KFC Case Analysis and Recommendations

It is of critical importance that we develop a strong understanding of KFC’s current position and of the market in which it competes. The more comprehensive and well-founded our situational analysis is, the stronger our strategic marketing plan will be.

I. The character and attractiveness of the U. S. food service and fast-food industries in 1994

The fast-food industry is considered a subsection of the food service industry, or rather a submarket within a broader market. This broader industry, the US food service industry, is in what is known as the maturity stage.

Typically, the maturity stage exemplifies the following characteristics:

• Sales continue but at slower pace.
• Competition leads to decreased market share or prices.
• Competing products become very similar and differentiating product becomes both crucial and more difficult

As a result, firms need to place their efforts into encouraging competitors’ customers to switch to their product offering, increase usage per customer and even convert non-users into customers. At this stage, the primary goal of a given firm is to maintain market share.

The food service industry, as is the fast-food industry, is typified by franchising which became well-established in the early 1950s. The concept held and in 1994 there were over 550, 000 restaurants and food outlets in America. Although the industry in 1994 was slowing, that is not to say that it was not growing. Food service industry sales were forecast to surpass $275 billion and this had grown at an estimated compound annual rate of 3. 9% from 1988 till 1994. This billion dollar industry is dominated by the fast-food and full service segments who commanded annual sales of $86 billion and .

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billion dollars respectively.

The fast-food segment is prima facie, a very attractive one. Not only did the segment grow 5. 6%, outpacing almost all other food categories but its future is also promising with a forecast of 6. 3% growth in 1994. In addition, the share of industry sales by the fast-food industry has risen by 1. 8 years over the last 5 years showing market dominance and growth. When we consider the fast-food industry specifically, pizza, family restaurants and dinner houses are the winners if e assess growth. The chicken segment, in which KFC competes, grew only 4. 1% as demographics changed and the trend towards healthier eating gained momentum. Figure 1 illustrates the market share held by each of the fast-food categories.

However, though there has been seemingly strong growth up until now, assessing market attractiveness inherently involves some element of forecasting as we need not only assess current attractiveness, but future scenarios as well. Consumer preferences in 1994 were changing. There was a move away from fried unhealthy food to healthier options

• As per the survey in 1994, consumers showed a desire for a greater variety of menu items
• In this time, consumers also began expecting greater value for their money.

This will inevitably have implications on the price strategy pursued by a firm as it puts pressure on lowering price and developing a viable cost structure. Other things being equal, this detracts from market attractiveness as it presents new and problematic challenges for current and potential competing firms.

II. The major competitors for KFC

KFC’s competitors can be considered in the context of consumers’ purchasing and consumption behaviours. The consumer segments can be classified depending on the benefits sought by the consumer. These benefits include the convenience of a fast food chain such as KFC, the satisfaction resulting from consumption and the attractive prices of the products. The success of the fast-food industry can be partly attributed to its universal appeal of convenience for the consumer in satisfying the basic physiological need for food. KFC’s competitors can be ranked accordingly.

Figure ranks the competitors of KFC from the most to least direct competition. Other Fast Food Chains such as McDonalds and Popeyes can be seen as KFC’s biggest competitors in the market as it too, has the competitive advantage of convenience for the consumer. Take away can be seen as less convenient as the time required in attaining the food is greater than fast-food and there is often a need to pre-order to ensure reduced waiting time. Take away is followed by restaurants, and Frozen Dinners, as they are more inconvenient and time consuming.

The most indirect competition is meals that have to be cooked at home. When we assess competition in light of taste, competition can be divided into several groups:

• Chicken Chains: Chains offering a large variety including fried chicken
• Upscale Chicken Chains
• Chains that offer other fried products

If the consumer segment purchases KFC for reasons of predominantly taste, Chicken Chains such as Popeyes and Chick-A-Fillet would be appropriately considered KFC’s main competitors. However the variety offered by such competitors as McDonalds and Hardees can not only satisfy the needs of the consumers that prefer fried chicken but also those with different preferences. Indirectly KFC is also competing with Fast Food Chains that do not offer fried chicken but does offer other fried products. The strong competition faced by KFC in the market of Fast Food, show that organisations such as McDonalds as the greatest threat. The distribution network of McDonalds and their large variety of meal offering quickly appeals to families.

McDonalds offering of Value Meals and lower pricing strategy makes McDonalds an even larger threat to KFC in the market.

III. The critical issues faced in 1994

In 1994, KFC Brand Development President Kyle Craig and KFC-USA were faced with several critical issues regarding the growth and development of KFC. Craig expressed that his main concern for KFC was the company’s ability to handle change in the future. However, there were many issues present that affected various aspects of KFC’s corporation, competition and customer.

There were numerous critical issues that involved the KFC corporation. One of these issues was the growth of international operations and declining domestic restaurant construction. The expansion of free-standing restaurants was seen as particularly difficult due to the availability of sites and the cost of construction. Another issue affecting the corporation was that of store refurbishment. Due to the age of many KFC restaurants, the expenditure of significant financial resources was required to refurbish and update these older restaurants.

Refurbishments were also required to accommodate consumer demand for faster service that included drive through and dine-in options. At the beginning of 1994, Craig noted that limited menu options and significant service problems presented considerable concerns for the business. The limited menu options would owe largely to changing consumer demands and the inability for KFC to stay current and focused. However, the service problems, which partly stem from the outdated systems and facilities in place at KFC, could be largely attributable to the takeover of KFC by PepsiCo in 1986.

After acquiring KFC, PepsiCo set about restructuring the KFC organisation, reducing staff numbers and replacing KFC personnel with managers from PepsiCo. The culture at PepsiCo, which was characterised by performance, accountability and the drive for promotion, starkly contrasted the traditional KFC philosophy, which emphasised life-time employment, independence and a relaxed atmosphere. Conflict arose due to the differing organisational cultures and corporate restructuring resulted in morale issues for KFC employees.

Employee morale would therefore present itself as a primary critical issue for Craig and KFC as feelings of uncertainty and the pressure to perform essentially hinder the quality of service provided. One other critical issue Craig and KFC were faced with regarding the corporation was that of product distribution and growing the KFC brand domestically. Domestic restaurant growth had slowed in the five years prior to 1994, largely due to the financial expenditure required to build traditional free-standing restaurants.

Craig and KFC also faced difficulties with their franchise operations. Difficulties with franchises arose due to two issues. Expansion of franchise location due to contract stipulations was one issue (no new KFC units could be built within a 1. 5 mile radius of an existing KFC store). Where franchise owners had once felt independent of the reign of the corporation (this ultimately led to a stronger sense of devotion to the KFC organisation), new PepsiCo management emphasised tighter control over day-to-day operations, which angered many franchise owners.

Some other critical issues that Craig and KFC faced involved meeting the demands of consumers and understanding new, niche consumer markets. By 1994, consumer expectations of the fast-food industry demanded -the provision of quick and efficient service -a greater variety of menu items -value for money -that fast food be available at more non-traditional outlets, for example, airports. Another issue faced by KFC was appealing to the needs of a more health conscious consumer, which would involve adding healthier products options to their menus.

Critical issues that involved KFC’s competitors largely revolved around the menu items of various fast-food chains. Throughout the late 1980s, most of KFC’s competition was limited to other fast food chains that offered fried chicken. However, by 1994, KFC faced competition from non-fried chicken chains, primarily the sandwich chains, who had introduced fried chicken products to their menus. This issue was of great importance for Craig and KFC, as it meant they lost business to other fast food chains offering a greater variety of food items across a range of food segments.

Another issue faced by Craig and KFC was the addition of new, upscale chicken chains to the market (for example, Boston Chicken and Kenny Roger’s Roasters). These new chains targeted a market niche not previously pursued by KFC, being higher income customers and health conscious customers. Essentially, in 1994, Kyle Craig and KFC-USA were faced with the problem of making the transition from an ‘old’ KFC to a ‘new’ KFC. Any business strategy to be formulated from there on needed to focus largely on the consumer.

This would mean encompassing current consumer demands for healthier food options at lower prices, greater variety in food selection and a higher level of service and cleanliness in a greater variety of locations.

IV. The industry’s key success factors

The key factor within the fast food industry is convenience, and it is this that becomes the common denominator for all other factors in the overall managerial and marketing strategy behind fast food franchises.

Pricing: Cheap pricing – appeals to younger demographic and general price perceptions (price aversion) of consumers. The cheap pricing is also implicitly reflective of fast efficient and convenient service as consumers expect less quality and care in their service for the money they have paid.

Location: Popularity and breadth of franchising shows importance of location to securing market share. While fast food outlets were originally stores with drive-thru and dine-in facilities, they are becoming ever more prevalent in food courts and in the central business districts. Essentially this means that placing outlets within close locality of people ensures greater convenience.

Speed and style of service/delivery: In survey 48% of the subjects said being in a hurry or wanting fast service as major factor in their choice. This means that there is a lower emphasis on the quality of the service offered as long as it is fast and efficient. Fast-food outlets offer drive-thru and home delivery so that customers can purchase their meal with minimal effort. Quality and

Variety: Although customers do not expect great quality as the trade-off for fast, convenient service and a low price, they are becoming increasing demanding for a greater variety of foods to choose from.

Franchises like McDonalds offer a wide range of foods from healthy options, vegetarian, chicken, beef and fish meals. It is McDonald’s ability to combine variety with convenience is one of the key factors behind its great success in the industry. Demography: Dominant growth of family restaurant chains and dinner houses is attributable changing demographic – move towards over 65s who eat out less often and tend to spend more time eating their meal, prefer sit-down restaurants and are more likely to choose more upscale restaurants such as dinner houses.

Studies have shown that the 18-24 age group consume around 5 meals away from home compared to the rest of consumers-proving that they are a valuable component of the food-service industry. Essentially, the food service industry has developed itself to be highly compatible with that of the American lifestyle. Consumers are expecting more for less cost and the fast food industry has provided exactly this, cheap food for fast efficient service, a wide variety of choice that is of ever-increasing quality.

V. Recommendations for KFC

KFC has been around for a long time spanning over some five decades over which it has gained a strong foothold in the fast-food industry. As the market leader in fried chicken, it can be safe to conclude that KFC is in the maturity stage in the product life cycle. While it currently maintains a dominating presence in the industry, changes in consumer preferences, the entry of new fast food chains and their increasingly out-of-date marketing system threatens to send KFC into the decline stage of the Product Life Cycle unless the organisation takes on certain changes that keep KFC up to date with the current market.

The recommendations for change can be directly correlated with the critical issues that KFC faces and are best analysed through the “4 Ps”, or product, price, placement and promotion, and the “3 Cs”, or rather competitor, consumer and corporation. Note however that there is significant overlap with the two analyses and in our endeavour to avoid repetition, aspects appropriately discussed in both of the models will only be discussed in one at the exclusion of the other. (i) Product KFC’s primary product is fried chicken and the meals on offer rarely deviate far from this base.

By offering fried chicken, KFC has made a niche in the fast-food market devoted completely to chicken and is currently the market leader. This is reflective of KFC’s position on the product life cycle graph at the maturity stage as they have gained a strong foothold in the industry and have to continuously remain competitive. Firstly looking into offering a greater variety of choices that spans across food groups outside of chicken may potentially be a viable option. Expanding the menu across a range of food groups enables KFC to gain a later share of the take-away market.

Consumers often walk into stores seeking take away, not necessarily seeking fried chicken in particular so offering a larger range of take-away foods makes KFC a more likely contestant in the choice for dinner. Should KFC choose to remain with the core product of chicken, they can still look into various options of differentiation for their product. Firstly, healthy options would appeal to the ever growing health conscious sector. This could entail menu options such as grilled chicken or barbeque chicken.

After seeing the success of the golden rotisserie chicken, one can fairly assume that these options can be potentially profitable. KFC also lacked in meal deals at the time of the article, whereas some take-away outlets offered value meals, KFC merely had products on offer individually, which goes against the core demand from customers- convenience. Offering meal deals enables customers to make quick choices on various meal combinations. This leads to the final product option, within the meal deals, KFC should look at “kids meals” because young children can potentially make up a large portion of the consumer base.

Offering value meals with toys attracts the 2-12 year old age bracket and these types of offerings would KFC on par with other competitors. (ii) Placement As KFC continues along the maturity stage in the product life cycle, the need for well thought out placement of new stores and the refurbishment of existing restaurants comes to the forefront of the organisation’s issues because the organisation is in danger of slipping into decline if it is seen as outdated and inconvenient by consumers. KFC should start off with their conventional free-standing restaurant layout and improve on it.

With the old outdated buildings, KFC would improve the outlook as well as the convenience factor in their existing stores. This can be achieved through the installation of more drive-thru and dine-in areas which will minimise overcrowding at the counter. This effectively reduces the service time and increases convenience both of which are key factors critical to the success of KFC in the Take-away market. KFC acknowledged the high cost and difficulty in locating land on which to build new free-standing restaurants.

But, with convenience as the key factor, KFC can take this drawback as an opportunity and look at new ‘unconventional’ placements of their products. This can include airports, food courts within shopping malls and in the central business district amongst city buildings. (iii) Price KFC should take advantage of their position at the maturity stage in the product life cycle and offer competitive prices that form a barrier to entry of new competition while emphasising their dominance as the chicken market leader.

While convenience is the primary factor for consideration with take-away, consumers are becoming increasingly demanding and expectations for lower prices must be met to maintain or gain market share. Once again, offering ‘meal deals’ creates a sense of “value” for customers while increasing convenience. (iv) Promotion The primary focus within the promotion should be on the kids meals and meal deals because both implicitly offer good monetary value and convenience.

The promotion of the new meal deals could be through the use of coupons, television advertising, radio promotions and importantly, the internet, which would provide a convenient access point of promotion through which the organisation can run various competitions and surveys. Through the internet, KFC can gather information on their consumer base and gain increasing recognition for virtually no cost. Furthermore, becoming active in CSR projects is a good promotion tactic as it helps stop the alienation of big corporate giants like KFC from the public and thus increases its good reputation amongst the community.

CSR also helps to boost the morale and strengthen the internal culture of an organisation. The 3 C’s… (minus material covered above) KFC is faced with changing consumer expectations. Areas including the improvement of provision of quick and efficient service, a greater variety of menu items, and value for money and availability at more non-traditional outlets require KFC’s immediate and committed efforts to address the dynamic expectations of consumers. One major change must be effected within the corporation.

PepsiCo needs to create a more supportive structure and environment for franchise owners, and a softer approach to human resource management to encourage franchise parent relationships and possible synergies. A better internal culture whereby management of different levels communicate and address problems, as opposed to viewing other management as competitors could promote efficiency within the organisation and boost morale within the organisation, and in turn productivity.

The above is a detailed ‘snapshot’ of the environment in which KFC and the industry at large participated in 1994. It is clear that Kyle Craig and KFC-USA are faced with significant issues but these are not without the potential for innovation and growth. From this analysis, objectives, strategy and positions can be developed to ensure KFC remains the powerful player that it is.