China’s Food Delivery Apps Slice Into Fast Food Profits

Food delivery apps in China are giving fast food chains like KFC and Pizza Hut a run for their money.

An ever-increasing competition between food delivery apps backed by eCommerce giants, such as Alibaba’s Meituan, Baidu’s Waimai and Tencent’s Ele.me, is sharply cutting costs and creating a win-win situation for Chinese consumers, Reuters reported.

The competition, which has now exposed a whole new set of previously unexposed restaurants to the mobile food delivery space, is so intense that it’s not uncommon to see food delivery apps offer as much as 40 percent off on orders.

Meanwhile, Yum Brands (KFC and Pizza Hut, among others), which has had a strong foothold in the Chinese market, is suffering a loss in market share after a series of food safety violations hurt Chinese consumer sentiment.

In July last year, for example, a huge scandal over KFC and McDonald’s serving stale beef and chicken emerged. The two then widely popular restaurant chains reportedly bought expired meat, which was purposefully mislabeled as fresh.

In another such incident, in June this year, 800 tons of smuggled frozen meat from the 1970s bound for restaurants and supermarkets surfaced in the Hunan province in China, CNN reported. While the shipment worth $1.6 million was confiscated by authorities, it was yet another major blow to the restaurant industry and a reminder to Chinese consumers about the lack of implementation of food safety regulations at big chain restaurants.

These reports are just two of many such incidences that have battered consumer confidence in China and is now diverting consumer attention to food delivery apps, which are increasingly gaining popularity.

Yum referred to this competition as a “savage battle” and blamed it for poor same-store sales that grew by a mere 2 percent in the third quarter, instead of the expected 9.6 percent, according to Reuters.

“We are experiencing what we believe is a short-term but significant impact of online ordering aggregators entering the casual dining space,” said Yum CFO Pat Grismer on third-quarter earnings call, which was followed by a steep 20 percent drop in the company’s share value.

While the U.S. company continues to remain bullish on its growth in China, which remains its largest market, it will either have to step up its omnichannel game or continue to lose its market share to a market increasingly being driven by mobile apps.

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