Analysis of KFC’s location strategies in different regions and cities

By | April 16, 2014

This Assignment Is Published With Permission From The Author For Online Review Only
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1.0 Introduction

KFC Corporation, whose headquarter is in Louisville, is one of the world most famous fast food restaurants such as McDonald’s, KFC, pizza hut and so on. Although the global development of KFC may not beat the expansion speed and popularity of its mortal enemy the McDonald’s, in Chinese domestic market, KFC can be defined as the king of the fast food chain restaurants in the Chinese kingdom. Launching in 1987 Beijing, China, KFC opened the first restaurant in Chinese market with a far sight on the big business potential in the emerging Chinese market. (Zhu 2008)

 

 

With successful location strategy in China, KFC has great reputation and biggest consumers in Chinese market to defeat McDonald’s in this region. The proper location strategy of KFC contribute to this success to a large part, which not only show a great concern about KFC’S strict service principles such as high quality service, tide and cozy dinning environment but also dig deeper into the Chinese culture to blend the golden essence of KFC with Chinese elements. For instance, there are about 3,000 chain restaurants compared with only more than one thousand or so chain restaurants of McDonald’s in China. (Zhu 2008)

 

 

In this paper, we will offer a discussion on the location strategy of KFC in the Chinese market, to present its successful elements to solve several challenges in Chinese market and also offer some suggestions on this weak point from the Chinese point of view.

 

2.0 Challenges

2.1 Political Challenges

There are 56 nations in China, which are also under the charge of communist party with the umbrella of a forming harmonious society. Among the 56 nations, there are so many races which have different food culture and requirements, one of which belongs to Islam, for whom the pork meat is a taboo there. And at the same time, the Chinese Islam is very restrictive about the food which also becomes the main reason why McDonald’s can’t enter and launch in the region of Chinese Islam- the XinjiangProvince. As most of Chinese people know the Chinese McDonald’s has a large amount of products made with pork meat particularly the hamburger products, which is banned in the Xinjiang Province of China. (Jayaraman 2009)

 

 

Although, KFC doesn’t have so many pork meat products as the McDonald’s does in China, there are also many pork meat related products such as minced Pork Congee with Preserved Egg. This is kind of food choice may also hinder the development of KFC in these regions such as Xinjiang Province of China. (Jayaraman 2009)

 

2.2 Legal Challenges

Although China has been making great efforts to build a strong legal system and protections to offer a relatively complete legal frame work to attract more foreign investors to run business in Chinese market, there are still several weak points for business especially foreign business people to run companies in China. In the first place, the shortage of transparency and heavy level of cooperation practices in all facets of the Chinese society haven’t been changed so much. (Jan 2010)

 

 

For example, the vagueness in the legalization of China endows the officers, judges, administrator to have the advantage to serve their own benefits such as the wording. These concepts and definition in Chinese laws such as reasonableness, good faith and so on are stated by Chinese with may often result in vagueness for foreign business people to understand thoroughly, which also allow some government officials to take the advantage of to make for their interests. And this kind of shortage in clearness and transparency in law result in terrible corruption climate in China. Such kind of situation gives KFC a tough trial if it wants to successfully operate its business in Chinese market. (Jan 2010)

 

 

And the weak restriction on patent right in China also results in a great loss of KFC, these cheap copy products from other small vendors imitate the trade mark of KFC to seduce some innocent customers as well. (Jan 2010)

 

 

2.3 Low personal income

 

In the year 1987, the personal income was very low in China. In figure 1.0, the GDP per person for Chinese people was about ¥300 RMB equals about $ 40 USD in 1897, and even until 1995, the GDP per capital was only about ¥600 RMB equals about $ 75 USD in that year. While the price for the products of KFC was about ¥4-15 RMB for each which for the Chinese consumer was an expensive charge.(Trading economics 2011)

 

 

Figure 1.0 China GDP per capital

 

 

Source: The World Bank group,

 

 

Moreover, even in the modern time, although personal income for Chinese people has increased a lot, the food price also shoot up, especially the price of some raw materials such as the prices for raw chicken, eggs, vegetables, flour and other fast food required raw materials. For instance, till the end of this year, the food prices in China has been enjoyed a continuous increasing and even surged by 11.7%. Such kind of high price contributes to a tough task for KFC to maintain its original food price and the affordable price for Chinese market. And now the question faced by KFC is how to offer the satisfactory prices for customers with a relatively satisfactory margin gaining. (Xinhuanet 2011)

 

 

2.4 Negotiation problems

In the early stage, there was a lack of management talents in Chinese market for KFC to develop a proper and effective negotiation both with ordinary employees and some Chinese business partners. Such kind of shortage often hindered the healthy and smooth development pace of KFC in this market. For example, some Chinese business partner of KFC often held of different perspectives with these business principles of KFC such as quality, service as well as cleanliness. The major reason for this dispute was stemming from the traditional Chinese belief that it should protect and avoid the exposure of the quality products to the public. Such kind of belief conflicts aroused a series of operation problems for KFC to contribute its location process in different regions of Chinese market and also came up with a new challenge to KFC that there was a bad need for a proper talent pool set to meet the negotiation challenges with Chinese (Zheng 2004).

 

 

2.5 Traffic Challenge

 

The basic infrastructure building in china wasn’t so complete and proper in many cities even in its capital city Beijing. In fact, there is a fact that the big the city is in China, the terrible traffic there will be, due to the over population people and their cars which often lead to terrible traffic jam every where. In some small city the incomplete road constructions such as the lack of highways, railways, and other necessary traffic facilities in these cities makes the raw material’s delivery become a big headache for KFC which wasn’t both time and money consuming.

 

2.6 Demographical challenges

 

The big population of China not only offers KFC a potential customer market, but also offers a variety of challenges from the customers’ requirements from the north to the south and from the east to the west. Actually, in such complicated market, with about 850 m population under the poverty line, 536 m in cities and only bout 247 m people can be regarded as middle class consumption group. With such great pace in the rich and the poor and the dramatically different requirements on food offering, it is a big challenge for KFC to meet these people’s demand in such a huge market. And moreover, the taste preferences of people in different regions of China are also different. For instance, in Guangdong, people may prefer food with a sweet taste and in Sichuan region people may prefer the spicy flavor. (Taylor & Russell 2009)

 

 

In short, to understand the market needs and meet these needs properly are a big challenge for KFC to locate its business successfully in China.

 

3.0 Strategies

 

3.1 To meet demographic challenge

 

Based on the relatively thorough investigation on the Chinese people in different regions, from the north to the south and from the east to the west, the management team of KFC has carried out a suitable city location strategic based on these location factor rating which indicates a kind of measure to identify and weight significant location factors to make the decision on which city to choose to locate these restaurants of KFC including factors such as the compatibility of local food culture, economy development, proximity to customers, quality of labor force and the development of infrastructure construction and others alike (Taylor & Russell 2009).

 

3.1.1 Economy development elements

 

In figure 2.0, we can find out the location choice of KFC is based on the economy development factor so much that most of the chain restaurants of KFC are located in economy developed areas, such as the east coast line which is the most prosperous regions of KFC including Guangdong province, Jiangsu province, Zhejiang province and these most developed cities such as Beijing, Shanghai and so on. (KFC 2011)

 

 

Figure 2.0 Location plan of KFC in China

 

 

Source: Tele Atlas.com

 

 

In the meantime, the number of chain restaurants of KFC is designed deliberately in different provinces or cities according to the economy status reflected in table 1.0. For example, as the most developed province of China, more than 136 KFC restaurants are opened in GuangdongProvince and there are also 93 and 88 restaurants are opened in Beijing and Shanghai respectively which are the most developed cities of China. (KFC 2011)

 

 

 

 

Table 1.0 the number of KFC restaurants in different places

 

Provinces or citiesGuangdongJiangsuBeijingShanghaiZhejiangFujianTianjin
Number

136

98

93

88

69

35

30

 

Source: KFC.com

 

3.2 To meet legal challenge

 

As we mentioned above, the loose hoops in the legalization of China resulted in many misbehaviors such as the piracy, corruption and so on. To avoid the troubles in China when running the business, KFC is smartly to adopt the international franchising to provide the business opportunities to many business people by this measure.

 

 

According to Griffin and Pustay (2010), franchising is a flexible business measure for a business to enter a foreign market and provide more control for the franchisor to management the business in the global region. KFC makes full use of this kind of means to locate the business in China with about 3000 franchised restaurants in this market. With the agreement signed between KFC and Chinese investors not only offer these Chinese investors the chances to make more money under the support of KFC brand but also make KFC act more flexibly in different regions of China with the assistance of these Chinese investors who are knowledge about the local market culture and customs (Cui 2008).

 

 

For example, in the business regions such as Chongqing or Sichuan province, KFC has launched many spicy food menus to attract customers in these regions according to the suggestion from the local franchisees. And in the Guangdong regions the food menus may include more the sweet food meet the needs of customers in these places (Cui 2008).

 

 

In short, this franchising means help KFC to at more flexible depending on the assistance of the local investors, because they are more knowledgeable about the local culture and food preference and the business behaviors of government officials and vendors. With their help, some legal challenges faced by KFC such as the kickbacks during the business process can be dealt properly by the local franchisee, which is more relaxed (Han 2011).

 

 

3.3 To meet price challenge

 

As we mentioned in the above, the infrastructure building and fast growth speed of the price for raw materials, KFC has restored so many effective location strategies to solve this kind of problem. A newsworthy one is the partnership with local or international business partners. For example, the supplier location strategy become the first choice of KFC to lower its cost in Chinese market to get a better quality and cheap price on local suppliers such as chicken, flour, oil, eggs and so on. And meanwhile, some old partners of KFC in the global market has also been invited and attracted by KFC and the potential Chinese market to build factories in China to continue their cooperation with KFC in Chinese region. For example, there are more than 30 chicken meat suppliers for KFC among more than 27 cities and nearly 17 international suppliers of KFC have launched their factories in different places of China to work together with KFC to boost its business in the huge market (Wei & Sheng 2008).

 

In short, according to the research by Wei and Sheng (2008), the chicken meat are one hundred percent supplied by local suppliers and 85% the package materials for KFC’s food are also from local suppliers. Such kind of supplier location strategies to boost the relation with local Chinese suppliers and localize some outstanding international suppliers contributes to the success of KFC’s Chinese location to a large part.

 

 

At the same time, when lower the raw material price to meet the challenge of fast growing material price, KFC also give several good prices via the discount coupon distribution including the online coupon download means to not only offer customers discounts on the food price but also save the cost of KFC to print these paper coupon (Baack 2008).

 

3.4 To meet negotiation

 

In the above, we also mentioned that the negotiation barriers have hindered the good development of KFC’s business in Chinese market to a certain extent because of the language problems and lack of local management talents (Zheng 2004). So to pave the location road, KFC has invested a lot to develop the local talent pool in China base. According to Taylora and Addisona (2009), to improve the communication effectiveness and clearness, KFC has attracted many Chinese top talents to join in the KFC family.

 

 

For example, in the early time, Taiwan became the first choice for KFC to build up the senior management team in China because the high level of economy development, education level, the understanding of Chinese cultural essences such as Confucius and Taoism and so on of some qualified Taiwanese. And with this wise management of the management team in the beginning of location period for KFC, the communication from top to the bottom has improved a lot to remove many barriers and misunderstandings both from the inside part but from the outside part. (Lee 2009; China today 2004)

 

 

Besides the top managerial talents location strategies, KFC also made great efforts to attract many qualified local people to join in KFC as the marketing staff, front line workers and so on and until 2011, there are more than 160,000 employees in KFC China to devote them to the development of KFC in this market. (Lee 2009; China today 2004)

 

 

In short, this kind of location strategies of KFC on the basic situation of Chinese market are regarded as a relatively successful one compared with its global competitors such as Mcdonald’s.

 

3.5 Analysis of location strategies in different regions and cities

 

3.5.1 Major cities

 

In these developed cities of China such as Beijng, Shanghai, Shenzhen and Hangzhou and so on, KFC have developed a good analysis on these location factors including the compatibility of local food culture, economy development, proximity to customers, and quality of labor force, transportation and related issues to choose the suitable site to locate these restaurants in the table 2.0 (Liu & Xu 2009).

 

Table 2.0 location factor analysis

 

Score (0 to 100)

Location factor

Weight

Beijing

Shanghai

Shenzhen

Hangzhou

Compatibility of local food culture

0.1

75

70

80

75

Supporting policies

0.35

85

88

90

80

Economy development

0.065

90

95

90

88

Transportation

0.1

75

70

82

77

Quality of labor force

0.05

80

85

77

75

Market size

0.045

95

85

80

79

Leasing costs

0.05

90

92

90

88

proximity to customers

0.04

90

88

85

82

Strategic importance

0.2

95

90

85

80

 

 

From table 2.0 and these factor rates of different column of different site, we can get the following data in table 3.0.

 

 

Table 3.0 Location factor rating scores for major cities

 

 

Location factor

Beijing

Shanghai

Shenzhen

Hangzhou

Compatibility of local food culture7.57.08.07.5
Supporting policies29.7530.831.528
Economy development5.856.185.855.72
Transportation7.57.08.27.7
Quality of labor force44.253.853.75
Market size4.283.833.63.56
Leasing costs4.54.64.54.4
proximity to customers3.63.523.43.28
Strategic importance19181716
Total score85.9885.1885.979.91

 

 

3.5.2Beijing

 

From the above results, we can infer that Beijing as the capital city of China has scored the highest to become the best choice for KFC to launch its business primarily, which also the actual choice of KFC to open the first restaurant in Beijing in 1987. And moreover, as the historical site and ancient cultural city, Beijing attracts customers from all over the world to visit this place which offers a huge number of customers for KFC in Beijing (Zheng 2004; Du, Tao & Lu 2008).

 

 

And with reference to the location site in Beijing, as the figure 3.0 told us, these sites chosen by KFC in Beijing to locate its chain restaurants are almost all in the down town areas especially in the 4 rings areas and meanwhile all of these sites are nearby the shopping mall such as Beijing King square, and other commercial circle including to ensure the business climate and proximity to customers. (Tao & Lu 2008; KFC 2011)

 

 

Figure 3.0 The location map in Beijing

 

 

 

Source: google.map.com ( these red spots are KFC restaurants)

 

3.5.3Shanghai

 

Referring to the scores of Shanghai in Table 2.0, we can get this city also have a high score as 85. 18, which is also the reason why KFC locate so many chain restaurants in this place about 88 sites there. As the economy center of China, Shanghai possess the biggest economy potential for KFC to locate several restaurants compared with other cities, which contributes more then 11% total revenue in industry and 17% export income for China every year since the economy reform.

 

 

With these advantage such as supporting policies for business development, fast economy developing speed, a large number of floating populations and a great many talents, KFC locate about 88 restaurants in shanghai in these populated regions and commercial circles such as Pudong areas, metro station and railway station areas and so on as figure 4.0 shows.

 

Figure 4.0 The location map in Shanghai

 

 

 

Source: google.map.com ( these red spots are KFC restaurants)

 

3.5.4 Shenzhen

 

In the location factor analysis table, we may also find KFC gives a high mark on the evaluation result of Shenzhen, which is working as a business center in the south region of China with more than 10,000,000 population and nearly ¥40,000RMB annual income. Such kind of fast economy developing speed and high income make Shenzhen become the good choice to locate a relatively big number of restaurants. These specified sites chosen to locate the KFC restaurants are also according to the principle of good business climate, proximity to customers and so on and till 2010, there are about 30 restaurants in this region shown in figure 5.0.

 

Figure 5.0 The location map in Shenzhen

 

 

 

Source: google.map.com ( these red spots are KFC restaurants)

 

3.5.5 Medium to small cities

 

Toward these medium size to relatively small size cities such as Chengdu, Chongqing, Shenyang, Yunnan and so on, KFC also has developed a deeper and thorough investigation on the business climate and other location factors to choose the proper sites and number to locate. For instance, in Chengdu, it is a second level city in China with a relatively weak business climate and consumption capacity from the population. KFC picked out most prosperous sites such as the commercial road Chunxi Road and large department stores to set up the restaurants to make full use of the advantages of these locations to attract customers as shown in figure 6.0.

 

Figure 6.0 The location map in Chengdu

 

 

Source: google.map.com ( these red spots are KFC restaurants)

 

 

And in these small cities, the requirements on locate the business of KFC are set seriously and strictly. For instance, besides the financial requirements of the Chinese investor in these small cities, there is also a strict restrictions on the population quality such as the number of city population should large enough than the agricultural population and the annual income of the population of the city should be above ¥6,000 RMB or else KFC will not give permission on for investors in the city to join in the franchising of KFC. (Zhu 2008)

 

 

Generally speaking, with the great attention paid to the location factors as the above described, KFC has managed its location process relatively successful in its investigation of Chinese market.

 

 

4.0 Evaluation

 

Based on the above analysis, we can get that the location strategy of KFC in Chinese market can be regarded a successful one under the properly analysis of the location factors in the Chinese market according to the difference of different Chinese region. There are also some weak points in the location strategy of KFC which requires consideration.

 

4.1 Culture blending location strategy

 

In fact, in the Chinese market, KFC has adopt the localization strategy to make its self as a western fast food brand blending with a variety of Chinese culture essences especially the food cultural essences of different regions in China. These new introduced products such as porridges, chicken roll with green Chinese onion, chicken rice in Chinese market may all learn from the traditional Chinese food culture. In the first place, we should admit and speak highly of this location strategy for KFC to attract some middle age or elder customers of China. In the other place, we should also point out some mismanagement practices in this kind of location strategy. (China today 2004; Sexton 2008)

 

 

Let’s have a look at some examples from the promoting campaign of KFC. In 2003, to meet the requirement and preference of customers in Guangdong province, KFC had introduced a brand new product in this region named Sweet and Sour Pork rice. In fact, such kind of deliberate design to meet the requirement of customers in Guangdong should receive a hot welcome by customers there. But the promoting campaign of KFC on this product was regarded as too arrogant and impolite to offend the treasure of traditional Chinese food essences cherished by Guangdong people. In the ad of the Sweet and Sour Pork rice, there was a situation that all the customers plugged into KFC to buy this food instead of entering into the traditional restaurant which is famous for the good taste of Sweet and Sour Pork rice. Such kind of exaggerative promotion activity not only offended the dignity of Guangdong people but also made many customers have a bad impression on KFC, which resulted in the decline of its sales in this kind of food and other related products. (China today 2004; Sexton 2008)

 

 

From this case, we can find the mismanagement of KFC in location its new products via the improper promotion means.

 

 

4.2 Health issues

 

Besides these good solutions implemented by KFC to meet several challenges, there are also frequent healthy related problems to nag KFC in China market (Cheng 2003). In China, with the development in economy, the education level of people in cities especially in large cites has a great improvement that results in more and more awareness on the healthy issues on their every diet. With the emphasis of the obesity and related healthy problems aroused by KFC, McDonald’s and other fast food resultants in many western customers, more and more Chinese customers also begin to worry about the health in diet with the food purchasing in KFC and McDonald’s. Such kind of awareness is a big challenge for KFC to continue its expansion to locate more restaurants in different sites of China (Cheng 2003).

 

 

And moreover, there healthy problems occurred in KFC including the scandal of Sudan red accident, unclear raw material accident and so on all put the reputation of KFC in the teeth of storm in Chinese market (Zhang & Carmody 2009).

 

4.3 Good deeds

 

As in the above we have a relatively thorough analysis on the strategies and some weakness of KFC’s location strategies in China, we will summarize the pros of KFC has practiced in its location strategies of China.

 

 

First, the location strategies of KFC are produced on the basis of an analysis of these location factors including compatibility of local food culture, supporting economy policies, economy developing level, transportation contribution, labor quality, market size and so on to evaluate the better sites for KFC to locate the business. The first location choice of Beijing and then Shanghai as well as other continuous places all proved the attention and effort paid by KFC in its entering practices.

 

 

Second, the international franchising with specified strict principles and requirements contribute a great flexibility and business potential for both KFC and its Chinese franchisees, which is worthy speaking highly of.

 

 

Meanwhile, the blend of Chinese food culture with KFC’s brand makes the location process of KFC more fast, despites some small errors, the orientation of this strategy is also proved right from the success of KFC in Chinese market.

 

5.0 Conclusion

 

As there are some weaknesses of KFC’s location strategy when entering and expanding in Chinese market, we will suggest some measures for KFC to enjoy a better development in its future in this market.

 

5.1 Learning to respect

 

This first suggestion we offered to KFC is to learn the host culture with a respect on its dignity. For the future development of KFC, we still affirm the good choice to blend the KFC brand of Chinese culture, especially the food culture and at the same time, we suggest it learn more on how to respect this culture essence that to not also make Chinese people to realize the interesting and attractive Chinese culture elements in KFC’s products but also make them notice the full respect laid by KFC on their culture. (KFC 2011; China today 2004; Sexton 2008)

 

5.2 Health issue

 

As a fast food based chain restaurant, the complete healthy products may not be made by KFC for ever. So we suggest KFC to take greater attention on the clearness and safety related issue of these products to avoid these scandals to occur. And meanwhile, we also suggest KFC to promote its products in emphasizing the intrusting, funny life style rather than the health diet manner to outstand its advantages in food offering instead of exposing its disadvantages. (Sexton 2008)