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The Success Factors of Kfc in China Essay

KFC has become synonymous with foreign fast-food after its entry in China. In 1987, KFC opened the first quick-service restaurant, which is totally a western-style, near Tiananmen Square in the capital of China, Beijing. KFC spread quickly after its first outlet in Beijing. It had the largest number of 11 outlets among the fast-food service restaurants in China in 1992. The number increased to 50 outlets in 1995. By 2001, there were more than 400 KFC outlets, which made KFC became the first international fast food chain to open the largest number of outlets. In 2004, the 1,000th restaurant opened in Beijing. Only six years later, KFC opened the 3,000th outlet in Shanghai.

Graph 1: Number of KFC China’s outlets 25 years later, KFC has more than 3,800 stores all over Chinese 800 cities with annual growth of 300 new restaurants. One report (Bell & Shelman, 2011) said that KFC is opening one new outlet a day. The 25-year development of KFC in one of the most diverse countries with the largest population in the world is amazing. Its annual revenue is over $1 million each restaurant and profit margin is about 20 percent. Which is to say that the number of outlets, revenue and market share are all much higher than its competitors. It is not easy for international restaurants adapted to Chinese market and became so successful. The study of KFC’s strategies and its secret recipe for success is significant. This discussion will try to figure out KFC’s secret strategies which can be absorbed by other international chain restaurants. The following parts are going to discuss the local strategies of KFC, compare the difference between KFC and MacDonald and conclude some general suggestions for international chain restaurants to entry into China. Literature Review

The review part is going to talk about what KFC China’s local strategies and other persons’ opinions of these strategies. When international food chain restaurants face an emerging market (such as China) companies should think about whether their products can satisfy consumers’ needs in new markets. They should also decide which business and operation model should choose to overcome the cultural barriers: adapt of not adapt to the local culture, pattern globalization or change the culture being marketed to. Warren Liu, the former vice president of business development of KFC China, also thinks that the great success of KFC should contribute to some key ingredients: context, people, strategy and execution (Cho, 2010).

Liu (2008) said: “That strategy is context-dependent; a strategy that works well in a stable and mature market economy would most likely not work well in China, given the diversity of its people, geography, the heritage of a rich and complex culture, and a rapidly and continuously changing business environment since China’s economic reforms commenced in 1978.” Bell and Shelman (2011) concluded five competitive advantages of KFC China. KFC China firstly influences a Western brand with Chinese characteristics. Secondly, it expands very rapidly. Thirdly, they develop a logistics network with the Chinese government and other departments. Fourthly, they focus on training employees in service. Last but not least, they focus on ownership rather than franchising. Generally, the success of KFC can conclude to one key word: localization. KFC’s Localization includes the following aspects: surveyed the local market before its entry, localized its western brand with Chinese characteristics, chose specific strategies for Chinese market, developed a Chinese franchising model and opened many operation concessions in smaller countries.

Although the company’s US model succeed in many other countries, it will not operate effectively in China. In China, as many other developing or Asian countries, food is the heart of the society. There is an old saying in China that food is the paramount necessity of people, taste is the priority of eating. Chinese like to eat in the restaurant and enjoy the flavors and an inviting ambience rather than take out. There is see significant difference between the consumption habits of Chinese and Americans. KFC chose localization strategies is the best choice. First, they did some research about Chinese Market before they entry into China. In the late 1970s, the economy in China began reform and started to build a new economic system, which allowing some market economy’s aspects and encouraging foreign investment. The desires for consumption and material pleasure had been awakened by the increasing income and loose policy (Wang, 2000). Not like the social economy period, the consumer goods and services are purchased will lead people consider more about the consumer taste (Shao & Herbig, 1994). Thus, the international food chains can never ignore this largest potential market with more than 1.4 billion people. Dick Mayer, the manager of KFC at that time, did not let the big opportunity slip.

Learning from the past failed experience in other Asian area, Dick chose Singapore market as the pilot project. The main reason was that Singaporeans speak Chinese and their living habits are closest to Chinese culture. In 1986, Dick established the special department of East Asian area and hired Mr. Wang Dadong as the vice manager (Liu, 2008). Mr. Wang had been study abroad and had a wealth of managerial experience. So he knew western and eastern culture well. Choosing Singapore as the pilot project and hiring an orient people as manager are two main strengths. To be honest, KFC’s success in China can be partly attributed to Dadong Wang, who laid the foundation for KFC to enter China. Second, they localized a western brand with Chinese characteristics. When talked about the localization strategies of KFC, people will remind of Beijing Chicken Roll (àla Beijing Duck), Spicy Diced Chicken, fried dough sticks and so on. This is a big part of KFC China’s Blueprint for success. Compared with 29 items in the menu of United States, KFC has about 50 items.

KFC China introduces about 50 new products a year and some of them are sold temporarily, while only one or two products in United States (Bell & Shelman, 2011). Besides, the company even offer different spiciness levels to customers because the difference among different local taste, for example, people in Guangdong will complain the food are too spicy while people in Sichuan complain the food is not hot enough for them. Moreover, KFC China’s localized offerings and material by country and region. It is a good effort to please the local consumers. KFC China localized the raw material purchase, either. Before its entry in China, Mr. Wang noticed that the poultry farming would become one of Chinese most important industry and had a bright future. He soon realized it was great news for their entry in China. Based on KFC’s annual report, 95 percent of raw material are purchased from the local region, including chicken, vegetables, and bread. KFC China created a scientific system to make sure adequate and high-quality supplies (Bell & Shelman, 2011). Third, they chose strategies specifically for Chinese Market. There are five basic strategies: expanding rapidly, choosing a good location for its headquarters, developing a Chinese franchising model and opening the operating concessions. Firstly, KFC China expands its outlets rapidly.

KFC set its sights on rapid expansion. As what I mentioned above, KFC has celebrated its 1000th restaurant milestone in Beijing only seventeen years after its first outlet opening in China (business wire, 2004) . KFC China decided to build a national business with stored all over the country (Li, 2004). It is important to being the first to entry a city, which means it can pick a perfect and popular locations and then occupy greater market share. In the past years, the develop rate of KFC is twice than McDonald. Secondly, KFC chose a good and proper location for companies’ headquarters. KFC set their Asia Division in Shanghai. Shanghai is a very global city, with influence in commerce, finance, and transport. It is also a major financial center (Yen, 2005). It is near the major market of KFC China. Thus, it is convenient to do survey about the consumers and respond rapidly to the market. Thirdly, KFC China developed a specific Chinese franchising model during its expanding process. As an international popular business operating, commercial franchise has both been used by KFC and McDonald for many years.

However, in 1993, KFC had created a new franchise model to help itself expand rapidly. The franchises owned their stores when this restaurant, which begin making profit and operating well. KFC expands rapidly under this Chinese franchising model. Fourthly, they open the operating concessions of these smaller cities in China. It only takes four to six months from site selection to open a new KFC restaurant in China; meanwhile more than one year is needed in United States (Bell & Shelman, 2011). It is a great benefit for investors to consider join KFC chain. Excluding Beijing, Shanghai, Guangzhou, which are the large cities in China, KFC China decided to open opportunities for investors in the smaller cities to join their Chinese franchising model. The franchise fee may reduce to 2 million Yuan (about $300,000) per outlet rather than the original franchise fee 8 million Yuan (about $1,200,000). The smaller cities would be more competitive than the big cities in China, so lower the barrier for the franchise fee is a right choice. Discussions about the comparison between KFC and MacDonald

Macdonald, one of the world’s top 500 companies, is famous for its QSC&V standardization. It has more than 14,000 outlets in the United States with more than 22.1 billion dollars annual revenue. Meanwhile, KFC has about 6,000 outlets with 5 billion dollars annual revenue. However, in China, KFC is much more welcomed than Macdonald. There is a saying that where there is a MacDonald there is a KFC restaurant, conversely not. KFC has got a 2:1 ratio over MacDonald in China (Cho, 2010). That evidence is strong enough to prove how KFC is much more popular than MacDonald in China. Why? SWOT analysis of KFC

Strength. Firstly, KFC China established a good brand image to consumers. When talked about KFC, consumers always remind of a kind face of an old man, who is smiling to everyone. Secondly, KFC China’s localization strategy is one of the most powerful and effective strength. Besides, KFC China also use some local promotion method, such as the three-player basketball match every year, which attract many young people to join and create a bright brand image. Thirdly, KFC follows a CHAMPS standardized operation process. Fourth, KFC China has the greatest number of outlet, according to Porter’s five forces model, its average product cost should be lower than its competitors, including MacDonald. Weakness. Fried food has been recognized as top unhealthy food. People will eat less fried food when considering health. Besides, the price is a little high, especially in smaller cities. Opportunity. The demand for fast food restaurants is increasing and KFC’s major market is China, which is growing rapidly. Threats. There are some threatens from traditional Chinese restaurants and other fast food stores like MacDonald. SWOT analysis of MacDonald

Strength. First of all, MacDonald established a good brand image just like what KFC did. People know wherever there is a big yellow M there is a MacDonald. And it builds good public relations with Chinese local government and people. Secondly, Macdonald’s product follows world standardization so that its product and taste are same all over the world, which ensure the same experience all over the world. Thirdly, the QSCV system (which is presented in the table below) is a great strength. Fifth, MacDonald always chose proper location. Macdonald usually chose new store’s location near big shopping malls, train stations, airports and universities. Q-QualityPromise the quality of every product.

S-ServiceProvide a standardized and high quality service to comfort consumers. McDonald’s motto is to ‘serve with a smile'(Official Website). C-CleanlinessEnsure the cleanliness of every outlet.

V-ValueConvey its MacDonald value to consumers.
Weakness. The main weakness of MacDonald is that it did not do any localization process. Besides, it is far behind KFC in China, which has as much as twice outlets than MacDonald. Opportunity. Some people say that the 19th century is British Century, the 20th century is American Century and the 21st century is Chinese Period. Thus, MacDonald should focus more on the Chinese market, which brings many opportunities. MacDonald should focus to be a Chinese MacDonald rather than MacDonald in China. Threats. The main threaten of MacDonald would be the competition with KFC China. From the former SWOT analysis of these two chains, it is easy to tell that the major difference between KFC and Macdonald is the different understanding of local customers. MacDonald is famous for its QSC&V standardization. KFC is doing same kind of standardization (QSC) of MacDonald’s. One thing that is different from MacDonald is that KFC is adapted to Chinese local market. To be honest, standardization will make customers more comfortable and lead the brand famous all over the world. However, as consumers, they consider more things rather than standardization. Consumers will be tired of the food if it is the same every day, every year; Consumers could not tell the difference between Chinese fast-food restaurants and American’s with the same decoration. Sometimes consumers like standardization, sometimes consumers, especially Chinese consumers prefer personalization. Menu

Chinese like to drink soy-bean milk and eat deep-fried dough sticks in the morning. So KFC added such kind of food in their breakfast menu. Besides, it also offers congee or some Chinese-style porridge for their local consumers, which are welcomed by Chinese consumers. These delicious food are some kind of Chinese food but are offered by KFC. These traditional and famous products had been proven as a successful strategy. Also since most Chinese prefer pork, followed by chicken, KFC set chicken as their core products while MacDonald’s still focus on its beef and hamburger product.

Therefore, KFC has an obvious product advantage over MacDonald’s. Moreover, in 2000, KFC China founded a food health advisory committee. KFC invited more than 40 national level nutrition experts, who made great contribution to develop a Chinese KFC menu, to join this committee. Meanwhile, Macdonald do not have such strong support to develop their local products. Ambiance

KFC localized its décor, special service, sound and visual stimulation into Chinese style. For instance, KFC use some traditional Chinese Cartoon character in its décor and also make these character toys as gift for children. These restaurants always play some Chinese popular music. KFC China purchase more than 95 percent raw material in regional area while MacDonald still import some of their material from the United States. Market Positioning

KFC and MacDonald both focus on urban families as target consumers, but there are some deviations when choosing which specific group (children, young parents and young people). Before 2004, MacDonald insisted focusing on families, which have children, as their core customers, then young people. But we need to realize that children do not have direct purchasing power so that MacDonald need to add more nonprofit cost such as play field to attract these group’s parents, which known as direct purchasing group. Conclusions

KFC is so successful that it is a good example for international restaurants, especially fast food restaurants. Nowadays, about more than 20 foreign-owned chain restaurants open their outlets in China. Here is a chart of the basic information of these restaurants (Bell & Shelman, 2011). The Chain Restaurants in China

Burger KingOpened its first outlet in 2005 It has about 3 dozen restaurants in China. Dairy QueenMore than 300 Chinese outlets McDonald’sOpened its first outlet in 1990
It has about two thousands outlets in China. PAPA JOHN’SIt has about 169 outlets in China. PIZZA HUTMore than 500 dine-in restaurants and 120 delivery-only outlets STARBUCKSIt plans to have 1500 outlets by 2015 TACO BELLIt was shut down in Chinese market after five years experiment. WENDY’SConsidering expansion in Chinese market.

From the chart above we can tell that there is many other chain restaurants want to expand their brands into the Chinese market. I conclude some general strategies for the chain restaurants to explore and expand their brands into Chinese market. Standardization

Standardization means that companies can control their machines to ensure their stand levels of their QSC (quality, service and cleanliness) at their foreign chain outlets. This is important because it fits a positive image in Asia countries that American fast foods are hygienic and standardized taste. Companies can also train their employees to follow the standard operating process (SOP). It is easier and more effective to manage employees under SOP in chain stores. Localization

Meanwhile, localization strategies are even more important than standardization strategies. Dr. Belk (2000) had said that they should clothe foreign companies’ brands in local costumes. The common practice for foreign companies to entry and expand in transitional markets, including China, is to localize of language, advertising content, domestic offerings and even product meanings. They should Utilize Culture Values. Chinese culture is one of the most unique cultures in the world.

The consumption habits and culture values are particularly different from others, especially Western culture. Foreign companies should utilize Chinese culture values and cultural symbols effectively. Some specific strategies are as following: They can convey their philosophy by using multicultural advertisement. Advertisement is recognized as one visible aspect of the culture of consumption (Wang, 2000). This would be the most effective way to influence the target customers. For instance, one of Starbucks’ winter television advertising is telling audience a story about how young people meet, know and fall in love in Starbucks during the Chinese New year. This advertising is a big success that it has been clicked on youku( one Chinese local video website like YouTube) millions of times. Many young people went to Starbucks and ordered a cup of winter special. Moreover, they should cater to the captious palate of consumers. Their products and menus should not only meet consumers’ desire for western style products but also cater to traditional Chinese taste. Building good relationship

The Chinese Government welcomes investment from western countries. Companies build logistic networks with the Chinese government is so important to the entry and expand process in China. Nowadays, the Chinese government concern more about food safety so that understanding the Chinese Food Safety Standard is very essential.

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