Competitive analysis of fast food industry in China: Case study of KFC China

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Competitive analysis of fast food industry in China:

Case study of KFC China

 

1.        Introduction

1.1    Introduction of KFC China

 

On 12th November 1987, KFC opened its first restaurant in China in the capital city of Beijing with the first joint venture company established in Beijing. KFC is not only one of the earliest famous global fast food brands entered into the Chinese market at that time, it is the first to introduce the fast food business mode of franchise to the China market in 1992 which still leaves its major global competitor McDonald’s far behind. Since then, with the help of the franchise business and the localized strategy, KFC had begun a rapid growth which continues to date. As a matter of fact, nowadays, KFC China has the rather comprehensive network covering each provinces of China through the operations of more than 3,500 restaurants in over 700 cities (Yun.com 2011).

 

1.2    Introduction of the fast food industry in China

 

Though some claimed that the fast food industry in China can be dated back to thousands of years ago in such foods such as stuffed buns (baozi) (Watson & Caldwell 2005, p. 170), more people believe that the fast food industry only began when the western fast food entered into the Chinese market. But nevertheless, the fast food industry is one of the fastest growing industries one of the fastest growing and emerging economies in the world. In the recent years, the industry’s growth rate reached around 25 percent per year which make it very attractive as an emerging industry in the country (giiresearch.com 2011).

 

2.        Research objectives

 

2.1    Identify and critically discuss the competitive determinants in the fast food industry in China

2.2    Position the Chinese fast food industry in the industry life cycle

2.3    Discuss the implications of the national competitive advantage analysis and the industry life cycle analysis in the marketing strategies

 

3.        Literature review

 

3.1
Review of Michael Porter (1990)’s model of national competitive advantage

Figure 1 Michael Porter (1990)’s model of national competitive advantage

Source: quickmba.com 2011

 

Michale Porter (1990) after studying the differences among some countries in term of the global competitiveness of the studied industry and classified the sources of such competitiveness in four key categories as shown in the figure above which include:

l  Firm strategy, firm structure and rivalry

 

l  Factor conditions, including supplier markets

 

l  Demand condition or the customer characteristics

 

l  Related and supporting industries

 

The model of the national competitive advantages was proposed to answer the three major questions:

 

l  First, why do some nations house so many excellent multinational companies?

l  Second, how do these companies maintain superior performance around the globe?

l  Third, what implications and hints this has for the national policy making and companies’ competitive strategies?

 

In term of firm strategy, firm strategy and rivalry, It is believed that the competitiveness of an industry not only resides on the natural resources but also comes from firm strategy, and rivalry. For example, though within an single industry, high rivalry would reduce the profit margin but according to Michael Porter (1990), because high competition also encourage and press the existing players to rely more on innovation and productivity improvement, therefore high rivalry could be a kind of source of competitiveness. Also local competition could drive some competitors to source better resources globally.

 

In term of factor conditions, including supplier markets, it is claimed that a country’s resources such as the low cost labor, land and high research and development (R&D) level are traditionally the source of competitiveness of a certain industry in the company.

 

In term of demand condition or the customer characteristics, there could be several cases in which demand conditions in the industry create competiveness. Firstly, when the market size has become larger than the foreign markets, the local competitors tend to be more competitive than the foreign local firms when they finally export their products or mode of business because the home market provides a market large enough for product segmentation; secondly, if the customers are more demanding in the industry in a country, it will prepare the existing players as better service providers; thirdly, a big local market also inspires the companies about the trend of development in the future.

 

In term of related and supporting industries, any industry does not exist without the supplementary or supporting industries. Because a strong and competitive industry tend to yield more and better products and services than the same industry in the oversea market, hence its existence would also strengthen the competitiveness of the industries that it has cooperation relationship with, such as supplying relationship.

 

3.2    Review of the industry life cycle model

Figure 2
The industry life cycle

Source: Grant 2005, p. 301

 

One of the best known and most enduring marketing concepts is the product life cycle which gave birth to the similar industry life cycle which comprises 4 stages as shown in the figure above: introduction, growth, maturity and decline.

 

In the introduction stage, the industry sale could be very low because the industry just starts and the offered products and services could be new to the customers and thus it takes a certain period of time for the market base and customer base to be formed. And also during this stage, industry innovators try to design the products and services to fit in the need of the potential customers in the market and also they would create the suitable mode of business through which the business would be operated. In term of profit generation, there could be high profit margin when there are few competitors and the innovators could charge premium prices or there could be loss because of the fix investment cased start up loss. But the similar thing is that the market share would be small and number of competitors would also be small.

 

In the growth stage, with the increase of market share and mature of the market, market profit and margin would also see a gradual growth. During this stage, products and services would evolve closely to the final shape and also because of the increasing industry profitability, more potential competitors are attracted to enter into the market and because the existing firms are also busy with the market share expansion, competition level would be high while entry barriers would be low.

 

In the maturity stage, products and service have be developed into the final status and the market share and profit reaches the maximum level, and because of the entering of the competitors during the growing stage and also in this stage together with the stabilized business model and product shape, competitors could easily follow the business mode and product design of the leading companies. And also because the market share reaches the full maturity and full potential, demand would not growth significantly unless there is a fast growth of population, hence competition would be intense and price competition would become common.

 

In the decline stage, in this stage, profit margin start to decline and industry sale decreases, and the remaining market competitors are those top performers and they tend to compete but could still search for exist in an appropriate manner. And because of the declining trend, investment in the R&D of the new products and new technologies tend to be low and profit maximization becomes the common targets.

 

4.        Case analysis

 

4.1    Analysis using Michael Porter (1990)’s model of national competitive advantage

 

4.1.1            Firm structure, firm strategy and rivalry

 

The majority of the outlets of KFC China are franchise restaurants. Franchising is the practice of using another firm’s successful business model (Todd 2011, p. 20). The company has utilized the franchise business mode to introduce its business model rapidly throughout China. In term of firm strategy, the China has adopted localized strategy which can be shown in three major facts: firstly, KFC China hires local managers who are more familiar with the market to run the local business; secondly the company has differentiated the menu in China from the menu in other countries by integrated the local diet traditions in term of adding a number of Chinese food such as the Old Beijing Chicken Wrap which was reminiscent of the taste of the Peking Duck and became an instant hit (Yuann & Inch 2008, p. 155); thirdly, the KFC China also decorate the restaurants differently to get adapted to the Chinese dining culture. For example, the KFC outlets in China provide a larger dinning space to the Chinese customers who prefer to dine with friend in a table.

 

In term of competitive rivalry, it should be said that the competition in the industry has increased with more and more western style fast food companies entering into the Chinese fast food industry and also the local Chinese style fast food companies are also emerging. There are two major reasons make us believe that the rivalry in China for KFC is not intense: first of all, KFC has more than 3,500 outlets which create the advantage of economy of scale for the company as more and more customers even misunderstand that KFC is a larger fast food brand than McDonald in the world; secondly, while McDonald’s outlet number is only one third of that of KFC, we can see that KFC has been leading the fast food industry in China and it takes time for the competitor to reach the current position of KFC.

 

4.1.2            Factor conditions, including supplier markets

 

Basic factors such as raw materials and unskilled workers are abundant in China, therefore the basic factors in the Chinese fast food industry is good. And also the with an increased number of graduates from with higher education background and the growing fast infrastructure building, the needed advanced factors would also be okay for the fast food companies.

 

4.1.3            Demand condition or the customer characteristics

 

Based on the customer characteristics, the fast food industry in China could be divided into two major market segments: Chinese fast food and the western fast food. With the fast economic growth and the trend of modernization and urbanization found in the mainland of China, the market of fast food is growing fast in term of market size.  During the past 10 years, China’s fast food market has sustained an annual growth rate of 10%-20%. In 2010, the market scale of China’s fast food industry exceeded CNY 260 billion (articlesbase.com 2011). Another trait of the Chinese customers that brings advantage to KFC China is that Chinese people have been found very keen on going to dine in Western fast food restaurants (Davis 2000, p. 211) especially in the large cities where economy and the market are more opened to the outside world.

 

4.1.4            Related and supporting industries

 

One important supporting industry in the fast food industry is the logistic industry. Though the major logistics indicators of the Chinese logistic industry are still not satisfactory in China compared to those of the advanced countries with some remote areas being excluded from the delivery coverage, the Chinese logistic industry is actually providing stronger and stronger support to the various industries through its rapid growth. As a matter of fact, between 1992 and 2004, the annual growth rate of the logistics industry had maintained a 22.2% (Farahani, Rezapour & Kardar 2011, p. 104).

 

4.1.5            Summary of the national competitive advantage analysis

Dimensions Descriptions Score (1 to 5)
Firm structure, firm strategy and rivalry Franchising; Hiring of local managers; Localized menu; Localized restaurant layout; Increased rivalry in the industry; Economy of scale; 3.5
Factor conditions, including supplier markets Abundant raw materials and unskilled workers; Large number of graduates with higher education; 3
Demand condition or the customer characteristics Trend of modernization and urbanization; Annual growth rate of 10%-20%; Chinese customers’ preference of western fast food; 4
Related and supporting industries Rapid growth in logistic industry; Lack of full delivery coverage; 3

 

 

4.2    Analysis using the industry life cycle model

 

There are three major factors making us believe that the Chinese fast food industry is in the growth stage of the industry life cycle model. Firstly, as mentioned above, during the past 10 years, China’s fast food market has sustained an annual growth rate of 10%-20%. And also as in the last year the overall market share of China’s fast food industry is over CNY 260 billion (38.2 billion USD) (articlesbase.com 2011) but the US fast food market had already reached 142 billion USD in 2006 suggesting that with a bigger population, and a faster economic growth which create demand for fast food during the urbanization, there is a big potential for market growth in the future; secondly, the industry profitability is improving significantly. In the case of KFC China, as the figure below shows, the China market has occupied 41.5 per cent in the KFC global total sale in the third quarter of 2010, and at the period, the Chinese market contributes to a larger percentage of profit earning which is 46.3%, this suggest that the profitability compared to the investment made in the market. This might probably due to the fact that the market is growing rapidly, and customers demand is strong enough compared to the limited offering in the market which makes them accept price even it is higher than the global average price.

Figure 3
The 2010 Q 3 total avenue and operating profits configuration

Source: money.cnn.com 2011

 

5.        Conclusions

 

To conclude that above analysis, we can see that the fast food industry in China has been increasing rapidly as it is within a growth stage according to the industry life cycle, and the excellent demand conditions and rapid growth in logistic industry and the large volume of unskilled labor have provided the fast food industry with competitiveness compared with the same industry in the oversea markets. And in the future there would be possibility that the fast food industry could outperform the same industries in other markets for several key reasons: firstly, a large market share in China would prepare the market competitors with chance to competitors with compete in an intense market competition. When the competitors become strong enough, they could extend the market mode obtained in China to the oversea markets. This applies to both domestic and international firms; secondly, the Chinese fast food which has not been introduced to the oversea markets could become a competitive product in the global market and the Chinese firms could extend their business into the oversea markets. Below there are some implications to the marketing strategies for KFC China’s expansion in the China market; thirdly, the fast food industry in China is attractive to the global fast food players, and existing companies in China should be prepared for such potential competition; and lastly, the above analysis would have implications to the competing companies in China, local or international firms.

 

6.        Implications to the marketing strategies of KFC China

 

6.1    Product strategy

 

In term of product strategy, because of the fast growing customer demand, it would be recommended that the KFC China adopts two product strategies at the same time: firstly, the company needs to ensure that quality of the products is the same throughout the market by adopting a product standardization strategy; and secondly, the company should continue its successful product differentiation strategy and continue to integrate the Chinese customer demand features into the new product development and provide more food products that are more suitable to the customers’ preference.

 

6.2    Price strategy

 

In term of price strategy, because at the growth stage it would be recommended that competitors target at a growth of the market share rather than the profit maximization, therefore, the KFC China could use a competitive pricing to make its products more competitive than the offering of the competitors. Another pricing strategy that could be adopted based on Chinese customer feature is the physiological pricing strategy which could increase the additional value or discount perceived by the customers. For example, numbers such as 9.99, 19.99, 8.88 and 16.66 are all have cultural hints to the Chinese customers who have the traditional Chinese culture background.

 

6.3    Promotion strategy

 

And in term of the promotion strategy, because of the large market potential in the near future, it is recommended that large resources in term of both human resource and capital to be injected into the promotion efforts to make the brand more aware among the potential customers. And in term of the audience of the advertising, because the customer base is enlarging in a rapid speed, the company should target in a boarder scale of customer base. And in term of the promotion channel, various channels such as personnel, regular mail, internet and indoor and outdoor advertisement space could all be utilized to promote the brand in China.

 

6.4    Place strategy

In term of place strategy, because of the rapid growth of the logistics industry in China, it would be recommended that KFC could establish its own logistic company to be in charge its own delivery and distribution of the raw materials, or else it could find out more third party logistic companies and identify some of them as long term partnership.

 

 

List of references

 

Articlesbase.com 2011. Annual 10%-20% Growth in Chinese Fast Food Market. Retrieved on 29 Dec 2011. [online] http://www.articlesbase.com/industrial-articles/annual-10-20-growth-in-chinese-fast-food-market-4323398.html

 

Davis, D. 2000, The consumer revolution in urban China. California: University of California Press. p. 211

 

Farahani, R., Rezapour, S. & Kardar, L. 2011, Logistics Operations and Management: Concepts and Models. London: Elsevier. p. 104

 

Giiresearch.com 2011. China Fast Food Analysis. Retrieved on 29 Dec 2011. [online] http://www.giiresearch.com/report/rnc75703-china-fast-food.html

 

Grant, R. M. 2005, Contemporary strategy analysis. Oxford: Blackwell Publishing. p. 301

 

Money.cnn.com 2011. Colonel Sanders: China’s favorite import. [online] http://money.cnn.com/2011/01/19/news/companies/thebuzz/index.htm

 

Porter, M. E. 1990. The competitive advantage of nations: with a new introduction. New York: The Free Press.

 

Quickmba.com 2011. Porter’s Diamond of National Advantage. Retrieved on 29 Dec 2011. [online] http://www.quickmba.com/strategy/global/diamond/

 

Todd, M. 2011, Handbook of Medical Tourism Development. Boca Raton, FL: Taylor & Francis Group, LLC. p. 20

 

Yuann, J. K. & Inch, J. 2008, Supertrends of future China: billion dollar business opportunities for China. London: World Scientific. p. 155

 

Yum.com 2011. Yum! China. Accessed on 29th Dec 2011 [online] http://www.yum.com/company/china.asp
Watson, J. L. & Caldwell. M. L. 2005, The cultural politics of food and eating: a reader. London: Blackwell Publishing. p. 170