kfc

Prologue
On November 12, 1987, KFC opened its first restaurant in China a short walking distance from Tiananmen Square. Nearly nine years later, in June 1996, KFC opened its 100th restaurant in China, also in Beijing. In the subsequent nine years between 1996 and 2005, KFC opened 1,400 more restaurants throughout China, fourteen times the number in the previous nine years.
How did KFC China do it? What are the key factors behind its success?
KFC, Pizza Hut, Taco Bell, Long John Silver’s, and A&W are all brands under the umbrella of YUM! Brands, Inc., which was spun off from PepsiCo, Inc., in 1997. At the end of 1986, China was not even in KFC’s map. By the end of 2005, less than 20 years later, China accounted for 16 percent of YUM! Brands, Inc.’s worldwide corporate earnings and 14 percent of worldwide revenue. In the next few decades these ratios are expected to grow steadily.
At the end of 2005, China’s restaurant service industry generated total revenue of RMB880 billion. KFC accounted for 1 percent of the industry total, making it the single largest chain restaurant enterprise in China.
Elsewhere around the world KFC lags behind McDonald’s in brand equity, market share, and consumer preference. Not in China. Take size, for instance, McDonald’s had over 30,000 restaurants around the world at the end of 2005, outnumbering KFC by more than two to one.
The successful execution of KFC China’s business strategy has since been rewarded with an unlikely industry leadership position in growth, profitability, market share, and brand recognition in one of the world’s fastest growing economies.

KFC- A pioneer in China

From one to one thousand

In the history of KFC, China has the best record of restaurant growth outside its home market of America. No other restaurant company, Chinese or foreign, has achieved such remarkable growth in China to date.
Today KFC is the largest restaurant chain in China, foreign or local, in terms of revenues, profits, and number of outlets. This statement takes into account all restaurant types, not just quick service (QSR), or "fast food", restaurants. What makes this achievement even more amazing is that this leadership position has been achieved, of all the markets around the world, in the People’s Republic of China-with a long history of culinary art known for its flavor, variety, and popularity.
At the end of 2005, nearly 1,500 KFC restaurants could be found in over 350 cities in every province and special administrative region of China except Tibet, outnumbering its archrival, McDonald’s, by a margin of two to one. On average, during 2005 each of these 1,500 restaurants generated US$1 million in revenue and a profit margin of approximately 20 percent.
These impressive numbers came during a challenging year that began with the Sudan I red-dye incident, which resulted in a public backlash following media reports that some KFC products contained a harmful ingredient, Sudan I red dye, and ended with public concerns across the country over avian flu, a bird flu virus that caused dozen of reported deaths in Asia, most of which were blamed on direct and indirect contact with infected poultry. As a result, both average revenue and profit margin per restaurant suffered a decline of up to 20 percent to the previous year.
In many ways, the timing of KFC’s first restaurant opening in China in 1987 was perfect. It was nine years after the official launch of China’s economic reforms, five years ahead of Deng’s historic journey to southern China, and three years ahead of McDonald’s entry. China had recently been reopened to the West after decades of hiding behind its self-imposed "bamboo curtain". China’s citizens, after being cut off from much of the world for decades, now looked to the West-and anything with a Western flavor-with a mixture of curiosity, anxiety, and anticipation.
Along with fried chicken, there were many other reasons why eager customers queued up outside the door during the first few weeks after the grand opening. Customers were attracted to KFC’s Chinese brand name; its American roots; its likeable, grayish, beard-bearing brand spokesperson- Colonel Sanders; the unique restaurant décor; the new way of ordering food; the bright red and blue colors of the brand logo; the American music broadcasted inside the restaurant; and, as an added bonus, a very clean toilet!
From the beginning, eating out at KFC was an expensive but curious, exciting, unique, and brand-new experience never before encountered by a Chinese customer. Although the food was prepared fast, the dining experience itself marked an occasion, a very special event that required savoring with a measured pace. From the beginning, KFC was never a "fast food" experience for the average Chinese consumer. Instead, it was more of a sit-down dining experience. Moreover, dining at a KFC restaurant was like taking a brief tour of America, with all its connotations: political, cultural, time; and space- real or imaginary.
As of early 2008, of four of its brands that have entered China, KFC and Pizza Hut have performed very well, while A &W and Taco Bel! Have not. Many companies have leapt into China with high hopes, only to beat a quiet retreat later on. Why?
In addition to a variety of uncertainties that normally surround entry into a new country market, one factor that makes entry into China an even more difficult challenge is the complexity of China’s population, geography, history, and recent economic development. China is not only the world’s most populous nation, it also possesses a massive land area- roughly the size of the U.S. To complicate matters further, China’s population density, economic development, and wealth distribution vary greatly from east to west and from south to north.
China’s population density is highly uneven. If one drew a straight line between the northernmost point in Heilongjiang Province and the westernmost point of Yunnan Province, approximately 80 percent of China’s total population and 40 percent of the total landmass would be found on the eastern side of this artificial dividing line. In other words, 20 percent of China’s population lives on 60 percent of China’s land west of this artificial line.
Officially, West is defined to include twelve provinces and equivalent administrative units including Chongqing, Sichuan, Yunnan, Guizhou, Shaanxi, Gansu, Qinghai, Ningxia, Xinjiang, Guangxi, Inner Mongolia, and Tibet. Together, they account for 71 percent of China’s total landmass, and 29 percent of the total population.
While vast areas in western China are sparsely populated, China’s eastern seacoast is among the world’s most densely populated. Up until the turn of the last century , economic development and wealth accumulation were largely confined to China’s eastern seacoast, especially in southeastern China, where 20 percent of the country’s population generated half of the nation’s GDP and three-quarters of its total exports at one point in time.
Aside from population density, economic contrasts between China’s eastern and western regions are staggering. Per capita gross domestic product (GDP) in the West is 58 percent of the national average, far below that of the East. For example, the per capita GDP of Chongqing, the most populous city in the West and the nation’s capital during the Japanese invasion of China from the late 1930s through the mid 1940s, is merely one-fifth that of Shanghai. Both belong to an elite group of only four cities (known as municipalities) in China that report directly to the central government (the other two are Beijing and Tianjin).
While the skylines of Shenzhen, Shanghai, and Beijing have long symbolized China’s economic transformation, many of the second tier cities around the country such as Shenyang, Qingdao and Xian had already begun the process of face-lifting by the turn of the century. More recently, even third are fourth-tier cities –some such as Urumqi and Lhasa, which are located in western China-have begun major face-lifting transformations. The magnitude, pervasiveness, and speed of these transformations can be mind-boggling.

Shopping Chinese Style

In parallel to massive infrastructure projects undertaken by the Chinese government to build new cities, roads, airports; or, for that matter, the world’s fastest commercial rapid- transit system- the magnetic levitation (Maglev) train in Shanghai, with a top speed of 430 kilometers, or 270 miles per hour-Chinese consumers have made significant changes to their spending and lifestyle patterns since the beginning of China’s economic reforms.
In 1992, China’s State Council, the country’s highest administrative authority, decided to allow foreign investment in the retail industry. Changes began to take place almost overnight. By the end of 2004, when China was required to fully open its retail sector to foreign investors under the terms of its accession to the World Trade Organization (WTO), China had given the green light to 314 foreign retailers and wholesalers. Bringing a whole new approach to the Chinese retail market, these newcomers from abroad had opened 4,000 retail stores of varying type and size, occupying a total of 9.2 million square meters, in the top few dozen cities in China.
Foreign investment in the retail industry accelerated in 2005. In a single year, China approved another 1,000 foreign retailers and wholesalers, allowing them to open 1,160 stores with an operational area of 4.7 million square meters. Of these new foreign stores, specialized stores representing well-known, high-end brands such as Armani, Hugo Boss, Gucci, and Zegna accounted for 57.2 percent. Hypermarkets made up 22,5 percent, and department stores accounted for 13.1 percent.
Today millions of Chinese consumers flock to foreign retail stores such as B&Q from the U.K., Carrefour from France, Isetan and Jusco from Japan, Lotus from Thailand, Metro from Germany, Parkson from Malaysia, and Wal-Mart from the U.S. on any given day in a growing number of Chinese cities. Relying on their superior knowledge of the local market, local players like Lianhua and NongGongShang are also fighting for a piece of the action with improved quality of service, upgraded techniques, spurred on by their formidable competitors from overseas and rising consumer expectations.
Compared to the late 1980s, the typical shopping experience for the average urban Chinese consumer has undergone a seismic revolution. In many ways, shoppers in the largest Chinese cities have more choice of international brands today than their counter-parts in New York, Paris, or Tokyo. Moreover, while it took decades or even longer for developed economies to evolve their retail distribution channels from mom-and-pop corner shops to department stores, supermarkets, hypermarkets, specialty shops, and convenience stores, the same process of retail evolution took in place in China in less than 15 years. Similar fast-paced, often generation-skipping, industry transformations have taken place across the Chinese economy in telecommunications, transportation, electronics, and manufacturing industries. More recently, similar changes have taken place in service industries such as banking, insurances, and even government services. The net effect of these developments across multiple economic sectors in the co-existence of old and new generations of technologies, products, and channels of distribution in almost every single direction one turns, at a speed of change seldom seen anywhere else around the world.

Economic reforms

Since the beginning of China’s economic reforms in 1978, China’s economic performance has made a dramatic turn for the better. While the standard of living for the average Chinese citizen has clearly improved, China’s economic reforms have created new economic challenges. These include, among others: corruption; unemployment; inadequate social welfare system; environmental pollution; waste and inefficiency of resource utilization; uneven distribution of wealth, education, infrastructure, and public health facilities between different geographical regions, and between urban centers and rural villages.
The gap between rural and urban China is huge in terms of both population density, according to official statistics, China had 668 cities at the beginning of 2004, half of them with populations in excess of 200,000. Thirty-seven of them had a population of over one million, led by Chongqing, with 31 million; Shanghai, 16 million; and Beijing, 14 million. The great majority of these top 37 population centers are in eastern China.
In terms of purchasing power, China’s top ten cities account for 20 percent of national retail sales; the top 30 cities-of which only four are located in western China, account for one-third. Furthermore, based on data from 2004, China’s urban per capita income of US $1,531 is more than three times the rural per capita income of US $488. These statistics contributed to China’s alarmingly high Gini Index, which measures the degree of wealth concentration. Worse yet, income disparity continues to grow at an alarming rate.


China’s restaurant industry

Reflecting the growth of the overall economy and rising consumer prosperity, China’s restaurant industry closed 2005 with total revenue reaching RMB 880 billion, or slightly over US $100 billion based on then-prevalent exchange rate. For the industry as a whole, this represented yet another year of double-digit growth. KFC accounted for approximately 1 percent of this industry total, making it the clear leader in terms of both revenue and profit in a highly fragmented industry.
KFC growth path in China followed the development of the larger economy, beginning with cities, countries, and townships within provinces along the eastern coast throughout the late 1980s and the mid-1990s. In 1995, upon entering Chengdu, the capital city of Sichuan Province, KFC kicked off its westward expansion. Two years later, the brand’s establishment in Chongqing further solidified KFC’s market position in western China. At the same time, market entry into Wuhan and Changsha pushed KFC inland to central China.
Over the years, KFC’s Expansion in China has proven to be well timed. By first entering China in 1987, it was well positioned to take full advantage of the acceleration of China’s economic reforms, which came five years later. KFC’s second big expansion began in 1995 when it expanded into China’s western region, four years before the official kick-off of a major government-led program to develop region’s full economic potential. On both occasions, KFC demonstrated an ability to anticipate emerging market forces and government policies, a unique skill set that is critical to the success of any company doing business in China’s “socialist market economy”.

KFC in Asia

KFC’s foray into Asia began with Japan in 1970. Within Greater China, KFC first entered Hong Kong in 1973 and quickly grew to eleven restaurants in the following year. But KFC misjudged the local market and failed up to develop a suitable business model. All eleven restaurants were closed in early 1975. Ten years later, KFC returned to Hong Kong and persevered this time, eventually franchising its operation to a company called Birdland, which was backed by a group of local investors.
In 1984, KFC entered Taiwan through a franchise agreement with a joint venture company set up by two large Japanese trading companies and a local food company called the UNI-President Group. Later, Birdland took over the KFC franchise in Taiwan from the original joint venture company.
In 1996, the YUM! Brands Greater China headquarters in Shanghai began opening its own KFC restaurants in Taiwan in tandem with Birdland, without an agreement between the two companies to divide up the territory. Until 2001, when Birdland sold its franchise back to KFC, there had been a period of five years during which both companies tried, in good faith, to co-manage the KFC brand in Taiwan. During that period, their business relationship was often cooperative, sometimes competitive, and always challenging, given the nature of a franchiser/franchise relationship.
KFC’s rocky experience in Asia, especially its early failures in Hong Kong and Taiwan during the 1970s and the 1980s, served as valuable and relatively inexpensive lessons in preparation for its 1987 entry into China, which later proved to be the most critical country market for KFC in Asia, or anywhere else outside the U.S.

An American Pioneer in China

There is little doubt that KFC was a pioneer when it entered China in 1987, the significance of which goes far beyond the fact that KFC was the first well-known Western restaurant brand to enter China. At the time of its market entry, KFC introduced at least two new concepts to China: fast-food and restaurant chains.
Prior to KFC’s entry in 1987, some might argue that there were already various forms of Chinese fast food being served. These ranged from the traditional Chinese breakfast items including congee, soy bean milk, and yiu-tiao (fritters of twisted dough), to noodles, various other snacks, and even selections or regular Chinese dishes already cooked-some kept warm, while others were served cold as appetizers-such as bao-zi (Chinese steamed buns), jiao-zi (Chinese water dumplings), sweetened baked goods of various types, and even Cantonese dim sum.
Unlike most Chinese food, which requires elaborate and time-consuming preparation, these Chinese “fast-foods” are usually prepared in advance of purchase, or can be prepared relatively quickly upon placement of an order because of their simplicity. Most of the catering units are small in scale, lacking sufficient financial capital, an attractive physical appearance, a group of properly trained employees, and a clean and well-maintained dining, kitchen, and lavatory environment. While the food may be served fast and its price may be affordable, this is usually because of the simplicity of the food offered and the lack of a desirable restaurant environment.
This type of fast food is very different from KFC’s concept of past food. First, KFC food is prepared quickly because of systemization, process standardization, and equipment automation, none of which is evident in the preparation of traditional Chinese “fast food”. Second, the physical characteristics of KFC restaurants are very different from the traditional Chinese catering units. They are cleaner, brighter, more relaxed, and require more financial investment. Third, food from KFC restaurants is priced at a significant premium compared to Chinese “fast food”. Therefore, it is no exaggeration to conclude that KFC introduced the concept of fast food or, at very least, a much higher standard or fast food, to China.
Before KFC arrived on the scene, these were very few Chinese restaurant groups that operated multiple restaurant units in different parts of China with the same brand name and under the same ownership. Of those, the number of restaurants in each group was very small, usually a handful, located in the same city or province. In less than a decade, KFC succeeded in developing a multi-province, multi-city chain of restaurants covering an ever-expanding territory and, before long, the whole of China. In doing so, KFC successfully transplanted a proven business model from America to China: a restaurant chain.
Prior to KFC, why were there no Western fast-food restaurants in China, and why was there not any sizeable restaurant chain, local and otherwise? On the first question, the short answer is that China lacked broad economic affluence and an emerging middle class prior to the 1990s, conditions often associated with the rise in of popularity of Western fast food. On the second question, the short answer is that Chinese food comes in many different varieties, and Chinese consumers in different parts of the country prefer different styles of Chinese food.
With the wide variety of Chinese dishes, ingredients, and complexity in their preparation, it is not easy to standardize the 3production3 process for one Chinese dish, let alone dozens of hundreds of them. Without process automation, the idea of product duplication with universal adherence to tight standards and consistently high quality, which is a fundamental percept behind a fast-food restaurant chain, would be virtually impossible.
The first appearance of KFC in China in 1987 brought not only American fast food, but also a major foreign restaurant brand. Even more important, it brought a sweeping revolution with a new approach to food preparation, restaurant operation, and business management to the Chinese restaurant industry, underpinned by the dual concepts of fast food and restaurant chains. Both concepts were new to China.