Case Study

KFC in China
In China, Yum! Brands, the parent company of Kentucky Fried Chicken (KFC),
are opening a KFC store every day. Using a different strategy compared to other
Western fast service counterparts, KFC has become the largest restaurant company
in mainland China. KFC outpaced its nearest competitor, McDonalds, by more
than 1,000 restaurants in China and is outpacing its development by a roughly
three to one [1]. The US chicken giant adapts its Western business model in
Chinese market through acknowledging the social and cultural differences. KFC
realized that the US fast food model needs to be adapted because Chinas culture is
not individualistic which is the characteristic of the US culture [2]. Therefore, it is
necessary to combine the US fast food business model and adapted them to serve
the needs of Chinese consumers.

China and Chinese Customers

In late 1978, China began implementing economic reforms to develop and
modernize its economy. The economic reform opened China market to the outside
world and improved the living of average Chinese people. A socialist market
economy was adapted by the Chinese government to lessen the governments
control of the economy, allowing some aspects of a market economy and
encouraging foreign investment.
Since then, income levels in China have been rising steadily as the countrys
citizens reap the benefits of its economic growth. A big challenge, however, for
companies like KFC is that Chinese diets are changing quickly as incomes improve.
Currently, there are more than 300 million middle class in China, creating
significant long-term demand for restaurant brands and encouraging rapidly new
unit development in the restaurant sector [1]. The rapidly rising income level
increases Chinese consumers spending power, and in turn drives market growth
for companies operating in the country. Consequently, China is now KFCs fastestgrowing and highest-margin market [3].
China has become the highest-growth market of KFC through its unique
CHAMPS strategies that stands for Cleanliness, Hospitality, Accuracy,
Maintenance, Product Quality, and Speed and by demonstrating its
understandings of Chinese culture. Research of the behavior of KFC consumers in
China and USA found that the Chinese customers showed more positive brand
impressions towards KFC than their American counterparts [4]. Interestingly,
Chinese customers ranked the KFC higher than their American counterparts in
areas like furniture, dcor, cleanliness of restroom, healthiness and freshness of
food. Furthermore, Chinese customers suggested that efficient, courteous, and
nicely dressed service personnel and attractive and well-done advertising
contributed to its positive brand impression of KFC [4]. Due to the positive brand
identity, Chinese customers are more apt to eat within KFC restaurants and spend
more time doing so than the American counterparts.

The Foreign Fast Food Market in China

A recent Mintel report (2012) suggested the total amount of foreign fast food
outlets in China were 50,000 in 2012up from 48,477 in 2011 and 36,037 in 2006
[5]. Moreover, 44 % of Chinese consumers said that they plan to spend more on
fast food in the coming year. Therefore, the potential for the foreign fast food
sector in China is clear. Actually, the market for foreign fast food in China has
seen steady growth over the past 5 years, as Chinese consumers have incorporated
it ever more into their lives and culture. Chinas foreign fast food sector grew at a
compound annual growth rate (CAGR) of 19 % from 2006 to 2011 to reach a
market value of RMB 75.1 billion. And there is further good news for the market
for foreign fast food in China, as Mintel forecasts the sector to increase to RMB
171 billion by 2017. Chinas fast food sector has recorded double-digit annual
growth since 2003. The market was estimated at US$303 billion in 2009 and
forecasted to reach around US$450 billion by 2014. Furthermore, the number of
outlets, chained and independent, is expected to increase to 71,964 outlets by 2017,
up 39 % on the expected number for 2012 [ 5].
In terms of competition, KFC and Pizza Hut, both owned by Yum! Brands, are
still ahead of McDonalds in China. KFC has the highest number of outlets in
China, while Pizza Hut remains Chinas number one casual dining chain [6].
However, McDonalds, with more than 1,000 restaurants in China, is investing
heavily to catch up with Yum! Brands. Specifically, McDonalds plans to reimage about 80 % of its stores by 2013, which will involve European and
Australian designs, comfortable seating, warmer colors and amenities such as WiFi.

KFC Adapts Its Strategy in China

KFC opened its first restaurant in Beijing in 1987. Owing to its successful
localization strategies in the China market, it has over 3,700 stores [7] in 700 cities
in China and is becoming a good example of cross-cultural marketing of multinational enterprise. KFCs adaptation in China is discussed next to show how the
US business model was altered in China.

Menu Adaptation
KFC China aims to be part of the local community and not be seen as a foreign
company and it reflects on changing the original Western menu to suit Chinese
tastes and preferences. Chicken is a familiar choice of food in China which is much
cheaper and more widely available than other forms of meat, such as beef.
However, in order to change the menu according to the Chinese preferences, KFC
largely increased its menu items in China. Actually, KFC Chinas menus typically
include 50 items, compared with about 29 in the US.
The extended wide range of product offerings in China include items such as
spicy chicken, fired dough sticks, porridge, sesame seed cakes, egg tarts, soya
milk, and other items that tailor to the tastes of specific regions within the country,
such as wraps with local sources or fish and Shrimp burgers on fresh buns. For

example, KFC introduced rice dishes in Shanghai before selling them in other
branches [8]. The company also introduces about 50 new products a year, compared with 1 or 2 in the US [9].
To counter concerns on fast food and obesity as it is now in the West, KFC
China offers a healthier menu and has completely eliminated supersized items.
From 2005, the company developed new fast food concept, focusing on
nutritious, balanced and healthy living diet. The product items added to its menus
include roast chicken, sandwiches, fish, shrimp, and more fruit and vegetable
dishes. Furthermore, KFCs children meals are served with vegetable and juice,
while fries and soda can be substituted on request [9].
Due to the extensive menus offered, it requires more staff in the kitchen area.
Therefore, KFC China cannot position itself as the cheapest dining option. Also,
Chinas inflation rate has hovered above 5 % in 2011, driven by the countrys
speculative real estate market and soaring demand for commodities [10]. Due to
the pressure from food and labor inflation, the company raised prices in China in
2011 and 2012 to help offset higher costs for food and labor and to bring margins
up to around 20 % [11]. KFC China increased prices on a number of its popular
menu items, including prices on chicken dishes, drinks, and burgers in order to
battle soaring business costs. In average, customers spend the equivalent of $2.50
$3.50 per visit to a KFC in China [9].

Distribution Adaptation
In China, multinationals normally focused on first tier cities, where their global
brands attracted mid- and high-income consumers with an interest in western
lifestyles. However, growing competition in first tier cities resulted in a growing
focus on lower tier cities, particularly from KFC China. In 2007, KFC notably
introduced lower franchising fees for second and third tier cities, with the chain
subsequently expanding more rapidly in these cities [12]. Following that, KFC
embraced smaller cities and build a national business with outlets all over the
country. As Chinese government restricts direct foreign investment in early days,
KFC China used a franchise model. However, when the country becomes more
receptive to wholly owned foreign enterprise, the company switched to a strategy
of company-owned outlets, which allows greater control compared to the
franchising model [9].
KFC China sources food from within the country whenever possible. This is not
an easy task in the early stage, when the supply chain system for chicken isnt
well-developed and multiple vendors provided only a handful of birds each.
Despite of the highest population in the world, compared to the West, the supply
chain in China is still unsophisticated, aboriginal, and relying on small food
processors which are inefficient and lack of technology for mass production [13].
As food safety is a big concern for Chinese consumers, KFC China made a big
decision to build the supply chain from the ground to help ensure quality. Despite
of the huge investment involved, such decision is necessary if the company was to
expand rapidly, carry a lengthy and complex menu, and introduce new products
quickly [9].
Furthermore, in order to broaden the reach of its brand, KFC China offers
delivery services in more than half of its restaurants. In average, KFC is opening
about 450 new restaurants in China per year, and half of them among those offer

delivery services [14]. According to Yum! Brand Chief Financial Officer, Rick
Carucci, KFC aims to have more than 2,000 new KFC restaurants in China that
will offer delivery over the next decade.
KFC also adapts the delivery format in China. Unlike the drive-through format
operated in the West, KFC delivery drivers ride red motorbikes on streets in China,
equipping with similar heated boxes, who charges a flat fee for delivery. Thanks to
the technology, online orders now account for about 40 % of the delivery orders
for KFC China. As a result, KFC China plan to stop building call centers in the
future as the numbers of customers buying online are increasing. Furthermore,
Chinese customers tend to order more food online because they dont feel as
rushed as they order by phone [14].

Training Adaptation
The extended menu means that food preparation is more complex and requires
more staff in KFC China than in US. KFC China typically employs 60 people in a
restaurant, which is nearly twice as many as in the US [8]. To maintain its current
restaurant-opening rate, KFC needs at least 1,000 new managers and 30,000 new
crew members a year. In terms of personnel recruitment, the strategy of KFC
China is to hire local management. They hire Chinese managers who read and
speak the language, who understood the restaurant business and Chinese
consumers but also have had Western business experience [2]. Still, teaching
employees how to interact with customers is a challenge, as one-child policy and
the wide usage of home PCs mean that the younger generation in China interact
less with others than their parents generation [2].
KFC adapts to the working needs of those young employees, as many are
college students working their first job. For example, young employees are
encouraged to socialize over company provided video games on their breaks. This
practice serves several purposes: it eases the minds of parents anxious about
sending their children out into the world, provides crucial social skills for young
adults who grew up in single-child households, creates lifelong Yum! Brands
customers, and develops a culture of customer service in a country where there
was none [2].

The Road Ahead

Despite its huge success in China, KFC China is facing a typical corporate
dilemma. They are more capable to improve and make changes within current
setting than to take entrepreneurial approach to start new type of business. For
example, Yum! Brands, the KFC parent company, started a Chinese food brand
named East Dawning from 2006, but it was not as successful as expected.
Compared to its rivals, KFC China is taking a radical approach, which is also a
more interesting road. When the competition is timid, it will continue to enjoy
success. However, with an extended and complex food menu in China, the long
term evolvement of KFC China is obviously challenging. It risks brand identity,
operation simplicity and long term development in exchange for hypothetical
larger consumer base and more revenues in order to meet its fast expansion [15]
(Table 1).

Table 1 Summary of the key strategies used by KFC in China

Adaptation
Key strategies
Menu adaptation

Distribution
adaptation

Training
adaptation

Extended menu items

Product items tailor to suit Chinese tastes, varying by geographical regions
Introduced healthier menu to counter concerns on fast food and obesity
KFC China focused on opening stores in second and third tier cities to build a
national business rapidly
KFC China switched from the franchising model to a strategy of companyowned outlet to allow greater c o n t r o l
KFC built the food supply chain from the ground in China in order to expand
rapidly and carry its complex m e n u
KFC focuses on the delivery services in China to broaden the reach of its
brand and the delivery format was also adapted
KFC China hires Chinese managers who had experience in the Western way
of doing business and who understood the restaurant business and the
Chinese consumers
KFC China adapts to the working needs of young employees and facilitates
the building of their social skills since they grew up in single-child
households

Questions
1. Discuss Chinese customers consumer behavior in selecting fast-food services
and evaluate the potential of the China market for the foreign fast food chains.
2. Evaluate the suitability of KFCs approach to amend its menus largely in China.
3. Examine the distribution strategies of KFC China. What are the pros and cons
of its approach in opening stores in second and third tier cities in China?
4. Discuss the training adaptation of KFC China. What challenges does KFC face
in China?

References
1. Quick Service Restaurant (QSR) web (2010). Yum! Brands promotes two Yum! China
division execs, Su now CEO. http://www.qsrweb.com/article/95404/Yum-Brands-promotestwo-Yum-China-Division-execs-Su-now-CEO. Accessed 27 Aug 2012.
2. Starvish, M. (2011). HBS cases: KFCs explosive growth in China. Harvard Business School.
http://hbswk.hbs.edu/item/6704.html. Accessed 31 Aug 2012.
3. BBC News (2011). KFC and Pizza Hut owner Yum Brands sees profits rise. http://
www.bbc.co.uk/news/business-13153516. Accessed 27 Aug 2012.
4. Witkowski, T. H., Ma, Y., & Zheng, D. (2003). Cross-cultural influences on brand identity
impressions: KFC in China and the United States. Asia Pacific Journal of Marketing and
Logistics, 15(1), 7488.
5. Mintel (2012). Breakfast key to growth of foreign fast food market in China. http://
www.mintel.com/press-centre/press-releases/910/breakfast-key-to-growth-of-foreign-fastfood-market-in-china-reports-mintel. Accessed 28 March 2013.
6. DAltorio, T. (2011). Fast-food culture grows in China. http://www.investmentu.com/2011/
February/fast-food-culture-grows-in-china.html. Accessed 28 March 2013.
7. Mellor, W. (2011). McDonalds no match for KFC in China as Colonel Rules Fast. http://
www.bloomberg.com/news/2011-01-26/mcdonald-s-no-match-for-kfc-in-china-wherecolonel-sanders-rules-fast-food.html.
8. Peoples Daily Online News (2010). Rice on the menu at Shanghai KFC. http://english.
peopledaily.com.cn/90001/90778/90860/6912182.html. Accessed 31 Aug 2012.
9. Bell, D. E., & Shelman, M. L. (2011). KFCs radical approach to China. Harvard Business
Review, 89(11), 137142.
10. Strategic Sourceror (2011). KFC raises prices in China. http://www.strategicsourceror.com/
2011/11/kfc-raises-prices-in-china.html. Accessed 31 Aug 2012.
11. Reuters (2012). KFC parent Yum sees more China price hikes in 2012. http://www.reuters.
com/article/2012/02/07/yum-idUSL2E8D77CY20120207. Accessed 31 Aug 2012.
12. Euromonitor International (2011). Fast food in China. http://www.euromonitor.com/fastfood-in-china/report. Accessed 31 Aug 2012.
13. Wang, P. (2011). How KFC make a stride in Chinas QSR market. http://blog.caijing.com.cn/
expert_article-151538-15237.shtml. Accessed 31 Aug 2012.
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4052970204397704577074982151549316.html. Accessed 31 Aug 2012.
15. Wang, P. (2011). Two mens race: McDonalds and KFC in China. http://blog.caijing.com.cn/
expert_article-151538-15237.shtml. Accessed 31 Aug 20