 300,000 yuan by about the sixth. Da Kai Sha Jie now has 43 stores in 22 cities, including Nanchang, Wuhan and Changchun. It sites them mostly in commercial and office complexes: "It can serve the working lunch and the leisure meal, and the customer base is fairly stable." Twenty percent of its customers now eat there more than four times a month.

The salad business as a whole is growing fast. Shanghai had a little over 20 salad restaurants at the end of 2015 and more than 300 by the end of last year. McDonald's, KFC and Starbucks have all added salads or salad combos, and convenience stores have been just as eager.

Even in the "just grabbing something" situation, these newer options are steadily replacing Ajisen Ramen, Yonghe King and the rest. As we also analyzed in an article on the snack market, snacks are getting more refined too: wontons and pan-fried buns are moving up to the higher floors of malls. On the lower floors, where the average check is smaller, you no longer see only takoyaki and fried chicken cutlets, but steak at close to 100 yuan a head, malatang you order from a menu instead of picking your own ingredients, and hand rolls stuffed with lobster and crab.

Traditional Fast-Food Chains Are Trying to Upgrade Themselves

Yonghe King and Ajisen Ramen know what the problem is. Over the past few years, both have tried different ways out.

Last June, Zhenkungfu announced it was entering the "Chinese fast food 3.0 era." Pan Yuhai said the company had already opened more than 10 upgraded concept stores by the end of 2015, and planned 50 in 2016. Zhenkungfu would not tell QDaily how many concept stores it has now; publicly available information shows them concentrated in Guangdong and Beijing, most of them well away from city centers.

These stores look nothing like the Zhenkungfu you know. Inside, the colors are yellow, black and raw wood; sofas have replaced the wooden chairs; there are bookshelves and plants; the logo's background has gone from red to black; and the figure that used to look a lot like Bruce Lee has been blurred out.

Eating there is different too. Ordering has shifted from a counter to a cafeteria line where you pick as you go and settle up at the end. The menu is much longer, with more than a dozen additions including glutinous rice chicken, desserts and rice noodle rolls. Like other fast-food chains, Zhenkungfu has also gone digital: the stores have self-service electronic ordering machines and similar equipment.

The concept stores also have a section the old ones never had: a tea-drinks counter. Zhenkungfu partnered with Maoxiong Chabu, a brand it incubated, to sell milk tea, beer, coffee and other drinks inside its stores. Together with the new sandwiches, it is clear Zhenkungfu wants customers who will stay even when it isn't mealtime.

Prices in these stores are higher. An article in 21st Century Business Herald found that Zhenkungfu's standard combo at a regular store — rice, one dish, one soup — costs about 3 yuan more at a concept store, and that the lunchtime check per customer runs above 40 yuan, well over the roughly 25 yuan at a regular Zhenkungfu.

In an interview, Zhenkungfu said the upgraded concept stores cost more per store to build than regular ones, but that it expects a return: some stores, it said, saw double-digit revenue growth after the refit.

Not every customer is sold. On Dianping you can find complaints that the food is too expensive and the service poor.

Ajisen Ramen picked the opposite route: launching new brands that look like they have nothing to do with Ajisen. Few people know, for instance, that Menya Musashi, on the fifth floor of Shanghai's iapm mall, belongs to the Ajisen group.

Ajisen has launched more than a dozen brands altogether, among them Wakayama, Wei Niu, Azabu Juban, Xi Duo Cang and Tokyo Shishang. They sit at different price tiers, but all of them cost somewhat more than Ajisen Ramen.

"Ajisen Ramen is positioned at the low-to-mid end. High-end malls are a market Ajisen Ramen doesn't reach, so I started thinking about how to build a brand that would suit a place like that. That's why some of the new brands aim at more upscale customers," Pan Wei said.

That is not hard to understand. In 2011, Ajisen was caught selling broth it claimed was simmered from pork bones but that was in fact mixed from a concentrate, which badly damaged its image — and tying new brands to an Ajisen Ramen urgently in need of fixing its own aging brand would do those new brands no good.

Not all of the sub-brands have worked. Beijing Business Today ran a simple tally of them last May; a year and a bit later, a Wakayama in Hong Kong and a Yakiniku Son Saburo have both closed.

Pan Wei has said in interviews that Ajisen needs to keep positioning itself across several tiers of spending and keep testing its multi-brand strategy by trial and error. Some brands will fail, but more of them will give Ajisen new places to grow.

To Yao Ying, Ajisen Ramen is genuinely improving itself in step with the changes in dining, but it is still working in the format it knows best. "What it has locked onto [as a market] is still pretty clear — high foot traffic, fast table turnover, a business-leaning idea. It has never left that category, and it almost never offers the kind of quiet, private space where you can sit down and have a meal."

There is a cautionary tale from the clothing business worth remembering: Septwolves' Mark Fairwhale, created for the high end, and Metersbonwe's Me&City both lost their original customers outright once more people worked out which parent company they belonged to.

Taking a new market with an entirely new concept, or an entirely new brand, is not impossible. It is just that raising the value of a brand takes sustained effort — and being honest with customers matters most of all.

Graphics: Feng Xiuxia

Cover image: Zhenkungfu, Flickr