Taco Bell Got Trendy in China. What Is "Fast Casual" Dining, Anyway?

It is a delicate balance between the demand for speed and the demand for health, between wanting a quick bite and wanting somewhere to sit for a while.

Purple neon, walls of graffiti, lighting kept dim even at midday, a cocktail counter and high stools, Taylor Swift's new album on loop, and "Remember Me," the theme song from Coco — all of it makes the Taco Bell at Fengshengli in Shanghai look like an American bar-restaurant rather than a fast-food outlet.

The store has been open less than two months, and Huang Hongqiang is already eating there for the fourth time. "When I just want to fill my stomach these days, I look for somewhere relaxed, where I can listen to music and sit for a bit," he says. On the evening of March 8 he arrived with two colleagues before eight and stayed until nearly ten, ordering two rounds of food and spending 190 yuan in all.

Few people know that Taco Bell, the burrito chain, belongs to the same company as the KFC diagonally across the Wujiang Road intersection, and as Pizza Hut: Yum China. Yum! Brands finished spinning off its China business in 2016, and Yum China listed on the New York Stock Exchange on November 1 that year.

According to the 2018 Top 500 Chain Restaurants report just published by the research firm Technomic, Taco Bell has passed Burger King to become the fourth-largest fast-food brand in the US, behind McDonald's, Starbucks and Subway. With more than 6,200 stores in the US, Taco Bell is, in fact, simply a fast-food brand.

Taco Bell first came to China back in 2003, when it was still called Ta Ke Zhong, opening three stores in Shenzhen and Shanghai, positioned as a sit-down Western restaurant along the lines of Pizza Hut. It withdrew in 2008 after the business went badly.

Returning to China a decade later, Taco Bell looks nothing like its American self or its earlier Chinese self, in either image or register. It is also facing an entirely different market.

Fast food is trading up, in the US and in China alike, and the trend gets clearer every year. The US started earlier and has gone further. Beyond the makeovers that traditional chains such as McDonald's, KFC, Burger King and Taco Bell are giving their stores and their ingredients, the wave is better represented by the brands known as "fast casual."

In the US, the Mexican chain Chipotle, the burger brand Shake Shack and the salad brand Sweetgreen all fit the category. These restaurants sit between fast food and casual dining: they sell "health" or "quality," use fewer heavily processed pre-made components and additives than traditional fast food, and charge more. Service is usually about as quick as fast food — sometimes a little slower, since the cooking differs — and, crucially, they want you to stay in the store a while.

In other words, a fast casual restaurant strikes a delicate balance between the demand for speed and the demand for health, between wanting a quick bite and wanting somewhere to sit for a while.

McDonald's has said that most of the market share and the customers it lost in the US went to fast casual chains. And what McDonald's is now rolling out worldwide — burgers made with fresh beef instead of frozen, food brought to your table — amounts to moving toward the fast casual model. By that measure, Taco Bell's positioning in China today fits the concept exactly, though the phrase "fast casual" never caught on here and gets folded into the broader talk about fast food trading up.

According to Meituan's 2016 China Restaurant Report, average spending per table in fast food and snacks rose from 42 yuan in 2012 to 63 yuan last year, a cumulative increase of 49%. We have written in detail about how milk tea and street snacks moved upmarket; fast food, it now appears, is doing the same in its own way.

In a little over a year, Taco Bell has opened three stores in Shanghai. The sites alone tell you which customers it is after.

The first opened in Lujiazui, thick with tourists and close to the head offices of big banks, financial institutions and corporations. The second sits in the Wanda Plaza at Wujiaochang, which covers not only the Knowledge and Innovation Community and its many tech companies and startups, but also students from Fudan, Tongji and the Shanghai University of Finance and Economics. That Wanda Plaza had just been through a tenant overhaul: sportswear brands replaced gold-jewelry shops along the street, and the whole place skewed younger. Taco Bell was one of the new arrivals, across from a Line store and near Taoyuan Village and Blue Frog.

The third store is in Fengshengli, which opened in 2017 and is a textbook case of gentrification: the old shikumen residential buildings were revalued and sold, and a lower- and middle-income neighborhood was rebuilt for a newly affluent crowd. Besides Taco Bell, the food tenants include the craft-beer bar Goose Island and the premium burger chain White Castle, mostly Western — the stated goal is to become "the next Xintiandi."

In Yum's official telling, the "international community" is the most important criterion when picking a site: these people can spend and are willing to, and will pay for better food and a better experience.

Families and children — the customers traditional fast-food brands prize — are left out. Taco Bell offers no kids' meals; it scrapped kids' meals and toys in the US in 2013 and aims only at the young.

Huang Hongqiang's experience bears this out. "You almost never see anyone over forty here," he says. "I'm 35 and I'm on the older side in this store. At the peak, between seven and eight in the evening, everywhere you look it's good-looking young people." Huang works in finance on Nanjing West Road.

"The food here looks like the next level," says Lindsay, who was a regular at Taco Bell in the US until she came to China a year ago. "Taco Bell in the US doesn't have an open kitchen. It's usually a drive-through, you take your food from the window." That is changing, too. In November 2016 Taco Bell opened a flagship in Las Vegas, the Taco Bell Cantina, with fashionable decor, an open kitchen, drinks and a resident DJ — it looks more like a bar.

Yum China has brought over Taco Bell's most fashionable form. In the US, Taco Bell pushes a $1 value menu and its average check is not much different from KFC's or McDonald's; in China it looks more modern and more upscale.

The store design follows the current fashion for the Instagrammable. The Lujiazui store has California-flavored surfboards hanging from the ceiling; two of the stores have big graffiti walls; and the expanses of neon are an interior touch traditional fast-food outlets rarely use. The overall effect is meant to feel of the moment.

The open kitchen is visible the moment you walk in. At KFC you can also catch part of the kitchen behind the ordering counter — in fast food the kitchen usually sits right behind the counter, to speed up service — but Taco Bell's layout is plainly different: all three stores spread the kitchen out sideways, on display for customers, rather than stacking it behind the front counter.

Order one of the new grilled-to-order dinner items and the staff will warn you that "it may take fifteen minutes." More than one of the customers we spoke to mentioned that Taco Bell is slow to serve.

That is deliberate. It wants you to sit down. The drinks list says the same thing: Taco Bell carries 28 beverages. KFC, even after adding a lot of coffee options recently, carries 19. Taco Bell serves beer and five cocktail slushies, and the Fengshengli store also sells Goose Island craft beer. Sodas — Pepsi, 7-Up and Mirinda — come with free refills. All of it says the restaurant wants you to stay, rather than chase table turnover the way KFC does.

And only once you sit down can it sell you more. Take Huang Hongqiang and his colleagues: over two hours they keep ordering snacks or drinks. "Look around. The people near us aren't eating, they're talking. If all you want is to eat, you go to KFC or McDonald's and you don't linger — young people don't see any reason to stay there."

The Wujiaochang and Fengshengli stores have both set aside a small space for live performances, with resident singers in certain weekend slots.

Pizza Hut, meanwhile, appeals to young people less and less. "Consumers feel that if you thought of the Pizza Hut brand as a person, he'd be the 'nice guy' or the 'backup option,'" says Yum China CEO Joey Wat. Yum China badly needs a new restaurant brand that stands for a fashionable, easygoing way of living.

Pizza Hut has been struggling in major markets including the US and China for some time. Its same-store sales in China have fallen since 2011 — last year showed signs of improvement, with same-store sales up 1% — and analysts have suggested Yum sell Pizza Hut. If it cannot revive Pizza Hut, Yum needs its next strong brand ready. Taco Bell, which has done a decent job of making itself younger at home over the past six years, may be a good bet.

Next to KFC and Pizza Hut, Taco Bell has done little abroad. Now Yum plans to take its 280 overseas stores to 1,000 by 2020, with sales of $15 billion.

Yum says it did not expand earlier because fried chicken and pizza are far better known around the world than Mexican food, but "now, outside the US, people in other countries are getting more and more familiar with Mexican food."

Taco Bell is a new brand with only three stores in Shanghai. It caught our attention because, backed by Yum China's capital and its way of running a group of chains, it could scale up and reshape the fast-food business. It is in an emerging market — and an increasingly crowded one.

Besides comparable players like White Castle and premium burger chains such as Shake Shack, which is about to enter China, the traditional fast-food chains remaking and upgrading themselves are competitors too.

Ting Hsin, the parent of Dicos, which has always concentrated on second- and third-tier cities, has designs on the fast casual market as well. It launched the pizza brand Nabulesi in 2016 and has four stores in Shanghai so far. Customers pick their own toppings, the kitchen is semi-open and the oven is impossible to miss. The average check is around 60 yuan. Wang Yiwen, a spokesperson for Ting Hsin's restaurant business, has said they studied brands such as Chipotle and Shake Shack.

Burger King is another rival not to be underestimated. Compared with KFC and McDonald's, its positioning is very close to Taco Bell's. Since changing operators around 2012 and adjusting its positioning, Burger King has gone after the more individualistic young people of big cities, with a higher average check than KFC or McDonald's.

As early as 2015 Burger King introduced its Premium line, with burgers at roughly 34 to 41 yuan each and combos running 48 to 55 yuan. When McDonald's average check was 23.5 yuan, Burger King's was 33 yuan.

Thanks in part to that higher positioning, Burger King has done well in China, with double-digit growth for three years running. That is fast for a brand that has been in China more than a decade. Over the same period, KFC in China either declined or posted same-store growth of 3% to 4%.

Yum's old enemy McDonald's has also spent the past two years experimenting with moving fast food upmarket.

In the second half of 2015, McDonald's build-your-own-burger outlets, Create Your Taste, set off a good deal of talk in Shanghai and Guangzhou. The burgers started at 42 yuan on their own and 49 yuan as a combo. Plenty of customers joked that it was "the Subway of burgers."

The project was quietly dropped a little over a year later, but McDonald's did not give up on the premium end. It soon brought out its Star Chef burgers, developed with Michelin-starred chefs. In price and positioning, the Star Chef line was a compromise between the build-your-own burgers and ordinary cheap ones: 28 yuan apiece, a step above the 20-yuan Big Mac, with combos at 33 yuan. Also made to order.

More recently, McDonald's "restaurant of the future" in Guangzhou introduced DIY desserts: sundaes, waffle cones and affogato can all be customized. There are hardware upgrades too. McDonald's says it will add more "2.0 restaurants," with food brought to the table, touch-screen ordering kiosks and mobile payment.

Nor can you assume cheap fast food and fast casual do not compete. Nick Setya, an analyst at Wedbush Securities, says fast casual restaurants are squeezed between fast food and casual dining: "There's pressure from both sides." In the US, fast food went through a slump and is now pushing back against fast casual.

The response has been warm enough that McDonald's has rolled out $1, $2 and $3 menus nationwide. Its rivals Wendy's and Burger King have come out with cheap combos of their own to win back price-sensitive customers.

These are all problems Taco Bell may run into as it expands. There is also the matter of local taste. Yum has already reworked the Mexican flatbread for China, swapping the cold cheese inside for hot, but some customers still think of it as cold food and "don't like it." And the problem fast casual faces in the US — how to balance store count against saturating the market and losing novelty and appeal — is one that restaurants like Taco Bell will have to solve too.

"Consumption upgrade is the most important trend," Yum China CEO Joey Wat said at the 2017 investor conference. "Consumers want better and more."

Whatever becomes of the brand in China, fast casual, as a new slice of demand, is now open for business.

(Huang Hongqiang is a pseudonym, at the interviewee's request.)

Except where noted, images come from Yum China and VisualHunt