China’s changing tastes buffet western brands as Ant Group faces old headwinds

“After 40 years, a Big Mac or a Whopper is no longer new or exciting — it’s the same old stuff for Chinese consumers.”

By Doug Young & Rene Vanguestaine

For those who have watched China’s economic landscape evolve over the past four decades, recent events feel like the turning of a page. The initial fervor for Western novelty is giving way to a more complex and challenging environment, a shift clearly visible in two recent events: the near-complete withdrawal of Burger King (QSR.US) from Hong Kong and renewed regulatory headwinds facing Ant Group’s latest acquisition. Each story, in its own way, reflects a market that is maturing, localizing, and operating under an increasingly assertive regulatory eye.

The struggles of Western fast-food chains are becoming a familiar narrative. Burger King’s decision to close all its Hong Kong stores, save for a single outlet at the airport, is just the latest example. This isn’t the brand’s first retreat from the city; it initially entered in the 1980s, only to withdraw in the 1990s, before a 2003 return. But this time feels different, and it’s not just about Burger King. We have seen other major players like McDonald’s and Popeye’s rejiggering their China partnerships, while Starbucks (SBUX.US) is seeking a new local partner to navigate the shifting terrain.

In Hong Kong, the problem extends beyond a single brand to the entire food and beverage sector. Since the post-Covid reopening, a new dynamic has reshaped the market: a significant number of local residents now cross the border into Shenzhen for weekend dining and entertainment. Many believe the food there is not only much cheaper but also of high quality, putting a major damper on Hong Kong’s restaurant industry. There are cases of other global chains retrenching; for instance, Outback Steakhouse has closed a significant number of its Hong Kong outlets over the last year.

Looking at the broader picture in Mainland China, the challenges are even more profound. For decades, the success of Western fast-food chains was partly fueled by a “newness factor.” China was opening up, and consumers were curious about the outside world. That era is over. After 40 years, a Big Mac or a Whopper is no longer new or exciting — it’s the same old stuff.

We believe several critical factors are at play. First, the geopolitical climate has fostered a notable shift in consumer preference toward domestic brands. Second, the competitive landscape has been completely transformed. Local competitors, which were nonexistent ten years ago, have emerged as major forces. In coffee, Starbucks faces intense pressure from rivals like Luckin (LKNCY.US). In fast food, a new generation of Chinese chains is rising. Finally, consumer habits have changed radically with the advent of sophisticated food delivery platforms that can bring any type of cuisine to your door in 30 minutes.

These elements have created a perfect storm for foreign brands. We think their struggles show they have not adapted quickly or effectively enough. In an environment where Chinese consumers are more discerning and spending less than before Covid, the old strategies are no longer sufficient. These companies must find new approaches and, crucially, new local partners who possess a much deeper understanding of the current Chinese consumer.

Ant Group’s Hong Kong ambitions face Mainland scrutiny

On the financial front, another drama is unfolding that speaks to the enduring complexities of China’s regulatory environment. Ant Group, the financial technology affiliate of Alibaba (BABA.US), is attempting to acquire a Hong Kong-based brokerage, Bright Smart Securities & Commodities. However, reports have emerged that Mainland Chinese regulators believe the deal requires a more thorough review, even as Bright Smart insists the process is moving forward as planned.

What makes this situation particularly interesting is the apparent discrepancy between the Hong Kong and Mainland authorities. In recent years, Hong Kong’s governance has moved increasingly in lockstep with Beijing, so it’s surprising that a deal seemingly approved on the Hong Kong side would suddenly face hesitation from the Mainland. This points to deeper, unresolved issues surrounding Ant Group.

To understand the wariness, one must look back to the 11th-hour scuttling of Ant’s massive IPO in 2020. While the fallout from Jack Ma’s controversial public statements is well-documented, a less-discussed but powerful factor was the growing resentment toward Ant from China’s large, state-owned banks. For years, these banks complained that Ant was competing unfairly. It was able to offer depositors much higher interest rates, attracting a massive migration of cash away from the traditional banking system. The banks felt they were subject to far stricter regulations than those governing the burgeoning fintech sector.

Though the whole Alibaba Group has since undergone a significant restructuring, Ant still commands a system with millions of users. We wouldn’t be surprised if this deep-seated antagonism from state-owned banks continues to fuel suspicion within government circles, creating persistent hurdles for the company’s expansion efforts.

As for Ant’s future IPO prospects, the path remains uncertain. The grapevine suggests the company is still eager to go public, either in whole or in part. A potential strategy that has emerged is to first list its international business. We believe this approach is being considered because it’s far less sensitive from a regulatory standpoint. Chinese authorities are intensely focused on the massive trove of personal data Ant holds on its domestic consumers, but they would likely have fewer concerns about how it handles the data of foreign customers.

One could even imagine the international arm pursuing a listing in the U.S., on the Nasdaq or the NYSE, partly as a branding exercise to underscore the global nature of that business. The domestic business, however, is a different story. We are convinced that if it ever lists, it will not be permitted to do so anywhere other than in an Asian market, with Hong Kong being the most likely venue.

About China Inc

China Inc by Bamboo Works discusses the latest developments on Chinese companies listed in Hong Kong and the United States to drive informed decision-making for investors and others interested in this dynamic group of companies.

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