Why Localisation Is Important for Success in China – Yum! Brands and the Rapid Growth of KFC

 Businesses from outside China trying to sell in China face a critical question as they try to enter China. How far should they go to adapt or redesign (“localise”) their products and services to meet the needs and wants of customers in China? Should they adapt existing products just enough to appeal to consumers in China? Or should they look to start again – rethinking the product or service from the ground up – in order to established a position in the market and then gain market share?

 Yum! Brands is a multinational that operates or licenses Kentucky Fried Chicken ("KFC"), Pizza Hut, Taco Bell and other small restaurant brands worldwide. Yum! is the world's largest fast food restaurant company in terms of outlets with more than 39,000 restaurants around the world in over 125 countries and global sales of over $12bn.

 For the last decade, Yum! Brands has relied upon international expansion as the main driver of revenue and profit growth. China in particular has proved to be a significant source of growth. For example, KFC has opened an average of one new outlet per day in China and has an objective of reaching 15,000 outlets.

 KFC has achieved this high rate of growth by adopting the concept of localisation. It has largely ignored the traditional model of KFC outlets in the US and other developed economies - that of a franchise operation with a limited menu, low prices and an emphasis on customers taking-out their food and drink to consume. Instead, the KFC model in China was redesigned to meet local needs.

First Mover Advantage in China?

The first KFC opened in Tiananmen Square (Beijing) in 1987 when western-style fast-food restaurants were unknown in China. Perhaps not surprisingly the first KFC outlet had strong novelty value and attracted huge queues and custom. KFC beat McDonald’s into China- they opened their first restaurant in China in 1990. Burger King arrived there in 2005.

However, it took several years for KFC's management team to develop a winning growth strategy. Trial and error was an important part of the process. By entering the market early and learning from their mistakes, KFC were able to develop a strategy that seemed to give them some important sources of competitive advantage:

·KFC localised the product, reinventing the menu, adding lots of choice and varying the menu by region within China;

·KFC moved quickly to establish scale in China. It identified 16 key cities as the base from which they could expand rapidly;

·KFC created its own distribution system to ensure that it could rely on supplies reaching the expanding store network;

·An emphasis was put on extensive staff and management training covering everything from food preparation to customer service and logistics;

·KFC owned rather than franchised the outlets in China (a break from the traditional model KFC has used in developed economies). This gave them greater control over those outlets which became an important source of information about local/regional customer needs.

The localisation of the KFC product was a key factor in Yum! Brand’s growth. Let's look at that in a little more detail to see what was done and why.

Not So Much Fast-Food; More of a Dining Experience

How a brand is perceived is a key part of its success and in China KFC attempted to position the brand as part of the local community. Each KFC outlet was much larger than those in the US (typically twice the size) to allow for bigger kitchens and to provide space for customers to dine and linger. KFC made a special effort to welcome extended families and groups.

A much wider choice was also offered on the KFC menu in China – typically 50+ items compared with about 30 in the US. Product innovation was also more active, with up to 50 new products added each year (some of them temporary specials). Compare this to the US where KFC introduce just a few new products each year.

Spice levels were also varied by region within China. In the early days KFC customers in Shanghai complained that the dishes were too “hot” whereas diners in Sichuan considered the menu too bland. So recipes were changed.

And then there is congee – the best-selling item at KFC China in the mornings. Congee is the perhaps the best example of localisation from the KFC growth story. Congee is a rice porridge that can feature pork, pickles, mushrooms and preserved egg.

The result of this localisation is that KFC outlets in China are much larger, more complex restaurants than the typical fast-food store we are used to. On average each outlet employs 60 people including hostesses who greet customers and organise pastimes for younger children.

Geographical Expansion Builds Scale But Creates Need for Widespread Training

KFC soon faced intensive competition from McDonalds in China’s four largest cities. So, rather than battle it out for market share in those cities. KFC opted to embrace smaller cities and build a genuinely national business with outlets all over China. It used an initial presence in 16 locations to act as a base from which it could accelerate the outlet opening programme. The period of time taken from initial site selection to opening was also made much quicker – typically 4-6 months compared with 9-12 months in the US.

To support this rapidly-growing network of outlets, KFC established its own distribution business in 1997, building warehouses and operating a fleet of trucks. Partly this was because China lacked an existing logistics network into which KFC could tap. However, it was also necessary for KFC to be able to offer a complex menu and to be able to introduce new products quickly. It also gave KFC greater control over food safety although KFC wasn’t immune to problems that arose with contaminated foodstuffs in the supply chain.

The rapid pace of outlet opening and investment in supporting infrastructure posed some significant workforce planning challenges for KFC. To maintain its annual expansion (roughly one store a store) KFC needs at least 1,000 new managers and 30,000 new staff members each year (allowing for relatively high manager and staff turnover)

The workforce planning challenge was made even tougher because of the strategy of opening wholly-owned rather than franchise outlets. Franchising is the traditional method of expanding in most fast-food markets around the world because it reduces up-front investment costs, lowers risk and enables more rapid geographic expansion. It also places the responsibility for staff recruitment onto the franchisee!

However, KFC wanted control of their brand in China. The restaurant operations and menu were relatively complex. Neither was there a large pool of experienced, entrepreneurial candidates who would be able to take the risk of investing in a KFC franchise in China. Avoiding the franchise model meant much higher investment and risk for Yum! Brands in China. However, it also meant that they could manage all aspects of the growth strategy and day-to-day operation.

Yum! Brands strategy in China undoubtedly proved successful; although the business would go onto suffer from concerns over KFC’s supply chain in 2011 and 2012 in relation to high levels of antibiotics discovered in samples of KFC chickens. The business was also hit by reduced demand for chicken-based products following an outbreak of avian flu in China. The resulting negative impact on KFC sales significantly reduced KFC’s profits from China in 2013, although the business remained committed to a continued outlet-opening programme of more than one store per day.

"Yum has become the most successful foreign company in China," says author James McGregor"They got in early," he says. "They adapted the product. They expanded aggressively, and they gave their Chinese managers real decision-making power."

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