Chinese Companies Alter Products, Strategies to Offset Rising Costs

Like their global peers, businesses in China are dealing with cost pressures, including elevated prices of oil, grains, meat and other commodities. Rather than raising their retail prices, companies often try to ease the impact of higher expenses by shrinking package sizes or filling containers with less product. Some businesses have simply been absorbing the increases or using creative approaches to keep a lid on costs.

Since the summer, Kentucky Fried Chicken outlets in some Chinese cities have included chicken feet, necks, collarbones and wingtips—parts of the bird that wouldn’t look out of place at a Chinese dinner table—in their Superabundant Chicken Bucket. The bucket, which is meant for one person, is made up of 19 small pieces of these bony chicken parts and sells for 29.90 yuan, the equivalent of about $4.27.

The chain’s operator,

Yum China Holdings Inc.,

said using a wider variety of chicken parts helps it lower costs and offer greater value. KFC increased its store count by 342 in China in the first half of 2022, and more than half of those were in less economically prosperous cities. Yum China, which also operates Pizza Hut restaurants, recently said its first-half revenue fell 4.2% to $4.8 billion, while its net profit dropped 55% to $183 million.

The hot-pot restaurant chain

Xiabuxiabu Catering Management (China) Holdings Co.

was hit hard by the Covid-19 pandemic as lockdowns reduced foot traffic to its outlets. Rising costs of meat, eggs and vegetables have eaten into its margins.

The company recently rolled out new set menus, priced at the equivalent of $7 to $10, which bundle less costly accompaniments such as condiments, rice, noodles and tea with other main dishes, in the hopes that the practice will increase sales volume.

“Income expectations are weakening,” said Tang Jun, a food and beverage sector analyst at Soochow Securities. “If companies raised prices, they would drive consumers away. That’s why we see companies trying very hard to minimize costs through revamping their operating models.”

The country’s largest producer of soy sauce,

Foshan Haitian Flavouring & Food Co.

, last year raised the retail prices of its products by at least 3%, citing higher material costs. While that increase contributed to a small boost in first-half revenue this year, the company said its costs continued to rise, hurting profitability.

Last month, Haitian said that despite soybean prices reaching all-time highs, it had no plans to raise prices farther. Instead, it said it intends to be less wasteful in using raw materials and will try to find other ways to streamline operations to counteract cost pressures.

China’s economy grew by just 0.4% in the second quarter from a year earlier, and official data released for July and August has been weak. While Americans have increased spending as the U.S. pandemic has eased, consumption in China has taken a hit from the country’s ongoing Covid-19 lockdowns, a deep property downturn and high youth unemployment.

The broader slowdown has spilled over to companies in China that sell mainly to wholesalers or other businesses. Earlier this year, one of the country’s major juice producers called off a plan to convert a plant into one that would make strawberry, peach and pomegranate concentrates.

The company, Yantai North Andre Juice Co., produces apple and other juices from larger fruits for domestic brands as well as the multinational beverage giants

Coca-Cola Co.

,

PepsiCo Inc.

and Nestlé SA. Andre Juice said that instead of expanding into more flavors, it planned to use some of the $25 million designated for that project to double down on its main business of making apple-juice concentrate.

Not all companies in China have had to cut corners or pull back spending. Beer companies, liquor makers and home-appliance makers that sell higher-priced products targeting more-affluent consumers have been able to pass on some of their higher costs by increasing retail prices.

Still, the drag on consumer companies’ margins in China is unlikely to go away soon. A decline in global commodity prices could provide some relief, but Beijing remains steadfast in pursuing its zero-Covid strategy. That makes a near-term rebound in domestic consumer demand unlikely.

“Beijing’s policies can make an impact on downstream demand…and that could provide a better scope for companies to pass on some of that higher cost to consumers and restore some of their margins,” said

Aidan Yao,

senior emerging Asia economist at AXA Investment Managers.

Alicia García-Herrero,

chief economist for Asia-Pacific at the French investment bank Natixis, said many consumer companies in China won’t do well this year given the poor consumption trends.

“This is a terrible year for them…I don’t think that’s going to improve anytime soon,” she added.

Like their global peers, businesses in China are dealing with cost pressures, including elevated prices of oil, grains, meat and other commodities. Rather than raising their retail prices, companies often try to ease the impact of higher expenses by shrinking package sizes or filling containers with less product. Some businesses have simply been absorbing the increases or using creative approaches to keep a lid on costs.

Since the summer, Kentucky Fried Chicken outlets in some Chinese cities have included chicken feet, necks, collarbones and wingtips—parts of the bird that wouldn’t look out of place at a Chinese dinner table—in their Superabundant Chicken Bucket. The bucket, which is meant for one person, is made up of 19 small pieces of these bony chicken parts and sells for 29.90 yuan, the equivalent of about $4.27.

The chain’s operator,

Yum China Holdings Inc.,

said using a wider variety of chicken parts helps it lower costs and offer greater value. KFC increased its store count by 342 in China in the first half of 2022, and more than half of those were in less economically prosperous cities. Yum China, which also operates Pizza Hut restaurants, recently said its first-half revenue fell 4.2% to $4.8 billion, while its net profit dropped 55% to $183 million.

The hot-pot restaurant chain

Xiabuxiabu Catering Management (China) Holdings Co.

was hit hard by the Covid-19 pandemic as lockdowns reduced foot traffic to its outlets. Rising costs of meat, eggs and vegetables have eaten into its margins.

The company recently rolled out new set menus, priced at the equivalent of $7 to $10, which bundle less costly accompaniments such as condiments, rice, noodles and tea with other main dishes, in the hopes that the practice will increase sales volume.

“Income expectations are weakening,” said Tang Jun, a food and beverage sector analyst at Soochow Securities. “If companies raised prices, they would drive consumers away. That’s why we see companies trying very hard to minimize costs through revamping their operating models.”

The country’s largest producer of soy sauce,

Foshan Haitian Flavouring & Food Co.

, last year raised the retail prices of its products by at least 3%, citing higher material costs. While that increase contributed to a small boost in first-half revenue this year, the company said its costs continued to rise, hurting profitability.

Last month, Haitian said that despite soybean prices reaching all-time highs, it had no plans to raise prices farther. Instead, it said it intends to be less wasteful in using raw materials and will try to find other ways to streamline operations to counteract cost pressures.

China’s economy grew by just 0.4% in the second quarter from a year earlier, and official data released for July and August has been weak. While Americans have increased spending as the U.S. pandemic has eased, consumption in China has taken a hit from the country’s ongoing Covid-19 lockdowns, a deep property downturn and high youth unemployment.

The broader slowdown has spilled over to companies in China that sell mainly to wholesalers or other businesses. Earlier this year, one of the country’s major juice producers called off a plan to convert a plant into one that would make strawberry, peach and pomegranate concentrates.

The company, Yantai North Andre Juice Co., produces apple and other juices from larger fruits for domestic brands as well as the multinational beverage giants

Coca-Cola Co.

,

PepsiCo Inc.

and Nestlé SA. Andre Juice said that instead of expanding into more flavors, it planned to use some of the $25 million designated for that project to double down on its main business of making apple-juice concentrate.

Not all companies in China have had to cut corners or pull back spending. Beer companies, liquor makers and home-appliance makers that sell higher-priced products targeting more-affluent consumers have been able to pass on some of their higher costs by increasing retail prices.

Still, the drag on consumer companies’ margins in China is unlikely to go away soon. A decline in global commodity prices could provide some relief, but Beijing remains steadfast in pursuing its zero-Covid strategy. That makes a near-term rebound in domestic consumer demand unlikely.

“Beijing’s policies can make an impact on downstream demand…and that could provide a better scope for companies to pass on some of that higher cost to consumers and restore some of their margins,” said

Aidan Yao,

senior emerging Asia economist at AXA Investment Managers.

Alicia García-Herrero,

chief economist for Asia-Pacific at the French investment bank Natixis, said many consumer companies in China won’t do well this year given the poor consumption trends.

“This is a terrible year for them…I don’t think that’s going to improve anytime soon,” she added.