Domino’s Set For China Rev Up

Western fast food chains have seen decidedly mixed results in China, reflecting a wide range of factors in this image-conscious society where perceptions and promotions are often just as important as product quality. It’s not often that I break news in this sector, but now I’m excited to report that US pizza specialist Domino’s is preparing a major push into the China market, aiming to tap the growing trend for products that can be delivered to the home.

My discovery of this aggressive new expansion plan came through a chance encounter during a chat with a western fast food executive during lunch one day. During our talk, the executive detailed plans for a Domino’s expansion that would see the number of stores grow to around 150 in Shanghai over the next 2 years, up 5-fold from the current 35 in the city.

Frankly speaking, I was surprised that Domino’s even has 35 stores now in Shanghai, as I’ve only seen one or two such shops after living in the city for 4 years. For those who don’t know about the chain, Domino’s is one of the top pizza franchises in the US, using a delivery-only model that helps to control expenses by avoid many of the costs incurred at more traditional fast-food and sit-down restaurants.

The executive told me that Domino’s has been in Shanghai for more than a decade, but has failed to gain much traction under its previous franchisee who was using non-Chinese business models to promote the chain. His firm recently took over operation of the franchise for Shanghai, and is now preparing the expansion in the relatively untapped market for delivered pizza.

Delivered food is certainly an area with big potential in big cities like Shanghai and Beijing, where high population density and cheap labor costs mean that low-cost products like pizza and hamburgers can be delivered quickly and profitably. Nearly all of my friends have ordered delivered food from McDonalds (NYSE: MCD) or KFC (NYSE: YUM) at one time or another, a service that doesn’t even exist in the US. Many local chains also do take-out, and the popularity of delivered food has even led to the rise Sherpas, of a Shanghai-based company that specializes in delivering food for other restaurants.

This growing love of delivered products is part of a broader explosion in e-commerce, which relies exclusively on large squads of couriers on bicycles, motorcycles and trucks to deliver goods ordered by consumers online and by phone. The e-commerce trend has even moved to ordinary groceries, as logistics systems grow more sophisticated and delivery times shorten to as little as a couple of hours.

All that said, this new Domino’s foray will still face an uphill battle due to lack of awareness of the brand among Chinese consumers. Western chains like Starbucks (Nasdaq: SBUX), KFC and McDonalds have all enjoyed strong success in the market, but only after years of brand building and savvy promotions aimed at value and image-conscious Chinese consumers. And for every brand that’s succeeded, there are numerous ones like Papa John’s pizza, Carl’s Jr hamburgers and Krispy Kreme donuts that struggle in the market due to lack of awareness.

Pizza is certainly a product that has found a market in China, as evidenced by the strong success of Pizza Hut, whose stores depend mostly on Chinese consumers for their success. The Chinese fondness for delivered food should also help. But at the end of the day, Domino’s will also have to find the right mix of promotions and image building to succeed, a tough challenge for both domestic and foreign firms trying to build new fast food brands in China.

Bottom line: Domino’s plan for a major expansion in Shanghai has a 50-50 chance of success if it can find the right mix of promotions and marketing.

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