Kfc History

Kentucky Fried Chicken and the Global Fast-Food Industry:
KFC : world’s largest chicken restaurant chain and third largest fast-food chain in 2004
One of the first fast-food chains to go international, one of the world’s most recognizable brands.
KFC’s early international strategy: grow its company and franchise restaurant base throughout the world  refocused in 2004 on several high growth markets (China, Canada, UK, Australia, South Africa, and more)  company-owned restaurants (greater control over product quality, service and restaurant cleanliness). In other international markets grow primarily through franchises, operated by local business people who understood local market.

Company’s History of KFC:
 Harland Sanders (1952) created “Colonel Sanders Recipe Kentucky Fried Chicken”  by 1960 more than 200 take-home retail outlets and restaurants (franchises) across the U.S.
 He sold his business to Jack Massey and John Young Brown  these 2 businessmen concentrated on growing KFC’s franchise system across the U.S.
 By the late 60’s  strong foothold in the U.S., attention for international markets  In 1969 joint venture with company in Japan, and rights to operate franchises in England were acquired.
 By 1971, KFC had established 2450 franchises and 600 company-owned restaurants in 48 countries
Heublein, Inc
 In 1971 KFC was acquired Heublein, Inc. (business for producing alcoholic beverages)  little experience in restaurant business.
 Conflicts between Colonel Sanders and Heublein management  Sanders upset over poor quality control and restaurant cleanliness.
 Heublein sent in a new management team to redirect KFC’s strategy  “back-to-the-basics”-strategy. New restaurant construction stopped until existing restaurants could be upgraded and operating problems removed.  This strategy enabled KFC to gain better control of its operations (soon it was again aggressively building new restaurants)
R.J. Reynolds Industries, Inc.
 In 1982 RJR acquired Heublein and merged it into wholly owned subsidiary. (RJR’s corporate strategy was: diversify into unrelated businesses to reduce dependence on the tobacco industry).
 RJR had little more experience in restaurant business (than Heublein).
 RJR allowed KFC to operate by itself. KFC’s top management team was left largely intact  RJR avoided many of the operating problems that Heublein had.(Heublein wanted to manage KFC with own managers)
 RJR subsequently divested (wegdoen) many of its nonconsumer food businesses  KFC was sold to PepsiCo Inc. in 1986.
PepsiCo, Inc.
 PepsiCo, Inc. is merger between Pepsi-Cola Co. and Frito-Lay Inc. (1965)  one of the largest consumer products companies in the U.S. Pepsi-Cola’s traditional business was the sale of soft drink concentrates to licensed independent and company-owned bottlers.
 PepsiCo believed the restaurant business complemented its consumer product orientation. The marketing of fast-food followed many of the same patterns as soft dinks and snack foods.
 PepsiCo believed it could take advantage of numerous synergies by operating the 3 businesses (soft drink, snack foods and fast food) under the same corporate umbrella and its managements skills could be transferred among the three businesses.
 PepsiCo’s earlier acquired Pizza Hut and Taco Ball. In 1986 also KFC. These 3 restaurants chains were market leaders in the pizza, Mexican and chicken categories.
 PepsiCo changed franchise contract to give it greater control over KFC franchisees. Staff at KFC was reduces to cut costs and many KFC managers were replaced with PepsiCo managers.
 Several restructurings that led to layoffs throughout KFC, replacement of KFC managers with PepsiCo managers and conflicts between KFC and PepsiCo’s corporate cultures created a morale problem within KFC
 KFC’s corporate culture:
- build on Colonel Sanders’ laid-back approach to management
- employees enjoyed good job security and stability
- strong loyalty over years  Colonel’s efforts to provide benefits, pension and other nonincome needs
- friendly, relaxed atmosphere at KFC’s corporate offices.
 PepsiCo’s corporate culture:
- strong emphasis on performance
- high performance, high accountability, highly driven culture.
- pressure on managers to demonstrate their management skills within short periods
- unwanted effect: employee loyalty was lost, turnover higher than in other companies
 Kyle Craig (president KFC U.S. operations) about relationship PepsiCo – KFC:
KFC culture is interesting, dominated by a lot of KFC folks  many of those intimidated by PepsiCo culture.
Today, some degree people have seen that PepsiCo’s culture can bring pretty positive results and the PepsiCo people have modified their cultural values somewhat.
 Second problem for PepsiCo: poor relationship with KFC franchisees  announcement of new franchise contract (in 1989): gave PepsiCo greater power to take over weak franchises, relocate restaurants and make changes in existing restaurants  uproar among attending franchisees. Contract remained unresolved until 1996, most objectionable parts were removed by KFC’s new president and CEO, David Novak.
 PepsiCo created one of world’s largest food companies and a portfolio of some of the world’s most recognizable brands  strategy of diversifying into 3 markets (soft drinks, snack foods and fast-food restaurants).
 PepsiCo’s growth masked troubles in its fast-food business  increasing maturity in U.S. fast-food industry, intense competition and aging of KFC and Pizza Hut’s restaurant bases.
 Cash had to be diverted from PepsiCo’s soft drink and snack food businesses to its restaurant businesses  reduced corporate return on assets, made it more difficult to compete with Coca-Cola and hurt its stock price.  In 1997 PepsiCo spin off restaurant business into new company Tricon Global Restaurants, Inc.
 PepsiCo’s objective was to reposition itself as a beverage and snack food company, strengthen its balance sheet and create more consistent earning growth.
Yum! Brands, Inc.
 Spin-off created new, independent, publicly held company (Tricon Global Restaurants, Inc.)  managed KFC, Pizza Hut and Taco Bell franchise systems. David Novak was CEO and moved quickly to create new culture within company.
 primary objective: reverse long-standing friction between management and franchisees that was created under PepsiCo ownership  new management emphasis on providing support to the firm’s franchise base. Franchises would have greater independence, resources and technical support.
 In 2002 Tricon acquired Long John Silver’s and A&W All-American Food Restaurants.  Tricon wanted to aggressively promote a multibranding strategy that combined two brands in one restaurant and attracted a larger consumer base by offering them a broader menu selection at one location.
 Corporate name change: Yum! Brands, Inc.
 Novak: plan to reduce company-owned restaurant base by either closing poorly performing restaurants or selling company restaurants to individual franchisees.

Fast-Food Industry (U.S.)
Major Fast-Food Segments:
 8 major segments: sandwich chains, pizza chains, family restaurants, grill buffet chains, dinner houses, chicken chains, non-dinner concepts, and other chains.
 Dominance of McDonald’s: accounted for 13 of sales of top 100 chains (Burger King, 2nd with 6 percent)
 Sandwich chains made up largest segment of fast-food market  however, were struggling because of continued price discounting that lowered profits. Threat of obesity lawsuits and increased demand of customers for more healthy food items and better service lowered demand for traditional hamburger, fries and soft drink combinations.
 Dinner houses made up 2nd largest and fastest growing segment of fast-food market  much of growth came from new unit construction
Increased growth among dinner houses came at expense of sandwich chains, pizza and chicken chains, grilled buffet chains and family restaurants. Slower growth in these other fast-food categories (“Too many restaurants chasing the same customers”)
 Dinner houses better positioned to take advantage of aging and wealthier U.S. population (however, even dinner houses faced prospect of market saturation and increased competition in future)
Chicken Segment:
