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Kentucky Fried Chicken

Mission
To sell food in a fast, friendly environment that appeals to pride conscious, he
alth minded consumers (www.KFC.com).
Stated Objectives
Product development
Increase variety on menu
Introduce desert menu
Introduce buffet to restaurants
2. Introduction on the Neighborhood Program with following:
Menu items target African Americans in major cities with the following items:
Greens
Macaroni and cheese
Peach cobbler
Red beans & rice
Menu items targeting Hispanics in major cities with the following items:
Fried plantains
Flan
Tres Leches
Implementation on non-traditional units including the following:
Shopping mall food courts
Universities
Hospitals
Airports
Stadiums
Amusement Parks
Office Buildings
Mobile Units
Increase profitability of KFC through the following:
Reduced overhead costs
Increased efficiencies
Improved customer service
Cleaner restaurants
Faster and friendlier service
Continued high quality products
Resolve franchise problems in the United States.
Implied Objectives
Expansion of international operations to provide the following:
Increased percentage of overall sales growth
Increased percentage of profit growth
Increased expansion of franchises into Mexico
Expansion of franchise operation beyond Central America
Continued promotion of healthier image through removal of the word "fried" from
the name
Improve menu selection of rotisserie
Organizational Structure
History
Since its inception, KFC has evolved through several different organizational ch
anges. These changes were brought about due to the changes of ownership that fol
lowed since Colonel Sanders first sold KFC in 1964. In 1964, KFC was sold to a s
mall group of investors that eventually took it public. Heublein, Inc, purchased
KFC in 1971 and was highly involved in the day to day operations. R.J. Reynolds
then acquired Heublein in 1982. R.J. took a more laid back approach and allowed
business as usual at KFC. Finally, in 1986, KFC was acquired by PepsiCo, which
was trying to grow its quick serve restaurant segment. PepsiCo presently runs Ta
co Bell, Pizza Hut, and KFC. The PepsiCo management style and corporate culture
was significantly different from that of KFC.
PepsiCo has a consumer product orientation. PepsiCo found that the marketing of
fast food was very similar to the marketing of its soft drinks and snack foods.
PepsiCo reorganized itself in 1985. It divested non-compatible units and organiz
ed along three lines: soft drinks, snack foods and restaurants. PepsiCo Worldwid
e Restaurants was created to create synergism between its restaurant companies.
By the end of 1994, KFC was operating 4,258 restaurants in 68 foreign countries.
KFC is the largest chicken restaurant and the third largest quick service chain
in the world. Due to market saturation in the United States, international expa
nsion will be critical to increased profitability and growth.
Present Situation
The organization is currently structured with two divisions under PepsiCo. David
Novak is president of KFC. John Hill is Chief Financial Officer and Colin Moore
is the head of Marketing. Peter Waller is head of franchising while Olden Lee i
s head of Human Resources. KFC is part of the two PepsiCo divisions, which are P
epsiCo Worldwide Restaurants and PepsiCo Restaurants International. Both of thes
e divisions of PepsiCo are based in Dallas.
Structuring
Another strategy of KFC is currently working with is to improve operating effici
encies. This in turn can directly impact the operating profit of the firm. In 19
89, KFC centered on elimination of overhead costs and increased efficiency. This
reorganization was in the U.S. operations and included a revision of KFCâ s crew tra
ining programs and operating standards. They emphasized customer service, cleane
r restaurants, faster and friendlier service, and continued high-quality product
s.
In 1992, KFC continued with another reorganization in its middle management rank
s. They eliminated 250 of the 1500 management positions at corporate and gave th
e responsibilities to restaurant franchises and marketing managers.
Financial Analysis
Introduction
PepsiCo acquired KFC in 1986 to add to their diversified restaurant segment, whi
ch included Pizza Hut and Taco Bell. PepsiCo produces yearly-consolidated financ
ial statements, which includes this restaurant segment, but does not separately
identify KFC, Pizza Hut, or Taco Bell. Therefore, the amount of financial inform
ation is very limited.
Market Share
In 1986, after the KFC acquisition, PepsiCo now had three of the four largest an
d fastest growing segments within the U.S. quick service industry. In 1994, Peps
iCo had some of their largest market shareâ s (See Exhibit 1) in the U.S. Market.

KFC Sales
As of 1995, KFC was ranked sixth in the U.S. sales in fast-food chains (See Exhi
bit 2). See also U.S. sales chart in Exhibit 3.

Top 10 Leading U.S. Fast-Food Chains

U.S. Sales ($M)â (Exhibit 2)

1995
1994
McDonald's
15,800
14,951
Burger King
7,830
7,250
Pizza Hut
5,400
5,000
Taco Bell
4,853
4,200
Wendy's
4,152
3,821
KFC
3,720
3,500
Hardee's
3,520
3,511
Subway
 2,905
2,518
Little Caesar's
2,050
2,000

Over the past seven years from 1987 to 1994, KFC worldwide sales have grown at a
n average rate of 8.2% (See exhibit4).
Worldwide Sales ($ millions)â Exhibit 4

$4,100
5,000
5,400
5,800
6,200
6,700
7,100
7,100

A big part of the increased sales is due to new restaurants and higher volume. E
xhibit 5 contains the total number of units of U.S. and international restaurant
s and also shows the percentage of growth.
Exhibit 5
Year U.S. Intâ l Total Growth%
1992 5055 3674 8729
1993 5094 3939 9033 3.3%
1994 5115 4292 9407 4.0%
1995 5137 4492 9629 2.3%

KFC has also met the changing demands of society. As the world has gone to a mor
e healthy living, KFC has come out with many changes on its menu, including Hone
y BBQ Chicken, Popcorn Chicken, Rotisserie Chicken and has begun to promote its
lunch and dinner buffets. Dinner is also very important to KFC. See the breakdow
n of dayparts in Exhibit 6.

The buffets now offered at KFC during lunch and dinner are also very important.
KFC is typically a fast-food service (See Exhibit 7), however with these buffets
, this may persuade customers to dine-in instead of take out.
KFC has also tried to meet the demands of consumers wanting fast-food in other "
non-traditional" locations. They are currently testing airports, shopping malls,
universities, and other high-traffic areas.
Financial Ratio Analysis and Capital Outlook
Financial ratio analysis is the calculation and comparison of ratios, which are
derived from the information in a company's financial statements. The level and
historical trends of these ratios can be used to make inferences about a company
's financial condition, its operations and attractiveness as an investment. In i
solation, a financial ratio is a useless piece of information. In context, howev
er, a financial ratio can give a financial analyst an excellent picture of a com
pany's situation and the trends that are developing.

Company Ratios:
Net Income per share: Net Income/Total # of shares outstanding

This figure is defined as Net Income divided by total shares outstanding. Net in
come per share evaluates the companies profit per share of stock outstanding. Fr
om an investor standpoint this figure should be at least the industry norms or b
etter if possible. PepsiCo has a ratio that is above industry standards however
there was a drop from 1994 to 1995 of almost 10% that should it continue would p
ossibly damage investor outlook on the company in the future.

Return on Shareholder Equity: Net Income/Share holders equity

Measures the return of shareholders equity to Net Income. PepsiCo numbers are be
low industry averages but not far enough for concern, because the company has a
long history of stable returns and investors will consider that. However, PepsiC
o should concentrate on this figure in the future, if it continues to lag indust
ry averages.
Liquidity Ratios:
Liquidity Ratios give a picture of a company's short-term financial situation or
solvency.

Working Capital: Current Assets â Current Liabilities

The Working Capital of a business is an indication of the short-run solvency of
the business. PepsiCo showed dramatic improvement from 1993 to 1995 but is still
below industry standards. If the firm should need immediate cash, it might not
be on hand. This is not probable because of their borrowing capacity can supplem
ent short-term cash needs.
Current Ratio: Current Assets/Current Liabilities
This ratio is the most commonly used measure of short-term solvency. It indicate
s the amount of current assets, such as cash, accounts receivable, and inventory
that can be converted into cash to pay your short-term liabilities. The Current
ratio is considered more indicative of the short-term debt-paying ability than
the working capital. For many years, the guideline for the minimum current had b
een 2.00. Presently the guideline is determined by the industry average. In this
respect, PepsiCo has been consistent in staying above the industry average and
is good condition regarding short-run debt-paying ability. 1995 is particularly
excellent with KFC doubling the industry average, and it has risen for the past
three years.
Cash Ratios: Cash Equivalents + Marketable Securities/ Current Liabilities

The Cash ratio is the best indicator of a companyâ s short-run or immediate liquidity
. Sometimes an analyst needs to view the liquidity of a firm from an extremely c
onservative point of view. This conservative view however is not realistic for a
corporation of this size. The lower the ratio the more advantageous for the com
pany, because a high cash ratio indicates that the firm is not using its cash to
its best advantage. Cash should be put to work in the operations of the company
. PepsiCo is below industry standards, but given the above definition, PepsiCo i
s putting to work in the operations of the company.
Solvency Ratios
Solvency Ratios give a picture of a company's ability to generate cash flow and
pay it financial obligations.
Debt Ratio: Total Liabilities/Total Assets
The Debt Ratio indicates the percentage of assets financed by creditors, and it
helps to determine how well creditors are protected in case of insolvency. This
ratio indicates the amount of debt your business has taken on relative to the to
tal assets it owns. A high debt ratio indicates that creditors have financed a s
ubstantial portion of your business. This is often a red flag to potential lende
rs since it increases the possibility of bankruptcy if your net sales are not en
ough to meet your monthly debt and interest payments. The debt ratio is conserva
tive because it includes all debt and near debt. PepsiCo is slightly above the i
ndustry but there has been a continuing downtrend that if continued will equal i
ndustry averages in 1996.
Debt/Equity Ratio: Total Liabilities/Shareholders Equity

Debt to equity ratio is a measure that helps determine an entityâ s long-term debt-pa
ying ability. It also assists in judging how well creditors are protected in cas
e of insolvency. From the perspective of long-term debt paying ability the compa
ny is above industry averages and need to be at or below. There is however a dow
nward trend that indicates that the company is addressing this issue.
Profitability Ratios
Profitability Ratios use margin analysis and show the return on sales and capita
l employed.
Return on Assets: Net Income before minority share of earnings and Non-recurring
Items/Total Assets
Return on Assets measures the firmâ s ability to use its assets to create profits by
comparing profits with the assets that generate the profits. Generally the large
r the RAO ratio the better, because this tells investors and competitors that th
is is stable company. This ratio for PepsiCo is somewhat alarming because it has
been lagging the industry by 4-5% and does not show an upward improvement trend
.
Net Profit Margin: Net Income before minority share of earnings and Non-recurrin
g Items/Net sales

Net Profit Margin gives a measure of net income generated by each dollar of sale
s. The company is well above industry average and that is very desirable. There
was however a drop of one percent from 1994 to 1995 should this trend continue i
t could damage the corporations profitability.

Total Asset Turnover: Net Sales/ Total Assets

Total Asset Turnover measures the activity of the assets and the ability of the
firm to generate sales through use of assets. PepsiCo is utilizing its assets wi
th regards to sales in that they are using fewer assets to produce more net sale
s.

Opportunities
Opportunities represent external finding which can enhance a companyâ s performance.
Opportunities that KFC can take advantage of are as follows:
The Mexican market, which offers a large customer base, lesser competition, and
close proximity to the US.
The growth in the fast-food industry is limited due to the aggressive pace of th
e growth in the 70â s and 80â s. As a result, the market is saturated and "the cost of fin
ding prime locations is rising." With the higher cost of the initial investment,
the new restaurants are pressured to increase per-restaurant sales. Many compan
ies are realizing that in order for them to grow they need to pursue foreign mar
ket. One of the potentially profitable markets is Mexico. Mexico has over 91 mil
lion people and growing. This give companies a huge customer base to work with.
Also, the companies are able to take advantage of the close proximity to the US.
The transportation cost to Mexico compared to other countries is very minimal.
Despite the advantages, US companies in general have not expanded much in the Me
xican market compared to European or Asian market. Therefore, the companies can
expect lesser competition when expanding in Mexico.
Peso devaluation has made it less expensive for US to buy assets in Mexico.
US companies are able to invest less money in buying assets in Mexico due to fav
orable exchange rate. This opportunity gives the companies a reduced risk in inv
esting in Mexico. Also, the companies that are already in Mexico are able to imp
ort raw materials at a favorable rate by converting dollars into peso.
"Dual branding" helps to appeal to the wider customer base and also provide high
er profit.
This strategy helps to "improve economies of scale within its restaurant operati
ons." For many companies that own more than one fast-food chain, "dual branding"
is an ideal way to expand quickly and increase profit. The companies no longer
need to wait for the store to be built or spend time and money looking for the l
ocation. By adding a brand to the existing fast-food store, the companies are ab
le to expand quickly and for less money. The companies are also capitalizing on
the increased customer base due to the increased menu offering. Increased profit
is another benefit of "dual branding." The companies are enjoying higher profit
due to the low cost in expanding and the reduced advertising dollar spent by ad
vertising the two chains together.
New franchise laws in Mexico give fast food chains the opportunity to expand the
ir restaurant bases.
In January 1990, Mexico passed a law that favored franchise expansion. The law p
rovided for the protection of technology transferred into Mexico. The law also a
llowed royalties. Before 1990, there was no protection for patents, information,
and technology transferred to the Mexican franchise. Also, before the new law r
oyalties were not allowed. This resulted in higher number of the company owned f
ast-food chains rather than the franchises in Mexico. However, with the new law,
the companies are given an opportunity to benefit from selling franchises. The
fast-food chains are now able to expand to other regions of Mexico by selling fr
anchises to individuals rather than keep building company owned stores in centra
lized locations to keep the operation