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The Fast Food Industry: Kentucky Fried Chicken

The fast-food industry is a multi-billion dollar global industry, and


one of the largest in the world, with multiple and diverse players.
Most of the strongest brands are American, and despite shortterm ups-and-downs, the greater expansion pace doesnt show
signs of abating.

The hottest regions are the emerging economies (such as China),


being fought over by competitors such as Kentucky Fried Chicken,
Wendys, Pizza Hut, and of course McDonalds, which leads the
industry in sales, profitability, number of retail stores and overall
brand recognition. Most of these competitors are highly verticallyintegrated franchises with very strong integrated operations and
strategic planning systems.

In many countries these establishments are perceived as


quintessentially representative of American culture, and this is
both a boon and a danger for fast-food outlets. The attraction of
American culture is a strong lure, and good for business; but
today special interest groups such as Greenpeace, PETA, Muslim
fundamentalists and other protectionists are increasingly active in
boycotting and otherwise damaging outlets businesses.

Kentucky Fried Chicken (Japan) Limited (KFC-J) was started as a


joint venture (JV) in early 1970 between JV initiator Mitsubishi,
who wanted to develop domestic demand for its poultry
operation, and Kentucky Fried Chicken (KFC). Harland (Colonel)

Sanders had franchised in 1956 a fried chicken recipe that was so


successful, he sold some 700 franchises in 9 years. KFC was
bought by John Y. Brown and Jack Massey for $2 million from the
74-yr. old founder in 1964, and in the next 5 yrs. KFC revenue
grew from $7 million to $200 million. In 1970 KFC was building
1,000 stores a year in the U.S. However, the rapid growth caused
a big problem: management turnover, and by the late-1970s the
U.S. economy slipping into a recession caused the stock to fall
from $58 to $18. The management exodus continued.

Compounding matters, a fast food industry shakeout began, and


franchisees suffered under the lack of higher management
support and guidance, the recession, and strong competition. Low
morale affected customer service and product quality, and
management was too preoccupied with its own internal
disagreements to pay much attention to international operations.
In mid-1971 Brown and Massey sold KFC in a stock swap to
Heublein, Inc., a packaged goods company with well-branded
franchises such as Smirnoff Vodka.

KFCs small international staff was folded into Heubleins


international group, which struggled to control the independentlyminded foreign subsidiaries. Meanwhile, KFC-J under Loy Weston
and Shin Ohkawara went ahead with their own development
plans, including menu adjustments; and thinking of KFC-J as a
fashion business, focusing marketing on upscale young couples
and children, which helped KFC-J to thrive. By the end of 1972, 14
new stores mainly in Tokyo opened, and in 1973 50 more were
added. 1974 was slated to be KFC-Js first profitable year, but the
oil crisis hit Japan, and losses began, causing refinancing and
store expansion slowdown.

In 1975, Michael Miles was appointed VP-Intl Operations for


Heublein, and strategic planning was his credo. He focused his
attention on KFCs international operations, and implemented a
strong strategic planning system, which took about 2 years for
subsidiaries to gradually adopt. KFC-J, however, was resistant and
adopted what it could to Japanese practices, and went along with
the new system reluctantly. In 1976, KFC-J made its first profit, 14
million yen, a modest amount.

In the early 1980s KFC headquarters reorganized under pressures


of domestic operations doing poorly, which was significant as it
accounted for 2/3 of KFCs global sales. Churches and other
aggressive new competitors appeared. Miles focused upon a
back-to-basics program of quality, service, and cleanliness
systems (QSC); and by 1979 profits rebounded, bringing KFC
closer to McDonalds profit levels.

Miles hired a professional manager, Bob Hiatt, to duplicate the


systems with the international subsidiaries, with the pitch that
better strategic plans meant better bottom-line results and the
operational aim of achieving consistency and control worldwide.
KFC-J again resisted, citing Mitsubishis practices, and preferring
short-term losses for long-term gains. However, Hiatt and other
senior managers insisted on reports (store-level efficiency targets,
QSC ratings, trends) and operations control systems to improve
strategy, financial systems, and database management systems.
Performance bonuses were also implemented to help with
management performance and retention.

As international operations slowly improved, giving KFC strong


sales growth and profitability, R.J. Reynolds (RJR) acquired the

company in October 1982 as part of its diversifying away from


tobacco products. KFC then came under the control of Richard
Mayer, who also held strong convictions about the values of
strategic planning. Although KFC-J was KFCs largest, fastestgrowing, and highest-potential international subsidiary, by late
1983, KFC-J was opening its 400th store, by on a per-capita basis
this represented less than 25% the level of penetration in the U.S.

The entry barriers to the fast-food industry are relatively high if


there is only one outlet the savings increase exponentially when
the number of outlets increase, and product quality and supply is
controlled. For KFC-J, supply was easier through its powerful Joint
Venture partner, Mitsubishi, which provided poultry and other
supplies. Additionally, as it had in early 1970s, Mitsubishi was
also a funding source. So, a new fast-food entrant has better
chances of surviving if it has a parent or partner or some other
funding source with which it can set up strong strategic planning
and operations systems, particularly in Japan.

Market conditions are another consideration, as burger-type of


chains are dominated by McDonalds, Burger King, and Wendys.
For KFC, Popeyes is its biggest challenger. The nature of the fastfood industry is about price, convenience, taste, and environment.
Brand comfort is certainly a consideration, but locale and price
dominate. Chains which can physically dominate good locations
and have alternative menus such as Dollar Menus or foods
preferred by local tastes do best. Buyers can easily switch if
competitors are physically located closely to each other, so
quality control is an additional concern. It is more profitable to
retain an existing customer than to acquire a new one.

KFCs management of its international operations has improved


dramatically over the last 3 decades. Implementing strategic
planning and operational controls is critical, and although more
entrepreneurial spirits consider the reporting and other controls
stifling, in a organization the size of KFCs, controls are
imperative. Consistency of product, including its environment, are
key to brand recognition and drawing traffic. Good management
knowledge of outlets activities is invaluable to decision-making,
including how much of what kind of support to provide.
McDonalds owns its suppliers in the sense that its control over
product quality is total and huge in dollars. For KFC-J, having
Mitsubishi as a solid, agreed upon JV partner could not be a better
fit in solidifying against Porters concerns of Supplier and
Substitutes control, Buyer control, and resistance to New
Entrants.

The nature of the Japanese market was also condusive to KFC-Js


success, as the involvement of the Japanese government is
critical to success in Japan. Other competitors seeking entry to
Japan would need a similarly strongly positioned partner the
caliber of Mitsubishi or some other sogo sosha.

Dick Mayer should consider carefully where to move Loy Weston.


Weston has been with KFC-J for a long time, and despite his
success in Japan, in the 4 years since hed taken on the VP-North
Pacific position, progress had been slow. Shin Ohkawara was
doing fine running KFC-J, but Korea, Taiwan, Thailand, and Hong
Kong needed not just an entrepreneurial spirit, but also a strong
strategic mind with an taste for detail. Mayer should examine the
reasons why KFC-J was successful, and determine how much both
Weston and Ohkawara actually contributed. Perhaps in actuality
he might have ridden on Ohkawaras strengths, or Mitsubishis

strengths, or lucky market conditions, or some combination. If he


really did have a workable system, at least some parts of it should
be transferable to success in Korea, Taiwan, Thailand, and Hong
Kong (KTTHK).

Assuming that KFC-International is still regionally based, Mayer at


HQ could:
- have KFC-HQ create another position to put Weston in,
- OR put him back as KFC-J head,
- and in either case promote Ohkawara to VP-North Pacific.

Before that, Mayer could first give Weston stricter performance


achievables within a reasonable timeframe, as determined by
market studies. In the meantime, Mayer could have Ohkawara
evaluated to see if he might have a greater chance at making
KTTHK successful. Its important to retain experienced
management, and Mayer should figure out a politically expedient
plan to retain both men, being particularly gentle with Weston.
Weston, having been a white man heading up a large American
enterprise in Japan for a long time and advancing in age, may be
delicate to handle.

KFC-J, with its Mitsubishi partner, is strongly positioned in Japan,


and growth can continue. Any new entrants should be watched
for, but more attention should be paid to KTTHK.

KTTHK are different markets, but all are economic tigers with
market segments which KFC would appeal to more from a brand

perspective (fashion) than a price perspective (fast food isnt


always the cheapest source of food in overseas markets). Certain
people in these markets might potentially resent a Japanese head
(Ohkawara) of an American chain coming into the market, given
the countries histories with Japan, so from a political standpoint
having Mayer continue for a year or two longer might be better
from a PR standpoint. Also, as hes been with KFC for so long with
a good track record, despite his shortcomings hes still a valuable
manager to retain. Mayer might find more politically comfortable
ways to communicate the need for KTTHK to show results,
perhaps spend some time personally with Weston in these
countries and developing a strategic plan in tandem so that
Weston feels he is involved with the new plan. Having
managements buy-in in critical to the successful implementation
of a strategy.

Additionally, significant location scouting is important for Seoul,


Taipei/Kaoshung, Bangkok, and HK Island/Kowloon, as fast-foods
primary marketing (product, price, PLACE, promotion) need is a
high traffic, fashionable shopping area with lots of young buyers.
Maybe Mayer could go on a few location scouts with Weston. All
four of these urban markets have a rich supply of new repeat
customers, in addition to tourist dollars. Location is key to KFCs
expansion in these areas, with specific studies to students and
young office/retail workers traffic patterns. Appealing to their
tastes is less important than location in a hot area, as these
markets are all intent on emulating American culture.

Id like to see KFC and all other fast food establishments make
nutritional information available to customers. In the years that I
and my family have traveled in these Asian countries, we have
seen a shockingly obvious, rapid deterioration of young peoples

health (overweight, acne). Taiwan and Hong Kong are particularly


education-oriented, so one generally finds these establishments
filled with students who munch on fast food while studying their
copious homework. Business profitability is good, responsible
business and profitability is better.

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