Fibhand Wey Boboo| of Busines IVE The University of Wester Ontario 9-90-G001 ORANG OWN (TKAE ~> WARS PESO, CAP WOT aeFePP 10 . MUN AUTRES | aug EXPECTATION) KENTUCKY FRIED CHICKEN IN CHINA (A) #1. HA (iw erty Level, WOU Fon iVine, WAIST A RS Oe RCCER TELE, rofessor Alen J. Memon prepared this case with assistance rom Professor Peul Beamish solely to prove ‘material for cass eiscussion. Funding was provided by The Federation of Canadian Municpallies: Open Cty Project through a grant rom the Canadian Intemational Development Agency (C.I.A) and by The Universty of Westem Cniane. The authors do not intend to ilustrate either effective or eflective handing of manager situation. The authors may have disguised certain names and other identiving information to proest cantina, ‘The University prohibits any form of reproduction storage or ransmitalwitnout writen permission trom the Richard ‘ey Scnoalot Business. This matenalis not covered under authonzaton trom CanCopy or any over reprodictn ‘ght organization, To onder copies or request permission fo reproduce materials, contact Case ard Publcaton ‘Senvces, Richard vey School of Business, The Universityof Westem Ontario, London, Ontario, nada, NGA 3K, ‘Phone (519) 661-3208, fax (519) 661-9882, e-mail cos@rvey uwo.ce (Copyright © 1989, The University of Westem Ontario and C.LD.A. Version: 1992.04.29 SS In late September 1986, Tony Wang leaned back in his leather chair in his Singapore office and thought ofthe long road that lay ahead if Kentucky Fried Chicken (KFC) were ver to establish the first completely Western-style fast food joint venture in the People's Republic of China. Wang, an experienced entrepreneur and seven-year veteran of KFC had only two months previously accepted the position of company vice president for Southeast Asia with an option of bringing the world's largest chicken restaurant company into the world's most populous country. Yet, as he began exploring the opportunities facing KFC in Southeast Asia, Wang was beginning to wonder whether the company should attempt to enter the Chinese market at this time. ALM crt WATICAL LODE -F9 Without any industry track record, Wang wondered how to evaluate the attractiveness cf the Chinese market within the context of KFC's Southeast Asia region. Compounding the challenge was the realization that although China was a huge, high profile market, itwould demand precious managerial resources and could offer no real term prospects for significant hard currency profit repatriation~even in the medium term. Wang also realized that a decision to go into China necessitated selecting a particular investment Jocation in the face of great uncertainty. It was equally clear that while opportunities and risks varied widely from city to city, the criteria for evaluating suitable locations remained unspecified. With limited information to go on, Wang realized that a positive decision on China would be inherently risky~both for the company and for his ownPage 2 001 HISTORY The origins of Kentucky Fried Chicken can be traced to Harland Sanders, who was bom in 1890 in Henreyville, Indiana. When Sanders was a boy, he dropped out of the sixth grade and began a stream of odd jobs, concentrating eventually on cooking. In time he opened his own gas station with an adjoining restaurant. In the 1930s, Sanders * developed a “secret” recipe for cooking chicken by first applying a coating containing a mixture of 11 herbs and spices and then frying the chicken under pressure. This “southem fried chicken" eventually became a hit at the gas station and in 1956 Sanders decided to franchise his novel concept. By 1964, he had sold almost 700 franchises. Much of Sanders’ success in this pioneer industry lay in his near obsession with product quality and a commitment to maintaining a focused line of products In 1964, at the age of 74, Harland Sanders finally agreed to sell the business in exchange for SUS. 2 million and a promise of a lifetime salary. The sale of the business 10 John Brown, 29-year old Kentucky lawyer, and his financial backer, Jack Massey, 60, was accompanied by the assurance that Sanders would maintain an active role in both product promotion and quality control of the new venture. With new, aggressive managers and a rapidly evolving American fast food industry, KFC's growth soared. Over the next five years, sales grew by an average of 96 percent per year, topping SU.S. 200 million by 1970. This same year almost 1000 new stores ‘were built, the vast majority by franchisees. A key element in this rapid growth was Brown's ability to select a group of hard-working ‘entrepreneurial managers. Brown's philosophy was that every manager had the right to expect to become wealthy in the rapidlv growing company. By relying heavily on franchising, the company was able to avoid the high capital costs associated with rapid expansion while maximizing returns to shareholders. Rapid sales growth provided promotion and opportunities to purchase stock for company managers as well as the opportunity for franchisees to improve margins by spreading administrative costs over a broader base of operations. This was critically important given the high fixed costs associated with each store. Volume, both at the individual store level and within a franchisee's territory, was thus essential in determining profitability. Profitability, in tum, assured the attractiveness of KFC to potential future franchisees. In 1971, Brown and Massey sold KFC to Heublein Inc. for $US 275 million. Heublein, ‘based in Farmington, Connecticut, was a packaged goods company which marketed such products as Smimoff vodka, Black Velvet Canadian whisky, Grey Poupon mustard, and Al steak sauce.Page 3 Challenges at Home and Abroad The establishment of KFC’s international operations began just prior to the company's acquisition by Heublein, KFC opened its first store in the Far East in Osaka, Japan in 1970 as part of Expo-70. By 1973, KFC had established 64 stores in Japan, mostly in the Tokyo area KFC also moved quickly into Hong Kong, establishing 15 stores there by 1973. Other areas of expansion included Australia, the U.K., and South Africa. Shortly after the acquisition, KFC’s small international staff was merged with Heublein's ‘much larger intemational group in Connecticut. In spite of Heublein's efforts to impose rigid operational controls, KFC country managers were frustrated by the imposition of USS, store designs, menus, and marketing methods on culturally divergent host countries, Resistance to corporate control grew and led many stores to develop their own menus: fried fish and smoked chicken in Japan, hamburgers in South Africa, and roast chicken in Australia. In some cases. local managers seemed to know what they were doing: in other cases, they clearly did not. After heavy losses, KFC pulled out of Hong Kong entirely in 1975. In Japan, operations also began on shaky grounds with losses experienced throughout much of the 1970s. In addition to poor relations between country managers and corporate staff, the 1970s presented 2 much more challenging environment for KFC in the United States. The fast food industry was becoming much more competitive with the national emergence of the Church’s Fried Chicken franchise and the onset of several strong regional competitors. Important market share gains were also being made by McDonald's hamburgers. With the Heublein acquisition, many top managers who had been hired by Brown and ‘Massey were either fired or quit, resulting in much turmoil among the franchisees, By 1976, sales were off 8% and profits were decreasing by 26% per year. To make matters ‘expansion had led to inconsistent quality, poor cleanliness and a burgeoning szoup of disenchanted franchisees who represented over 80% of total KFC sales, At one point, even white-haired Harland Sanders was publicly quoted admitting that many stores lacked adequate cleanliness while providing shoddy customer service and poor product quality ‘Tuming Operations Around In the fall of 1975, with rapidly deteriorating operations both at home and abroad, Heublein tapped Michael Miles to salvage the chain. Miles was initially brought in to head up Heublein's international group, which by this point was dominated by KFC. Miles had come to Heublein after managing KFC’s advertising account for ten years with the Leo Bumett agency. At Heublein, he had risen to vice-president in charge of the Grocery Products Division. While he had litle international experience, he had developed a strong reputation for strategic planning, His challenge in late 1975 was to 3-80-Go01