Case Study 2: KFC in China

Introduction

In China, Yum! Brands, the parent company of Kentucky Fried Chicken (KFC), are opening a

KFC store every day. Utilizing 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, McDonald’s, by more than 1,000 restaurants in China and is outpacing its

development by a roughly three to one. 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 China’s culture is not individualistic which

is the characteristic of the US culture. 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 government’s 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 country’s 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. 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 KFC’s fastest-growing and

highest-margin market.

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. Interestingly, Chinese customers

ranked the KFC higher than their American counterparts in areas like furniture, décor,

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. 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 2012—up from 48,477 in 2011 and 36,037 in 2006. 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. China’s 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. China’s 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.

In terms of competition, KFC and Pizza Hut, both owned by Yum! Brands, are still ahead of

McDonald’s in China. KFC has the highest number of outlets in China, while Pizza Hut remains

China’s number one casual dining chain. However, McDonald’s, with more than 1,000

restaurants in China, is investing heavily to catch up with Yum! Brands. Specifically,

McDonald’s plans to ‘‘re-image’’ about 80 % of its stores by 2013, which will involve European

and Australian designs, comfortable seating, warmer colors and amenities such as Wi-Fi.

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 in 700 cities in China and is becoming a good

example of cross-cultural marketing of multinational enterprise. KFC’s 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 China’s 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. The company also introduces about 50 new products a year, compared with 1

or 2 in the US.

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, KFC’s children meals are served with vegetable and

juice, while fries and soda can be substituted on request.

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, China’s inflation rate has

hovered above 5 % in 2011, driven by the country’s speculative real estate market and soaring

demand for commodities. 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 % . 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.

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. 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 utilized 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.

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 isn’t 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.

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.

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. 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 don’t feel as

rushed as they order by phone.

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. 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. 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.

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.
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

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 KFC’s 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?
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.

Consumer Behavior:

Chinese consumers demonstrate a strong preference for fast-food services that align with their tastes,
health consciousness, and dining experiences. They favor cleanliness, quality service, and variety in
menu options. Chinese customers often seek value for money and are influenced by peer
recommendations and advertising. Additionally, with rising incomes and urbanization, there is a growing
acceptance of fast food as a convenient dining option.

Market Potential:

The potential for foreign fast-food chains in China is significant. With over 300 million middle-class
consumers, demand for fast food is on the rise. The market has experienced consistent growth, driven
by changing dietary habits and increasing spending power. A report indicates that the foreign fast-food
market in China grew substantially, suggesting a promising future as consumer spending continues to
rise. The growth rate and market expansion present ample opportunities for foreign brands to establish
and grow their presence.

2. Evaluate the suitability of KFC’s approach to amend its menus largely in China.

KFC’s approach to amending its menu in China is highly suitable. By offering a wide variety of local food
items that cater to regional tastes, KFC has successfully integrated itself into Chinese dining culture. The
introduction of dishes like rice, porridge, and unique local flavors reflects an understanding of Chinese
culinary preferences. Additionally, offering healthier options addresses growing health concerns among
consumers. This localization not only attracts more customers but also enhances brand loyalty and
positive perceptions, positioning KFC favorably against competitors.

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?

Distribution Strategies:

KFC has adopted a dual strategy of expanding into both tier-one cities and lower-tier cities. Initially
focused on larger cities, KFC has shifted attention to second and third-tier cities, where competition is
less intense, and opportunities for growth are substantial.

Pros:

- Market Expansion: Opening stores in lower-tier cities allows KFC to tap into new customer bases with
growing disposable incomes.
- Less Competition: These areas may have fewer established fast-food options, providing a unique
opportunity for KFC to capture market share.

- Franchising Opportunities: Lower franchising fees can encourage local entrepreneurs to open KFC
outlets, speeding up expansion.

Cons:

- Operational Challenges: Managing a larger number of stores across various regions can complicate
logistics and supply chain management.

- Brand Consistency: Maintaining KFC's quality and service standards may be more challenging in less
developed areas.

- Economic Variability: Smaller cities may experience economic fluctuations that could impact sales and
profitability.

4. Discuss the training adaptation of KFC China. What challenges does KFC face in China?

Training Adaptation:

KFC China has adapted its training programs to meet the needs of its local workforce. With a significant
number of young employees, many of whom are entering the workforce for the first time, KFC
emphasizes social skills development alongside job training. They encourage interactions among staff
and provide activities, such as video games, to build teamwork and communication.

Challenges:

- Cultural Differences: Many young workers come from one-child families and may lack social skills,
creating a challenge in customer service training.

- High Turnover Rates: The fast-food industry often faces high employee turnover, requiring ongoing
recruitment and training efforts.

- Workforce Management: KFC needs to balance the need for experienced staff with the influx of new,
less experienced employees, complicating training efforts.

- Competition for Talent: As more fast-food chains enter the market, attracting and retaining qualified
staff becomes increasingly competitive.

Overall, KFC's strategies in China highlight the importance of cultural adaptation and understanding
consumer behavior while addressing operational challenges inherent in a rapidly expanding market.