During my first trip to China, a few particularly bad meals and resulting stomach issues led me to choose safety over novelty and dine at Pizza Hut, owned by Yum! Brands (NYSE: YUM ) . I was surprised to find the restaurant was upscale compared to its U.S. counterparts, and packed with children attending birthday parties.
Investors know that Yum! Brands has done an excellent job in China; both Pizza Hut and KFC are ubiquitous in urban areas, providing the company a big head start in becoming part of China's middle-class lifestyle.
And that's important. In its report "The Value of China's Emerging Middle Class," consulting group McKinsey outlines how Chinese economic growth will create about 230 million new middle-class consumers between 2011 and 2025. As projected in that report, the largest market for these new consumers will be food, with an expected 6.7% annual growth rate.
Numbers like that make everyone want to feed China. Looking around Shanghai, I saw that McDonald's (NYSE: MCD ) and Yum! currently have the market cornered. While Burger King (NYSE: BKC ) and Carl's Jr. parent company CKE (NYSE: CKR ) are just getting into the game, there seems to be ample room to grow if these brands can establish a niche. For instance, Burger King is focusing on serving customers at airports.
Packaged foods will also benefit from this middle-class explosion. Like restaurants, some brands have already done an admirable job of tailoring products to China's preferences. While lychee-flavored potato chips may seem strange to us, Lay's snack products held the high price point in the supermarkets that I visited, showing that parent company PepsiCo (NYSE: PEP ) understands local markets.
Even though China's growth may have only a small impact on the earnings of multinationals like PepsiCo and Coca-Cola (NYSE: KO ) , the companies will still have to nurture a new generation of repeat purchasers and extend their presence into the less-developed regions in order to benefit from China. PepsiCo is already deep into the country; I was able to buy Gatorade products at a Buddhist shrine a few hours off the coast.
From what I saw, it was the ability to adapt to a different culture that determined which food and restaurant companies had an edge. New entrants into the Chinese food markets will have to determine how to best position their products. Those that succeed will have a steady stream of customers for decades.