Down an alley from a KFC, McDonald’s and Pizza Hut in Shanghai, Li Hong sat inside a dingy little storefront that serves full-course dinners for a dollar.

Her tray was filled with cabbage, carrots, potatoes, a chicken leg and rice, plus soup. A Western fast-food meal would have cost her three times that much, said the young woman, who works as a sales clerk. “Why should I go there?” she said.

In the U.S., fast-food chains often thrive in tough times. But not so in China, where Western quick-service food isn’t the cheapest stuff in town and, in target markets like Shanghai, there’s too much competition. Plus, a growing number of consumers see it as unhealthful.

“Western fast food is still not cheap enough,” said Yee Mei Chan, a group-account director at Millward Brown’s office in Beijing.

In a recent survey, the marketing research firm found that 78% of Chinese consumers were feeling some effect from the global financial crisis. About half said they were likely to cut down on eating at Western fast-food restaurants.


That might help explain why Yum Brands Inc., China’s largest restaurant chain with nearly 2,500 KFCs and 416 Pizza Huts, said same-store sales in the country were up just 1% in the fourth quarter compared with year-earlier growth of 17%.

In the U.S., Yum’s same-store sales, an industry measure of branches open at least a year, rose 2% in the latest quarter, ended Dec. 27.

McDonald’s Corp. doesn’t report such figures for China, where it has about 1,050 stores. But Jeff Schwartz, head of China operations, said, “We had some softening at the latter part of 2008.” He noted that sales rebounded in January, rising higher than a year before, but that also reflected an earlier Chinese New Year holiday.

Like many retailers in China, including Wal-Mart, McDonald’s cut prices recently, saying it wanted to do its part to keep China’s economy growing. Its new “value meals” cost $2.42, a saving of up to one-third for combos such as a double cheeseburger, medium-size French fries (or cup of corn) and a Coke.

Schwartz said he remained “very bullish” on China. McDonald’s is on its way to opening 175 stores in China this year, he said, more than anywhere else.

Yum is also planning for another year of high growth in China, which has been increasingly driving the corporation’s profits. And other food and beverage retailers, including Burger King, Dunkin’ Donuts, Starbucks and Cold Stone Creamery, are bulking up in China as well.

With rising affluence and changes in lifestyle, the pace of China’s spending on eating out has been growing by double digits year after year. The China Cuisine Assn. estimates that sales surged 24% last year to $225 billion at the nation’s 4 million eating and drinking establishments.

If Western fast-food diners are slipping a bit, it could be that they’ve “lost some of their freshness,” said Xu Yunfei, the association’s industry development director.

KFC, which opened its first store in China in 1987 and has since penetrated deep into the nation’s heartland, still has a lot of cachet in rural areas, where its restaurants are often packed. But most foreign retailers in China have yet to enter such smaller markets inland, tending to focus instead on young consumers and the middle class in China’s urban centers.

Yet once-booming coastal cities such as Guangzhou and Shenzhen are now reeling from a falloff in exports and industrial production. Even in Shanghai, with its large service economy, it isn’t hard to find people who are battening down the hatches.

On a recent Friday evening, Wu Lei, 40, and her 11-year-old son were having dinner at a McDonald’s in a northeast Shanghai neighborhood. Most of the seats in this two-story restaurant were taken, though plenty of students had only books and papers spread out on the tables.

Wu said she and her husband, both architectural designers, saw a 20% cut in pay between them in the last year because of a lack of work.

“I might come more if it’s cheaper,” she said, adding that she takes her son to McDonald’s and KFC each once a week. On this evening the total tab was about $5.

Other customers at this branch and several others said lower prices wouldn’t change their eating-out routine.

“It’s fast food; it’s not good for you,” said a 30-year-old tech worker who identified himself by his English name, Alex Lu.

KFC in particular met with early success in China in part because consumers viewed it as cleaner and offering more-hygienic foods. In recent ads and promotional materials, KFC and McDonald’s have been stressing good value, high quality and healthful lifestyles.

Still, more Chinese are showing interest in nutritional and dietary considerations, which could prove a challenge for purveyors of fast food. “I suspect it’s more of a long-term trend,” said Warren Liu, author of “KFC in China: Secret Recipe for Success.”

In many other cases, consumers said they simply preferred Chinese food, including quick-service establishments, of which there’s no shortage.

In Shanghai’s northeast Yangpu District, an area of 23 square miles, research firm GeoPro counted 4,990 eating and drinking places. About 40% were quick-service, take-out eateries or shops.

“There’s immense saturation,” said Corbett Wall, GeoPro’s China director.

And as the economy has weakened, Chinese fast-food operators too have been engaging in price wars, trying to undercut rivals.

Real Kungfu, a chain of 309 restaurants that uses an image of Bruce Lee in its logo, has introduced a lineup of “extra value meals” that includes rice, meat and vegetables, steamed egg, soybean milk and green-bean soup for about $2.58. Real Kungfu’s president, Cai Dabiao, insisted it was a better deal than a Western alternative.

“Rice suits Chinese people better,” he said.