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Quick Service Restaurant Giants in the Middle Kingdom In 2008, McDonald's and KFC were the two largest qtack- service restaurants (QSR) in the world, with

Quick Service Restaurant Giants in the Middle Kingdom

In 2008, McDonald's and KFC were the two largest qtack- service restaurants (QSR) in the world, with 31,999 and 15,580 outlets, respechvely1 Both chains were renowned for their broad spectrum of consumers on a global bas:s

McDonald's appeared to be a clear winner m interna- tional expanslon It had over 17,500 international outlets and was the first corporation to set up a solid foundation for international franchising. It spearheaded global expan- sion with :ts first overseas outlet m Canada m 1967, and entered Japan m 1971 2 McDonald's outlets had tremen- dous success in JapanIdesp:te the difference m culytre-- with record-breaking daily sales and speed of expansion m the myaal stage 3

KFC also started mternahonal expans:on early, opening its hrst overseas outlet in England in 1964 However, it was g:ven a bumpy r:de when :t began to penetrate the market m Asia The Japanese outlets were far less successful than McDonald's and only started to make a profit in 1976, SEX years after KFC entered Japan KFC outlets opened m Hong Kong m 1973 but were all closed down within two years The company would even- tually wm the confidence of Hong Kong customers ten years after :ts first entry In Ta:wan :t exper:enced rela- hvely smoother development, although KFC headquarters was to spend a huge amount of money and effort m order

Tins case was written by Gabriel Szulanska, Professor of Strategy at INSEAD, Welru Chen, Assistant Professor of Strategy, and Jennifer Lee, Research Assoc:ate It :s intended to be used as a basis for class discussion rather than to yustrate e:ther effechve or meffechve handling of an adnumstrattve s:tuatlon The authors gratefully acknowledge ftmdmg from INSEAD R&D

to get the ownerslup back from its joint venture partners at a later stage 4

It was a totally different picture m China In the 'Middle Kingdom,' KFC was not only recogmsed as the leader m foreign qmck-serv:ce restaurants but was also a sigmflcant player in the Chinese restaurant industry as a whole, alone contr:butmg 1% of the country's total food and beverage mdusyv revenues m 2005 s In 2005, KFC's outlets m China recorded an average of US$1 2 mflhon m annual sales per store, compared with just US$900,000 for smnlar stores m the US 6 According to the 2008 figures, KFC had over 2,300 outlets m China, with an average profit margin of nearly 20 1%.7

In contrast, at 1,000 outlets, McDonald's presence m China was less than half of KFC's, with an est:mated profit margin s:gnlhcantly below that of its leading com- pehtor Many people attributed KFC's success m China to :ts early entry--three years earher than McDonald's--and :ts natural advantage m menu selechon wluch corre- sponded to the typ:cal consumer's preference for chicken over beef However, were these reasons enough to explain KFC's contmued growth and the extens:on of its lead over :ts rival? How could McDonald's as a latecomer and the second-largest QSR player m China, capltahze upon :ts global dominance and resources to catch up w:th KFC?

Replicate or Adapt?

The Inherent Challenge for International Franchisors

Internahonal franch:smg :s frequently associated with serv:ce firms, such as hotels, retail outlets and qmck serwce restaurants These hrms often have strongly identifiable

rademarks and try to guarantee the customer a umform and consistent level of service and product quality across different locations and over time. However, the high degree of standardlsed operations makes the replication of the format across diverse markets difficult Differences In things such as mgredlents, labour and physical space can mean slgmhcant modifications to the service formula Consequently, the basic service may be sumlar to that of the home country, but details m the delivery of the service are often altered 8

Many foreign enterprtses found China very different m culture and consumer behaviour Franchise restaurants faced several major hurdles, including a different labour force structure, dffarlculty m recrulKng technically competent and culturally sensitive managers, tough technologacal problems and a less than satasfactory legal environment and enforce- ment 9 So the challenge for international franchlsors hke McDonald's and KFC was to decide whether to comply strictly with their ongmal models, and if adaptation was reqmred, when and how to make adaptations m order to dehver globally consistent standards while catermg to local consumer needs

Potential of China's Restaurant Industry

Chinese consumers' spending on eating out had increased tremendously along with the country's economic boom In the past decade Retail revenues of the restaurant industry increased from 5 2% m 1991 to 14% m 2007 as a portion of total retail revenues from consumer goods.1 According to annual statistics from the Mamstry of Commerce of the People's Repubhc of China, the retail revenue of the hotel and restaurant Industry reached 1,235 2 billion RMB in 2007, rep- resenyng 19 4% growth over the previous year, foreign fran- chises were the mare dlaver of food and beverage revenue growth as foreign direct investment m the hotel and restau- rant industry totaled US$10.4 bllhon, an increase of 25.8% on the previous year.11 China was the world's largest consumer of meat The Economast InteIhgence Umt forecast that annual meat consumption m China would jump from 59 kg per head m 2005 to 74 kg per head m 200912 With US meat consump- taon at 128 kg a head, there seemed plenty of scope for the Western fast-food industry to expand m China 13

Foreign quick service restaurants played a significant role m Chma's restaurant industry The share of fast food m the retail industry was expected to reach 9 3% by 2011 from 74% in 2007 Chma's fast-food Industry was expected to grow at a CAGR of around 25% during 2008-2011.14

The first comprehensive franchising regulations, wtuch came into effect m February 2005, made it easier for foreign fast-food operators to open branches and roll out

the franchising model, which had proven to be such a sure path for fast-track growth m the US and Europe is The new Law on Franchise Regulations, passed m February 2007, helped clear up the ambiguity surrounding franchlsor's disclosure duty 16 Thenceforth, the rights of both fran- chisors and franchisees were better protected

Quick Service Restaurant Chains: A New Experience for China

Foreign qmck service restaurants began to surface m China with the opening of KFC's first store in 1987, followed by McDonald's entry three years later. The tmung was propi- tious for foreign enterprises as it had been nine years since China embarked upon a pohcy of operung up and reform m 1978 and Chinese curiosity about the West was at a peak

Although GDP growth m China had averaged well over 9% per year since 1978, per capita GDP at the twne of KFC's entry was a mere US$621 05 17 Given the 120 to 130 yuan monthly salary of Beijmg urban residents at that tune, KFC prices were unaffordable to most, but many still flocked to the store to purchase the 12-yuan KFC hamburger or 8-yuan fried chicken The most frequent customers were foreigners hying m China Despite the attractweness of fast food chains, local consumers m those early days could sel- dom afford to eat at KFC, McDonald's or Pizza Hut. Dmmg at these estabhshments was considered such a luxury that some couples chose to hold their wedding banquets there,t8

Behind the 'dream market' with a vast land area and 1.3 billion people, the complexaty of Chma's population, geography and tustory presented major challenges for for- elgn players Population density, economic development and wealth distribution varied greatly from east to west and from south to north Foreign invested enterplises usu- ally focused on the populous, more affluent eastern Ctuna The western legaons were beyond the reach of even domes- tic businesses without an effective nataonal transportation system

Chinese-style fast food had existed plaor to the entry of western quick service restaurants but represented a totally different concept and ambience compared with modern chains Most of the catering umts for Chinese fast food were small m scale, serving pre-made appetazers such as congee, buns and fritters of twisted dough (yiu-tiao). They lacked hmdmg, trained employees and a well-maintained dmmg environment 19 As restaurant staff reqmred at least five years of experience, western food chains could not fred a sufficient number of internal candidates to meet growth- driven demand and had to import skilled managers from nelghbouring markets such as Taiwan and Hong Kong, and even from headquarters m the US

The Very First Western Restaurant Chain

Yum!'s KFC brand was the first foreign qmck-servlce restau- rant chain to enter China 20 On 12 November 1987, the first KFC m Chma was offloally opened at Belling Qlanmen, within walking distance of Tlananmen. In 2002, KFC opened the first ever drive-through restaurant m the country:. In 2004, the 1,000th KFC restaurant was opened m China (Beljmg), only a few kdometres from the site of its first restaurant From the beginning of 2005, the Yurn! Chma Division (mdud- mg Mainland China, Thailand and KFC Tmwan), based m Shanghai, reported dtrectly to YumI headquarter mstead of to its mternataonal division, reflectmg Chma's market size, umque strength and tmportance.21 From 1987 to 2005, the number of KFC outlets m China grew by 50% annually, growth wluch was considered exponentaal outside its parent market m the US,22 parttcularly m a country known for Rs culinary soplusticataon developed over thousands of years Today, KFC IS the nturtber one qmck-servace restaurant brand m China. YumY China has more than 2,300 KFC restaurants in nearly 500 citrus m Mainland China (Q3 2008) 23

Initial Stage--Replication with Localisation in Mind

In 1987, KFC set up a joint venture, B-KFC, with Beqmg Ammal Productaon Company and Bmjmg Tourism Board m order to gain access to better product supply and F&B management authority Sam Kay Soon, a Smgaporean who had held area manager and training officer posRlons wRlun KFC system since the 1980s, was appointed to be yts the first general manager, responsible for day-to-day oper- atmns 24 Posflmns below (and including) assistant man- agers were all held by Chinese nationals. The company started using local food mgredmnts from day one Cincken was purchased from Bmjmg Anmyal Productaon, and pota- toes, cabbage and carrots were all purchased locally. However, cooking eqmpment was mostly amported, such as blenders, heating racks and even cash registers

The first Beljmg outlet represented KFC's largest restaurant worldwide with 1,400 square metres of space allowing for a capacity of 500 seats and considerable office space for B-KFC staff Only four months after open- rag, the Beljmg restaurant had become the lughest-selhng single KFC store m the world

The response to B-KFC's recruitment was over- whelmmg as the base salary offered was set at 140 RMB per month, about 40% more than could be earned by assoemte professors at the country's umversltms at that ttme So

attractave was the compensataon package that a ratm of 20 to I people apphed for every opening In the end, B-KFC lured those apphcants who were high school graduates, could speak some Enghsh, did not have prewous restau- rant work expermnce, and had demonstrated a wflhngness to work hard 25

A Management Team Familiar with Local Culture

From the beginning, KFC lured ehtes from overseas-- Hong Kong, Tatwan and other Asian countries--some with decades of experiences m the QSR industry, and most with a deep understanding of the language, culture, habits and customs of China. As many of the management team mem- bers were associated with Talwan, they were mcknamed the "Taawanese gang -26

Other than the top management team wtuch was composed of almost all overseas Chmese, KFC was keen on developing local talent from day one The company paid well to hire haghly educated and mottvated restaurant staff, and used Rs training system to develop those staff into future restaurant managers or even chstnct general man- agers. 80% of China KFC's chstnct general managers were uruversRy graduates, some from top schools Thys strategy paid off when the company declded to expand aggres- sively after 10 years m China Joseph Han, Operating Vice President of Yumv Brands m greater China from 1996 to 2003, described KFC Chma's people strategy

m China, KFC understands the unportance of peo- ple's talent In the Umted States, m the fast-food chains, zt ys very dtfficult to hrre very htgh-quahty peo- ple, espeaally on the cook labour szde So m China, KFC bmlt very aggresswe talent recrmtment pro]ects It went to umversltyes to hzre umverslty students KFC hyred management trainees wyth very quaffed unwer- slty graduates There are a total of 22 branch offices

for Yum! Brands m China and the general managers are now already 90% locahsed Those people actually, 20 years ago, started at the restaurants as the cook per- son, or as a management trainee Thzs talent pool has become thetr great asset for the future development 27

Takeoff during Time of Crisis

KFC chose to put down roots m big eastern ottes along the coast in the 1980s and to go west m the 1990s Lake many foreign enterprises, KFC's expansion route was from east to west, from Gtaes to towns, and blanketed China with wider coverage by hnkmg outlet presence in cities and towns. Wltinn 10 years of its entry into China, KFC has baslcally covered the mare cities in the populated areas,

this is case and just write the importanit idea about it

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