Strategic Management

Case Study Presentation

Kentucky Fried Chicken and the Global Fast-Food Industry

Presenters:• Imran Javed

• Talha Abdul Halim

• Adnan Dohadwala

• Javaria Said

• Sadaf Haque

• Syed Hasan Raza

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• Case Synopsis

• Relevant Case Facts-History

• Pepsi Acquisition of KFC

• SWOT Analysis

• Case Analysis and Problems

• Strategic Alternatives

• Recommended Strategy

• Justification of Recommendations

• After the case

Presentation Contents

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The case has two aspects:

• The first concerns KFC’s history and place as a business unitin the American market.

• The other part is regarding KFC’s strategy in Latin America,focusing on Mexico extensively as in the case.

Case Synopsis

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• Headquarters : Louisville, Kentucky-USA

• Founded by Colonel Harland Sanders in 1952

• World’s most popular and 3rd Largest food chain/ Chicken restaurant in 2000.

• Mission statement; “To sell food in a fast, friendly environment that appeals to pride

conscious, health minded consumers.” (www.KFC.com)

• More than 11,000 outlets worldwide.

• 85 countries and territories around the world.

• 8 million customers each day.

• KFC is a division of Yum! Brands –

– Yum brands -run by David Novak, Chairman & CEO ;

– KFC division-run by Cheryl Bachelder (President and Chief Concept Officer)

Relevant Case Facts - History

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• 1952- Col. Sanders started franchising his recipe door to door financed by $105.00

• 1964-Col Sanders had more than 600 franchised outlets in the US and Canada.

• 1964- Sold his interest in his company for $2 million to a group of investors.

• 1966- KFC went public

• 1969- Listed on the NYSE

• 1971,-KFC was acquired by Heublein Inc. for $285 million.

• 1982,-Heublein & KFC Inc. was acquired by RJ Reynolds

• 1986-RJ Reynolds & KFC, was acquired by PepsiCo, Inc. $840 million.

• 1997-PepsiCo, Inc. spined-off of its qsr’s into independent Tricon Global Restaurants.

• 2002-Tricon changed it's corporation name to Yum! Brands, Inc. .

• NOW:

o Yum Brands, Inc. is the world's largest restaurant company in terms of system units with nearly

32,500 in more than 100 countries and territories.

o Yum! Brands, Inc., is a Fortune 300 company

o Yum! Brands, Inc. global system sales totaled more than $22 billion in the year 2001.

o Current Market Cap value on the NYSE is 7.2 Billion

From $105 to $7.2 Billion in 50 years

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• Pepsi Co. is organized in 3 divisions: – Soft drinks

– Snacks

– Restaurants

• They believed that Marketing of fast foods follows the same pattern as soft drinks.

• The acquisitions of three food chains led to a leading market share in the chicken (KFC in 1986), pizza (Pizza Hut in 1977) and Mexican food (Taco Bell in 1978) segments of the fast food industry.

• Pepsi made sweeping changes in the management of KFC.

• They also changed franchise contracts of KFC to company operated branches

Pepsi’s acquisition of KFC : The Relationship

• Replacement of KFC managers by Pepsi managers

• Col Sanders style of laid back management changed to performance driven management.

• Conflict between KFC’s and Pepsi’s corporate cultures created morale problems.

• Less job security and stability

• This corporate culture was left essentially unchanged during the Heublin and RJR years

• Immense pressure on managers to demonstrate management skills

Pepsi’s acquisition of KFC : The Relationship

• Poor relationships with KFC franchisees.

• Pepsi after incurring operating losses finally spun of its restaurant business into the new company Tricon which later became YUM brands in 2002.

Pepsi’s acquisition of KFC : The Relationship

Power of Brand and Global Presence

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Demographic Trends

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• In the US a number of demographic and societal trends influenced thedemand for fast food eaten outside of the home.

•A rise in demand of beef products had begun in USA in 1990’s as an averageAmerican ate 64 pounds of red meat each year.

•In the 90s the greatest concern was the high labor costs as it makes upto 30%of the total cost. Shortage of employees was as 16-24 age group employeesdidn’t want such jobs as they had never experienced recession.

• Since 1970, 50% of women started working outside and is expected to rise to65% by 2010.

• In 2000, Baby Boomers aged 35-50 were the largest consumer base.Generation X age between 25-34 and the mature age 51-64 were the secondand third largest groups.

• Ethnic food was also rising in popularity as US immigrants were increasing.

• Coffee shop phenomenon had arisen by 1999.

The Management style of Col. Sanders was to rely on the basic goodnessof the people around him and trust the franchisees to play fair.

• Strong Brand Name and Identity• KFC is a Market leader : World’s largest chicken restaurant chain and

third largest fast-food chain in 2000• Key Success Factor (KFC):

– Locations– Effective store management/cleanliness– Key to continued growth was to find, motivate, and retain hard-

working and entrepreneurial managers and franchisees around theglobe

– Secret recipe of 11 herbs• Practices CSR (Corporate Social Responsibility).• Competitor research

SWOT Analysis- Strengths

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• Internationalization

• 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-traditionaloutlets like Airports, Shopping malls, universities, and hospitals.

– Second, KFC continued to experiment with home delivery, whichwas already firmly established in Louisville, Las Vegas and LAmarkets

– Third, KFC established “2 in 1” units that sold both KFC and Taco Bellor KFC and Pizza Hut

SWOT Analysis- Strengths

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• Fewer opportunities to expand its US restaurant base due to saturation.

• KFC chicken segment sales fell from 71% in 1989 to less than 56% in 1999 since the new owners did not understand the chicken business and were not providing leadership expected from a franchisor.

• Limited cash flow and resources to expand in Latin America

• Culture incompatibility internationally

• Company stores floundered and become underperforming the franchised operations.

• Limited menu and Innovation cycle is too long- KFC misses first moveradvantage.

SWOT Analysis- Weaknesses

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• Overseas expansion– Rapid economic growth– Trend toward two-income families that had fuelled the growth of fast-food

industry in the 1950s and 1960s were appearing in the late 1960s in theother country.

• NAFTA - Expansion of its Mexico operations, and other large LatinAmerican nations

• Expansion into emerging markets such as the Middle East, anddeveloping nations such as China.

• Frozen food line

• Demographic trends (demand for food eaten outside of the home)

SWOT Analysis- Opportunities

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o Domestic:

• Competition from Chick-fil-A and Boston Market, who increased theircombined market share by 17%.

• Product development threats

• New Entry to the Market place

SWOT Analysis- Threats

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o International:

• Competition in the Asian market for the fast food industry is growingrapidly.

• Competition in Latin America from Habib’s (Brazil), Burger King, El PolloLoco and Wendy’s

• Mexico’s slow reduction of restrictions on US investments.

• Instability of the Peso may reduce profitability in US Dollars.

• Social unrest in Mexico i.e. organized crime, high poverty rate, politicalmurders etc.

• High cost of purchase for restaurants in prime location

• Acquisition and Mergers of Competition

• Increasing awareness related to Obesity

• Bird flu syndrome

SWOT Analysis- Threats

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Through an analysis of the strengths, weaknesses, opportunities, andthreats of KFC, the following potential problem areas were identified:

• No defined marketing strategy– It does not appear to have a consistent long-term approach.

– The U.S. has enormous changes in its demographics. Single-person householdshave increased from 12% in 1970 to 25% in 1995.

• Saturation of the U.S. Market– Increase in the overall number of fast-food chains.

– Access to restaurants is now easier due to non-traditional locations, forexample in airports and gas stations.

– Also increase in frequency of eating out.

Case Analysis

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• Health Conscious Consumers. – Increasingly healthy diet trend in America.

• Increased Start Up Costs.– Prime locations have increased in cost due to limited room for expansion.

– New technology has increased efficiencies, but resulted in greater increased startup costs. Restaurant and equipment packages range from $500,000 to $1,000,000.

Case Analysis

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• Low profitability and high risk of doing business in Mexico

–Due to the devaluation of Peso, profits are greatly reduced.

–The reduction in earning/ purchasing power has brought about muchpolitical unrest.

–Mexico has a largely unskilled labor pool.

– Cultural attitudes toward punctuality, absenteeism and job retention.

–High turnover rates lead to high training costs.

–In the past, there have been incidents of violence toward American firmsby frustrated nationalists.

• Limited cash flows and resources.

• No country subsidiary in Latin American countries.

Salient Problems

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1. Re-franchise all company owned Mexican units into franchises

Advantages

• Reduced risk—political and economical

• New legislation promoting franchises and protecting patents andtechnology in Mexico

• Increased cash flow from sale of units (more franchises- more saleunits)

• Less Administrative Costs for KFC

• Steady royalties even after the sale of the company owned restaurants.

Disadvantages

• Foregoing potential greater profits

• Losing control of day to day operation of the franchises

• Expansion through franchise endangers brand equity

Strategic Alternatives

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2. Completely divest KFC of Mexican operationsThis alternative includes canceling all franchises and selling off all company units inMexico.

Advantages

• Eliminate risk in foreign markets--Mexico

• Reduced currency rate exposure in Mexico

• Protects brand integrity

• Increased cash flow/capital for other investments

• Would not have to oversee Mexico and would save operational andadministrative expenses

Disadvantages

• Forgoing potential profits from the 2nd largest international market (Mexico issecond behind Australia)

• Ill will from franchises and Mexico consumers

• Eliminate brand visibility in Mexico

Strategic Alternatives

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3. Leave Mexico as is and grow other foreign markets

Advantages

• Focus investment on strongest growing segment in Australia

• Less political and financial risks in other foreign markets

• Still maintain a minimal presence in Mexico for further growth in thefuture when stability is greater

Disadvantages

• Would not have mitigated risk in Mexico

• Foregoing potential growth at profitable market

• Still have brand exposure

• Still have to service Mexico units with no increased economy of scale.

Strategic Alternatives

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Recommended Long term Strategy

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We recommend that

a. KFC re-franchise all of the 129 company units in Mexico.

b. Open up a country subsidiary to control operations.

c. Also expand in other Latin American countries through franchises

This will

a. Effectively mitigate the risk of doing business in Mexico by making afranchisee responsible for the profit and loss of each unit.

b. KFC will still receive royalties based on the sales of each unit. However,franchises will protect the company from currency devaluation by usinglocal suppliers.

c. Still maintain a presence in one of the largest growing markets.

d. Expansion is not recommended at this time in Mexico, due to the volatilityof the economic and political situation.

• They also need to make sure that their restaurants offer a diversifiedmenu, quality food, excellent service and restaurant cleanliness.

• KFC should always listen to their customers and follow new markettrends to forfeit or competition (Ref : Boston outperforming withGrilled chicken)

• Develop a healthier menu

• Attain cash by selling unprofitable restaurants

• Evaluate countries based on attractiveness (Market research)

Short term Strategies

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Justification of Recommendations

• The Mexican markets are not yet saturated and, by a number ofindications, KFC is doing well in these locations.

• KFC should stay focused on its Mexican markets because the politicaland economic conditions of the other Latin American countries aregenerally unstable.

• KFC can also create and add local food items on the menu that cater tothe local market taste.

• KFC do not have the ability to concern any options with priceconsiderations. Immense competition in the domestic market disallowsthis alternative.

• Due to increases in prime land prices, KFC is also limited in theexpansion of its locations domestically

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Afterwards..

• In 2002 the company announced that it had already opened its 400threstaurant in Mexico and according to the managing director of theMexican subsidiary KFC was strong, profitable and growing rapidly.

• In August 2003, after a meeting between D. Novak and the president ofMexico (Vicente Fox) the company announced that the network will beexpanded with 590 new restaurants, which is a huge growth plan.

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• www.yum.com

• www.kfc.com

• www.economist.com

References

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Question and Answer Session

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Thank you and have a nice day…..