Photographer: Brent Lewin/Bloomberg

KFC Thinks It Can Out-Coffee Starbucks in China

Selling freshly ground coffee at a lower price—and in more locations than there are Starbucks cafes in China

Coffee is going to be big part of KFC's future—and the ambition goes far beyond the stunt of testing an edible coffee cup. Thousands of KFC restaurants in China, where the fried chicken purveyor is already the single largest fast-food chain, will start selling freshly ground coffee this year in a bid to become a lower-cost "premium" alternative to Starbucks.

Trying to beat Starbucks on higher-quality coffee in China makes more sense than it might seem for KFC, which has a long-established breakfast menu featuring such local fare as congee (a rice porridge with pickles and preserved egg). Starbucks, meanwhile, has spent the past 16 years spreading the concept of "coffee culture" and cultivating demand for high-price brews throughout China.

KFC started rolling out its new premium coffee in its most developed Chinese markets in December. "And we were very pleased with the results," Pat Grismer, chief financial officer at Yum Brands, KFC's parent, told investors at a conference on Tuesday, March 3. So far the new coffee has helped boost KFC's breakfast and afternoon business. The company will offer premium coffee in 2,500 KFCs in China by year's end—a footprint that already surpasses all the 1,500 Starbucks locations in the country. China has about 4,500 KFC outlets, leaving yet more room for the chain to expand. (McDonald's, with more than 2,000 locations in China, also sells coffee and McCafe products.)

KFC's premium coffee will cost about 10 renminbi ($1.60), according to Youngchinabiz.com. Yum's Grismer didn't confirm the price in his remarks, but KFC's coffee would be sold for half the price of a comparable cup at Starbucks. Both KFC and McDonald's already offer lower-end coffee for about 6 renminbi, and the McCafe menu in China also includes some more expensive items.  

KFC executives have drawn direct comparisons between the chain's new coffee and Starbucks's, making explicit the challenge to the Seattle-based coffee giant and its plan to turn China into its second-largest market by store count. While Starbucks coffee is positioned as a more luxurious product, the entry of a large competitor such as KFC at a midrange price will certainly complicate those expansion plans in a country where tea is far more popular.

As KFC focuses on its coffee business overseas, it so far has no such plans to change its coffee approach in the U.S.

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