Kentucky Fried Chicken and the Global Fast-Food Industry Essay Example

operating franchises in 42 other countries throughout the Caribbean, and Central and South America by mid-1994. Executive Summary Fast-food franchising was still in its infancy in 1952 when Harland Sanders began his travels across the United States to speak with prospective franchises about his “Colonel Sanders Recipe Kentucky Fried Chicken. ” By 1960, “Colonel” Sanders had granted KFC franchises to over 200 take-home retail outlets and restaurants across the United States. He had also succeeded in establishing a number of franchise in Canada.

By 1963, the number of KFC franchises had risen to over 300 and revenues had reached $500 million. By 1964, at the age of 74, the Colonel had tired of running the day-to-day operations of his business and was eager to concentrate on public relation issues. Therefore, he sought out potential buyers, eventually deciding to sell the business to two Louisville businessmen – Jack Massey and John Young Brown Jr. – for $2 million. The Colonel stayed as a public relations man and goodwill ambassadors for the company. During the next five years, Massey and Brown concentrated on growing KFC’s franchise system across the United States.

In 1966, they took KFC public and the company was linked on the New York Stock Exchange. By the late 1960s, a strong foothold had been established in the United States, and Massey and Brown turned their attention to international markets. In 1996 they took KFC public and the company was listed on the New York Stock Exchange. By 1971, KFC had 2,450 franchises and 600 company-owned restaurants worldwide, and was operating in 48 countries. In 1971, KFC entered negotiations with Heublein Inc. to discuss a possible merger.

Several months later, Heublein acquired KFC.

Heublein was in the business of producing, vodka, mixed cocktails, dry gin, cordials, beer and other alcoholic beverages. Because of his limited experience in the restaurant business, conflicts quickly erupted and new restaurant openings had slowed to about twenty per year. In 1977, Heublein sent a new management team to redirect KFC’s strategy. A “back-to-the-basics” strategy was immediately implemented. By 1982, KFC had succeeded in establishing a successful strategic focus and was again aggressively building new units. In 1982, R. J. Reynolds Industries, Inc. RJR) merged Heublein into a wholly owned subsidiary.

The merger with Heublein represented part of RJR’s overall corporate strategy of diversifying into unrelated businesses, including energy, transportation, food, and restaurants. In 1985, RJR acquired Nabisco Corporation for $4. 9billion. Nabisco sold a variety of well-known cookies, crackers, cereals, confectioners, snacks and other grocery products. The merger with Nabisco represented a decision by RJR to concentrate its diversification efforts on the consumer foods industry. It subsequently divested many of its nonconsumer food businesses.

RJR sold KFC to PepsiCo. Inc. one year later. PepsiCo’s strategy of diversifying into three distinct but related markets – soft drinks, snack foods, and fast-food restaurants – created one of the world’s largest consumer products companies and a portfolio of some of the world’s most recognizable brands. Between 1990 and 1996, PepsiCo grew at an annual rate of 10 percent, surpassing $31 billion in sales in 1996. However, PepsiCo’s sale growth masked troubles in its fast-food business.

Declining margins in the fast-food chains reflected increasing maturity in the U. S. ast-food industry, more intense competition among U. S. fast-food competitors, and the aging of KFC and

Pizza Hut’s restaurant base. As a result, PepsiCo’s restaurant chains absorbed nearly one-half of PepsiCo’s annual capital spending during the 1990s.

However, they generated less than one-third of PepsiCo’s cash flows. Therefore, cash was diverted from PepsiCo’s soft drink and snack food businesses to its restaurant businesses. KFC continued to dominate the chicken segment, with 1997 sales of $4 billion. Its nearest competitor, Boston Market, was second with sales of $1. billion. KFC operated 5,120 restaurants in the United States in 1998, eight fewer restaurants than in 1993. Rather than building new restaurants in the already saturated U. S. market, KFC focused on closing unprofitable restaurants, upgrading existing restaurants with new exterior signage, and improving product quality.

The strategy paid off. Despite KFC’s continued dominance within the chicken segment, it has lost market share to Boston market. In 1993, KFC introduced its own rotisserie chicken, called “Rotisserie Gold,” to combat Boston Market. Lower growth in the U.S. fast-food market intensified competition for market share among restaurant chains and led to consolidation, primarily through mergers and acquisitions, during the mid-1990’s.

The effect of these and other recent mergers and acquisition on the industry was powerful. The top ten restaurant companies controlled almost 60 percent of fast-food sales in the United States. The relatively low growth rate in sales in KFC’s domestic restaurants during the 1992-1997 period was largely the result of KFC’s decision in 1993 to begin selling company-owned restaurants to franchisees.

While company-owned restaurants were relatively easier to control compared to franchisees, they also required higher levels of investment. This means that levels of cash were diverted from PepsiCo’s soft drink and snack food businesses into its restaurant businesses.

KFC faced a variety of issues in Mexico and Latin America in 1998, few restaurants had been opened in South America. However, KFC was now aggressively building new restaurants in the region. KFC halted openings of franchised restaurants in Mexico and all restaurants opened since 1995 were company-owned.

KFC was more aggressively building restaurants in South America, which remained largely unpenetrated by KFC through 1995. Of greatest importance was Brazil, where McDonald’s had already established strong market share position. Brazil was Latin America’s largest economy and a largely untapped market for KFC. The danger in ignoring Mexico was that a conservative investment strategy could jeopardize its market share lead over McDonald’s in a large market where KFC long enjoyed enormous popularity.