KFC andthe Global Fast Food Industry (703).

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KFC and the Global Fast Food Industry (703)

1.        The five-force analysis suggests that KFC faces a very active and rigorous competition.

·        There is extreme rivalry in the fast food industry. There are more then a hundred other fast food businesses that KFC competes with.

·        Statistics show that there is always threat of new competition as there are new chains developing from time to time in the industry. The reason behind such a threat existing is due to the fact that the industry is a highly profitable market.

·        There a various number of substitutes that KFC faces as competitive forces such as fine dining, different fast food concepts such as Mexican, Chinese, Italian etc.

·        There is not a significant pressure from supplies in terms of bargaining as there are also a vast number of supplies available to supply the fast food Industry.

·        When it comes to bargaining between seller and buyer, there is heavy competition, due to the fact that there are many other fast food chains with the same restaurant concept as KFC, with whom KFC competes with.

2.        The competitive factors to be considered to succeed in the fast food industry: -

·        To succeed a fast food chain should always be working in improving their quality of food they offer to their consumers.

·        The development of new product from time to time is critical to stay on top of the market; consumers always look forward to new products that businesses have to offer.

·        The frequent analysis of demographics helps the business to keep active awareness of a risk in the change of their target market in a particular area. The analysis helps businesses keep track of any change needed to cater to changing demographics.

3.        KFC’s internal strengths and weaknesses: -

·        One of KFC’s internal strengths is its early experience in the international market. Due to the fact that it was among the first to enter the market it had early experience on what international markets demanded while other chains where still experimenting.

·        The independent franchising strategy resulted to loyal and competitive franchisees, which leaded to a strong competitive force.

·        A weakness that KFC had was the fact that there menu was limited and new products where rarely or slowly coming in.

External opportunities and threats

·        A external opportunity that KFC has is that it can expand its operations to Latin America which consisted of countries which held potential for a new fast food chain.

·        The threats that KFC would have externally would be the competition against them that is every growing and new ones erupting.

·        Another threat would be the political, Economic and natural risks of countries they would like to expand into.

4. Major strategic issues surrounding KFC’s decision to expand or freeze growth in Latin        America: -

·        One factor that KFC’s considered to be the reason to freeze growth, is because the countries have constant changes in political status and economic environment.

·         Expanding growth in the some Latin countries was beneficial because of the free trade agreement that was arranged between them and the U.S.

·        Due to the fact that geographic proximity between the countries was as such that communication and travel was made easy, this point would hold as a plus in the idea of expanding to these countries.

 To Expand in Mexico: -

·        Transportation costs where relatively low.

·        American products where highly excepted in Mexico

·        There was free trade between the countries.

·        Labor was by far cheaper in Mexico then in the U.S

To Freeze Operations in the U.S

·        High import and export tariffs being imposed.

·        Most of the industries where owned and run by the government, thus causing less effort being put in importation.

5. Latin America is a attractive market with great opportunities, but great opportunities come with great risks. KFC will have to definitely undergo a certain level of risk if they expand to Latin America. The costs of operating in these countries are relatively low, there is good understanding between government and the target market is readily available. The risks are mainly to do with the fact that political and economic conditions of these countries are highly unstable. The alternative to expand internationally is to do further develop and expand there present operations in the U.S.A.

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 KFC and the Global Fast Food Industry

Q3) What was PepsiCo¡¯s corporate strategy during the 1960s and 1970s?  How did it differ from its corporate strategy during the 1980s and early 1990s?

PepsiCo¡¯s corporate strategy was acquisitions. PepsiCo, Inc, was formed in 1965 with the merger of the Pepsi-Cola Co. and Frito-Lay, Inc. These corporate strategy made PepsiCo its one of the largest consumer products companies in the United States. Pepsi-Cola¡¯s major business was the sale of soft drink concentrates to licensed independent and company owned bottlers that manufactured, sold, and distributed Pepsi-Cola soft drinks. Frito-Lay manufactured and sold a variety of snack foods.

PepsiCo was heavily invested on an acquisition similar to RJR. PepsiCo bought a number of companies in area unrelated to its major businesses. Acquisition included North American Van Lines, Wilson Sporting Goods and Lee Way Motor Freight. But corporate strategy was not so success, because the management skills required to operate these business lay outside of PepsiCo¡¯s area of expertise.

PepsiCo restructured company operation by chairman and chief executive officer Don Kendall in 1984. He was divested companies which that business did not support PepsiCo¡¯s consumer product orientation and sold foreign bottling company and Kendall recorganised PepsiCo along three lines: soft drink, snack food, and restaurants.

PepsiCo¡¯s strategy of diversifying in to three distinct but related markets-soft drinks, snack foods and fast food restaurants to created one of the world¡¯s largest consumer products companies and a portfolio of some of the world¡¯s most recognizable brand.  

   

PepsiCo entered the restaurant business with acquired Pizza Hut with 3200 unit restaurant system in 1977 and Taco Bell was merged into a division of PepsiCo in 1978. The restaurant business completed PepsiCo¡¯s consumer product orientation.

PepsiCo believed that its management skills could be easily transferred among its three business segments. Because of both of soft drink and fast-food business has some of same pattern of marketing factors. PepsiCo¡¯s restaurant chains provided an additional outlet for the sale of Pepsi soft drinks. Both business segments also could be marketed together in the same television  and radio segments, thereby providing higher returns for each advertising dollars. To complete its diversification into the restaurant segment, PepsiCo acquired Kentucky Fried Chicken Corporation in 1986.  The acquisition of KFC gave PepsiCo the leading market share in chicken(KFC), pizza(Pizza Hut), and Mexican Food(Taco Bell).

 

KFC and the Global Fast Food Industry

In 1939, Colonel Harland Sanders first gave the world a taste of his most famous creation, Original Recipe Kentucky Fried Chicken, featuring that secret blend of 11 herbs and spices. Since that time, millions of people the world over have come to love his one of a kind chicken, homestyle side dishes and hot and fresh biscuits.

We still take pride in doing things The Colonel's way, utilizing only the highest quality ingredients, innovative recipes, and time-tested cooking methods.

So come and dine with us, or take some home - any way you like it. Only KFC has so much tasty chicken, fresh from our kitchens, just for you.

KFC Corporation, based in Louisville, Kentucky, is the world's most popular chicken restaurant chain, specializing in Original Recipe®, Extra Crispy™, Twister® and Colonel's Crispy Strips® chicken with homestyle sides.

Every day, nearly eight million customers are served around the world. KFC's menu includes Original Recipe® chicken -- made with the same great taste Colonel Harland Sanders created more than a half-century ago. Customers around the globe also enjoy more than 300 other products -- from a Chunky Chicken Pot Pie in the United States to a salmon sandwich in Japan.

KFC has more than 11,000 restaurants in more than 80 countries and territories around the world. And in quite a few U.S. cities, KFC is teaming up with sister restaurants, A&W, All-American Food™, Long John Silver's, Taco Bell and Pizza Hut, selling products from the popular chains in one convenient location.

Over fifty years ago, Colonel Sanders invented what is now called "home meal replacement" -- selling complete meals to busy, time-strapped families. He called it, "Sunday Dinner, Seven Days a Week."

Today, the Colonel's spirit and heritage are reflected in KFC's brand identity -- the logo features Colonel Harland Sanders, one of the most-recognized icons in the world.

KFC is part of Yum! Brands, Inc., which is the world's largest restaurant system with over 32,500 KFC, A&W All-American Food™,Taco Bell, Long John Silver's and Pizza Hut restaurants in more than 100 countries and territories.

 

Case 10:  KFC and the Global

Fast Food Industry

1.        How well did KFC fare under its various owners — Heublein, Reynolds, and PepsiCo? What value did they add to the KFC enterprise? Did they have anything to offer KFC that would help KFC improve its financial performance or competitive strength?

Under Heublein, quality control and restaurant cleanliness was a problem. By assigning a management team to redirect KFC’s strategy they sought to solve the problems that KFC was going through at the time. They achieved gaining better control of the operations and then only began to build new restaurants.

In my analysis Heublein when acquiring KFC was under the impression that KFC was in a positive gowth stage at the time and did not require much management intervention or in other words there was no need to re-invent the wheel. This was coupled by the fact they had very inexperienced managers with regards to the restaurant business did little to strategise the direction odf KFC. This as we know brought about other operations related problems.

Under Reynolds (as opposed to Heublein), they differed in management style for KFC whereby, they was allowed to operate on its own with little interference. Eventually KFC was divested when RJR decided to redefine itself as a leader in the consumer foods industry. In my analysis, RJR obviously did not bring about much improvement to KFC. If anything, they would have hampered the image of KFC due to its affiliation with a cigarette manufacturing company. Fortunately the acquisition of KFC under RJR was only for a year and the damage was not extensive.

PepsiCo was predominantly in the consumer product orientation, this provided them with the experience required with operating the restaurant business. Prior to acquiring KFC it had already owned Pizza Hut and Taco Bell; this provided the relevant know how in implementing strategies that would improve the financial performance and competitive strength of KFC. Not forgetting the fact that PepsiCo is on e of the world’s largest consumer product companies and a portfolio of some of the world’s most recognizable brands.

2.        What are the chief economic and business characteristics of the global fast-food industry?

The global fast food industry evolves in the typical manner that of how every one of its players does. Its characteristics are recognizable brand names, the creation of franchising, local management of its restaurants, maintaining basic food menu and introduction of local flavours to create a sence of belonging to of to that locality.

3.        What forces are driving change in the industry?

In my analysis the growing incomes of consumers and the sophistication that comes with it provides affordable alernatives. The full-service restaurants that provide a different amosphere and ambience provides this alternative. The demand for a more healthier life-style among consumers would create defection from fast food to more healthier food types.

4.        What does your 5-forces analysis of the fast-food industry tell you about the competition facing KFC?

KFC’s closest competition were Popeyes, Chick-fill-A, Boston Market and Church’s and in that order. The competition offered alternative dishes in its menu and other methods of chicken preparation which appealed to consumers who prefered healthier alternatives. Apart from that. Mature consumers, however prefered to patronize dinner houses and full-service restaurants. US immigrants tended to prefer ethnic foods and they patronized estrablishments that sold their native foods. The above reasons attributed to the lost of sales form 70.8% in 1989 to about 55.6% in 1999.

5.        What factors do you see as critical to competitive success in the fast-food industry?

Food menu should include healthier alternatives to cater for the more mature consumer. The fast food industry highest percentage of consumer age group are teenagers of whom is the group that have less spending power and are easily influenced by the pop culture. That being the case value meals and affiliation to pop idols should be emphasized. Adding local food type menu especially in international restaurants would appeal to the locals of that country.

6.        Is the fast-food industry attractive? What factors make it attractive? Unattractive?

The fast food industry is attractive due to the fact that that worldwide demand for fast-food was expected to grow rapidly duringb the next two decades. The rising capita per incomes worldwide made eating out more affordable for greated numbers of consumers.

7.        What is KFC’s current strategy and how well is it working? Do you like the company’s    competitive position vis-à-vis other fast-food chains?

It introduced a variety of new products and nenu items. It rolled a buffet that included some 30 dinner, salad and dessert items. It introduced Colonel’s Crispy Strips and five new chicken sandwiches. It then focussed on building smaller restaurants in non-traditional outlets. It also continued to experiment with home delivery and establised 2-in-1 units that sold both KFC andTaco Bell or KFC and Pizza Huts products.

8.        What are KFC’s internal strengths and weaknesses? What are its external opportunities and threats?

Strengths:

-insulated from currency fluctuations

-has a global brand name

-provides a tasty menu

-affordable prices

Weaknesses:

-limited resources and cash flow

-menu does not cater for healthier alternatives

-long distances between headquarters and franchises

Opportunities:

-NAFTA and Mercusor agreements that allow non-tariff and free-trade

-beef was becoming less popular due high fat content

-worlwide demand for fast-food growing rapidly

-internet development was breaking down communication and language barriers

     Threats:

-competitors (other fast-food operators, dinner reataurants and full service restaurants)

-long term value of the peso in Mexico

9.        What are the major strategic issues surrounding KFC’s decision to expand or freeze growth in Latin America and in Mexico in particular?

In Venezuela growth was freezed due high costs of operating in smaller countries. In Brazil the 8 restaurants was decided to be closed bacause it lacked the cash flow needed to support an expansion program in that market. KFC’s early entry into Latin America gave it leadership position over its competitors in Mexico and the Carribean. It expanded into Mexico and Puerto Rico because of their geographic proximity as well as political and economic ties to the United States. Latin America was also appealing due to the size of its markets, its common language and culture

10.        What are KFC’s alternatives for expanding internationally? Is the Latin American market attractive? Why or why not?

KFC has a number of reasons supporting the venture to expand internationally especially in the Latin American region. Geographic proximity made communications and travel easier and quicker between countries. NAFTA had eliminated tariffs on goods shipped between Canada, Mexico and the United States. The Mercusor signed in 1991, eliminated tariffs on trade among Argentina, Paraguay, Uruguay and Brazil. Other countries such as Chile and Argentina had also established free-trade policies that were beginning to stimulate growth. All these free-trade agreements would also benefit foreign establishments such as KFC as it would there would less ‘protection’ by the governments in that country towards the local companies thus creating fair game business practices in those countries.

11.        What recommendations would you make to KFC management regarding the company’s operations in Latin America and Mexico?

Extend the use of local suppliers in the form raw food supplies and distribution services. Create and add local food items on the menu that cater to Mexican or Latin American tastes. Create a management hub in the Latin American region to oversee operations of franchises in those countries. The non-tariff and free-trade agreements would only ease the management of these franchises. Form alliances with local restaurant chains of these countries; they would not be  a direct threat to the local restaurants. However they would be able to create presence and have an edge over other international fast-food franchises due to these alliances that already have significant market share.

1.0        Introduction

Colonel Harland D. Sanders established Kentucky Fried Chicken Corporation (KFC) in August 1952 in Salt Lake City. Due to the over-whelming response, Colonel Sanders cashed in his $105 social security check to begin franchising his dream.

In 1964, Harland Sanders (age 74) lessen his load by selling his business to Jack Massey and John Young Brown Jr, who turned their attention to the international markets. KFC subsidiaries were later established in Hong Kong, South Africa, Australia, New Zealand and Mexico.

In 1971, KFC entered into negotiations with Heublein, to discuss a possible merger. However, Heublein later acquired KFC as Brown decided to pursue other interests, which includes political career. Heublein was in alcohol beverages business and has little experience in the restaurant business. Conflicts quickly erupted between Colonel Sanders and Heublein management.

R.J. Reynolds (RJR) then acquired Heublein in 1982. R.J. took a more laid-back approach and allowed business to operate autonomously with little interference and because of this, RJR avoided many of the operating problems that plague Heublein during his ownership of KFC. Finally in 1986, KFC was acquired by PepsiCo, which was trying to grow its quick serve restaurant segment. The acquisition of KFC gave PepsiCo the leading market share in chicken (KFC) segments of the fast food industry.

By the year 2000, KFC was the world’s largest chicken restaurant chain and third largest fast-food chain. There have more than 10,800 KFC stores in more then 80 countries.

KFC fast food chains are currently under the restaurant division of PepsiCo Incorporated. The fast-food industry is highly competitive and includes external threats that are social-cultural, political, economic, operational, competitive, and substitutional. Some major threats include the changing attitudes of society towards healthier eating habits, the unstable business environment and diversion of fast food menus by other fast food chains.

2.0        Problem Identification

1.        Strategic Growth of KFC

2.        Challenges KFC faces when they globalize

3.        Why KFC acquisition never worked well under R.J Reynolds (RJR)

4.        The environmental risk and opportunities associated with international expansion, particularly looking at Mexico and Latin America.

3.0        Assumptions

i.        All the facts given to us are accurate at the time of printing of the case study.

ii.        Anything that happened to KFC after 2000 will not be reflected as it falls outside of the case study.

iii.        The financial figures provided are accurate and does not have to be proven.

 

4.0        Situational Analysis

4.1        SWOT Analysis

SWOT analysis was done to analyze KFC’s resource Strength, Weaknesses, external Opportunities, and Threats.

Strength        Weaknesses

i)        Proprietary recipes and technologyii)        Delivery of high quality / consistent foodiii)        Established / strong brand image and loyaltyiv)        Widely recognized market share leader in its segment (Refer to Fig 2 Market Share of KFC in Chicken Segment)v)        Operating efficiency vi)        Experience in international marketsvii)        Diversification (Taco, Pizza Hut & KFC)viii)        Cash rich companyix)        Cost sharingx)        Global advertising - having one expense on an ad for 3 productsxi)        Ample financial resources (Refer to Appendix 1)        i)        Too many substitutes in the marketii)        A number of outdated restaurants and restaurants are in deteriorating locationsiii)        Many restaurants are small and offer take-away onlyiv)        Lack of product innovation beyond chicken as KFC offers mainly deep fried chickenv)        Service and cleanliness could be improved—problems here have hurt KFC’s reputation in those locations where service/cleanliness/quality problems existvi)        Relying on independent franchisees for expansion in many markets adds to the difficulty of maintaining consistent quality and cleanliness and otherwise striving for standardized operations from restaurant to restaurantvii)        Unhealthy food - Majority of the products offered are fried items, which are not suitable for the health conscious population.viii)        Spent quite a bit on acquisition, which not all are profitable. ix)        McDonalds is the dominant market leader in the fast food chainx)        Difference in management style – between KFC laid back approach vs. PepsiCo’s performance driven culturexi)        Weak advertising and promotion

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Opportunities        Threats

i)        More varieties to be offered in the menu as customers are inquisitiveii)        Low labor cost in other countries, creating an opportunity for international expansioniii)        International markets-KFC well received in other countriesiv)        Expansion of product line – to embrace healthier choices to meet the market demands like having roasted or steamed chicken which have less oil contentv)        Co-branding with Pizza Hut and Taco Bellvi)        Malls, home delivery, and other non-traditional distribution channelsvii)        Upgrade of the facilities in the smaller outlets viii)        Localize the global ads to meet the customer’s cultureix)        Going into burger businesses x)        Localize the menusxi)        Introduce a brand new selling concept like having a buffet style where ...

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