The Global Fast-Food Industry

Colonel Harland Sanders signed up his first franchise in Salt Lake City, Utah in 1952. In 1956 he sold the Corbin, Ky. restaurant he owned, and began traveling across the United States to sell new franchises. Later that year he sold his first international franchise in Canada. By 1960 there were more than 200 Colonel Sanders Recipe Kentucky Fried Chicken (KFC) outlets. In 1963 revenues were over $500 million and the number of outlets had increased to over 300. In 1974 at the age of 74, he sold the business to Jack Massey and John Brown for $2 million, one of the great bargains in business history. The Colonel stayed on with the company in a ceremonial role, often helping to open new franchises. Brown and Massey grew the business throughout the United States over the next several years and in 1966 took the company public, listing it on the New York Stock Exchange and the Colonel was allowed to purchase the first 100 shares. The year 1969 was a crucial one in the history of the company with the first major penetration into international markets outside North America by acquiring franchises in England and Japan. By 1971, there were more than 2400 franchises and 600 company-owned restaurants spread throughout the United States and 47 other countries. 1971 became another key year in company history with the sale of KFC to Heublein. This was Heublein†s first significant entry into the restaurant business and it did not go smoothly. By 1977 restaurant quality had declined and the Colonel was upset. Only about 20 new restaurants were being opened per year. In response, Heublein implemented a new strategy emphasizing clean restaurants, product consistency across franchises and better service. Old franchise buildings were remodeled. In 1982 R. J. Reynolds Inc. (RJR), in an attempt to diversify beyond the tobacco business, acquired Heublein for $1.2 billion. KFC was profitable and growing again, but Colonel Sanders never saw the end result of Heublein†s strategy in the late 1970†³s, because he died in 1980. RJR continued to run KFC as an autonomous business for several years. In 1985 it acquired Nabisco and in 1986, in preparation for the subsequent move to take RJR Nabisco private, it sold KFC to PepsiCo Inc. for $840 million, over the objections of former Heublein chairman, Stuart Watson. Also this year the Colonel Sanders Technical Center in Louisville, Kentucky was established. The acquisition by PepsiCo was a significant turning point in the company†s history. In previous acquisitions by Heublein and RJR, KFC had been operated as a separate entity, although in different ways. Heublein tried to use its own managers to operate KFC, while RJR adopted a completely hands off approach. PepsiCo was looking to the acquisition of KFC to create some synergy within its other operations. Recently restructured into three major divisions, soft drink, snack foods and restaurants, PepsiCo could cross-pollinate between divisions, for instance by selling its soft drinks in restaurants. PepsiCo†s culture was also much different than KFC. PepsiCo placed a strong emphasis on employee performance, while KFC†s culture was more laid-back in the southern tradition. In 1991 a change was made that was to have unintended consequences. Kentucky Fried Chicken decided to change their name to KFC for several reasons, according to the web site Snopes.com, A move to de-emphasize â€Å"chicken† because KFC planned to offer a varied menu that included other types of food. (The Boston Chicken corporation took the same approach for the same reason, changing their name of their retail food outlets to Boston Market.) A desire to eliminate the word â€Å"fried,† which has negative connotations to the increasingly health-conscious consumer market. A recent trend towards the abbreviation of long commercial titles, as demonstrated by other companies' employing shortened forms of their names, such as The International House of Pancakes (IHOP) and Howard Johnson's (HoJo). As a result of this name change, rumors later began circulating throughout the internet that the government had forced KFC to change its name because it was no longer using chickens. According to the rumor, KFC was producing a genetically altered chicken with more than the normal amount of appendages. In spite of the fact that some of these claims, such as chickens without beaks, feathers or feet, are beyond scientific capabilities, the rumors have persisted. Over the next several years, KFC continued to prosper and undergo changes. It refocused its strategy to increase the traffic in individual franchises by expanding the menu to appeal to a larger group of consumers. In 1993 the company added non-fried chicken to menus in the U.S. and Australia, and in 1994 KFC officially opened its 9,000th restaurant in the world, in Shanghai, China, and announced a $200 million investment over the next four years for 200 restaurants in 48 Chinese cities. 1995 saw the introduction of Colonel's Crispy Strips and Chunky Chicken Pot Pie. The first KFC restaurant in Moscow was opened. In 1996 KFC introduced Tender Roast chicken pieces and brought back one of the world's most recognized packages, the bucket, and in 1997 the company introduced Honey BBQ-flavored Tender Roast, Spicy Buffalo Crispy Strips and Chicken Twister, which are wrapped up chicken and vegetables. In spite of all these innovations and improvements, PepsiCo had become increasingly unhappy with the restaurant division. Aging facilities were requiring much of the parent company†s revenue to be spent on remodeling restaurants and thereby neglecting investment in the soft drink and snack food businesses. In an attempt to return to its roots, PepsiCo spun off the entire restaurant division into a publicly traded company, Tricon Global Restaurants in October 1997. In May 2002, with the acquisition of A&W and Long John Silver's, Tricon changed its name to Yum!. One of the main strategic issues presented in this case is the question of whether or not KFC should continue to expand globally and where. Since the early days of its inception, KFC has been involved outside the United States, having expanded to Canada in 1956 and then in a major move in 1969, to Japan and England. As of 2000, of the thirty-five largest fast-food chains, KFC was second only to McDonalds in the number countries penetrated. It is an arena where KFC has had enormous success and should continue to be involved. As of 2001 KFC had more than 500 outlets in China compared to only about 400 for McDonald†s. KFC beat McDonald†s to China by five years, opening their first outlet in Beijing in 1987. Market surveys in China by AC Nielson have indicated a preference for KFC over McDonald†s, both in terms of products and the outlets themselves. In addition, the Chinese have cultural bias in favor of chicken over beef. This is certainly an area where KFC should continue to exploit its advantage. Latin America is another global area where KFC has a strong presence. In the Central American, Caribbean and Mexican area, KFC is very competitive with McDonald†s and Burger King in terms of number of outlets. It has a particularly strong presence in Mexico and the Caribbean. Only in the Southern part of Latin America does KFC fall sharply behind McDonald†s. With the advent of the North American Free Trade Agreement (NAFTA) the environment has changed in Mexico. A helpful factor is that one of KFC†s major suppliers, Tyson Foods, has major chicken facilities in Mexico. The political environment has changed with the election of Vicente Fox. KFC†s already strong presence should be expanded aggressively. They should also use this base in Mexico as a means of investing capital to further expand the franchise base throughout South America, in order to negate a first-mover advantage by McDonald†s and Wendy†s. Franchise outlets require less capital than company-owned restaurants, and are thus a quicker way in which to expand. Anther strategic issue facing KFC is the decision to franchise or expand by company-owned restaurants and whether to refranchise. The original strategy of Colonel Sanders and his immediate successors was to franchise and not build company-owned restaurants. This allowed them to grow quicker than they would have if KFC had primarily invested in company-owned restaurants. This strategy continued until the purchase of KFC by PepsiCo. Because of a clash in corporate culture between KFC and PepsiCo, and the presence of a strong franchisee group within KFC, PepsiCo embarked on a strategy of repurchasing weaker franchises and running them. At the time of the spin-off of KFC and the restaurant division into Tricon Restaurant Group in 1994, the percentage of company-owned restaurants was about 40%. After the spin-off, Tricon management began to divest of many of the company-owned outlets. This was the result of a change in attitude on the part of Tricon management. They did not believe in absolute control of all aspects of the local business and were willing to admit that the franchisees knew the local business better than they did. By the year 2000, the number of company-owned outlets had dropped to 27%. As shown in the SWOT analysis below, there are a number of factors in the external environment that KFC should consider when formulating and implementing strategies. Some of the more important aspects are brand name awareness, global market expansion, shrinking resources available to outlets and attacks by activist groups such as PETA. On the positive side, the brand name awareness is a tremendous asset for KFC. The move in 1996 to bring back the bucket was one of the best decisions in its history. Likewise, global market expansion presents an enormous opportunity to KFC to grow. They should build on their existing international base and continue to grow franchises. On the negative side, KFC, along with other fast-food companies, is facing a shrinking of the available potential outlet locations. The proliferation of fast-food outlets in this country has absorbed many of the prime locations. This is another reason to justify continued overseas expansion, where many prime spots remain. Just as potential locations have dwindled, so too has the labor pool. In spite of increased unemployment since 2000, there is still a problem attracting workers in the eighteen to twenty-four year old range. An interesting aspect of the external environment that has negatively impacted KFC has been the virulent attacks on KFC by People for the Ethical Treatment of Animals (PETA) and other similar groups. A number of celebrities have joined the campaign against KFC, which is focused on trying to force them to change the process of defeathering chickens. KFC has consistently refused to meet with the animal rights group for years, but because of concerns of losing market share in the inner city, has recently attempted to mediate this dispute through the offices of hip-hop mogul Russell Simmons and the Reverend Al Sharpton. Examining the list of top fifty U.S. fast-food restaurants for those sectors and companies that might be good investments we observe several companies that have a dominant position in their section. McDonald†s has a 35% market share among sandwich chains, Pizza Hut has a 44% share among pizza chains, KFC a 55% share among chicken chains, Golden Corral a 32% share among grill buffet chains and Dunkin† Donuts a 43% share among non-dinner concepts. Each of these companies would seem to be a good investment over the near term because of that dominant position in their sectors. In addition, financial data available for these companies confirm that the reason each is dominant in their sector is because they consistently produce above average financial returns. KFC continues to have a bright outlook for the future. It is well-positioned both domestically and international for continued growth. While it is unlikely ever to overtake McDonald†s, either in the domestic or overseas market, it is dominant in certain countries such as China and Mexico, and should be able to leverage this advantage to fend off other competitors, like Wendy†s and Burger King. Over the next five years look for KFC to have a strong number two position in the industry, particularly if it can address the problems with activist groups.