Institute of Business Management

Strategic Management

Analysis of

“Kentucky Fried Chicken and the Global Fast-Food Industry”

GROUP MEMBERS

ALI ZULFIQAR ZAHID AHMED SYED FARHAN SUMAIRA ASLAM JEHANZEB KHAN

INTRODUCTION:

The world’s largest chicken restaurants chain and the third largest fast food chain in 2000 with respect to global coverage.

Had a 55% share in Chicken Chains. More than 10,800 restaurants in 85 countries. First fast food chains to go international in the late 1950s and was one of the most recognizable brands. KFC planned to base much of its growth in these markets on company-owned restaurants, which gave KFC

greater control over product quality, service, and restaurants cleanliness. In other international markets, KFC planned to grow primarily through franchises, which were operated by

local business people who understood the local market better than KFC. Latin America was an appealing area for investment because of the size of its market, its common

language and culture and its geographical proximity to the United States. Mexico was of particular interest because of the North American Free Trade Agreement (NAFTA) which

went into effect in 1994 and created a free trade zone between Canada the United States and Mexico.

COMPANY HISTORY

1960- “Colonel” sanders had granted KFC franchises to more than 200 take- home retail outlets and restaurants across the United States.1966- KFC goes public and listed on the New York stock Exchange.1969- KFC entered into a joint venture with mitsuoish shoji kaisha.Ltd. that involved the rights to operate franchises in Japan and England, and Mexico.1971- KFC had established 2450 franchised restaurants and 600 company owned restaurants in 48 countries.1971- Entered into negotiation with Heublien, Inc. to discuss possible merger.(The Heublin was in the business of producing Vodka, mixed cocktails, dry gin, cordials, beer, and other alcoholic beverages)1977- New restaurants openings had slowed to only 20 a year, few restaurants were remodeled, and service quality had declined. To combat these problems Heublin sent in an new management team to redirect KFC strategy I.e. “back-to-the-basics”1982- R.J Reynolds industries,Inc acquired Heubliein and merged it into a wholly owned subsidiary. RJR allowed KFC to operate autonomously with little interference.RJR believed that KFC’s executives were better qualified to operate the business than their own managers.(RJR has a corporate strategy to diversify into unrelated businesses such as energy, transportation, food, and restaurants to reduce its dependence on tobacco,, tobacco had driven RJR’s sales since its founding in North Carolina in 1875)1985- RJR acquired Nabisco Corporation for $4.9 billion.(Nabisco sold a variety of well known cookies, crackers, and other grocery products, including Oreo cookies, Ritz Crackers, Planter peanuts, LifeSavers candies and milk bone dog biscuits.)1986- PepsiCo acquired KFC in 1986. The acquisition of the KFC gave PepsiCo the leading market share in the chicken (KFC), Pizza (Pizza Hut), and Mexican-food (Taco Bell) segments of the fast food industry.(PepsiCo Was formed in 1965 with the merge of the Pepsi-cola Co and Frito-Lay Inc.)

Management Following its acquisition of KFC, PepsiCo initiated sweeping changes. Franchise contract would be changed to give PepsiCo greater control over KFC franchisees and to

make it easier to close poorly performing restaurants.

Staff at KFC was reduced in order to cut costs and many KFC managers were replaced with PepsiCo managers.

KFC new personnel manager remarks in KFC cafeteria” There will be no more homegrown tomatoes in this organization.” The conflicts between PepsiCo and KFC corporate cultures created a morale problem.

A Second problem for PepsiCo was its poor relationship with KFC franchises. Because of the new franchise contract the PepsiCo have the greater power to take over weak franchises, relocated restaurants, and make changes in existing restaurants. The contract remained unsolved till 1996 when most objectionable parts of the contract were removed by KFC’s new president and CEO. A new contract was Ratified by KFC’s franchises in 1997

Major Fast Food Segments:

Eight major segments made up the fast food sector of restaurant industry:

- Sandwich Chain- Pizza Chain- Family Restaurants- Grill Buffet Chains- Dinner houses- Chicken Chains- Non Dinner Concepts- Other Chains

Sales data for leading restaurant chains for 1999 is below:

S.No. Restaurant Chain Chain Type Sales ($ Mn) % of Share1 McDonald's Sandwich chain 19,006 17%2 Burger King Sandwich chain 8,659 8%3 Wendy's Sandwich chain 5,250 5%4 Taco Bell Sandwich chain 5,200 5%5 Pizza Hut Pizza chain 5,000 5%6 KFC chicken chain 4,378 4%7 Subway Sandwich chain 3,200 3%8 Domino's Pizza chain 2,560 2%9 Applebee's Dinner House 2,305 2%

10 Arby's Sandwich chain 2,260 2%11 Others Others 52,275 47%

Total 110,093 100%

KEY ISSUE WITH KFC

The growth rate was slow though KFC was leading in terms of chicken restaurant chains but still was facing problem with the growth rate.

1994 1995 1996 1997 1998 1999Growth Rate (%)

Sales in Millions

KFC 3,587

3,740

3,935

4,002

4,171

4,378 4

Popeyes 614

660

677

720

843

986 10

Chick-Fil-A 451

502

570

643

767

946 16

Boston Market

371

754

1,100

1,197

929

855 18

Church's 465

501

526

574

620

705 9

Total 5,488

6,157

6,808

7,136

7,330

7,870 7

KFC faced difficult decision surroundings the design and implementation of an effective Latin American Strategy over the next 20 years. It wanted to sustain a leadership position in Mexico and the Caribbean. Through research different types of risk were evaluated which are as follows:1. Political Risk- war, revolution, changes in government, process controls, government regulations2. Economic Risk- inflation, high interest rates, foreign exchange rate volatility3- Natural Risk- rainfall, hurricanes, earthquakes, volcanic activity4. Supplier Risk- changes in quality, shifts in supply, changes in supplier power5. Product Market Risk- changes in consumer tastes, availability of substitute products6. Competitive Risk- rivalry among competitors, new market entrants, new product innovations PROS & CONS:

PROS KFC had refocused international strategies to grow both company owned restaurants and franchise

restaurant base all over the world. Competitive marketing strategy: Developed three types of chicken: Original recipe (pressure cooked) Extra

crispy (fried) Tender roast (roasted) Distribution strategy First, focused on building smaller restaurants in non-traditional outlets like airports Shopping malls,

universities, and hospitals. Second, KFC continued to experiment with home delivery, which was already firmly established in

Louisville, Las Vegas and LA markets Third, KFC established “2 in 1” units that sold both KFC and Taco Bell or KFC and Pizza Hut KFC continued to dominate the chicken segment ($4.4B) past its nearest competitor Popeyes at a distant

second ($1.0B)

CONS

Management Shift- KFC was acquired by PepsiCo from RJR Industries. Sweeping changes into the culture was initiated by the new management- this brings about demoralization to old KFC employees and even franchisees.

Several restructurings led to layoffs throughout KFC, replacement of KFC managers with PepsiCo managers

Conflicts between KFC and PepsiCo cultures- this is manifested with PepsiCo’s stronger emphasis on performance rather than loyalty expressed by Col. Sanders to KFC employees over the years.

KFC’s leadership in the US market was so extensive that it had fewer opportunities to expand its US restaurant base, which was growing at about 1% per year

KFC finds difficulty in entering the German market (culture incompatibility) KFC sales stagnated. There was widespread discontent among the franchisees, some of whom felt the

new owners did not understand the chicken business and were not providing leadership expected from a franchisor.

Bird Flue Animal rights activists and welfare organizations have been protesting KFC’s treatment of the animals

used for its products

MARKETING STRATEGY OF KFC

During 1980s and 1990s KFC faced the problem of limited menu and inability to quickly bring new products to the market.

In 1989 suffered a serious setback by introducing a chicken sandwich to its menu. KFC eventually withdrew the sandwich because of low sales.(sandwich are sold through traditional hamburger chains)

Late 1990’s refocused its strategy by introducing a variety of new products and menu items that appealed to a greater number of customers. Like original recipe, extra crispy, tender roast and buffet.

One of the problems with these items was that they cannibalized sales of fried chicken items. Overcapacity in the US market made it more difficult to justify the construction of new freestanding

restaurants.

RECOMMENDATIONS

KFC should continue to grow in Mexico and Caribbean because KFC is considered as the leader in the chicken restaurants. Another strong reason for the penetration is that latin America was an appealing area for investment because of the size of its market its common culture and its geographical proximity to the united states specially after the implementation of the NAFTA agreement.

This can do this by franchising the KFC outlets because by giving control to the locals who already know the demographics and all other characteristics they will be more successful in those areas as compare to the company owned outlets because the experience shows that locals through franchising proves to be more successful then the company owned outlets.

Another recommendation is to add sandwiches to their menu though they once have introduced sandwiches in their menu and failed in it but looking at the top restaurants most of them are from sandwich chains so it could be beneficial for KFC if they could come up with some quality sandwiches in their menu.