University of Southeastern Philippines

College of Business Administration

Kentucky Fried Chicken in China

Submitted by

Laureen Baylon

Kevin Cabante

Carmela Cañizares

Charlemagne Garcia

Submitted to

Dan Protacio P. Pacoy, MBA

September 7, 2019
Kentucky Fried Chicken in China - PESTLE Analysis

Case Study: KENTUCKY FRIED CHICKEN IN CHINA

Question to Answer: “Where should KFC locate their first store in China?”

I.​ ​Executive Summary:

In 1964, Harland Sander, the owner of Kentucky Fried Chicken agreed to sell the
business in exchange for $U.S. 2 Million and a promise of a lifetime salary. The business
was first sold to John Brown, a Kentucky lawyer and his financial backer, Jack Massey was
accompanied by the assurance that Sanders would maintain an active role in both product
promotion and quality control of the new venture.

In 1971, Brown and Massey sold KFC to Heublein Inc. for $US 275 Million. Heublein
expand rapidly the operations of KFC internationally and incur heavy losses due to impose
rigid operational controls that led to inconsistent quality, poor cleanliness and burgeoning
group of disenchanted franchisees and in 1976, sales fall by 8% and the profit continue to
decrease year-on-year by 26%. Heublein tapped Michael Miles to manage KFC’s entire
worldwide turnaround operations and the results were dramatic.

By 1982, KFC had become Heublein’s fastest growing division with growth of 2.3%.
Although the KFC had made dramatic progress, at the late summer of 1982, R.J Reynolds of
Winston-Salem N.C. acquired Heublein for $US 1.4 billion and Richard Mayer became the
CEO of KFC who had worked with Mike Miles on the turnaround. The heavy financial
backing of Reynolds resulted in further growth for KFC. By 1983, KFC had established 85
franchise stores in Southeast Asia Region and after a 10 year absence, KFC moved back into
Hong Kong in 1985.

The initial discussion over feasibility of entering the huge Chinese market was held in
early January 1985 between Richard Mayer and Tong Wang, a former executive of KFC.
Tony Wang was investigating alternatives for China as an option for the growth of the
company.

II.​ ​Problem Statement

Kentucky Fried Chicken has extensive experience in the fast food chain business.
Recently, KFC ranked as fourth largest fast food restaurant chain having a 20,404 number of
locations across the globe. As Tony Wang investigates some alternatives on how they can
penetrate Chinese Market. Tony wants to know the setbacks, inherent risk and if the low risk
alternatives were worth pursuing to derive into the answer to “where should KFC locate their
first store in China?”

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Kentucky Fried Chicken in China - PESTLE Analysis

III.​ ​Pestle Analysis

China is an emerging economy that offer lot of market opportunities for foreign
investment. Although the country has a huge potential for economic growth offering access
to a large market and considerable savings in labor costs, caution must be used due to
differences in the political and cultural environment that create risk and pose uncertainty for
foreign investors. There are conditions that KFC would need to consider as they penetrate the
Chinese market are the determinant of the worthiness of pursuing the expansion.

People’s Republic of China

Political ● China is particularly hazardous with respect to political risk. The

possibility of nationalization of industries. This had already
occurred in 1949 in China
● Possibility of Government Interference in Beijing for political
purposes.
● Transition in government and changes in policy which might
affect on how business is done in China. This could be favourable
or unfavourable to KFC.
● Stable political system in which KFC can take advantage in
making strategies for putting up a store.
● In Guangzhou, the government is given a greater autonomy
approving foreign investment projects, reducing tax rate and
encouraging technological development.
● Knowledge concerning government policies, local business
practices, operational conditions and so on, could be difficult for
foreigners to ascertain.

Economic ● Foreign exchange rate affects many companies, especially those

doing business internationally. KFC may incur foreign exchange
gains or losses.
● Communist economies imposed to operate two separate currencies
in Chinese economy namely ​Renminbi ​which is used by local
Chinese and ​Foreign Exchange Certificate which is used by
foreigners to represent the value of hard currency while in China.

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Kentucky Fried Chicken in China - PESTLE Analysis

● In 1986, China’s GNP rises to7.9% from 5.9% in the early 1980’s,
if KFC had decided to enter in Chinese market in 1986, the rise of
GNP uplifted the condition of the country’s overall production as
well as the direction of its economy. If KFC will enter the market
at the current year 2019; the GNP as of June 2019 is 6.2% also
yielded high is still an advantage.
● If KFC chooses Shanghai, Chia-Tia Group asa supplier of their
chicken will give a growth in the share of wallet of KFC. Thailand
has a population of 52.6 million. GNP per capita is USD 790 with
annual real GNP growth of 5.3%

Social ● Cultural difference. This includes the attitude of the employees

locally hired and the customers of KFC. Poor behaviour as well as
good behaviour of employees may impact sales, quality service,
image of KFC.
● High cost of training employees to adapt the culture of KFC.
● Language barrier inChina that will put any foreigners at an
overwhelming disadvantage. Relying on translations could
potentially miss out on important discussions and decisions.Like in
Guangzhou, they have two languages in the region and
● Adjusting with the local market’s eating habits and taste
preferences.
● Challenges like intercultural problems within joint ventures.
● Population for potential market.China has a 1.054 billion mass of
potential market having life expectancy of 69.

Technological ● Changing market trends.

Advancement ● Automation of some process in production to achieve consistent
quality in service and products.
● Future markets are revolving around the handy gadgets including
mobile phones, tablets and similar wearable gadgets.

● Future market is looking for some ways present effectively the

content in a form of words and in the shape of visuals are the most
successful ones
● Ease of access for supply chain partners.

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Kentucky Fried Chicken in China - PESTLE Analysis

Legal ● Employment laws and regulations that should be observed in

hiring locals.
● Laws and regulations that should be observed and followed in
relation to putting up business in China.
● Abides by the law and avoid cutting corners. It will take more than
3 months to complete the business registration. Business visa is the
best choice while setting up KFC Stores in China.
● Establishing joint venture with the local partneris the fastest means
of setting up a KFC store.

Environment ● Corporate Social Responsibility. This is the company’s

commitment to manage the social, environmental, and economic
effects of its operation to build up positive image of the company.
● Managing its waste through recycling and proper disposal of
waste.
● Noise and pollution in Shanghai discourages tourists which could
be potential customers of KFC.
● Tourist attractions in Shanghai, Guangzhou, and Beijing attracts
tourists which could be potential customers of KFC.
● Guangzhou is the city that contains three “special economic zones”
of China; it is frequently welcoming western business people as
well as the tourists. Operations could easily be serviced out
because of easy access to HongKongoffice via road or train,but
inadequate supplier of chickens.
● In Beijing, there is advancement inInfrastructure and a tourist
centre for Western visitors. The city has considerable advantages
to expand throughout, with several poultry producers outside the
city but heightened the possibility of government interference.

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Kentucky Fried Chicken in China - PESTLE Analysis

IV. Conclusion and Recommendation

KFC has the capacity to expand its services in China; however the management of KFC
will decide which area of China, they will be putting their store. Since, KFC had already returned
to Hong Kong from their turnaround operations. Based on the PESTLE Analysis made, it is more
advantageous to put up their business in Shanghai. Since it is China's largest city with a
population of 11 million out of 1.054 billion population of the People’s Republic of China, it can
provide an easy access to the supply of quality chicken. Chia-Tai Group has a good relationship
with KFC and that will be the opportunity of KFC growth share of wallet as operations expands
to Bangkok, Thailand having 52.6 million population of a potential market. Besides, having a
local partner like Tony Wang is somehow be a valuable tool for Richard Mayer’s in facing these
challenges in legal, financial and reputational setbacks.

V.​ ​References

Yang, L. (2008). ​China’s Growth Miracle: Past Present and Future​. Accessed on September 1,
2019 from http://www.unrisd.org/80256B3C005BD6AB%2F(httpAuxPages)%2F2893F
14F41998392C1257BC600385B21%2F$file%2FChina's%20growth%20miracle%20080
8.pdf

Morrison, A. (1989).​ Kentucky Fried Chicken in China.​ Ivey Management Services.