KFC’s Radical Approach to China

David E. Bell&Mary L. Shelman

Presented by Melih Torlak

Global companies face a critical question when theyenter emerging markets:

How far should they go

to localize their offerings?

Should they adapt existing

products just enough to

appeal to consumers in

those markets?

Two Main Questions?

In 1987, KFC China was opened in TiananmenSquare. (China was still in the Mao era)

Western-style fast food restaurants were unknown in China, KFC was a novelty, a taste of America.

Extremely controlled market.

Customers didn’t like the food much.

The all-American business model was not goodenough.

Overview

KFC China is opening almost one new outlet each day(current base ~ 3300) and intends to reach 15000 outlets by 2015.

To determine how much of an existing businessmodel is worth keeping in emerging markets andhow much should be thrown away.

Overview

1) Infusing a Western brand with Chinesecharacteristics (Repositioning KFC in China)

2) Expanding rapidly

3) Developing a logistics network

4) Training employees in service

5) Focusing on ownership rather

than franchising

Five Radical Elements

Customer sees KFC China as part of the localcommunity.

It is offering the variety of foods and the traditionalChinese dishes.

Redesigning the menu (typically include 50 items, compared with about 29 in the US) and 50 new products are added every year.

Enlargement of outlets. (about twice the size of those in US)

Offering of regional recipes.

1. Infusing a Western Brand with ChineseCharacteristics

One factor – Presence of McDonald’s in China’s fourlargest cities. (KFC China has decided to embrace smallercities)

In 2008, Yum! Brands’ annual

opening rate in China surpassed

500 restaurants. (most of them

KFCs—compared with 103 new

KFCs in the United States)

With KFC as its flagship chain, Yum! has become China’slargest restaurant company today, with more than250,000 employees and about 40% of the market forfast-food chains.

2. Expanding Rapidly

In 1997, KFC China established a distribution channelin order to compete with its competitors. Also, it has built warehouses and run its own fleet of trucks.

Implemented a supplier rating system for selectingthe suppliers that perform the best.

Put emphasis on food safety.

Buying locally is essential to keep costs low. Itstrengthens the parent company’s relationship withthe Chinese government.

3. Developing a Logistics Network

KFC China is one of the first companies to promoteexcellent customer service.

New employees at KFC China

often have to learn basic

communicative skills to

interact with customers.

KFC China prides itself on being a “learning organization.” Each team composed of new employees works closelywith experienced ones in outlets; after training they moveto a new location.

4. Training Employees in Service

Main reason is to closely control every aspect of theiroperation. (More than 90% of Yum!’s outlets in Chinaare company-owned, compared with 12% in the U.S. and 11% in other international markets)

Franchising reduces investment costs and risks. Alsoit enables rapid geographic expansion; however KFC China’s model was more complex and evolvingrapidly.

Owning the outlets permit centralizedpurchasing, which reduces costs, and gives thecompany a larger share of outlet profits.

5. Focusing on Ownership rather than Franchising

Chinese adults were overweight up from 6% in 1982 to 22.8% in 2002.

In 2005, KFC China developed the concept of a “New fastfood”:

Nutritious and balanced

Eliminated “supersize” items

Added new food such as roast chicken, sandwiches, fish,

shrimp, and more fruit and vegetable dishes to its menus

The information about nutrition is printed on every package

Hostesses teach kids about nutrition to promote healthy living

The Risk of a Backlash

In the first half of 2011, sales at Yum! China locationsthat had been open a year or more rose16%, compared with a decline of 2% at U.S. locations.

The restaurant’s profit margin for those six monthswas 22% well above the U.S.’s one of 11%. Yum!

China’s revenues and operating profits in 2010 were$4.1 billion and $755 million, respectively; comparable figures for the overall company were$11.3 billion and $1.77 billion. KFC China’s revenue(more than $1.1 billion) surpassed KFC US revenue in Q3 2010.

A Confident, Dynamic Company