The World Is Flat #3: How KFC Went Global

October 1, 2009

Large corporations are often overlooked in the discussion of entrepreneurship. Yet, they are forced to innovate daily to keep growing and providing value to shareholders. Globalization is one such growth strategy, and one of the most successful going global stories is about a brand with which we are all familiar: KFC. This is the story of an American fried chicken restaurant chain dominating the Chinese restaurant industry on its home turf. Furthermore, China has thousands of years of culinary tradition and sophistication. How did this happen, you may ask?

Warren Liu speaks at Maggianos in Washington, DC on KFCs success in China Former YUM Brandsexecutive Warren Liushares with us the entrepreneurial side of the restaurant business, and the positive impact of going global. Q: Tell us about yourself and the business youll be telling us about today. My name is Warren Liu. I served with Yum Brands Greater China (which included China, Hong Kong, Macau and Taiwan) between 1997 and the end of 2000, with responsibilities including supply chain management, distribution and logistics, new product development, quality assurance, new market and real estate development, and IT. There was no such position before me and, as far as I know, none after. Essentially, these responsibilities covered all of the back room operations in support of all KFC restaurants within Greater China. I was also a member of the Yum Brands Greater China Executive Committee.

KFC is the leader of the Chinese restaurant industry in terms of market share, profit, and revenue; way ahead of McDonalds and other restaurant brands foreign and domestic.

The book I authored, KFC in China: Secret Recipe for Success, traces the key factors which contributed to KFCs amazing success in China based on an insiders perspective. The book was written in two languages: Chinese and English. Q: Explain the decision to go global. Was your company hesitant to go global? If so, what helped them make the jump? Like most multinational companies, KFC was first attracted to China by the size of the countrys market potential: 1.3 billion people, 20% of the worlds total. Even after Chinas economic reform that began in 1978, China remained a high-risk investment destination for multinationals during the ensuing decade due to political and economic uncertainties.

Map Image from Liu's Presentation Yum Brands parent company at the time, Pepsico, wanted to get into China early, and did. On November 12th, 1987 Chinas first Western fast food restaurant opened to the warmest embrace imaginable by Chinese consumers. For weeks, long queues formed every day outside the restaurant, waiting to gain entry. It was as if decades of hidden

curiosity and conflicting emotions toward the West had been unleashed all at once. While some thought that Shanghai or Guangzhou would make a better choice, in reality KFCs decision to locate the first restaurant in Beijing Chinas political center was a wise choice. Politics still reigned supreme. Since that first restaurant opening in 1987, KFC has come a long way in China. So have Chinese consumers. Q: In going global, what types of new things did your companys staff have to learn? How did you have to adapt? The right attitude One thing Ive learned about going global especially going to a country market like China which is huge, complex, and highly dynamic - is that a company needs to be prepared to adapt its products, services, business practices, even management systems and processes in order to fit into the local context different customer habits and needs, social and cultural values, political systems, government regulations, industry structure and drivers, and competitive forces. We were prepared to adapt. Not every company is. Local leadership with strong corporate support To formulate, and to effectively implement, a business strategy that fits well with the local context requires a local leadership team. That leadership team must be equipped with strong support from the corporate office, have years of industry experience, and possess deep, insightful knowledge about China. This knowledge must be so deep and so insightful that it is intuitive. Thus, part of the secret to our success is what we didnt have to learn thanks to this local team. Such a leadership team is the prerequisite, the base and foundation, for developing and implementing an effective business strategy geared for the accumulation of company resources and organizational capabilities required for building a sustainable competitive advantage.

Slide from Warren Liu Presentation Q: What were the major steps involved with setting up operations internationally? After the leadership team was in place, it was time to focus on operations. There are three big categories of emphasis under which many of KFCs activities fell: Development of People and Talents, Localization, Distribution & Logistics. People and Talents. From the early days, Yum Brands Greater China paid special attention to the recruitment, training, and development of its management talents, especially restaurant management talents. Over time, KFC China refined a restaurant operation management development system which enabled, on average, one new KFC restaurant opening each day. Today, this system is a model for the Chinese fast food industry. Localization. The business model for the fast food industry is a cookie cutter business model. That is, in order to present a consistent consumer experience and brand image around the world, all restaurants - although situated in different countries and cities and facing different social, cultural, political and economic contexts need to conform to a common set of operating standards and practices. Yet, beyond the standard product and service offerings, the look and feel of each restaurant, operating systems and practices, some local adaptations and adjustments are necessary, appropriate, and often unavoidable. Where should a multinational company draw the line between global standardization in order to drive brand consistency and global economic efficiency on one hand, and local adaptations in order to better meet local market needs on the other? In China, as elsewhere, the optimal choice is seldom one or the other. Instead, it is a question of degree and mix; and it is situation dependent. China is a market with a few thousand years of recorded history, a deeply entrenched culture, and very different from the West. Any Western company selling a product or service that touches upon Chinas cultural roots such as food products or education services must consider various programs of localization unless it is content to stay within a niche market segment. Under such circumstances, while the degree of localization required depends, in part, on the characteristics of a product or a service, the actual extent of localization depends on a companys willingness to localize - reflecting elements of its corporate DNA such as flexibility and adaptability.

KFCs decision to pursue a broad and active localization strategy in China began with the assembly of its local leadership team made up of US-educated ethnic Chinese drawn from Taiwan and other parts of Asia which was, practically speaking, as local a leadership team as feasible during the 1980s. Once a qualified and experienced leadership team is in place that is very knowledgeable about both the best industry practices outside China and the local context inside China, KFC was in a strong position to assess how far, how deep, and how fast to expand localization practices across people, products, functions, management systems, policies and processes. Over time, the best judgments of this local leadership team led to timely actions, quick learnings, continuous adjustments, and self-improvements in a highly dynamic and fast-moving economic environment. Beyond the localization of talents, the importance of product localization comes next. After establishing its first test kitchen in Shanghai during the late 1990s, KFC has been busy with frequent new product introductions - products developed in China; for China. All of these new products have been designed and developed with local Chinese characteristics, from content and taste, to appearance and name. Products like Beijing Chicken Roll, Golden Butterfly Shrimp, Four Seasons Fresh Vegetable Salads, Fragrant Mushroom Rice, Tomato Egg Drop Soup, Preserved Sichuan Pickle And Sliced Pork Soup, Seafood Egg Drop Congee, and Mushroom Chicken Congee make some people wonder: is KFC turning into a Chinese fast food chain? Therein marks the essence, and the success, of KFCs product localization program in China. In addition to talent and product, KFCs localization programs in China touched on nearly every aspect of its operation, from marketing, advertising, brand positioning to supply chain, distribution, and logistics. Distribution & Logistics. The distribution and logistics system of KFC China is one of the most important, and least recognized, contributors to it success. At the time of first entering China in 1987, KFC was confronted with two basic facts: 1. Both the quality and reach of roadways in China were vastly inferior compared to the developed countries. No highways existed at the time. As a matter of fact, the first highway in China only appeared in the late 1990s; and the overwhelming majority of Chinas highway system today, which amounts to approximately 60,000 km, is a direct result of construction completed since 2000. In other words, it took China ten years, fifteen at most, to construct a nation-wide highway

network which rivals that of the United States; another vivid example of the speed of change in China.
2. Lack of qualified 3rd party logistics service providers that offered storage,

transport, and delivery services across all provinces. Even today there are very few firms with this capability. Presented with these two challenges, KFC adopted an approach that began with utilizing existing assets: Warehouses, trucks, and workforces which KFC inherited from its local joint venture partners. This was followed by the installation of its own employee training and quality control and management systems. Within a few years, the operational standard of these warehouses and trucking fleets were brought up to KFCs global standard. With distribution and logistics resources directly and completely under KFCs own control, KFC China was able to expand further and faster into new geographic territories than its competitor. This allowed the company to establish competitive advantages through business volume, scale, cost efficiency, and brand leadership over time. A captive distribution and logistics system complemented KFC Chinas business strategy of building scale and speed through rapid restaurant expansion; without which the successful execution of KFCs strategy in China would have been impossible. Q: What have been the benefits and risks, and to whom, with regard to going global? (The company, customers, other) Risks Cost to the company. One of the risks was exposure. Many other brands have been pulled out of China. Of the five different restaurant brands Yum Brands has introduced in China, two have been pulled out (A & W and Taco Bell); another, a locally developed brand called East Dawning serving Chinese fast food, has been struggling since its inception a few years ago. Two brands have been very successful, Pizza Hut and KFC. Cost to the consumer. In particular, we were not sure how customers would react to the price. Most Beijing citizens could not afford the relatively high cost of eating out at KFC in those days, as was most certainly the case in every other city and village throughout China. Benefits

The Food: In addition to tasty American-style fried chicken, there were many other reasons eager customers queued up outside the very first KFC restaurant after its grand opening on November 12th, 1987 The Values: Customers were attracted to KFCs American roots; its likeable, grayish, beard-bearing brand spokesperson Colonel Sanders in a society that revered age, wisdom, and the importance of family. The Experience: The unique restaurant dcor; the new way of ordering food; the bright red and blue colors of KFCs brand logo; the American music broadcasted inside the restaurant and, as an added bonus, a very clean toilet! Though eating out at KFC was expensive, it was a curious, exciting, unique and brand new experience never before encountered by a Chinese customer. Although the food was prepared fast, the dining experience itself marked an occasion, a very special event that required savoring with a measured pace. From the very beginning, KFC was never a fast food experience for Chinese consumers. Instead, it was more of a sit-down, dining experience. Moreover, dining at a KFC restaurant was like taking a brief tour of America, with all its connotations: political, cultural, time and space; real or imaginary. For YUM Brands, the benefit has been growth. Today, there are more than 2,500 KFC restaurants, each of which generates an average of one million dollars in revenues and 20% gross profit annually. A new KFC opens almost every day. KFC leads the closest competitor by a comfortable margin of at least two to one in China. At the end of 2008, China operation contributed 31% of Yum Brands worldwide revenue, and 28% of worldwide operating profit. Three years earlier, at the end of 2005, 14% and 16%, respectively. At this rate of organic growth, Yum Brands China will be contributing half of corporate revenue and/or profit before the year 2015. Q: Aside from the benefits, how has going global changed the business? If my prediction is proven correct, in less than five years China will become the largest country market on which its parent company relies for revenue and profit contributions. This would be larger even than its home country, the United States. When that happens, it will be a record-breaking event for US-based multinationals. As the leader of Chinas fast food industry, KFC has undertaken key initiatives in a few social projects since the beginning of this century, two of which are related to college education of youth in need of financial assistance, and consumer balance of diet. Q: What resources (information, organizations, experts) would you recommend to a business taking the first steps in going global?

Due to internet and related technologies, resources available today are far more varied, and data can be accessed far quicker, compared to thirty years ago when I was facing this problem myself. Nevertheless, I hope some of the tools I found useful, and costeffective, havent changed. For example, various U.S. government agencies offer different background data on countries around the world, from demographics gleamed from country analysis published by the CIA, to country-specific industry reports prepared by The U.S. Department of International Trade. I have found the quality of these reports to be first-grade, at a fraction of the cost of a private syndicated report or, far worse, a consulting report.The American Chamber of Commerce located in your destination country, or city, is another reliable and cost-effective source.