17 Jun 2011  HBS Cases

KFC’s Explosive Growth in China

In China, Yum! Brands is opening a KFC store every day. But this is not the KFC you know in America. A recent case study written by professor David Bell and Agribusiness Program director Mary Shelman reveals how the chicken giant adapted its famous fast-food formula for the local market.

 

Homogenization has made it easy for fast-food joints to circle the globe, spitting out carbon copies of themselves, their burgers, and their fries along the way. But in the most populous country in the world, a fast-food giant stepped off the conveyor belt and found unprecedented success by being different, not by being the same.

In the Harvard Business School case "Yum! China," professor David E. Bell and Agribusiness Program director and senior researcher Mary Shelman examine how Yum! Brands, the parent company of KFC and Pizza Hut, outperformed McDonald's and became the largest restaurant company in mainland China.

The case describes how Yum! China succeeded and expanded by staying local on many levels. It keeps close ties to the Chinese government, hires local management, sources food from within the country, and changes the menu to suit Chinese tastes and style of eating.

KFC in Xiamen, China

A matter of scale

One key issue the case examines is "how to implement the rollout of a fast-food chain involving so many stores across such a vast—and regionally different—country," says Bell, who teaches the case in the School's annual Agribusiness Seminar.

Both KFC and Pizza Hut restaurants in China differ markedly in many ways from their Western counterparts. And while Pizza Hut has done very well for itself with nearly 500 restaurants in 120 cities (as of December 2010), KFC's performance has been finger-lickin' incredible. Since the first piece of fried chicken (available in dark meat only, to the disappointment of many an American tourist) was served at a Beijing KFC in 1987, the number of KFCs in China has grown to over 3,000, in 650 cities, with one new restaurant opened a day.

"If I could have written any case in the world, this would have been the one I would have picked," says Shelman, a Kentucky native with more than a passing interest in Colonel Sanders. "Not only is this the story of a successful entry into China by a Western company, this case provides a glimpse of how quickly Chinese diets are changing as incomes improve. Because China is so big this has a huge impact on the rest of the global food system. What happens in China, what Chinese people eat, impacts what you and I pay for food."

What happened in China with Yum! Brands, and with KFC in particular, had a lot to do with China division chairman and CEO Sam Su. "He really flexed the model," says Shelman. This was in part due to KFC being owned by PepsiCo when it first came to China. PepsiCo was not a fast-food company, so Su was given more managerial freedom.

Along with being lucky, Su is smart, driven, and visionary—a classic entrepreneur. But he's also humble. "There's no room for ego," Su explained in the case. "China doesn't have the same culture of individualism that is present in the United States."

Su's strategy was that KFC "would not be seen as a foreign presence but as part of the local community… Our opportunity was to take the best ideas from the US fast-food model and adapt them to serve the needs of the Chinese consumer."

Initially this involved hiring the right people. For Su this meant Chinese managers who read and spoke the language, who understood the restaurant business and the Chinese consumer, but who also had experience in the Western way of doing business. "It was a foot in both worlds," Shelman says. "They knew firsthand the Western model but they also understood the challenges of operating in this Chinese, very traditional, very evolving market."

The people Su brought on board were also close in a way Shelman found surprising when she spent time with them when researching the case.

"There was huge camaraderie evident in the way that the top management team interacted with each other … they bantered back and forth and poked fun at each other," Shelman says. "They'd be walking down the hall jostling, pushing, laughing. This is a group that has worked together a long time—unusual in a country where experienced management talent is at a premium ."

It turns out that unusual employee interactions, at least in comparison with Western business decorum, are the norm at Yum! Brands, something Shelman experienced when she accompanied then-COO Mark Chu to one of KFC's Shanghai locations. "You walk into a restaurant and not only do [the employees] recognize him, but they love him as well."

And so the employer-employee relationship has more a feel of family. "In the United States, if you don't show up at work, what happens? You get fired," says Shelman. "In China, where many of the company's 250,000 employees are college students working their first job, it's like, 'Oh we understand that sometimes you feel like skipping class. If you decide to skip work—please call in and let us know, so we can make sure your job is covered.'"

Trained labor, it turns out, is a very valuable asset even in a land of 1.3 billion-plus people.

"Chu's acceptance and appreciation for these young employees is exceptional for Western companies to see," says Shelman. Younger employees, for example, are encouraged to socialize over company-provided video games on their breaks. This practice serves several purposes: It eases the minds of parents anxious about sending their children out into the world, provides crucial social skills for young adults who grew up in single-child households, creates lifelong Yum! Brands customers, and develops a culture of customer service in a country where there was none.

The restaurant management program is similarly focused. "You're a college graduate," says Shelman. "You're recruited for that position. You're very carefully developed to be able to do all these different jobs in the restaurant. And it's perceived as something that you would do your entire life."

Along with training and retaining quality employees, another key factor in KFC's success was Su's early decision to downsize his own career. Originally hired to cover the northern Asia-Pacific region, he departed from the usual managerial growth path of taking on larger geographic assignments and instead argued that he should focus exclusively on China. Early on, he decided that Yum! should develop a national footprint—supported by a company-owned distribution system since third-party suppliers didn't exist—instead of growing in geographic chunks through franchising.

Su sourced products from within China whenever possible. This was no easy feat early on as the supply chain for chicken, for example, included multiple vendors providing a handful of birds each. Food safety is a big concern for Chinese consumers, and it was Su's decision to build the supply chain from the ground to help ensure quality. "We work with our suppliers to build their capabilities. We stress the importance of knowledge transfer, and even arrange for them to go overseas to learn," Su said in the case.

The Chinese way

"One of the lessons I take away from this case is that to do China, you have to do China," says Shelman. "It's a large, complex, and dynamic market that deserves single-minded attention." That attitude extends from the boardroom of Yum! Brands to the menus in KFC restaurants. A small number of items would be familiar to Western visitors—mashed potatoes, corn on the cob, fried bone-in chicken—but most would not. The Chinese KFC menu may include fried dough sticks, egg tarts (which Shelman raves are "to die for"), shrimp burgers, and soymilk drinks, as well as foods tailored to the tastes of specific regions within China.

The large selection of menu items is meant to appeal to the Chinese style of eating, in which groups of people share several dishes. But it's also part of the "New Fast Food" initiative Su developed in 2005 in response to concerns about the role of fast-food restaurants in the obesity epidemic—concerns that he shares and takes responsibility for. "We have been too greedy, too shortsighted," Su said, referring to the traditional high- volume, low-choice fast-food model.

Su believes that offering a wider variety of foods will help patrons make healthier choices. The KFCs in China have also limited the amount of money saved on combo meals, and have completely eliminated supersized items. Exercise is actively promoted inside the chain; as of 2010 the youth programs and competition it sponsored had over 260,000 participants in 438 cities.

KFC succeeded in China both because it was not McDonald's and because in many ways it decided it wouldn't be KFC either—which brings up another key question. "With the benefit of 20/20 hindsight…how do you avoid the mistakes of the American fast-food model?" asks Bell. "Put another way, if McDonald's and KFC were to start over in the United States knowing what they know now, how would their model differ?"

About the author

Maggie Starvish is a writer based in Somerville, Massachusetts.

Comments

    • Tarun Sharma
    • Executive

    That's make a lot of sense. That's the only strategy possible to make business successful in country where no single food category predominates.

     
     
     
    • walter P. Blass
    • Visiting Prof. of Mgm;t, Grenoble Grad Schl of Bus, France

    I am surprised that there is no reference to the earlier experience of KFC in Japan ( HBS Case 9-387-043 ) That case details all the mis-steps KFC made in an earlier attempt at globalization, including questionable choices both in the field and at HQ. Even though KFC was bought and sold several times in the period 1946-86, my sense is that YUM Brands was smart enough to learn from KFC's mistakes and not repeat them!

     
     
     
    • Siddharth Bharadwaj
    • student

    This model is a perfect fit for countries where multi-cuisine is predominant. As, for McDonald's, due to their inability to adapt to the regional taste's , they are not only being challenged but beaten by the local players on their own grounds.

     
     
     
    • chuck strum
    • chairman, Mountain Top Ventures

    It appears that everyone entering a foreign market should first study the Coca Cola Co.They work closely with the government and influencers and give the customer what they want using Coca Cola as the brand name.

     
     
     
    • Kapil Kumar Sopory
    • Company Secretary, SMEC(India) Private Limited

    Here is a glaring example of how success can be acieved in an alien environment. Adapting to local scenario and correctly judging the tastes,likes and dislikes of locals, employing a local to head the organisation are very useful strategies. And the person selected is focused, energetic as well as humble. This quality mix is ideal for long-term success.

     
     
     
    • Frank Riganelli
    • (Former) Fortune operations management and Instructor, Author

    A great example of meeting the market's wants in an offering. Having lived in China for several years, I can attest to the popularity of the wide offering of products on top of their famous secret-recipe chicken. And as much as KFC has managed to cater successfully to its customers, it is a somewhat unique offering to the tastes of the Chinese market. The egg-arts for instance, while popular, were an acquired taste item for people who weren't Chinese. However, regardless, KFC has gained remarkable presence in China, and having seen their bright and fun advertisements on the streets there, people have taken to the brand well. I'd say the model has two main aspects; offering to the customer's wants, and doing it with consistent quality.

    About Frank Riganelli: http://www.freado.com/users/28684/frank-riganelli

     
     
     
    • Corbett Wall
    • MD, +CW Associates

    Yes, KFC is a great example of getting it right in China. One thing which wasn't mentioned is real estate. KFC typically always finds and negotiates the best spots. In the 40+ cities I've been to recently, I rarely saw a bad location. For clothing check out Vero Moda, for chocolate look at what Mars has doing. For cars drive a new Buick. KFC is just one of many examples of companies getting it right in China. Each is really a different formula, but the equation usually begins with leaving the "we know it all" back home and taking the time to look at China for what it is - a once in a lifetime opportunity to be in the most chaotic and growing and competitive and profitable retail environment ever.

     
     
     
    • Jim
    • Chairman, SHI Group

    Getting camaraderie is not simple. Sam Su is the genius who knew that he could be smarter if he built a team that could be a real team.. You can be sure that he has people who are committed to KFC first and their agenda second. That did not happen by accident. I can feel in this story how careful he was putting his team together. Great stuff and Sam should be studied in more depth.

     
     
     
    • Ram
    • Accountant, ADIC

    This is perfect example of Emerging market helping developed market to sustain growth. MNC is globalizing the world with domestic growth. This will continue with many more consumer moving to BRIC. This is just a beginning.

     
     
     
    • Harland
    • misandrist, China

    You can tell how developed a city is by how many KFC exist. McD's and Starbucks indicate a higher level of development.

     
     
     
    • Rose
    • CFO, Confidential

    This is a great example how to take acknowledgement about the culture, enviroment and soft factors pay in the success of any venture. Is a mistake I oftenly see that companies who go abroad bring their teams, their management, their workers with almost no knowledgement about culture, tastes, etc. which makes more difficult to enter any market . Like it or not, cultural factor is a relevant issue when doing business in any other country and unless we westerners take that in consideration we will keep struggling in foreign markets.

     
     
     
    • Adriana Valtierra
    • highschool student, Centro Escolar Los Altos

    To correct the American fast-food model I think they should sell smaller and healthier portions. Few decades ago in the cafeterias a glass of Coke was sold in a reasonable size; but now with the competition of prices, sizes, and refill; sizes have increased impacting in people's alimentation. In these years we can't just be interested in money and market, but improve our conditions while gaining money. Being socially responsible.

     
     
     
    • Prasad Andugula

    KFC is not only doing well in China, also in India. As pointed out, it is all about adapting to the local culture and understanding the needs of the market. What may work in USA / Europe not necessary has to work in emerging economies. Quick disposal income also adding to the growth. This will be another classic case study for the management students .

     
     
     
    • Anonymous

    Did someone say high calories or trans fats in your oil....almost just as the local cuisine demands to have that delicious "fried" chicken just a little bit more fried might open new doors and the challenges of serving long, long lines.............!Atleast spicier KFC in India works wonders and it just really boils down to the adaptability of the local cuisine for sure!

     
     
     
    • Anonymous

    GREAT CASE STUDY ON HOW US COMPANIES ARE LEARNING TO NOT USE ONE SIZE FITS ALL APPROACH IN GLOBAL MARKET. WITH HUGE REVENUE POTENTIAL IN COUNTRIES LIKE INDIA AND CHINA US BUSINESSES MUST UNDERSTAND THE LOCAL CUSTOMER AND CATER TO THEIR NEEDS AND PREFERENCES TO BEAT THE COMPETITION.

     
     
     
    • Rokujo
    • Muser, Cookievision.blogspot.com

    The KFCs and Pizza Huts in China are recognizable in name only. The culture surrounding these restaurants are so different. I remember that eating in the Chinese Pizza Huts were like a luxury to many common people. They had waiters, a delicious salad bar, and pizza tailored to chinese tastes. It was like an upscale western restaurant, instead of like the "fast food" chains in America. The United States original model is a far cry from how sophisticated the Chinese really developed these chains. I could testify to McDonalds' unadapting model because they tasted the same, except in America, the portions were bigger. McDonalds really needs to step it up and lose its hoity-toityness. I never cared for McDonalds that much anyways. It's way too hyped up.

     
     
     
    • Prof. Roger Thompson
    • Sci, NMTU

    This is an odd problem that seems to stem from China's rapid internal expansion, coupled with American industry's need for external growth outside the traditional export markets due to an ailing economy. The result is what you see here, a lot of chickens and a lot of strange juxtapositions. When writing a journal on fishing reports on the South American coastal regions, I saw a lot of odd intrusions that are similar in effect to this. You have an outside force inspiring chaos and degradation in an area that previous to was untouched by this particular ill. Be it the fishing industry, or KFC you cannot ignore the facts.

     
     
     
    • Anonymous

    Who to say it is an odd thing in other places. As long as the locals accept and continue to buy-in to this "odd juxtapositions". Otherwise, it will die and wither. How arrogant we say those "odd things" should not to be there, because of our preconceived ideas or our static views of the world.

    When there is trade, there will be cultural exchange also. When things happen in reverse, our culture or preconceived notion of the "original state" will change, too.

     
     
     
    • Aakash Kataria
    • Student

    The decision taken by Mr. Chu to downsize and concentrate just on the Chinese market proved to be effective. Also sourcing supplies from the local Chinese would be seen as a good move by the Chinese govt., people.

     
     
     
    • Taiwo
    • TACandor

    "I Have a Dream", "In God We Trust"; I mean if McDonald's and KFC were to start over, they won't just model to serve and make returns, they would consider America. The beliefs from America's history will most certainly be infused into the model making process. The Why question of purpose will be integrated into their value question.

     
     
     
    • Naveen Prasath.S
    • Lecturer, Hill side institute of management

    This case has exorbitant share of insights to contemplate on issues of KFC. 1.It relates to adaptability of culture ,beliefs and expectations of china. 2.It urges us to contemplate on employees engagement in entertainment. 3.Employees and employer relationship of significance was screened . 4.It also nurtures to work according to the tastes and needs of a locations. It is a case study with immense ideas to thunder yound entrepreneurs with impeccable strategies to win over this world of business endeavours. Thanks & regards, Naveen Prasath.S

     
     
     
    • Ellen Gu
    • Student, Boston University

    Hi I mentioned this site in my own blog when analyzing KFC marketing strategy in China, please feel free to check it out: http://ellenyilungu.blogspot.com/2012/11/multicultural-brand-is-all-about-culture.html