Kentucky Fried Chicken business model and operations

Kentucky Fried Chicken

Col. Harland Sanders, the founder of Kentucky Fried Chicken, had a lasting impact on fast food, a segment he helped create. The Colonel, who became known throughout the world for his white suit, string tie and Kentucky-colonel goatee, is credited by industry leaders today with being a brilliant marketer and a man of exacting standards who understood food and the ways to whet the nation's appetite. One of the most compelling facts about the Colonel, who inspired many entrepreneurs during his life and since his death in 1980, is that he did not start the business that made him a legend until he was 66. At that age, and as a newcomer to the multiunit-restaurant business, he had new ideas that remain fresh today. His innovations included selling busy moms buckets of chicken to take home so they could put a complete dinner on the table with little fuss and using a character - his own image of a Kentucky Colonel - to sell a product.

On September 9, 1890, Harland David Sanders was born in Henryville, Kentucky. In 1895 his father Wilbert died and his mother was left with three children. While his mother worked in town, Harland took care of his younger brother and sister, and learned to cook. He lost his first job as a farm hand for daydreaming, and after realizing he had disappointed his mother, he vowed to never to do it again.

In 1925, after a variety of jobs, Harland opened up a Standard filling station in Nicholasville, Kentucky. The filling station did well until the Great Depression hit. In the summer of 1930 Shell Oil gave Harland their Corbin station rent-free. It was successful and to serve the customers better Harland began serving dinner, and soon people were stopping just to eat his country ham or fried chicken with smashed potatoes. His filling station and restaurant were very successful and Harland decided to expand.

In the spring of 1937 he decided to go into the motel business. Along with having a filling station and a superior restaurant he now added a tourist court of equal quality. The motel was a money-marker from the start, and Harland then expanded the restaurant to its final capacity of 142 seats. In 1939 he opened another Sanders Court in Asheville, North Carolina, but it never showed the return of the original in Corbin.

The pressure cooker was invented in 1939, and in 1941 Harlan purchased one. He began to experiment with it to cook chicken using a recipe he got from a Corbin friend, and eventually perfected a method of cooking chicken quickly, leading the Governor of Kentucky, Ruby Laffoon, to bestow on him the honorary title of Colonel in recognition of his contribution to the state's cuisine in 1949. He let his white hair grow full, grew a mustache and goatee, began to wear white suits all the time, and insisted on being called "Colonel." He finally settled on a recipe that customers liked, but he still was not completely satisfied. He continued to work on his recipe for fried chicken until he got the final recipe that pleased him. "At the end of the decade his restaurant was mentioned in Duncan Hines' 'Adventures in Good Eating.'"

After World War II the Colonel's restaurant was booming, but then the federal government announced plans to build an interstate highway bypassing Corbin. The Colonel was forced to sell his operations at auction to cover his debt. He was 66 and down to a monthly $105 in Social Security checks.

He had given out his first franchise in 1952 to Harman and by 1956 had more than a dozen. Harland had met with restaurateur Pete Harman in Salt Lake City and cooked the Harman family a meal. Pete Harman was so impressed that he opened the first franchise, and in 1954 Harland began traveling to sell franchises. Harman, already a successful businessman, is credited with creating systems and marketing strategies that carried the business through its first years. Harman's company is credited with coining the phrase Kentucky Fried Chicken, introducing the takeout bucket, and coming up with the winning phrase, "finger lickin' good." "Harman was hooked after a few bites. Soon, his restaurant was promoting the dish, called Kentucky Fried Chicken. The chicken became an instant hit in that August of 1952 as customers lined up outside the Salt Lake City eatery to take home dinners by the bucketful. For $3.50, they got 14 pieces of chicken, mashed potatoes, rolls and gravy."

It was time, the Colonel felt, actively to franchise his regionally famous fried chicken. He did this by driving across the country from restaurant to restaurant and cooking chicken for the owners and employees. If they liked it, they would add it to their menu and pay the Colonel a few cents for every Kentucky Fried Chicken they sold. By the beginning of 1958, Kentucky Fried Chicken restaurants began to dot the landscape, and by 1963, the Colonel had over three hundred outlets and he had become a celebrity. However, he was growing tired and was looking to sell the business, so John Y. Brown, Jr. (who was governor of Kentucky from 1980 to 1984) and Jack Massey bought Kentucky Fried Chicken, Inc. For $2 million, one of the great bargains in business history. It was a move he later regretted. "Kentucky Fried Chicken took flight under Brown and his partners. By 1971, when they sold the company for $285 million to Heublein Inc., it had more than 3,500 franchised and company-owned restaurants."

Why did Harlan Sanders sell the company he had built from nothing? By all accounts he regretted the action in later years, but that has to be judged in light of the subsequent success of the company. Certainly Sanders was tired. In 1964 he was 74 years old, and his life had not been easy. He was eager to lessen the loads of running his day-to-day business, so he initiated a search for potential buyers. It is questionable whether he had the stamina and the business background to take the company where it could go. Brown and Massey did. Sanders received a fair price for the company, based upon the value at that time, and he most likely did not envision how successful his startup would be. He was tired, and there were no other factors to consider.

Both men understood the importance of the Colonel and hired him as a public relations man and goodwill ambassador. Soon Harland was appearing on national TV and in national commercials. The Colonel remained aboard the ship he helped launch, traveling some 250,000 miles a year, visiting new and old units, offering advice and criticism and becoming a world celebrity. Colonel Sanders was a very important image for the selling of KFC.

Brown and Massey grew the business throughout the United States over the next several years, reporting a gross income of $15 million, and in 1966 took the company public, listing it on the New York Stock Exchange. The Colonel was allowed to purchase the first 100 shares. "Brown attributed the company's success to its emphasis on take-home dinners that resembled the kind mother made, a revolutionary concept in the restaurant industry. The company also capitalized on Sanders' popularity. The colonel always looked the part of the Southern gentleman, wearing his trademark white suit and black string tie while pitching chicken or dishing out homespun wisdom on television shows."

The year 1969 was a crucial one in the history of the company with the first major penetration into international markets outside North America by acquiring franchises in England and Japan. By 1971, there were more than 2400 franchises and 600 company-owned restaurants spread throughout the United States and 47 other countries.

1971 became another key year in company history with the sale of KFC to Heublein. This was Heublein's first significant entry into the restaurant business and it did not go smoothly. By 1977 restaurant quality had declined and the Colonel was upset. Only about 20 new restaurants were being opened per year. In response, Heublein implemented a new strategy emphasizing clean restaurants, product consistency across franchises and better service. Old franchise buildings were remodeled.

In 1982 R.J. Reynolds Inc. (RJR), in an attempt to diversify beyond the tobacco business, acquired Heublein for $1.2 billion. KFC was profitable and growing again, but Colonel Sanders never saw the end result of Heublein's strategy in the late 1970's, because he died in 1980. RJR continued to run KFC as an autonomous business for several years. In 1985 it acquired Nabisco and in 1986, in preparation for the subsequent move to take RJR Nabisco private, it sold KFC to PepsiCo Inc. For $840 million, over the objections of former Heublein chairman, Stuart Watson. Also this year the Colonel Sanders Technical Center in Louisville, Kentucky was established.

The acquisition by PepsiCo was a significant turning point in the company's history. In previous acquisitions by Heublein and RJR, KFC had been operated as a separate entity, although in different ways. Heublein tried to use its own managers to operate KFC, while RJR adopted a completely hands off approach. PepsiCo was looking to the acquisition of KFC to create some synergy within its other operations. Recently restructured into three major divisions, soft drink, snack foods and restaurants, PepsiCo could cross-pollinate between divisions, for instance by selling its soft drinks in restaurants. PepsiCo's culture was also much different than KFC. PepsiCo placed a strong emphasis on employee performance, while KFC's culture was more laid-back in the southern tradition.

In 1991 a change was made that was to have unintended consequences. Kentucky Fried Chicken decided to change their name to KFC for several reasons, according to the web site Snopes.com,

A move to de-emphasize "chicken" because KFC planned to offer a varied menu that included other types of food. (The Boston Chicken Corporation took the same approach for the same reason, changing their name of their retail food outlets to Boston Market.)

A desire to eliminate the word "fried," which has negative connotations to the increasingly health-conscious consumer market.

A recent trend towards the abbreviation of long commercial titles, as demonstrated by other companies' employing shortened forms of their names, such as The International House of Pancakes (IHOP) and Howard Johnson's (HoJo).

As a result of this name change, rumors later began circulating throughout the Internet that the government had forced KFC to change its name because it was no longer using chickens. According to the rumor, KFC was producing a genetically altered chicken with more than the normal amount of appendages. In spite of the fact that some of these claims, such as chickens without beaks, feathers or feet, are beyond scientific capabilities, the rumors have persisted.

Over the next several years, KFC continued to prosper and undergo changes. It refocused its strategy to increase the traffic in individual franchises by expanding the menu to appeal to a larger group of consumers. In 1993 the company added non-fried chicken to menus in the U.S. And Australia, and in 1994 KFC officially opened its 9,000th restaurant in the world, in Shanghai, China, and announced a $200 million investment over the next four years for 200 restaurants in 48 Chinese cities. 1995 saw the introduction of Colonel's Crispy Strips and Chunky Chicken Pot Pie. The first KFC restaurant in Moscow was opened. In 1996 KFC introduced Tender Roast chicken pieces and brought back one of the world's most recognized packages, the bucket, and in 1997 the company introduced Honey BBQ-flavored Tender Roast, Spicy Buffalo Crispy Strips and Chicken Twister, which are wrapped up chicken and vegetables.

In spite of all these innovations and improvements, PepsiCo had become increasingly unhappy with the restaurant division. Aging facilities were requiring much of the parent company's revenue to be spent on remodeling restaurants and thereby neglecting investment in the soft drink and snack food businesses. In an attempt to return to its roots, PepsiCo spun off the entire restaurant division into a publicly traded company, Tricon Global Restaurants in October 1997. In May 2002, with the acquisition of A& W. And Long John Silver's, Tricon changed its name to Yum!.

Since the early days of its inception, KFC has been involved outside the United States, having expanded to Canada in 1956 and then in a major move in 1969, to Japan and England. As of 2000, of the thirty-five largest fast-food chains, KFC was second only to McDonalds in the number countries penetrated. It is an arena where KFC has had enormous success and should continue to be involved.

As of 2001 KFC had more than 500 outlets in China compared to only about 400 for McDonald's. KFC beat McDonald's to China by five years, opening their first outlet in Beijing in 1987. Market surveys in China by AC Nielson have indicated a preference for KFC over McDonald's, both in terms of products and the outlets themselves. In addition, the Chinese have cultural bias in favor of chicken over beef. This is certainly an area where KFC should continue to exploit its advantage.

Latin America is another global area where KFC has a strong presence. In the Central American, Caribbean and Mexican area, KFC is very competitive with McDonald's and Burger King in terms of number of outlets. It has a particularly strong presence in Mexico and the Caribbean. Only in the Southern part of Latin America does KFC fall sharply behind McDonald's.

A strategic issue facing KFC is the decision to franchise or expand by company-owned restaurants and whether to refranchise. The original strategy of Colonel Sanders and his immediate successors was to franchise and not build company-owned restaurants. This allowed them to grow quicker than they would have if KFC had primarily invested in company-owned restaurants. This strategy continued until the purchase of KFC by PepsiCo. Because of a clash in corporate culture between KFC and PepsiCo, and the presence of a strong franchisee group within KFC, PepsiCo embarked on a strategy of repurchasing weaker franchises and running them. At the time of the spin-off of KFC and the restaurant division into Tricon Restaurant Group in 1994, the percentage of company-owned restaurants was about 40%.

After the spin-off, Tricon management began to divest of many of the company-owned outlets. This was the result of a change in attitude on the part of Tricon management. They did not believe in absolute control of all aspects of the local business and were willing to admit that the franchisees knew the local business better than they did. By the year 2000, the number of company-owned outlets had dropped to 27%.

As shown in the SWOT analysis below, there are a number of factors in the external environment that KFC should consider when formulating and implementing strategies. Some of the more important aspects are brand name awareness, global market expansion, shrinking resources available to outlets and attacks by activist groups such as PETA.

SWOT Analysis

INTERNAL

Strengths

Size and resources

Experienced management

Menu diversity

Profitability

Efficient operations

Good customer service tradition

Control over product & service quality

Weaknesses

Age of physical facilities

Lack of sandwich offering

Increased labor costs

Squeezed profit margins

Strong franchisee group

E

X

T

E

Opportunities

Brand name awareness

Increased demand for fast food

Global market expansion

Higher divorce rates

Increase in 2 working parents

Cross sales with TB & PH

SO Alternatives

Focus franchise expansion on international locations

Increase attempts to diversify menu and increase in-store sales

WO Alternatives

Remodel existing older facilities

Develop sandwich offering

Increase cross-pollination with Taco Bell & Pizza Hut

R

N

A

L

Threats

Less prime real estate

Shrinking labor pool

Perception of unhealthy food

Increased competition

Public attacks (PETA)

Aging population base

Ethnic food popularity

Anti-American feelings

ST Alternatives

Continue to diversify menu to more healthy alternatives

Examine ways in which to automate processes

Consider offering ethnic foods

WT Alternatives

Look for opportunities in Latin America with lower costs