There is a major war going on in the China ice cream market as all the key international ice cream players fight it out for a slice of market share. Some take the retail store route like Cold Stone Creamery (Cold Stone) , Baskin Robbins (BR) and Dairy Queen (DQ). Others the on premise route in restaurants and hotels like Movenpick (Owned by Nestle) . Some the supermarket and independent mom and pop route like Nestle and Unilever. One does all three very successfully – Haagen-Dazs. And then there are McDonald’s and KFC selling soft serve for only 2.5 Rmb. Who has the winning strategy?

Let’s start with the big Goliath QSR players – McDonald’s and KFC. There are over 4,000 locations between them and they sell a lot of cheap soft ice cream. I doubt they make much money on this business but it brings in the kids with their parents and grandparents to buy burgers, chicken, fries and cokes. There is no doubt that the price of this product depresses demand for higher priced ice cream given the still low disposable income in the country. Certainly these QSR’s don’t focus on ice cream but it did not take much by Seven-Eleven in Japan selling fried chicken to hurt KFC’s demand there in the 1990’s. So you need to look at all the other players in the context of what McDonald’s and KFC do with their ice cream menus.

Second, anyone can get a cheap locally made ice cream bar at any supermarket, mom and pop store or street vendor for about 2-4 Rmb. This is where companies like Nestle play in the market. The product is up to international standards and very satisfying. I eat it all the time!

At the branded store retail level you can begin to see the growth of Cold Stone, BR and DQ. Not a lot of stores but definitely visible in Shanghai and some other cities in Eastern China. Go to any big secondary city and they are all virtually non-existent. DQ has the largest network in China with over 170 stores as of end-2008 and relies on 3 master franchisees. The network could easily expand to 250 within 2009. DQ usually operates the stores in combination with Orange Julius, a sister company. Operations are simple so offshore franchising seems to work at least at the moment. The model looks similar to the USA and there does not appear to be too many modifications for the local market. Just how much the big QSR players hurt DQ is hard to tell but I see a lot more Chinese eating ice cream at McDonald’s and KFC than DQ. I have been in many DQ outlets in secondary cities like Dalian and Wuhan and there is very limited customer traffic. It may be good business for the franchiser but how good for the franchisee? It take very little labor to operate these stores of course but one still needs sales to make it pay off.

Baskin Robbins should be a major player in the market given the success they have achieved in Japan and Korea. But the models in these two countries are different and they did not have the competition or influence of Starbucks or Haagen Dazs when they began to penetrate those markets. BR only has a few stores now in China (mostly in Shanghai) but they hope to have around 20 by the end of 2009. I have been to some of the stores and they resemble the US or Japan model and very different from Korea. Which model will work? You would think that BR itself would build some company owned stores for themselves, define the success model and then begin to franchise but such is not the logic of many USA food service players. I personally think that the Korean model makes more sense with Cafe style operations and combination units with Dunkin Donuts.

The Movenpick business make a lot of sense because they are selling a high end European ice cream primarily in hotels and nice restaurants not subject to heavy price competition or couponing. Being owned by Nestle does not hurt of course and I am amazed at how well the brand is distributed in China. Nestle has it both ways – the low end ice cream bar market and the high end gourmet segment. Smart marketing all around. Both segments have enormous growth potential.

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