In recent years, the competition among domestic foodservice enterprises in China has become increasingly fierce, with price wars intensifying across various segmentsHowever, amidst the backdrop of rising ingredient costs, some restaurant chains are choosing a different path by raising their prices instead of lowering themFollowing McDonald’s price hike last year, another prominent Western fast-food chain, KFC, has announced its own price adjustments, marking its first price increase in two years.

On December 24, KFC confirmed reports that it had implemented a price hike on certain menu items, with the average increase being around 2%. Prices for individual items have gone up by as much as 2 RMB, and some products have seen price rises as small as 0.5 RMBThis change has sparked noticeable reactions in the market, with KFC’s parent company, Yum China (09987.HK), experiencing a rise in stock value after the announcement, closing up 1.77% by midday trading on the same day

This marked a reversal for the company, as its stock had been on a three-day losing streak prior to the price adjustment.

For example, the price of KFC's "Hot and Spicy Drumsticks" (three-piece set) has increased by 1 RMB, from 12.5 RMB to 13.5 RMB, representing an 8% increaseHowever, not all of KFC’s products saw a price hikeThe company has kept its promotional items such as the "Crazy Four" meal deal, OK single meals, and kids’ meals unchanged in terms of pricingAccording to KFC, the price adjustments are intended to balance consumer demand for value with the need to maintain long-term operational sustainability, taking into account factors like customer loyalty and purchasing habits.

In response to customer inquiries, KFC’s customer service team confirmed that the price changes are based on operational cost fluctuations and that prices are transparently listed across all ordering platforms.

This price increase by KFC comes almost a year after McDonald’s began adjusting its prices

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At the end of December 2023, many consumers noticed price hikes in McDonald’s outlets, with some products seeing an average increase of around 3%. McDonald’s has also adopted a region-specific pricing strategy, meaning that price increases vary from one outlet to anotherMcDonald’s has been steadily raising prices over the years, with price hikes occurring almost annually.

Another representative brand in the “affordable Western fast food” segment, Saizeriya, followed suit in July 2023, modestly raising prices on a few menu items, citing the need to maintain service quality within an affordable price range for consumers.

So, what exactly is driving this trend of price increases, especially in the context of an industry characterized by fierce competition and price-cutting strategies?

This year, the domestic foodservice industry in China has faced multiple challenges, with consumer spending becoming more cautious and competition reaching new heights

These factors have put significant pressure on businesses, particularly those operating in the Western fast-food segment, where price sensitivity is a critical factor in attracting customersAccording to a 2023 survey by the Red Restaurant Brand Research Institute, 52.9% of consumers stated that price was the most important factor when choosing a Western fast-food restaurant.

For the past two years, the price war in China’s foodservice industry has been intense, with some companies offering deeply discounted promotions, even at a loss, to attract customersThis has led to a situation where consumers have become conditioned to expect discounts and promotions as the norm, making it increasingly difficult for businesses to maintain profitabilityThis mentality has had negative effects on the overall market, as many consumers now expect low prices year-round, which further squeezes margins for operators.

However, given the rising costs of labor and raw materials, price hikes from major Western fast-food chains like KFC and McDonald’s are somewhat expected

As long as the increases are moderate, they are unlikely to cause significant damage to store-level profitabilityMoreover, these price adjustments come alongside other strategic moves designed to maintain customer loyalty and support long-term profitabilityFor instance, both KFC and McDonald’s have recently lowered their delivery fees, with KFC doing so in December and McDonald’s making similar changes earlier in the year.

This move of raising product prices while simultaneously lowering delivery fees might seem contradictory at first glance, but industry experts suggest that both KFC and McDonald’s are pursuing a “high value for money” strategyBy optimizing costs, improving supply chain management, and adjusting operational strategies, these brands aim to create a sustainable business model that can continue to deliver value to customers even in a challenging economic environment

The thinking here is that, despite the trend toward “downgrading” in consumer spending, customers will still gravitate toward the products, services, and brands they perceive as offering the best overall value.

Interestingly, the trend of price increases is not limited to Western fast-food chainsDomestic brands in other sectors of the foodservice industry, such as the freshly brewed tea segment, are also quietly raising prices amidst the ongoing price warOne such brand, Mixue Bingcheng, which is one of China’s largest tea chains, has raised prices on certain products in select first-tier citiesThe company explained the price hike by citing “market factors and the need to optimize store operations.” While some consumers have accepted the price increase, others have criticized itFor example, a cup of milk tea at Mixue Bingcheng now costs a bit more than it did before, but many still consider it affordable compared to other premium tea brands, which can cost 20 RMB or more.

The reasons behind the price hikes in the tea sector, besides rising costs, likely have to do with the financial pressures faced by franchisees, who may be seeking ways to increase profitability

In this case, gradual price hikes could be a necessary step to help the brand maintain healthy margins and continue growing in an increasingly competitive market.

Ultimately, it seems that the price increases by brands like KFC, McDonald’s, and Mixue Bingcheng are a response to the pressures of a price war that has reached its limitsWith rising operational costs and increasingly aggressive competition, many restaurant chains are turning to price hikes as a way to stabilize their businessesWhile these adjustments may bring some relief to operators in the short term, they also mark the beginning of a new phase in China’s foodservice industry, where the focus will shift away from unsustainable price slashing to more sustainable pricing strategies that balance value with profitability.

As the price war continues to evolve, the question remains: will these price hikes be enough to put an end to the cutthroat competition in China’s foodservice industry, or will the next phase of competition involve even more aggressive pricing tactics? Only time will tell, but for now, KFC, McDonald’s, and other brands seem to be betting that their consumers will continue to prioritize quality and value, even in the face of rising prices.