Strategic Planning Process of KFC

Strategic Planning Process of KFC

KFC is one of the first fast food chains in the U.S.  and also among the first to expand globally.  The chicken chain operated in almost 63 countries worldwide with more than 3, 000 outlets both company owned and franchised.  KFC underwent into a series of mergers and acquisition by several corporations the last of which is PepsiCo, Inc. The latter is one of the most admired companies in the U.S.  Company history is also presented and the   effects of such organizational changes and company restructuring are also discussed. 

The fast food and the restaurant industry in the U.S. and in other countries is also described.  The fast food industry is comprised of 6 segments: sandwich chains, pizza chains, family restaurants, dinner houses, chicken chains, and steak chains.  A list of the leader companies in each segment is also presented.

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Despite the growth of the restaurant industry, there are several indications that the U.S. market is saturated.  Competition is very stiff and lead to the mergers and consolidation in the industry. Demographic and societal trends also resulted toe change in demands for fast-food chains.

KFC as a firm has evolved also in many ways.  Under the management of PepsiCo, Inc., there has been organizational restructuring and PepsiCo’s top executives replaced KFC managers.  On the other hand, the reorganization has also lead to the increase in efficiency and lowered operational expenses.  Relationship between KFC and the franchisees were also affected.

Marketing strategies were also changing directions.  The increasing demand for healthier foods and the increase of mobility among consumers have made KFC respond with those demands.  New menu offerings were introduced and distribution coverage were widened.  This resulted to increase and growth of KFC in terms of sales, profits, and international markets coverage.

Operations in Mexico are given emphasis in the case.  A total of 129 outlets, 21 of which are franchise restaurants and the majority of which are company-owned reflects a very wide expansion over the country.  The political and economic instability and the risk faced by KFC with the situation is one of the constraints sought in this analysis.  The investment approach of KFC in Mexico without losing market share is the main problem identified.

Alternative recommendations were made and strategic implementations were formulated to support realism on the analysis of this case.

II. Situation Analysis

1.) The Environment

In 1960s to 1970s restaurants are fast expanding in the United States.  Kentucky Fried Chicken (KFC) is among those who were able to quickly respond to the trends.  By 1980s, expansion went international and in 1993 KFC, was able to establish outlets 60 countries like Japan, Australia, United Kingdom, China, and Latin America.

The intense expansion and marketing increased the demand for fast food in the U.S.  However, demographic and societal trends may affect these demands to some directions.  The rise in single person households increases by 17 % in the U.S and is forecasted to increase further in the coming years.  Also the disposable household income continues to increase.  This increase is attributed to the participation of women in the labor force.  The increasing number of workingwomen increases the demand of microwave oven in the US households by 70 percent.  Foods that can be easily prepared in microwaves are booming.  Birth rates are projected to increase and this may affect whether families may eat out or stay home.

The increasing pace of restaurant construction in 1960s to 1970s resulted to limitation of future growth in construction.  There is an increase of cost of finding prime locations resulting to an increasing pressure to increase sales to cover initial investment costs.  These also results to establish aggressive international expansion a month the top three fast food chains: McDonalds, KFC, and Pizza Hut.

Among the 1992 World’s Largest Fast-Food Chains, only 1 non-US company appeared in the list.  This could be attributed to the 25% share of US in foreign investments.  The scarcity of fast food chains outside US can be relatively accounted to the US consumer market size, acceptability of fast food concept among Americans, and culinary practices of other countries are hard to break down.  Aside from cultural factors, international business carries a risk that includes quality control over franchises, service and support problems, relative transportation and resource cost, and communication and operational problems.  The saturation of the US market and increasing knowledge in international markets make expanding more attractive to the fast food chains.

The enactment of the franchise law in Mexico in 1990 altered strategies for KFC in Latin America.  Under the legislation, “ the franchiser and franchisee are set free to set their own terms.”  Royalties are allowed and taxed at 15% on technology assistance and know-how and 35 % on other royalty categories.  This legislation increased franchises throughout Mexico.

Mexico is a profitable potential for KFC.  The passage of the North American Free Trade Agreement (NAFTA0 eliminates tariffs and non-tariff barriers and further eased restrictions in foreign investments.  Trade relations between Mexico and the U.S. are generally attractive however overall trade and investment is still at small percentage.  This is accounted to the political and economic turmoil in Mexico over the past. Foreign exchanges are also fluctuating.

The economic situation affects the stability of the labor market in which KFC is very concerned about.  Low purchasing power resulted to labor unrest and high turnover rates.

2.) The Industry

The National Restaurant Association forecast projects that the 1994 food service will top among the restaurant industry in the United States.  The food industry is estimated to grow at 6.3 percent.  This figures implies that the fast-food restaurant chains have dominated the growth of the restaurant industry.  Overall sales growth for the restaurant industry is at 3.9 percent.

There are six (6) major segments that comprise the fast food in the food service industry.  The Table also shows the sales of the top 64 US fast-food outlets.

Business Segment
Chains
1991
1992
1993

Sandwich Chains
17
36.70
39.70
42.40

Pizza Chains
8
9.60
10.40
10.80

Family Restaurant
13
7.00
7.70
8.20

Dinner Houses
15
6.30
5.90
7.80

Chicken Chains
4
4.50
4.70
5.00

Steak Restaurants
7
3.50
3.30
3.40

TOTAL
64
$   67.60
$   71.70
$   77.60

The sandwich chain is the largest segment in the industry with estimated sales of 42.4 billion dollars in 1993.  McDonalds eats up 33% of the market share.  The slow sales growth faced by these chains have made them offering new menus like fried chicken and clams and shrimp in some outlets.  Franchise relations, government regulations, and food and safety handling are also some of the issues given importance by the chains in these segments.

Pizza Hut dominated the pizza segment and is estimated to eat up 44% of the market share.  Stiff competition among this segment has increased pressure resulting to wider customer base, special promotions, diversification into non-pizza items, and development of non-traditional units.

Dinner houses have the highest growth among the business segments.  Red Lobster is considered the segment leader and Olive Garden follows this.  The high growth is attributed to the fact that there is still low-penetration by major chains in this segment.  PepsiCo. Inc. are poised to dominate a large-portion of this segment. KFC dominates the chicken segment with 72% of the market share. These also accounts for almost 50 % of chicken franchise sales.

Despite the rapid growth of the restaurant industry, there are several indications that the market is saturated.  Eating and drinking establishments has increased by only 2.7 percent on 1992 and the fast-food industry has begun to consolidate.  Acquisitions and mergers has also begun in the chicken segment.  This strengthens the position of Popeye, the second competitor of KFC.  Though the acquisition increased the competitive base of Popeye, this is still small compared to KFC with 8,729 international units as of 1992.

The effects of mergers and acquisitions are significant to the industry.  Top10 restaurants controlled almost 50 % of the fast-food sales and larger firms were able to give financial and managerial resources to these chains.

3.) The Firm

“Colonel” Harland Sanders founded Kentucky Fried Chicken during 1954 in the US. At that time, fast food franchising is still a new practice and with Sanders travel and persuasion he was able to grant 200 take-home retail outlet franchises in 1960.  He was also able to establish franchises in Canada increasing the number of franchises to 300 and revenues up to US $500,000  in 1963.  The following year, sold the business to 2 businessmen, Jack Massey and John Young Brown Jr.. Brown became president of the United States. Sanders focused on the publc relations of KFC.Massey and Brown concentrated on increasing the franchise systems across the US and took KFC into public and the company was listed in the New York stock exchange.  This strengthens the company in the US markets and made them see the international markets.  Joint ventures, acquisitions of rights to operate, and subsidiaries were established all over the world.

There is constant change in the management of KFC.  In 1971 it entered into negotiations with Heublin Inc. and later acquired by RJR Nabisco Corp. In 1986, KFC was sold to PepsiCo, Inc.

PepsiCo., Inc. is one of the largest consumer companies in the United States. 63 percent of PepsiCo’s net sales were accounted for its soft drink and snack food businesses.  The company underwent into restructuring of operations in 1984.  It divested businesses outside consumer product orientation.  The reorganization also focused the business into three product lines, soft drinks, snack foods, and restaurants.

PepsiCo’s restaurant business started in 1977 after its acquisition of Pizza Hut and Taco Bell.  The compatibility of the products allows management skills to be easily transferred among the three business segments.

The acquisition of KFC gave PepsiCo the leading market share in the three of the four largest and fastest growing segments in the US.  It made ranks in America’s Most Admired corporations.

One challenge faced by PepsiCo when it acquired KFC is the distinct corporate values among the two. While PepsiCo is based on a fast-track approach to management, KFCs is laid-back. This approaches has also distinct effects on employee loyalty.  Turnover rates tend to be higher in PepsiCo while there is strong loyalty among KFC employees and franchises. Organizational changes after the acquisition focus on replacing KFC managers with PepsiCo’s top executive.  Conflicts also were encountered with the implementation of those changes like those of PepsiCo’s franchise interference in Louisville.

4.) The Marketing Strategy

The organizational changes made result to the increase of worldwide sales by 10.3 %.  Company sales that include royalties from franchised outlets and company-owned restaurants reach $2.2 billion.  Worldwide profits increase by 110 percent.  Domestic profits lowered as a result to the increase in marketing expanses and international profits rose due to revenues in Canada and Mexico but were offset with lower profit returns in Australia.

YEAR
WORLDWIDE
KFC CORP
KFC CORP.
PERCENT OF

SALES ($B)
SALES ($B)
PROFIT ($M)
SALES (%)
1987
4.1
1.1
90.0
8.3
1988
5.0
1.2
116.5
9.6
1989
5.4
1.3
100.0
7.5
1990
5.8
1.5
126.9
9.3
1991
6.2
1.8
80.5
4.4
1992
6.7
2.2
168.8
7.8

The growing demands for healthier foods and variety have led KFC to change their number of menu offerings.  In 1992, it launched Oriental Wings, Popcorn Chicken, and Honey BBQ Chicken as alternative to its Original Recipe fried chicken.  Dessert menus such as pies and cookies were also introduced.  Lunch and dinner buffets that include 30 items had also been introduced.  The “Neighborhood Program” that is introduced in 1993 increased sales by 5 to 10 percent.  Menus were targeted exclusively to the Black Community.

Distribution outlets have also increased as non-traditional locations are in demand.  Distribution are made in fast-food chains, shopping malls, high-traffic areas, drive-thrus, airport kiosks stadiums, amusement parks, office buildings, concerts and fairs, and snack shop and cafeterias.

There is also a continuous improvement in operating efficiencies.  Reorganization of operations reduced overhead costs and increased efficiency.  Much of the responsibilities was tasked to franchisees and marketing managers.

STRATEGIC FACTORS ANALYSIS

OPPORTUNITIES
THREATS

1. Environment

• Large room for international markets expansion
• Increase disposable income in the U.S

Leadership of the fast-food chains in the industry both in U.S. and outside U.S.

• Enactment of the franchise law in Mexico
• Passage of the NAFTA in Latin America
• Saturation of the U.S fast-food industry as reflected on the low growth rates forecast of the NRA.
• Increasing cost of getting prime locations of restaurants thereby affecting cost of initial investments.
• Risks faced along with economic and political instability and upheavals in Mexico

Foreign exchange risks

2.Industry

• Room for growth at 6.3 % in the fast food industry
• Leadership of KFC in the chicken segment.
• Aggressiveness of KFC in terms of international expansion
• Acquisition of KFC by PepsiCo, Inc. strengthens their corporate position
• Fried Chicken offerings of McDonalds and other fast food chains due to low sales in the sandwich segments could affect KFC sales.
• Consolidation of other fast-food chains with larger firms and bigger restaurant chains

STRENGTHS
WEAKNESSES

3. Firm

Presence of Sanders as public relations and goodwill ambassador for KFC strengthens relationship of KFC with franchisees and projects good company image

• Wide international franchise system
• Going public
• Management skills and presence of top executives of PepsiCo., Inc.
• Pioneer in franchise and expansion in some countries Like Mexico
• Management support to employee training and quality issues
• Improvement in operational efficiency
• Constant change in ownership
• Distinct organizational structure between KFC and PepsiCo, Inc.
• Implementation of PepsiCo management practices affects employee loyalty and turnover rates.
• Labor market instability in Mexico

4. Marketing Strategy

• Increase in sales and profit
• Responsiveness of menu offerings to the changing wants and needs of the consumers
• Wide distribution channels and expanding to non-traditional outlets
• Success of the “Neighborhood Program” and adding its contribution on sales
• Increasing profit contribution of international operations
  Lower profit returns in some countries like Australia
• Increasing offerings of chicken foods among competitors

III. Statement of the Problem

What investment approach should KFC take to retain market share given the political and economic risks in Mexico?

KFC depends highly on the company-owned restaurants in Mexico.  Out of 129, only 21 are franchised.  It has market share of 10% in 1990.  Given the political and economic stability KFC’s alternative is to have a conservative investment approach.  Instead of pouring out for additional outlets in Mexico, resources could be directed to other less-risky countries.  However, the disadvantage of taking the conservative approach is losing a piece of the market share that they have been enjoying in the past several years.

DESCRIPTION OF STRATEGIC ALTERNATIVES

ALTERNATIVE 1: Take a conservative investment approach until economic and political stability is achieved.

Taking a conservative investment approach would mean retaining the number of outlets and avail some of them for franchising.  By then, KFC could still protect its market share in Mexico and they will be able to minimize the risk they are facing with the current economic and political upheavals.

Advantages:

• Safeguard market share at 10% in Mexico
• Minimize risk faced due to economic and political instability

Disadvantages:

• Limits potential market growth

ALTERNATIVE 2: Take a moderate investment approach.

Taking a moderate approach would mean continuation of its building program despite economic and political turmoil, they should take steps to increase market share.   Over the past years that they have been in Mexico, economic and political unrest is always an issue and yet, they still pursue investing there reaching to 129 outlets.  Expanding the franchise base may not be very attractive for franchises and KFC may have a hard time convincing franchises to invest on them.  Risk is also high at the same time.  The economic and political instability would be the main factor affecting decisions to franchise or not, however, proving that they have earned growth despite even worser situation, franchises might just be convinced with that.  Chances would be high that they could be successful though.

Advantages:

• KFC could protect and grow market share
• Expand franchises base
• Could help Mexican economy

Disadvantages:

• Risk is high given the  economic and political situation.
• May take time to convince franchises to invest with them.

SELECTION OF STRATEGIC ALTERNATIVES/RECOMMENDATIONS

ALTERNATIVE 2: Take a moderate investment approach.

It is recommended that KFC should be taking a moderate investment approach. Continuation of its building program despite economic and political turmoil would be a good step to defend and grow market sharethough careful evaluation should be done before building a certain outlet.  Every investment carries a form of risk and  the presence of 129 outlets despite worse economic situations would mean that KFCs confidence over Mexico is still good and profitability is still increasing otherwise, they wouldn’t have reach that wide.  The entrance of new franchises of competitors such as McDonalds and Arbys is an indicator that Mexico is still a good place to invest in.  Expanding the franchise base may not be very attractive for franchises and KFC may have a hard time convincing franchises to invest on them however with proper communications and good incentive schemes and proof of profitability, chances are high that franchises would increase.

IMPLEMENTATION OF STRATEGIC ALTERNATIVES

In relation to the above recommendations, the following are the actions to be implemented:

PLANNED

ACTIONS
DEPARTMENT RESPONSIBLE
TIME FRAME
WAYS TO
IMPLEMENT

1. Continuation of building program

• Marketing & Public relations
• 1 year
• Negotiate with potential franchisers.If successful, go ahead with SOPs of franchising like look for strategic sites, etc.

2. Evaluation of  continuing of building programs

• Administration quarterly
• Checking the status of every building project should be done quarterly.  A special group should be tasked to assess profitability of each chains.

3. Retention and improvement of existing marketing strategies for KFC

• Marketing
• 1-3 months
• Improve current media advertising and promotions
• Provide good incentive schemes, relations and support to franchises

References:

Kentucky Fried Chicken and the Global Fast-Food Industry.  J.A. Krug & W. Harvey Hegarty.

Market-Based Management; Strategies for Growing Customer Value and Profitability.  Roger J. Best. 2nd ed. 1999.

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