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Kfcs Radical Approach to China

By pkushaowj Feb 03, 2013 3829 Words



KFC’s Radical
Approach to China
To succeed, the fast-food giant had to throw out its
U.S. business model. by David E. Bell and Mary L.

With compliments of...

The Globe

At a KFC in Beijing

KFC’s Radical
Approach to China


To succeed, the fast-food
giant had to throw out its U.S.
business model. by David E.
Bell and Mary L. Shelman

2 Harvard Business Review November 2011

lobal companies face a critical
question when they enter emerging markets: How far should they go to localize their o erings? Should they
adapt existing products just enough to
appeal to consumers in those markets? Or
should they rethink the business model
from the ground up?
The typical Western approach to foreign
expansion is to try to sell core products or
services pretty much as they’ve always
been sold in Europe or the United States,
w ith headquarters watching closely to
make sure the model is exported correctly.
This often starts with selling imported
goods to the expat community or opening
one or two stores for a trial run. Once such

an approach is entrenched, companies are
reluctant to rethink the model. U.S. retailers and food corporations that have spent years saturating the huge home market
tend to cling to what has worked in the
past. Domino’s Pizza nearly failed in Australia because it underestimated the need to adapt its offerings to local tastes; only
after it turned the country over to a local
master franchisee did Domino’s become
the largest pizza chain there.
A master of adaptation is the Swiss food
giant Nestlé, which has created an array
of products that incorporate differing regional avors—and cater to local tastes—in co ee, chocolate, ice cream, and even water. For a hundred years Nestlé’s country




KFC China’s
Blueprint for Success

managers have been empowered to say
no to the head o ce if a product or a campaign doesn’t suit their locales. Perhaps the greatest tribute to the strategy is that many
consumers around the world believe Nestlé
is a local company.
One of the most impressive stories of a
U.S. multinational in an emerging market is
unfolding right now in China: KFC is opening one new restaurant a day, on average (on a base of some 3,300), with the intention of reaching 15,000 outlets. The company has achieved this success by abandoning the dominant logic behind its growth in the United States: a limited menu, low

prices, and an emphasis on takeout.
We recently studied KFC China’s transformation of the business model that had made Kentucky Fried Chicken a global
brand, and we learned how, in the process,
the company accumulated strengths and
competencies that now pose formidable
barriers to competitors. KFC China o ers
important lessons for global executives
who seek to determine how much of an existing business model is worth keeping in emerging markets and how much should
be thrown away.

Five Competitive Advantages

In 1987, when the rst Chinese KFC opened
in Tiananmen Square, Western-style fastfood restaurants were unknown in China. Many Chinese still wore the tunic suits of
the Mao era, and bicycles were the main
means of transportation. KFC was a novelty, a taste of America. It was a place where residents with spending money could go
for a special occasion. Although customers
didn’t like the food much, KFC made steady
progress, according to Sam Su, now the
chairman and CEO of Yum! Brands China
Division, which owns KFC and a number of
other brands in the country.

In 1992, after the Chinese government
granted foreign companies greater access
to markets, KFC China’s managers gradually developed the blueprint that would transform the chain. Like every other multinational in China, KFC made its way up the learning curve by trial and error. But

the strategy that emerged was remarkably
clear and embodied five truly radical elements: turning KFC into a brand that would be perceived as part Chinese; expanding
rapidly into small and midsize cities; developing a vast logistics and supply chain organization; extensively training employees in customer service; and owning rather than franchising the restaurants.

KFC China’s executives believed that
the company’s U.S. model, although good
enough to do moderately well in the largest
Chinese cities, wouldn’t lead to the level of
success the company sought. They understood that in China, as in many other developing countries, food is at the very heart of society, inextricable from national and regional cultures, and that an abundance of avors and an inviting ambience would be

necessary to win over consumers in great
Execution of the strategy turned on
a fluke of corporate ownership. With a
closely involved parent, KFC China might
not have been free to pursue its homegrown strategy. But the chain was then a unit of PepsiCo, which took a hands-off
approach—it was more concerned with
beating Coca-Cola than with selling fried
chicken. As long as KFC China’s nancial
results were good, PepsiCo was happy. Su
(who joined KFC China in 1989) created a
knowledgeable, motivated top management team, hiring ethnic Chinese and painting a scenario they could believe in:
T he company they would build would
make China a better place.

KFC China’s menus typically include
50 items, compared with about 29 in
the United States.

KFC China’s success in winning
over Chinese consumers grew
out of a deep understanding of
the differences between established and developing markets
and a willingness to radically
alter the U.S. business model.
KFC’s approach may not apply
across the board, but it suggests
a mind-set that can position
multinationals to win in emerging markets.

KFC China’s five competitive advantages all depart from the U.S. model.

Infusing a Western brand with Chinese characteristics. The company’s

managers sought to stretch the brand so
that consumers would see KFC as part of
the local community—not as a fast-food
chain selling inexpensive Western-style
items but as restaurants offering the variety of foods and the traditional dishes that appeal to Chinese customers. They
enlarged the outlets, which are about twice
the size of those in the U.S., to allow for bigger kitchens and more floor space where customers can linger. They made a special
effort to welcome extended families and
groups. In the United States, by contrast,
KFC outlets are designed primarily for takeout—most of the dining is done at home. KFC China’s menus typically include
50 items, compared with about 29 in the
U nited States. The menu variety adds
traffic and encourages repeat visits. The
company introduces about 50 new products a year (some of them are o ered only temporarily), compared with one or two
in the U.S. Its executives have what they
consider to be a very aggressive program
for new product development, which is
handled by a committee of managers from
m arketing, operations, product safety,
and the supply chain. Menus offer spicy
chicken, rice dishes, soy milk drinks, egg
tarts, fried dough sticks, wraps with local
November 2011 Harvard Business Review 3




In an effort to
please local consumers, the company reinvented its
menu and varied
spiciness levels
from region to

KFC established 16
beachheads as a
way of quickly
expanding throughout the country.

In the absence of
logistics providers,
KFC China created
a distribution
system to ensure
adequate and highquality supplies.

sauces, and fish and shrimp burgers on
fresh buns. Spiciness levels are very important to customers. In the chain’s early days, when the same recipes were served at all
outlets, Shanghai customers complained
that dishes were too hot, while diners in
Sichuan and Hunan complained that they
were too bland. So the company changed
its recipes to suit the regions. It also o ers
congee, a popular rice porridge that is hard
to make at home, which is KFC’s number
one seller at breakfast.
The extended menu means that food
preparation is more complex in Chinese
KFCs than in American ones and requires
more hands (thus the bigger kitchens).
These outlets typically employ 60 people—
nearly twice as many as in the U.S. Often
one of those employees is a hostess who
greets customers and organizes pastimes,
such as learning English songs, for young
children in play areas.
With all this activity to support, KFC
c an’t position itself as the cheapest dining option—nor does it want to. Customers spend the equivalent of $2.50 to $3.50 per visit, a price point that puts KFC way
above street vendors and local restaurants
and even somewhat above other fast-food
chains. Although young “white collars”
in Shanghai might eat a KFC lunch with
friends once or twice a month, a family in
a smaller city might go once or twice a year,
to celebrate a special event.
4 Harvard Business Review November 2011

Across the
company, from
logistics to food
preparation to
customer service,
employees require
extensive training,
and experienced
managers must
be constantly
developed as the
company grows
and changes.

Focusing on owned
restaurants rather
than franchises
enabled the
company to make
changes where
necessary to meet
local needs.

Expanding rapidly. Rejecting the measured growth of its China competitors and of KFCs in other countries, KFC China set
its sights on rapid expansion. One factor in
this decision was the presence of McDonald’s in China’s four largest cities. Rather than go head-to-head with the Big Mac,
KFC decided to embrace smaller cities and
to build a national business with outlets all
over the country. Scale allows the company
to reduce costs, and being the rst to enter
a city means getting the pick of locations
with good foot tra c and visibility. Being
first also means garnering free publicity
when o cials celebrate an outlet’s opening
as marking the city’s coming of age. Moreover, a national presence means that KFCs (and other Yum! outlets) are popular with
mall developers.
KFC rushed to establish a presence in 16
locations from which it could grow and develop. By 1999 it was opening dozens of restaurants a year, and in 2002 it picked up the pace even further. (In 2008 Yum! Brands’
annual opening rate in China surpassed
500 restaurants, most of them KFCs—compared with 103 new KFCs in the United States.) From site selection to grand opening, it takes KFC China four to six months to bring a new restaurant into the world—

about half the time required in the U.S.
Some 700 Chinese cities now have outlets.
With KFC as its agship chain, Yum! has
become China’s largest restaurant com-

Concern in the
West over high-fat,
foods prompted the
company to begin
changing its menu
and educating
consumers about

pany by far, with more than 250,000 employees and about 40% of the market for fast-food chains. KFC’s rapid expansion in
China has allowed the company to widen
the gap between itself and competitors:
McDonald’s has about one-third as many
outlets and owns a 16% market share.
Developing a logistics network. In
the United States and Europe, fast-food
chains rely on networks of distributors to
ensure that food is handled properly and
kept refrigerated from the farm to the restaurant. No such networks exist in many of the world’s emerging markets. To meet
this challenge, KFC China established a distribution arm in 1997, building warehouses and running its own fleet of trucks. This
was an expensive undertaking, but necessary if the company was to expand rapidly, carry a lengthy and complex menu, and introduce new products quickly. That same year the company implemented a sup plier rating system that allows managers throughout China to concentrate purchasing with the suppliers that perform best. Food safety is a matter of paramount

importance, especially given Chinese consumers’ concern in recent years over incidents involving tainted milk powder and contaminated livestock feed. KFC China
had a brush with this issue a few years ago,
when a colorant that had been linked to
cancer was found in one of the company’s
sauces. Although the problem was resolved


quickly, Yum! China reported a resulting
30% drop in operating pro t in the second
quarter of 2005.
KFC China closely monitors the entire
supply chain, all the way back to animal
feed companies and other input providers,
and it trains employees in personal hygiene,
including how to dress for the workplace
and how often to wash their hands. It now
has the most advanced and integrated
cold-chain system in China, with 11 fullservice logistics centers and six satellite c enters serving every province except
Tibet. To circumvent the tra c jams that
sometimes extend for miles in the winter,
it relies on contingency plans that involve
renting temporary warehouses and reserving space on cargo airlines. Most products are sourced in China.
Buying locally is essential to keeping costs
low, and it strengthens the parent company’s relationship with the Chinese gov-

ernment. The policy has a few unavoidable
exceptions, including certain herbs and
spices—for KFC’s “secret” fried chicken
recipe—that can’t be obtained in China.
But the company works with its suppliers
to build their capabilities and capacity; it
is even working with growers to introduce
U.S. varieties of sweet corn.

Training employees in service.

When KFC opened in Beijing, it was one of
the first companies to promote excellent
c ustomer service—a concept then unfamiliar in China after decades of commu-

New recruits at KFC
often have to be taught
basic people skills in
order to interact with


nism. But despite an abundance of willing
workers, sta ng is a perennial obstacle. In
fact, it is the limiting factor in the chain’s
expansion, according to Sam Su. To maintain its current restaurant-opening rate, KFC needs at least 1,000 new managers
and 30,000 new crew members a year, and
they must be ready the minute an outlet
opens, because it is likely to be packed. The
company prides itself on being a “learning
organization.” Teams of new employees
work side by side with experienced ones
in established outlets; once trained, they
move to a new location.
Teaching employees how to interact
w ith customers is no small matter. Onechild families and the proliferation of home computers mean that Chinese children interact less with other people than they did in previous generations. New recruits at

KFC often have to learn basic people skills
and teamwork.

The Chain Restaurant Landscape in China
Ever since KFC China opened its first outlet, in Beijing
in 1987, the number of foreign-owned chain restaurants
has grown steadily in China. Here’s a look at some of them.


about three dozen restaurants
in China, where its first outlet
opened in 2005. In 2010 an
executive said that Asia would
be the brand’s largest growth
engine within three to five
years but that BK planned to
proceed cautiously in China.


some 300 Chinese outlets.


opened its first restaurant
in China in 1990 and plans
to double the number of
outlets there to 2,000 by


TACO BELL was similarly

2013. The company says
its strong sales in the Asia/
Pacific, Middle East, and Africa
regions are led by results in
China, and it cites the appeal
of such conveniences as
delivery, drive-through, and
extended hours. Some 70%
of McDonald’s Chinese outlets
are open 24 hours a day.

some 500 dine-in restaurants
and 120 delivery-only outlets.
Like KFC, it has undergone
a transformation in China. It
now offers a lengthy menu
that includes seafood pizza,
beefsteak, and fried squid,
and it attracts an older and
more affluent crowd than KFC


positioned by Yum! as an
upscale restaurant, but it was
shut down in China after a
five-year experiment. Mexican
food, with its emphasis on
dairy and beans, didn’t appeal
to Chinese consumers.

STARBUCKS opened in

to increase the number of its
outlets in China from 155 to
300 within three years.

PIZZA HUT is a part

of the Yum! portfolio; it has

has only about 300
restaurants outside North
America. It announced
earlier this year that it was
considering expansion in

China in 1999 and has about
450 shops there; the company
plans to have 1,500 by 2015.
Executives say they believe
there is huge potential to drive
coffee consumption in China.
November 2011 Harvard Business Review 5





Taking on a New Challenge:
Chinese Food

Many other companies have followed
KFC’s example in customer service (last
year McDonald’s announced that it was
opening a Hamburger University in China),
but KFC’s training program functions exceptionally well, churning out a continual stream of new managers. This, like the
company’s extensive logistics network, is
an advantage that is di cult for any competitor to emulate.

Focusing on ownership rather than
franchising. In KFC’s early days, China

required foreign companies to have local
partners; but when the country became
more receptive to wholly owned foreign
enterprises, KFC China switched to a strategy of company-owned outlets—another way in which it challenged the dominant
logic. (More than 90% of Yum!’s outlets in
China are company owned, compared with
12% in the U.S. and 11% in other international markets.)
Franchising has long been a mainstay of
the fast-food industry, because it reduces
investment costs and risk and enables rapid
geographic expansion. It works well when
a pool of experienced, entrepreneurial candidates are available to run franchises and when restaurant operations are relatively
simple—built around, for example, a limited menu of easy-to-make products. But KFC China’s model was more complex and
evolving rapidly. Owning the restaurants
allows the company to closely control every aspect of their operation, from menu to decor, and to monitor results and the success of new products. It permits centralized purchasing, which reduces costs, and gives

the company a larger share of outlet pro ts.

The Risk of a Backlash

KFC China’s rapid growth poses challenges:
A highly visible company could easily become the target of a consumer or government backlash against the perceived negatives of fast food. Some Western health problems are already showing up in China.

The 2002 China National Nutrition and
Health Survey revealed that 22.8% of Chinese adults were overweight, up from 6% in 1982. The number of overweight and
6 Harvard Business Review November 2011

Yum! China’s strengths in service, logistics, and training have positioned the company to support additional restaurant formats, including a local one with which it had no experience: Chinese
fast food.
In recent years Yum! has experimented with developing East Dawning, a chain that takes its name from a line in an ancient Chinese poem. The
clean, efficiently run restaurants have
Chinese decor and serve Chinese food
exclusively—no U.S.-style fried chicken,
no pizza, no burgers. The chain, which
opened in Shanghai in 2005, offers such
favorites as beef rice and bean curd at
prices similar to KFC’s.
Yum!’s initial hope was to create a
large national chain, but Chinese food
poses significant challenges in a fastfood context: Noodles and vegetables must be prepared just before serving;
customers are highly discerning about
freshness and traditional flavors; and
tastes vary widely across regions. The
chain has relatively few outlets, and nationwide expansion is still a distant goal. Recently, Yum! has focused on acquiring a competitor, Little Sheep, a Hong Kong–listed chain of hundreds of
Mongolian-style hot-pot restaurants. By
2010 Yum! held a 27% stake in Little
Sheep, and earlier this year it proposed
to increase its ownership level to 93%.

obese children aged seven to 17 has tripled
to 8.1% over the past 10 years, according to
the same agency.
In the mid-1990s a fellow participant
at a seminar in the U.S. asked Su why he
would want to bring “junk food” to China—
a question that started him thinking deeply.
Aware of a growing sense in the West that
high-fat, high-carbohydrate foods play a
role in the obesity epidemic, Su asked himself how Yum! Brands could take action to forestall such problems in China.
In 2005 the company developed the
concept of a “new fast food” that would
be “nutritious and balanced” and promote
“healthy living.” It eliminated “supersize”
items and added roast chicken, sandwiches,
sh, shrimp, and more fruit and vegetable

dishes to its menus. KFC’s children’s meals
are served with vegetables and juice, although fries and soda can be substituted on request. Tray mats carry educational
messages. Nutrition information is printed
on every package. Hostesses teach lessons
on nutrition to kids.

A Confident, Dynamic Company

The results of the strategy of heavy localization have been impressive: In the first half of 2011 sales at Yum! China locations
that had been open a year or more rose
16%, compared with a decline of 2% at U.S.
locations. The restaurant margin for those
six months was 22%—well above the U.S.
margin of 11%. Yum! China revenues and
operating pro ts in 2010 were $4.1 billion
and $755 million, respectively; comparable
gures for the overall company were $11.3
billion and $1.77 billion. The third quarter
of 2010 marked the first time that China
revenue (more than $1.1 billion) had surpassed U.S. revenue, and many analysts expect that Yum!’s China business will be
twice as large as its U.S. business within
ve years.
Over time, KFC China has come to reect China itself in some respects: It is large, growing, con dent, and eager for variety
and new experiences. Most of all, it is, like
China’s economy, dynamic and capable of
expanding still further—at a remarkable
pace. Much of what the company has accomplished is the result of its homegrown strategy—and of the independence that
PepsiCo gave Su and his leadership team
in the early days. If there is an overriding
lesson to be drawn from KFC’s experience
in China, it is that when entering an emerging market, a multinational must decide whether it wants to garner quick extra sales
or to establish a long-term presence. If it’s
there for the long haul, it should install local managers whose vision is to build an organization that will last.
HBR Reprint R K
David E. Bell is the George M. Moffett
Professor of Agriculture and Business and
a senior associate dean at Harvard Business
School. Mary L. Shelman is the director of the
Agribusiness Program at Harvard Business School.

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