Case Study:Kentucky Fried Chicken and the Global Fast-Food Industry

Presented by:

Wajiha KhanFouzia Arshad

KFC Presentation Roadmap

• Brief History About the Company.• Merger and Acquisitions• PepsiCo Takeover• The Industry Overview and Performance

Highlights.• Internal Analysis.

– Current Corporate Strategy• SWOT Analysis

– Elaborated Marketing Strategy– Elaborated Strategic Management and

Leadership• Future Strategy Layout

– Strategic Vision and Mission Statement– Marketing Strategy– HR and Franchisees Strategy

• Monitoring and Evaluation of the Strategy

KFC Evolution Video

Origin of KFC

The restaurant in North Corbin, The first Kfc restaurant situated in Kentucky where Colonel Sanders south salt lake, Utah and since itsdeveloped Kentucky Fried Chicken. replaced by a new Kfc.

History of KFC

• In 1952, Harland Sanders began his travel around the United States to find prospects franchisees for its Unique Chicken Recipe.

• By 1960, Colonel Sanders had granted KFC franchises to more than 200 take home retail outlets and restaurants across United States

• In the year 1963, KFC franchises touch the mark of 300 with the revenue of $500 million.

• On Sander’s 74 birthday he was eager to lessen down the load of his business, so he sold his business to two louisville businessman Jack Messey and John Young brown Jr. for $2 million.

• By the late 1960s KFC turned its attention to the Global Markets and joined hands with Mitsuoishi Shoji Kaisha, ltd that enabled them operation in England and Japan

The takeovers of Heublein, Inc. and R.J. Reynolds Industries, Inc.

• In 1971, Heublein were in negotiations with the KFC• Heublein was in the business of Producing vodka, mixed

cocktails and other alcoholic beverages• Conflicts started between the managements• By 1977, new restaurant opening was lowered to 20,

remodeling of restaurants started as the services standards fell drastically.

• This strategy enabled KFC to gain better control of the existing franchises and then expand.

Heublein, Inc.

• In 1982, R.J Reynolds Industries acquired Heublein• This acquisition for a part of their corporate strategy of

diversification.• R.J Reynolds believed the KFC management were well versed

to manage this business hence they had no interferences, which avoided various operating problems of KFC

• In 1985, RJR acquired Nabisco Corporation and sold KFC to Pepsi Co one year later

R.J. Reynolds

Industries, Inc.

KFC Commercial

KFC Product Line

Burgers:• Zinger Burger• Colonel’s Chicken Burger• Colonel’s Fillet Burger• SUB60• Zinger Jr.Chicken:• 1 piece• 2 pieces• 5 pieces• 10 pieces

Continued….

Combos:• Chicken Meals• Sandwich Meals• Family MealsDesserts & Beverages:• Fruit Salad• Regular & Large Drink• Regular & Large Mineral Water• Tea• Scoop of Walls Ice cream• Coffee

Continued…

Snacks & Side Orders:• 5 & 20 Pieces Nuggets• Arabian Rice• 5 & 10 Pieces Hot wings• Dinner Roll• Regular & Large Fries• Hot Shots• Corn on the Cob• Hot & Crispy Soup• Cole Slaw

Pepsi Co Profile

•Pepsi Co, Inc was formed in 1965 with a merger of Pepsi Co. and Frito-lays, Inc.•Business lines– Soft drinks

• Pepsi Cola• Diet Pepsi• Mountain Dew

– Snacks• Lays Potato Chips• Doritos tortilla• Tostitos tortilla chips• Ruffles Potato Chips

Corporate Strategy

• The groups Acquired major businesses such as North American Van Lines, Wilson Sporting goods, and Lee Way Motor Freight. However it lacked management skills to operate these businesses.

• In 1984, Don Kendall the Chairman and CEO of PepsiCo restructured the business and got rid of the consumer product orientation and PepsiCo was divide into 3 divisions:– Soft drinks– Snack foods, and– Restaurants

Restaurant Business and Acquisition of KFC

• Why did PepsiCo entered the Restaurant Industry?• Because,

– Same Patterns of Marketing– Additional venue for the Sale of the Pepsi Co brands (Soft drinks)– Management Skills could be transferred and will be compatible in

these business.

• So the acquisition initiated,– 1977: Pizza Hut– 1978: Taco Bell– 1986: KFC

• This acquisition gave them the leading market share in all the segments.

Human Resource Restructuring

• It was a collision between two different cultures.– PepsiCo: Performance Oriented– KFC: Laidback and Loyalist

• Harsh Comments were exchanged between the managements.

• Two massive downsizings.

• Immense Pressure on KFC management and employees

Poor Relations with the Franchisees

• In 1989, John Cranor was appointed the President and CEO of KFC.

• John Cranor in the same year addressed the Franchisees to explain the details of new franchising contract. These were:– PepsiCo can takeover the weak

franchises– Relocate Restaurants– Existing KFC outlets will not be

protected against competition from new outlets.

– PepsiCo will have a right to increase royalty fees

Continued…

• This address of the Cranor backfired and resulted in the Protest of the franchisees.

• However in 1996, the most object able parts were removed by KFCs new president David Novak.

• A new contract was ratified by KFCs Franchisees in 1997.

PepsiCo Divestiture

• Between 1990 and 1996, PepsiCo sale grew by 10% surpassing $31 billion.

• However troubles were faced in the fast food segment where the margin reduced from 8% to 4% in 1996.

• As a result, PepsiCo food division absorbed half of the company’s capital spending and generated one-third of the cash flows, declining its ROA and stock price as compared to competitor Coca Cola.

• In 1997 PepsiCo decided to forward its restaurant business to a new company called Tricon Global Restaurant.

Continued..

• PepsiCo’s objective was to reposition itself as a soft drink and snack brand.

• Later PepsiCo acquired Tropicana Products.

• By the divestiture of Pizza Hut, KFC and Taco Bell sales fell down by $11.3 billion and asset fell by $7 billion.

• However the operating margin rose from 11 to 14% in 1999

and ROA from 11 to 16 % in 1999

Video on Fast Food Industry

Fast Food Industry

• According to National Restaurant Association, food service sales increased by 5.4% to $358 billion in 1999.

• More than 800,000 restaurants and 11 million people employed.

• The industry comprises of 8 major segments with Mc Donald being the top performer with sales of $19 billion in 1999.

Chicken Industry

• KFC is the market leader in the Chicken Industry with the Market Share of 55.2% and sales of $ 4.4 billion in 1999.

• However it has witnessed a decline of 15% in the last 10 years.

• The competitors like Chick-Fil-A and Boston market increased combined market share by 17%.

• It was assumed that KFC will face competition from Boston Market but the company filed bankruptcy due to mounted debt problem.

KFC Future Strategies

• Drive aggressive international expansion and build strong brands everywhere

• Dramatically improve U.S. brand positions, consistency and returns

• Drive industry-leading, long-term shareholder and franchisee

value

Continued…

Particulars Growth RateSales (in million)KFC 4%Popeyes 10%

Boston Market 16%Number of US Restaurant

KFC 1%

Popeyes 6%

Boston Market 11%Sales Per unit

KFC 3%Popeyes 3%Boston Market 5%

Kentucky Fried Chicken Corporation Current Strategies

• Marketing Strategy– In 1990, they focused on three types of Chicken: Fried,

Extra Crispy, and Tender Roast.– Launch of Buffet– Launch of Crispy Strips and Chicken Sandwich– Drive through and delivery points at nearby locations– Introduction of “2 in 1” and “3 in 1” restaurants

International Operations

• By year 2000, more than 50% of the KFCs restaurants were located outside USA.

• These restaurants were mostly owned by the country’s local entrepreneur who possess better understanding of the market.

• Of 5,595 KFC restaurants 69% were franchised 21% were company owned and 10% joint ventures.

• In larger markets such as China, Mexico, UK, Thailand Australia and Canada more emphasis was laid on company owned restaurants.

Latin America Market

• KFC operated 438 restaurants in Latin America in 2000. Its established subsidiaries in Mexico, Puerto Rico in 1960s and launched company owned franchises.

• Franchises were also allocated to local entrepreneurs and further subsidiaries were formed in Venezuela, Virgin Island and Brazil.

• However the operation from Brazil Shut down.

• But still KFC is the market leader in the Latin America Region and enjoys the first mover advantage.

Risk Assessment in Latin America• NAFTA had eliminated tariffs on goods shipped between

Canada, Mexico and US.• Many countries such as Chile, Argentina, Paraguay, Uruguay

and Brazil had also established free trade policies.• That’s made Latin America an attractive place for investors.• In 1992, researcher Kent D. Miller developed a framework

for analyzing country’s risk and attractiveness of a country for future investment.

• He argued that firms must examine country, industry and firm factors in order to fully assess country risk.

• Many US companies believed that Mexico was an attractive country for investment . Its population was more than one-third as large as the US and represented a large market for us goods and services.

Continued…

• However, the volume of trade between the US and Mexico has increased significantly since the NAFTA went into effect in 1994.

• One year after NAFTA went into effect Mexico posted its first balance of trade surplus in six years

Risk and Opportunity

• KFC face variety of risk and opportunities in Mexico. It had eliminated all of its franchises in Mexico and operated only company owned restaurants that enable it to better control over quality, service and restaurants cleanliness.

• But company owned franchises required more capital than franchises did.

• MacDonald's was growing its restaurants base rapidly and was beating KFC in terms of sale.

• Even Wendy's had also announced plans to open 100 restaurants in Mexico by 2010.

• Habib’s , brazil 2nd largest fast food chain. Habib’s served traditional eastern dishes at prices below KFC and MacDonald's. It planned to open 400 units in Mexico by 2005

KFC Strategy in Mexico

• KFC wanted to sustain its leadership position in Mexico and the Caribbean.

• Second strategy was to invest more capital in these large markets to challenge existing competitors.

• Another strategy was to focus on building a franchise base through out the Latin America

SWOT Analysis

• Strengths– Market leader in the

Category– Outreach in 85 countries– Stable parent company– Good and Consistent taste– Pioneer Brand Image

SWOT Analysis

• Weakness– Limited Product line.– History of acquisition and

transformations which limited their growth.

– Human Resource weaknesses

– Past Strategy Failure– Unhealthy segment of

Fried Chicken– Cannibalization of the

Products

SWOT Analysis

• Opportunities– Extend Product line.– Acquire small chicken

companies of the segment.

– Move towards developing and untapped countries.

– Grilled Chicken, Roasted Chicken, and Bar-b-q chicken segment

SWOT Analysis

• Threats– Increasing Growth of the

Competitor– Sandwich market

introducing me 2 products such as Mc Chicken and Crispy Chicken Burger.

KFC Controversies

• Kentucky Fried Cruelty• KFC supporting Racism

New Strategy Formulation

• Vision Statement:

“We believe in being the best in chicken category by extending our product range

and increasing our outreach, we also believe in acquiring small chicken

company and extend our company’s portfolio”

New Strategy Formulation

• Mission Statement:

“Our mission is to improve and expand in the businesses maintaining excellent

relationship with our suppliers, franchisees, customers and employees.”

New Strategy Formulation

• Objectives:– Increase sales by 5-7% annually.– Acquisition of small grilled, bar-b-q and

roasted chicken franchises.– Expansion of All in one unit restaurants

providing all the brands under one roof.– Maintaining better controls on the franchises– Better Animal Rights Control System.

Future Marketing Strategy

• Induction of new products.• Grilled Chicken.• Developing acquired restaurant

to compete against KFC.• This Strategy will benefit the

group and will also help KFC to stick to the original recipe and less Cannibalization will be seen amongst the products.

• Using Innovative mediums for Marketing such as Facebook , twitter and their websites.

Franchisees and Employee Development

• Training and Development of all franchisees on quarterly basis enabling them to enhance service standards.

• Employee rotation in the international countries so that they could better understand and formulate the operational and functional Strategies

Monitoring and Evaluation

• Third Party Audits.

• Performance evaluation and devising the future Short term Strategies to overcome quarterly highlights problems.

Questions?

Thank You