Britain's weekly website The Economist reported on June 6 that China's fast-food upstarts have beaten McDonald's and KFC.

Western fast-food chains used to dominate China's casual dining market, the report said. The arrival of a Kentucky Fried Chicken restaurant in a Chinese city was once seen as a development milestone. Today, China has about 10,000 KFC stores, more than twice as many as its U.S. stores. Starbucks has more than 7,000 coffee shops in China, and McDonald's has 6,000 burger joints. The money and prestige of foreign brands used to make it difficult for local companies to compete with them.

But now the situation is changing, the report noted. In the first quarter of this year, Starbucks' sales in China fell 8 percent year-on-year. Chinese consumers, who have lost interest in foreign chains, are turning to domestic restaurant chains. Tustin, which adds local favorites such as Peking duck or mapo tofu to its burgers instead of beef, has opened about 1,600 new stores in the past six months, bringing its total to more than 7,000. Another burger chain, Wallace's, now has more than 20,000 stores. Two-year-old coffee chain Cudi Coffee plans to increase its store count to 20,000 by the end of 2025, up from 6,000 in October last year. The older Ruixing Coffee opened 8,000 new stores in 2023. For its part, Honey Ice City sells pearl milk tea in 36,000 stores.

Investors are rubbing their hands. Honey Snow Ice City, which posted a net profit of 2.5 billion yuan in the first nine months of 2023, may soon seek a $1 billion initial public offering in Hong Kong. Its rival Cha Ba Dao raised $330 million when it went public in April. Another rival, Bawang Cha Ji, is said to be preparing for a U.S. listing.

A key reason for the sudden popularity of China's domestic restaurant chains is that they are inexpensive, the report said. As China's economic growth has slowed, instead of giving up their lattes, consumers have lowered their spending levels. Ruixing Coffee's promotional price is one-third the price of an equivalent drink at Starbucks. Honey Snow Ice City and Cudi Coffee also offer similarly cheap drinks.

Another reason, the report suggests, has to do with geography. Many of the local chains come from outside China's affluent metropolises such as Shanghai. Kudi Coffee and Wallace opened their first outlets in the second-tier city of Fuzhou. Tustin was founded in Nanchang. These are the very areas where such chains have expanded most rapidly, in part because Western competitors have historically ignored them. About half of Tustin's stores are in second- and third-tier cities. Nomura says Ruixing Coffee's rapid growth has been fueled by its expansion in these relatively backward regions. Starbucks, on the other hand, has barely ventured outside of major cities in the past two years.

That has allowed locals to capitalize on the more vibrant consumer sentiment in those places. UBS recently found that residents of smaller cities tend to spend more money on dining, cosmetics and sportswear than those in larger cities.

But the report goes on to say that foreign rivals are catching up. between January and March, about 60 percent of the new stores opened by KFC and Pizza Hut in China were in third-tier cities and below. McDonald's plans to open 4,000 new restaurants in China by 2028, many of which are expected to be located in smaller towns.

In addition, despite Ruixing Coffee's strong growth, with pre-tax profit nearly tripling to nearly 3.1 billion yuan last year, the company's share price has halved since last October. Tea Budao's shares have fallen more than 40 percent since its IPO.