KFC & the Fast Food Industry

Case 10: Kentucky Fried Chicken & The Global Fast-Food Industry Group Members Haris Rashid Kashif Sajjad Siddiqua Ali Bhai Managerial Policy Case-Study

The Evolution of KFC 1939 - Colonel Sanders develops his original recipe chicken 1952 - K entucky F ried C hicken is Formed 1952 -1997 KFC grows into national Restaurant Chain - Many owners and stake holders along the way. 1986 - PepsiCo’s acquisition of KFC 1997 - Tricon Global Restaurants Inc is formed as a spin-off from PepsiCo. 2002 - Tricon changes its corporate name to YUM! Brands. 2007 – KFC introduces its Zero grams Trans Fat recipe

SWOT Analysis Threats New Entrants / Better Quality Brands. Bird Flu It’s becoming increasingly expensive to acquire real estate for stand alone restaurants. Health Trends Changing Customer Demands. Cannibalization of own products. Opportunities Undeveloped Markets, abroad. Growth in U.S. Median income. Increase in the 18 – 24 age group in the U.S. The Chinese market (The World’s fastest growing economy) Increasing trend to take meals out of home. Weaknesses Most KFC products have close substitutes in the market. Franchising strategy is not culturally sensitive. Slow in reacting (product innovations after long gaps) Inconsistent Quality of Service in many outlets. Lack of control in Joint-venture arrangements. Strengths Delicious and Well-liked recipes (Finger Lick in’ Good). Strongest category share amongst all its competitors. First Mover Advantage / Global Penetration. Widely recognized brand Image. (Face from Space – World’s largest logo in Rachel, Nevada) Strong cash flows generated via, Franchise and License Fee revenues.

Strategic Approaches to preparing for Future Market Conditions

Marketing strategy & Product Innovation 1980 – 1990: Limited Menus, focus on opening new outlets. 1990’s : Focus on increasing sales in Individual restaurants by launching new appealing products. 2007 : 0 gram Trans-fat Chicken Launched 2008 : “Life Tastes better with KFC” Campaign launched. 2008 : Toasted Wrap introduced after consumer survey

Global Strategy Key Success Factors: Quality Service Cleanliness Satisfying Consumer needs (Now) KFC’s Traditional franchising strategy has been: emphasizing standardization reducing financial risk. KFC’s Market Entry Strategies : Franchising, Licensing & Joint-ventures.

Allegations / Issues Animal Cruelty Unsafe Chicken / Bird Flu Un-healthy and Fattening Food.

KFC and the Internet KFC utilizes the internet for : Promotion of New Products Creating awareness about existing products Distribution of free coupons Nutrition calculator & Health Tips

Recommendations Develop effective operational strategies to ensure the execution of the new business model.

Problems & Issues 1977 – 1982 The Heublein, Inc Years Heublein Had Little Experience in The Restaurant Business – Tried To Actively Manage KFC Using Its Own Managers New Restaurants Opening Slowed Down to 20 A year Few Restaurants Were Being Remodeled Service Quality Had Declined Quality Control Restaurant Cleanliness 1986 – 1997 The PepsiCo, Inc Years Atmosphere of PepsiCo Management Vs KFC Management Conflicts Between Corporate Cultures of PepsiCo & KFC – Created A Morale Problem Arrogance Of PepsiCo Executives led to: i) Loss of Employee Loyalty ii) High Employee Turnover

Problems & Issues Cont’d PepsiCo’s Poor Relationship With KFC Franchises 1989 New Franchise Contract – The First Contract Change in 13 Years i) Greater Power To PepsiCo to Take Over Weak Franchises, Relocate Restaurants, & Make Changes in Existing Restaurants ii) Restaurants Would No Longer Be Protected From Competition From New KFC Units iii) Raise in Royalty Fees When Existing Restaurants’ Contracts Came Up For Renewal 1990 – 1996 Operating Margins In The Fast-Food Restaurant Division (KFC, Pizza Hut & Taco Bell) Of PepsiCo Fell From 8% to 4% Due To: i) Declining Margins As The US Fast Food Industry was in The Advanced Maturity Stage ii) Intense Competition In The Fast Food Sector The Restaurant Division Of PepsiCo Absorbed Half Of PepsiCo’s Annual Capital Spending & Generated Less Than 1/3 rd Cash Flows.

Problems & Issues Cont’d KFC Had Fewer Opportunities To Expand In The US Market (As Its Leadership In The US Market Was Extensive) KFC Was Losing Market Share To Competitors: i) Popeyes ii) Chick-Fil-A iii) Boston Market iv) Church’s KFC’s Share Of Chicken Segment Sales Fell From 71% (1989) To 56% (1999) Baby Boomers, Generation Xers Grew Older & Preferred Dinner Houses & Full Service Restaurants Ethnic Foods Were gaining Popularity (Japanese, Indian, Vietnamese) Shortage Of Employees in The 16-To-24 Age Category i) US Economy Was Expanding: Prosperity ii) Unemployment Was At Its Lowest Point Labour Cost Was High – But Intense Competition Did Not Allow Increase In Price

Problems & Issues Cont’d Higher Cost Of Real Estate (US$ 1.5 To 2.5 Million) Poor Availability Of Prime Location Market Saturation Decreased Per Store Sales Going Global KFC Had Trouble Breaking Into The German Market Long Distances Between Headquarters & Foreign Franchises Caused : i) Difficulty In Controlling The Quality Of Individual restaurants ii) Problems In Service & Support iii) Higher Costs Were Incurred In Transportation & Other Resources Communication & Operational Problems due to Time, Culture & Language Differences Limited Menu & Inability To Quickly Bring New Products To Market Serious Setback in 1989: KFC’s Chicken Sandwich Lost The Race To McDonald’s Chicken Sandwich Colonel’s Crispy Strips & 5 New Sandwiches Accounted For 30% Of The Sales But Cannibalized Sales of Fried Chicken Items

Problems & Issues Cont’d In Mexico: McDonald’s Restaurant Base was Growing Rapidly & Beating KFC In Terms Of Sales Major Competitors: Burger King El Pollo Loco (The Crazy Chicken) Habib’s

Analysis Of The Company’s Situation The Process Of Strategy Crafting The Chief Architect Approach – Colonel Sander’s Era The Delegation Approach – The RJR Era The Corporate Intrapreneur Approach – The Tricon Global Restaurants Era Innovation in Products – Line Extension Colonel’s Crispy Strips Chicken Sandwiches Strategic Inflection Point PepsiCo Running The KFC Setup: New Franchise Contract Entering The European Market

Analysis Of The Company’s Situation Cont’d The Driving Forces Of The fast Food Industry Globalization: Expansion Product Innovation: i) Healthy, Nutritious Options: Salads, Grilled Chicken ii) Catering To Host Nation’s Tastes e.g., Spicy Zinger, Arabian Rice Technology: Production Equipment, POS, Tracking of Inbound Logistics Changes in Preferences, Tastes, Lifestyles

Recommendations KFC Should Venture In To Latin American Markets of Argentina, Brazil & Venezuela It Should Go For Franchise Operations & Multibranding KFC Should Continue To Adapt To Host Nation’s Tastes Yum! believes Multibranding is the key to the future of the QSR business. Owning more than one brand allows you to "eliminate the veto vote" and give your consumers a "WOW" experience. Research shows that consumers prefer Multibrand restaurants six to one over single brands. http://www.franchising.com/kfc/ Thursday, March 29, 2007 Yum Brands Inc 's international unit has reached an agreement with Brazil Fast Food Corp , owner of hamburger fast-food chain Bob's, to franchise Yum's KFC brand in Brazil. Under the agreement, Brazil Fast Food will operate KFC's four existing company-owned restaurants in Rio de Janeiro and will expand the KFC chain throughout Brazil, according to a news release. Yum opened its first Brazilian KFC restaurant in 2003, the release said. http://louisville.bizjournals.com/louisville/stories/2007/03/26/daily23.html

KFC & the Fast Food Industry

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KFC & the Fast Food Industry