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CASE 35 KFC and the Colonel* Introduction The story of Kentucky Fried Chicken is the story of Colonel Harland Sanders. The Colonel," however, was not a real colonel and Sanders was not even a Kentucky native. He was nevertheless, a prime example of the resiliency of the human spirit because he demonstrated that, even at 66 years of age, after a series of financial fiascoes, it is still not too late to become a business success and a millionaire. After having lived in obscurity during the first six decades of his life, his benign, bewhiskered countenance became the best-known living advertising symbol throughout the world. Although he was often tough and curt with his employees and associates, he loved children and he donated much of his time and fortune to helping young people. Unpredictable and sometimes erratic in his personal and business dealings, he was unfailingly dedicated to hard work and to the perfection of details. Active until December 1980, when he died at the age of 90, he was a living example of his own philosophy, "A man will rust out faster than he'll wear out:" this was Harland D. Sanders, the kindly curmudgeon who founded Kentucky Fried Chicken. Harland Sanders was born in Henryville, Indiana, a small town about 17 miles north of Louisville, Kentucky. When he was five or six years old his father died, leaving his mother to raise him and two younger children. What appeared to be a disaster prepared Harland for his future success, because as the oldest child in the family Harland had to take over some of the duties of the household, including some of the cooking. Preparing meals under his mother's direction helped to provide him with the know-how on which he would capitalize many years later. "I cooked just like Mom did, and later when I went into the restaurant business I just kept doing it the same way," he said in an interview in his later years. When Harland was 12, his mother remarried, but his new stepfather did not take kindly to his inherited brood. In fact, on one occasion, he kicked Harland. Hurt by such harsh treatment, intance with KFC and Case 35 Harlund left Henryville and found a job working on a farm in Greenwood, Indiana At this time he also attended school, but he dropped out of the seventh grade. He said later that it was the mathematics that did him in Job Hopping without Success The jobs he held-brey: taking care of mules on si Louis to Memphis, Over the next several years Harland led a varied and checkered career, little of which, on the surface, would give any inkling of his later success. In fact, during the carly phase of his career he seldom stayed on a job longer than a few months or a year or two at the most. A sketch of his early business experience is fascinating but would hardly qualify for a manual on "How to Become a Millionaire at Age Seventy-Five." The jobs he held-briefly, in many cases-included collecting fares on a streetcar in New Albany, Indiana; taking care of mules on a cargo boat from New Orleans to Cuba: working as a deckhand on a river boat from St. Louis to Memphis: serving as a blacksmith's helper in Alabama, putting in several years as a railroad yard worker and train fireman, driving spikes and laying rail, and unloading cars at a local mill in Jasper, Indiana. After the last railroad experience, Harland decided that he had enough of blue- collar jobs and physical work, and he decided to try something less strenuous. He accepted a job with Prudential Insurance Company in Jeffersonville, Indiana, and gave his first evidence as a promoter when he declared that he was "the best insurance salesman in the state of Indiana." He had found his niche, for he reported later that he tore into the job "like a possum after persimmons." However, he did not remain long with Prudential. He did continue selling, first selling stock for a ferryboat company, then later as executive secretary for the Chamber of Commerce of Columbus, Indiana. Again on the move, Sanders began sib like a poss e ntial. He did comptary for the selling Michelin tires in Kentucky. To promote the sale of his product he wore a "tire suit," made of imitation tires fitting around the body from neck to ankle, the trade symbol of Michelin. His success at attracting the public eye in tire sales may have been the beginning of the idea of the Kentucky Colonel to promote the sale of his famous chicken some years later. Although he was reasonably successful as a tire salesman, Sanders wanted the opportunity to run his own business, and he persuaded Standard Oil to let him operate a filling station at Nicolasville, Kentucky. Again he displayed his flair for promotion--and perhaps exaggeration. He put up a large sign reading, "FREE and he later claimed that he was the first filling station operator in Kentucky to wipe off windshields. He also displayed a certain lack of modesty by claiming that within six months we were pumping more gas than any station in Kentucky." A combination of the depression of the 30's, a decline in farm prices, and drought brought an end to the station in Nicolasville. Sanders' First Restaurant-Success and Failure Like the phoenix that ris moved to Corbin, Ken location. When he around here," he bee station. The station was food service area was we Caf and Shell Station sister Claudia Led employees and many ye jobs had brought Sanders Shell Soon attached to place to eat nix that rises from the ashes, Harland managed to rise again. He shin. Kentucky, and took over a Shell station at a rather desirable he heard one traveler exclaim, "There ain't no decent place to eat - he began serving meals in a small room attached to the service ation was rechristened "Sanders Shell Station and Caf," and, as the area was well received and expanded, it was again renamed, "Sanders bell Station." He hired Nell Ray as a waitress, who was succeeded by her sudia Ledington Price. The latter would become one of his most trusted and many years later his second wife. (Sanders' earlier travels and many had brought an end to his first marriage, to Josephine King.) the continued success of his restaurant, Harland decided to add a motel. Motor Court. But cooking was his first love, and chicken was the main item the menu. The only problem was that frying chicken took about 30 minutes, which he felt was a long time to keep customers waiting. Therefore, he began to expenme on to experiment with a pressure cooker to cut down on the cooking time, cecking at the same time to keep flavor, moisture, and consistency. Finally, through trial and error, he was able to reduce the cooking time to eight or nine minutes. The significance of the success of this experiment is noted by the fact that one of Colonel Sanders' early pressure cookers is on display at the head office of KFC in Sanders Motor Court. Bu Louisville. In addition to the process using the pressure cooker, however, much of the success of Sanders' chicken was his famous recipe. On one occasion in filling an order for some 500 box lunches, he tried a somewhat different recipe with 11 spices. The food was so well received that he decided to use the recipe regularly. Sanders admitted later that he had used spices that could be found in almost any kitchen and that it was just the proportions that make the difference. He always kept the recipe a secret and even today, according to one reliable report, only two executives at the KFC head office have access to the exact formula Sanders' first appearance on the national scene was the recognition he received by Duncan Hines, who had made a stop in Corbin and mentioned the excellent Kentucky fried chicken in his "Adventures in Good Eating. With this added success, Sanders expanded the restaurant to accommodate 142 customers. Later he was offered $165,000 for the restaurant, but he tumed down the offer. Again misfortune struck In 1955 a new north-south interstate highway (1-75) ed to bypass Corbin. As a result, Sanders' business dwindled and in 1956 rced to sell out for $75,000. After paying off his debts, he found himself scraping bottom. He was 60 years bottom. He was 66 years old, drawing about $125 a month in Social Security, and left with very little capital. he was forced to sell out to Cose 35 Franchising and Success at Last d o biso en est in 1952., at the time thataurants operatifect, the operati had some with 11 heren on a broader not open anoth He still had a form of capital in fact the famous recipe for fried chicken and a tremendous capacity for work. He had also ventured briefly into franchisine A few years earlier, in 1952, he had sold the rights to his recipe to Leon ("Pete") Hirman of Salt Lake City and at the time that Sanders had been forced to sell his restaurant in Corbin, Harman had some 14 restaurants operating successfully in Salt Lake City, all using the famous recipe with 11 herbs. In effect, the operations in Utah had been a good test market for Sanders' chicken on a broader scale. With his monetary capital depleted, Sanders realized he could not open another restaurant, but he did realize that with what capital he had, he could try to sell rights or franchises to his special recipe, which had been successful at two locations. So, at age 66, when most men would have retired, Sanders hit the road to sell his then not- so-famous recipe. In order to make the sale, Sanders would stop at a restaurant, prepare the chicken free, using the special recipe, and then let the owner decide whether he wished to acquire a franchise. The fee was rather modest-four cents per chicken (later increased to five cents). Sanders often tried the chicken himself after preparing it, so he generally got at least one free meal at each stop. Even early in his attempt to sell franchises, Sanders always looked for a quality restaurant-one that would maintain his reputation for a fine product. Perhaps as the result of the Michelin tire experience, Sanders decided to adopt a new image, that of the Kentucky Colonel. He had actually been appointed a Kentucky Colonel by Governor Rudy Laffon in the early 1930s. The appointments are made rather generously by most governors, and the duties of the colonels include mainly responding to the call to attend the pre-Derby gala dinner and the post-Derby barbecue, with the proceeds going to some charities in Kentucky. No particular uniform is furnished or required. Sanders, therefore, designed his own: a white suit and black string tie. He grew a moustache and goatee, and, since his hair was on the reddish side, he dyed it white to complete the appearance of a "colonel." Later Sanders was accompanied by Claudia Ledington Price, who had worked for him in Corbin at his restaurant and whom he married in 1949. To add to the "Old Kentucky" touch, she appeared on his business calls wearing an antebellum gown, until finally, when the volume of business had grown, she remained at Sanders' office in Kentucky to manage the paperwork. By 1960, roughly four years after he had begun selling his franchises actively, Sanders had an estimated 200 outlets under franchise in the United States and half a dozen in Canada--all of this mainly the result of the work of one individual. As the ownership of the company was not publicly held, financial results of Sanders' operations did not have to be made public. It is estimated; however, that Sanders profits before taxes were in the neighborhood of $100,000 in 1960. By 1963, there were some 600 franchised outlets in the United States and Canada, and annual profits were estimated at $300,000 before taxes. date Allahted Natid Caber Enter John Young Brown, Jr. At this point, Sanders practically single-hande have wondered how I Young Brown, Sr., a well. John Y. Brown, Jr. w lawyer by profession, John Y his way through the University of K become governor of Kentucky Sanders was 73 years of age and still running his company le-handedly. Even with his tremendous drive and energy, he may how long he could continue to operate on his own. Through John Sr., a well-known Kentucky politico, he became acquainted with own Jr., whom he hired to do some legal work for him. Although a ofession, John Y., Jr., was actually a super salesman. In order to work ough the University of Kentucky, he had sold encyclopedias, and by the he was a senior he was making $25,000 a year. (He would, in fact, go on later to governor of Kentucky.) When John Y., Jr., discovered that Sanders had no esmen on the road other than himself, he is said to have remarked, "With my sales background, I began to think what you could do with this business if you had a really onessive sales program," which perhaps was not giving much credit to the Colonel Under the original arrangement between Sanders and Brown, Brown would set una barbecue business under the unlikely name of Porky Pig's. He would attempt to spin off franchises from the original operation. Brown soon realized, however, that chicken, not pork, was in the pot at the end of the rainbow. Brown felt that the Colonel might be persuaded to part with his creation if he could be convinced that the business would be carried on successfully. In order to make an offer that would be sufficiently attractive to Sanders, however, Brown needed more capital than he personally had available. He, therefore, arranged to get some financial support from Jack Massey, a Nashville millionaire. Sale of KFC to Brown and Massey Brown and Massey began discussing the possibility of buying the company from Sanders. The Colonel's first reaction was to snarl, stomp, grumble, and curse. Brown emphasized that, even if the Colonel sold them the company, he would be retained to continue to promote sales and to be its goodwill ambassador. After some Turther discussion, Sanders-apparently without any fine-line calculations on his part-said, "Well, I've been giving it some thought, and I think that two million Sounds about right." Brown and Massey at first considered making a counteroffer, but finally decided that, rather than risk losing the deal, they would tell the Colonel that two million also sounded right to them. Sanders apparently did not talk over the proposed deal with effect, had been his closest advisor. had been his closest advisor. She said later that, if she had been consulted, she would have advised against selli ld have advised against selline at that time. The Colonel also did not consult with the members of his office staff in Shelbyville. already come to the conclusio the company going with office staff in Shelbyville. Moreover, he had perhaps e to the conclusion that no one on the staff had sufficient talent to keep going without him. That staff had been selected primarily on the basis ship, rather than on administrative ability. Lee Cummings, hephew, and Harland Adams, his grandson, handled shipments o nepotism and friendship, rather than on a the Colonel's nephew, pright 2017 M rights reserved. No reproduction or distribution without the prior wricom Case 35 Several others helped with the office work. Claudis helped to keep the Colonel in touch with problems at the office when he was on the road. However, there was puently no one with the experience and talent needed to succeed the Colonel in appare direction of the busilk with Pete HaBrown, and Mathe move was a Colonel did want to All three, Sand The latter indi The Colonel's far Harmonickeringership and contractomel willion ove The Cobla final de due sale possible of lead to se e ke Casual Woering e Cola Februarve the rector of relationer this Harman agreemera 300 word be madricipal po ayer sey may co by mic. Addition, and as wary of Sarown and efforts gravy The Colonel did want to talk with Pete Harman, his original franchisee, before he came to a final decision. All three, Sanders, Brown, and Massey, went out to Salt Lake City to discuss the sale with Harman. The latter indicated the move was a wise one-one that would avoid possible bickering among the Colonel's family and franchisees by offering a continuity of leadership and a firm central control Following Harman's advice, the Colonel agreed to sign a contract for the sale. Under the final agreement, dated February 18, 1964, the Colonel was to receive $500,000 by mid-April 1964 and would receive the remaining $1.5 million over a five-year period. In addition, he would be made a director of the company and serve as an ambassador of goodwill and as the principal public relations man. For his services, he was to receive initially a salary of $40,000 a year. Later this would be increased to $75,000 and then to $125,000. Brown and Massey may have had misgivings from time to time about the Colonel's goodwill efforts. Sanders, after having visited certain franchises, was quoted as having said that their gravy "tasted like wallpaper paste." However, whenever Sanders appeared on TV or on the as an ambassures to receive initially 125.000. Brown and efforts. Sanders, afte econd to $75,000 and then to the Colonel's goodwill their gravy "tasted screen in movies, sales jumped In the negotiations prior to the final signing of the contract, the Colonel had been offered 10,000 shares of stock as partial payment for KFC, but he declined the offer, commenting in his characteristic and colorful fashion that "stock is just like toilet paper." He also said that "I thought it best to sell [for cash) so that I'd have my estate liquid and I could handle it myself. This way I can do something for my grandchildren and perpetuate the company, too." The Colonel, however, did not part with the entire company for the 2 million. He retained the rights to the franchises in Canada, where he had formed a separate company. Remembering his early days, be directed that all the profits from this operation should go to aid orphaned boys. He also retained his rights to Florida for his daughter, Margaret. Pete Harman was to retain his rights to Utah and Montana, and the rights to franchises in England were also excluded from the original package. Following the takeover of the administration from Sanders, Brown assumed the immediate direction of the company, even though Massey had the largest financial interest. Under Brown's aggressive promotion, sales almost doubled and profits more than doubled from 1965 to 1966, as follows: Gross Income $8.5 million $15.0 million Net Income (after-tax) $1.5 million $3.5 million Earnings Per Share $0.79 $1.80 1965. 1966. Case 35 Required 1. Although a number of business-related items are covered in this case, concentrate your attention on the time in 1964 in which Colonel Sanders sold his business to Brown and Massey. Do you think he acted prudently, based on the information he currently had available to him? What additional factors or items should he have considered? You should not be overly influenced by the later success of the business