Location strategies of Kungfu Fast Food Chain

By | March 9, 2013

 

This Assignment Is Published With Permission From The Author For Online Review Only
All Rights Reserved @ ChinaAbout.Net

 

1.        Introduction

 

1.1    Company background

 

 

Figure 1.0 The Kungfu Fast Food Chain in China

 

Initiated in 1994, Kungfu has become one of the most eminent Chinese fast foods chain through 16 years’ fast growing business operations despite and set up a good example for the Chinese fast food industry while the western style fast food seems to dominate the fast food industry in the mainland of China. By promoting the “zheng” concept which means “steam” in China representing its business positioning which is to provide the customers with fast food but yet healthy food and is different from the western competitors such as KFC and McDonald, Kungfu Catering Management Co., Ltd managed to established its chain network with the present more than 373 Kungfu restaurants in the 13 provinces and autonomous cities of mainland China and this digit is still growing in a fast pace (Zkungfu.com 2010). In term of strategic positioning, Kungfu has been focused on providing healthy rice fast foods for the urban white collars and this positioning has made the restaurant chain since establishment have been expanding in the large cities which are able to provide with sufficient customer base for the Kungfu fast food. And the large and medium big cities are still the potential market for Kungfu’s future expansion. With the current fast growing of the business, Kungfu Catering Management Co., Ltd in order to keep the high and standardized quality of the food to the vast customers, since establishment the company has focusing on building the three standard operations systems for the Chinese fast food: standardized logistic production, standard cooking equipments and standardized restaurant operations as part of the effort to achieve the goal of international standardized quality, sanitation and service.

 

Qingdao

Xian

Meizhou

 

Figure 2.0 Candidate cities for Kungfu’s expansion

 

Right now three cities have been selected as the candidate cities for the next focus of expansion strategy: Qindao (Shandong Province), Xian (Shan Xi Province) and Meizhou (Guangdong Province) as shown in the figure above. This study has been devoted to find out the next city to be developed as the company is using “city clustering” strategy which means that the company will at one time focus the expansion in one single cities and establish the brand in the cities by opening more than one restaurants in the cities within a short period of time and also this research will offer the suggestions in the relative location strategies in the perspective of Kungfu fast food.

 

1.2    Location strategies for restaurants

 

Location refer to a general area in a city and location strategy involves selecting the general area in which a firm could be operating and determining whether the company will expand through clustering or a more scattered expansion strategy (Hsu & Powers 2002, p243) and techniques of the location strategy includes location and site selections.

 

Unlike heavy or light manufacturing facilities and plants, restaurant as a kind retail and service facilities though with relatively small establishment cost is more sensitive to the location of the restaurant as it is generally believed that restaurants need to be located near their customers. Also for a restaurant, it is also applied to the principle of “location is everything” (Russell & Taylor 2009) especially after taking into the consideration of the bad traffic conditions in the big cities of China. There are several key determinates that need to be examined in the location strategies for restaurants:

 

1.2.1            Proximity to customers

 

The proximity to customers though is believe to the most important determinant to the retail store location, but to the consideration of the restaurant location, the long distance between the customers and the restaurant could be fatal to the survival of the company. Even it happens some traditional restaurants in a remote place do attract a lot of customers to drive from a distant place just to have a dinner there. But this is obviously not applicable in Kungfu Fast Food Chain because of the nature and position of the product. In term of nature of the product, Kungfu provide Chinese style rice fast food and people who want fast food actually want to save time so the proximity to customers is necessary and in term of product positioning, Kungfu select the white collars in big cities as their segment, and white collars tend to concentrate near the uptown zone.

 

1.2.2            Industrial competition

 

Industrial competition could influence the decision of the new restaurant by gradually reducing the profits due to price competition among similar products or even differentiated products (Choi 1991) though this is based on the assumption that demand in the market would not increase with the growth of the suppliers. But life experiences also tell us the common principle that prices of products would be lower in the market where there are a lot of suppliers in competition relationship.

 

1.2.3            Infrastructure

 

Infrastructure is important after taking into the consideration that China is still a developing county and the cities are developing in different levels and infrastructure only marks the development level of a city and the transportation sector of the infrastructure could be vital to restaurants because highly developed and convenient transportation could bring more customers.

 

1.2.4            Closeness to suppliers

 

The closeness to suppliers is another factors that need to be taken into considerations. This importance of the closeness to suppliers is determined by the nature of fast food industry as its fast daily consumption of large materials and foods needed by all the restaurants. Transportation between suppliers and restaurants could be costly if the restaurants are locating far away from the suppliers. As for Kongfu Fast Food Restaurant, it has its own logistics centers which locate in Guangzhou (South China), Shanghai (East China) and Beijing (North China) which are set up as part of effort to build up its standardized quality and these logistics center is in charge of purchasing, processing and distributing for all the restaurants and because of the function of the logistics center, the closeness of the location or the convenience transportation between them could be helpful to control the cost of transportation and reduce the delivery time.

 

1.2.5            Local food cultures

 

China is a vast market with quite different food culture and preference from place to place. As for Kungfu Fast Food Restaurant which is famous for its steamed food and healthy diet concept, it inherit its food culture originated in South China’s Guangdong province. This particular food culture has been expanded and promoted into other provinces and cities by Kungfu and other competitors, but before entering into a specific city the examination of the extent of acceptance of the food provided by Kungfu Fast Food Restaurant is necessary.

 

2.        Literature review

 

Despite the general understanding that a good location strategy should be placing the new facility close to the customers and suppliers and at the same time avoid being too near the competitors to reduce the possibility of over competition which undermines the margin profits that every unit could gain eventually, Birkinshaw and Hood (2000) suggested that the concentration of companies which are in similar industries can be an important location advantage which like a magnet could attract large flow of customers and this theory also corresponds with the fact that there is effect of agglomeration of industrial activities within the same industry or similar industries.

 

In term of the implementation of location strategy, Thompson (1986) identify three steps for location in the project level: the first step is to analyze the demographic and socioeconomic situation of the market to indentify the area; the second step is the indentify the sub-area by taking into consideration of the local market and the three step is the site selection part which is devoted to find out the best site with the greatest sale potential. Cathy H. C. Hsu,Thomas F. Powers (2002 p234) used a geographic information system (GIS) and form a seven step computer-assisted decision strategy to identify the locations: Identify area for store assessment; Perform a geographical inventory; Assess the relative performance of retail units; Identify situation targets; Assess market penetration; Identify geographic markets for expansion and Make a judgment.

 

3.        Challenges

 

Challenges come from outside and inside of the Kungfu when it set up its strategic expansion plan. Challenges surround the company before the location strategy is implemented could be two folds:

 

3.1    Economic conditions

 

With ongoing the economy slow down Kungfu Catering Management Co., Ltd has reduced fund and human resources to develop two cities at the same time, so the company could only focus the resources into only one out of the candidate cities. And the selection of the best suitable city among the three candidate cities would be critical to the company to continue to adhere to its expansion strategy under the current economic conditions. One factor marks the current bad economic condition which has significant influence on the demand of the customers is the increasing inflation rate started from the economic recovery from the beginning of 2009 as illustrated in the chart below. Though the continued growth of the inflation rate seems to be mild compared to the still high economic development in term of GDP growth, but according to the recent fact that the food prices especially the food of necessity such as meat, vegetable and meat actually drive up the inflation rate to a two year high in November this year (Theglobeandmail.com 2010) to some extend indicate how difficult for the fast food industry when the cost of materials has been forced to go up. This difficulty is corresponding with the recent social unrest in many part of China while people complain heavily about fast raise in food price and the recent move of McDonald to raise its menu price for major meal sets and burgers (Reuter.com 2010) in face with rapid increases in food prices. And in order to reduce the influence of the high food price, Kungfu need to find out ways to control and reduce the cost in the existing and new chain stores and obviously the location strategy could be helpful to achieve the cost control target.

 

Chart 1.0 Inflation rate in China from January 2009 (Source: Tradingeconomics.com 2010)

 

 

 

3.2    Industrial competition

 

The second challenge comes from competition which already exists in the fast food industry in the candidate cities to entry as in these three cities Kungfu is an outsider to enter into the market though it has established its chain store in many other big cities. Michael E. Porter (1985) identified five determinants of the industry competition intensity in the perspective of an existing player’s perspective as shown in the figure below. And in the angel of Kungfu Fast Food Restaurant, three out the five industrial competitive forces could be identified as the barriers to the company’s entry: Rivalry in the existing competitors, Bargaining Power of Buyers & Bargaining Power of Suppliers.

 

Figure 3.0 Porter’s five competitive forces framework

 

3.2.1            Rivalry among existing competitors

 

In term of rivalry among existing competitors, it could be partially evaluated by examining the major competitors’ situation in these three candidate cities. Two major competitors national wide are the famous global fast food giants: McDonald and KFC. For McDonald, it has eight chain restaurants in Qingdao out of which seven are operating in a 24 hours basis, ten chain restaurants in Xi’an out of which seven are operating in a 24 hours basis and in Meizhou there is only one restaurant (Mcdonalds.com.cn 2010). As for another major competitor KFC, it has four chain restaurants in Meizhou, twelve in Qingdao and five outlets in Shan’xi (Kfc.com.cn 2010).

 

3.2.2            Bargaining Power of Buyers

 

The bargaining power of consumers could have significant impact on the successful penetration of Kungfu Fast Food Restaurant. As mentioned above, faced by the current economic situation consumers are more conservative in spending money and high price of food, consumers would be select cheaper way of catering such as cooking themselves instead of going out for eating. The bargaining power of the customers issue could be more issues in the less developed Meizhou, Xi’an than Qingdao. Another factor that may have influence over the customers’ behaviors is the Muslim culture. As we know port is not edible in Muslim culture, and port is widely used in the menu of Kungfu Fast Food Restaurant and Xi’an as the capital of Shan’xi which is adjacent to Gansu where there are large population of Muslims which explains the reasons why there is no McDonald restaurant in Gansu province. And provided that there is also a proportion of Muslim residences in Xi’an it would put Xi’an in disadvantageous position compared with other two candidate cities.

 

3.2.3            Bargaining Power of Suppliers

 

The bargaining power of suppliers could be fatal to entry strategy and location strategy of Kungfu Fast Food Restaurant as a new player in the fast food industry in the targeted cities. While the major suppliers have already established cooperation relationship with the competitors in term of contract, how to gain the access to the quality suppliers and share the supply side resources would be one of the major challenges for Kungfu Fast Food Restaurant. Another kind of supplier to the restaurant is its own logistic center which will handle the purchasing and distribution of the raw good for the chain restaurants’ operation needs.

 

4.        Implementation

 

Below let’s focus on the implementation of the location strategy based on the literature review and challenges analysis we have above to determine which city to be entered by Kungfu Fast Food Restaurant and how the exact entry strategy is performed in term of site selection criteria.

 

4.1    City identification

 

4.1.1            Location factor rating

 

To identify the best city to be expanded into by Kungfu Fast Food Restaurant, below the location factor rating system would be used to consider the factors influencing the location decision in a weighted manner. But please take note that location decision typically will not be made based only on these ratings as other information is also needed (Russell & Taylor 2009) such as results of cost analysis.

 

  

Scores

(0 to 100)

 

Location Factors

Weight

Qingdao

Xi’an

Meizhou

Proximity to logistic center

0.1

40

20

70

Wage rates

0.05

60

80

75

Rivalry among existing competitors

0.2

40

50

95

Food culture compatibility

0.1

60

50

80

Infrastructure

0.1

85

80

65

Economic development

0.1

80

50

25

Social stability

0.05

85

80

90

Strategic implications

0.3

70

95

30

 

Solution:

 

             Weighted Scores

Location Factors

Qingdao

Xi’an

Meizhou

Proximity to logistic center

4

2

7

Wage rates

3

4

3.75

Rivalry among existing competitors

8

10

19

Food culture compatibility

6

5

8

Infrastructure

8.5

8

6.5

Economic development

8

5

2.5

Social stability

4.25

4

4.5

Strategic implications

21

28.5

9

Total score

62.75

66.5

60.25

 

The total scores of these three candidate cities are not very optimistic; but this is not necessarily bad new because many other major cities have already been developed and penetrated as part of the Kungfu Fast Food Chain. Among the listed location factors, several measurements need to be clarified to help readers to understand how the readers to what’s the source of the data and how the weight is divided between different location factors. The “Proximity of logistic centers” is measured by the distances from the cities to the nearest logistic centers and as mentioned in the beginning, Kungfu has three logistic center in Beijing, Shanghai and Guangzhou, the three major cities and leading urbanized cities; The measurement of “Rivalry among existing competitors” is measured by the number of KFC and McDonald outlets that has been discussed just now. This is a rough evaluation rather than a precise one. And the economic development is calculated by the per capita income in 2009 for the three candidate cities. According to the Bureau of National Statistics, in 2009 the per capita income for Qingdao citizen is 22368 CNY and 18963 CNY for Xi’an citizens and 9259 CNY for the Meizhou citizens in year 2009 (Stats.gov.cn 2009). The most important location factor the need to be explained it the “Strategic Implication” which is in accordance to the company’s chain networking strategy eying at the whole China’s market. A city that is rated as high in the strategic implication means that the development of this city is strategically important as it can help the company to expand into the cities and regions near to that city. As in Kungfu Fast Food Restaurant’s three candidate cities, Meizhou is a small city and it is located at the border of Guangzhou province which is far away from the capital of the provinces. This location and city status as add little to the Meizhou’s score in strategic implications. And as for Qingdao, which is a medium sized city and it is also not the capital of the province that it is located in, Shandong but it also has a medium meaning in strategy as in the whole Shandong province only the capital city Jinan has the been developed by Kungfu Fast Food Restaurant and the development of Qingdao could help the company further develop this important provinces that has great potentials. And for Xi’an, even though with a less developed economy, Xi’an is the capital of Shan’xi province which makes it of the most significance in the strategic implications as it is a very important strategic position in the north west of China which should be as important as the other part of China in Kungfu’s future strategy.

 

According to the analysis using the locating factor rating system, with a final score of 66.5 compared to 62.75 and 60.25 for the other two candidate cities, Xi’an has been ranked as the most suitable city largely due to its well built infrastructure, low rivalry in the fast food industry and most importantly the strategic implications in the company’s future blueprint.

 

4.2    Site identification

 

After Xi’an has been identified as the ideal city for Kungfu Fast Food Restaurant’s expansion, the next step would be to pick the specific sites to locate the new restaurant outlets. Several factors need to be considered by Kungfu Fast Food Restaurant in the new chain restaurant site identification process: number of restaurants, operating size and site selection.

 

4.2.1            Number of restaurants

 

As mentioned at the beginning, the Kungfu Fast Food Restaurant has adopted the strategy of “city clustering” so that the number of restaurant in Xi’an would be more than one. And according to the similar past expansion experiences of Kungfu Fast Food Restaurant in the capital city and the consideration of the market size and people’s income level, four or five restaurants would be suitable in the beginning of the implementation of the expansion plan. The final determination of the operating size of the restaurant is better to be finalized after the detailed survey over the market volume and the leasing cost, but one thing is certain that it should be large enough as a window through which customers could refer to the Kungfu Fast Food Restaurant as in accordance to its leading fast food chain image.

 

4.2.2            Operating size

 

As the first four or five restaurants in Xi’an which could act as showcase to in the whole market in Shanxi province, the company needs to have a clear idea about the operating size of the these red chip restaurants. The operating size could basically follow the size of the ones in other capital cities such as Guangzhou and Hangzhou but adjustment after the consideration of leasing cost, availability of sites, survey over visitor flow and other factors is also needed. But basically the red chip restaurants to be set up in Xi’an should be in a large enough operating size to show the customers the image of Kungfu as the leading Chinese Fast Restaurant brand.

 

4.2.3            Site selection criteria application

 

With the lack of information about the detail available sites, specific positions may not be identified, but location rules still could be applied in this situations which Kungfu could follow to find out the specific site characters. The first character is accessibility. With the product positioning to the middle class especially the white collars, it has more strategic implications for Kungfu Fast Food Restaurant to locate its new restaurants in the office zone so that the white collars could walk there within 15 minus to enjoy lunch or supper between or after work which is the desired locations. And shopping mall is also a alternative site option due to its wide exposure to the targeted customers especially the shopping malls near the business or resident zones. Another character is visibility which could be simply defined as how easy the customers could see the location (Arduser 2003). And a far corner of a main road intersecting a secondary road could be used achieve maximum visibility. Other characters include Ingress, security and synergy. Ingress which measures how easy it would be to get in and out of the parking lot which if of significant importance for restaurants in Xi’an due to the heavy traffic problem. Synergism in area of location strategy refers to the positive correlation between the proximity to other businesses and increase of sale (Arduser 2003). The synergy effect is obvious if Kungfu locates its restaurant in Xi’an urban area closed to other business such as shopping mall, banks and other businesses because the proximity to these businesses or even competitors increase Kungfu Fast Food Restaurant’s exposure to the potential customers. A sample site characters analysis could be done like this:

 

Site A address: No.50, South Street, Beilin District, Xi’an, Shangxi Province, China

 

Visibility

Parking

Ingress

Access

Synergy

Security

Excellent

  

 

Good

  

 

 

Average

 

    

Poor

      

Comments: This is a new site located in the business center with good visibility and accessibility but parking seems to be an disadvantageous factor

Table 1.0 Site characteristic analysis of site A

 

Site B address: No.88, Middle Changan Road, Yanta District, Xi’an, Shangxi Province, China

 

Visibility

Parking

Ingress

Access

Synergy

Security

Excellent

   

Good

      

Average

   

Poor

      

Comments: Site B is a old restaurant site located in the outskirt of Xi’an city with high visibility, accessibility, parking and ingress but less security image and synergy effect with other businesses.

Table 2.0 Site characteristic analysis of site B

 

Site B address: No.88, Middle Changan Road, Yanta District, Xi’an, Shangxi Province, China

 

Visibility

Parking

Ingress

Access

Synergy

Security

Excellent

 

   

Good

      

Average

  

Poor

      

Comments: Site C is a restaurant site in the dead end of a street, though with good parking and ingress score, it is generally not attractive

Table 3.0 Site characteristic analysis of site C

 

The sample characteristic analysis provides general and new perspective in understand how good a site is compared to another site. It could be helpful to Kungfu Fast Food Restaurant in choosing better sites among the available candidate sites in a qualitative way.

 

 

5.        Current challenges

 

5.1    Catering cultural difference

 

Kuangfu Fast Food Restaurant started in Dongguang City, South China’s Guangdong Province, it has inherit the traditional Cantonese food which has focused on the healthy style insipid and sweet taste and rice is the major staple food in the south part of China and the catering culture characterized by these features is different from the food culture in the north part of China. And in the traditional Shangxi style catering culture, noodle is the staple food which is more favorable than rice and heavily salty and spicy taste could be found in most of dishes in Xi’an city (Chinavoc.cn 2007), the capital city of Shangxi province.

5.2    Government relations

 

Government relations, is perhaps more important in China than in any other country in the world as most Chinese industries are owned or controlled by the government giving senior officials the power to alter the course of industries with a single decision (Brahm 2002) when transparency and rule of law still being built up in to the society. When the government play an critically important role in directing and supervising the business and social life, building up rules for people to follow, it might not be difficult for a new player to enter into the market but the penetration into the existing “Quanxi” network especially with the local government could not be done easily without cost and time consumed.

 

6.        Recommendations

 

6.1    The establishment of a new logistic center in Xi’an

 

As discussed in the location factor rating analysis above, the proximity to the logistics center for Xi’an is not advantageous for Xi’an as in competition with other two candidate cities. Now as Xi’an has been chosen as the next cities to develop and what’s more with its strategic implication that it has for the future development of the company, and after taking into consideration of the fact the current three logistics center (Beijing, Shanghai & Guangzhou) have been far away from the Xi’an and the northwest part of China; it would be necessary for Kungfu Fast Food Restaurant to establish its new logistic center in northwest China and Xi’an would be the best choice. And the location of the new logistic center in Xi’an could be determined by a center-of-gravity technique which is a quantitative method for locating a facility based on the assumption that cost is directly proportional to both distance and volume shipped (Heizer 1996).

 

Hunajie Trading.Ltd
Dahua Catering

Uncle Tom Ltd

Wanzhong Food, Ltd

 

 

Solution

Hunajie Trading.LtdDahua CateringUncle Tom LtdWanzhong Food, Ltd
Xh= 720Xd= 750Xu= 220Xw= 510
Yh= 810Yd= 550Yu= 555Yw= 210
Wx= 80Wd= 58Wu= 88Ww= 72

x= (720*80+750*58+220*88+510*72)/(80+58+88+72)= 527

y=(810*80+550*58+555*88+210*72)/(80+58+88+72)= 539

So under this center-of-gravity technique, the optimal site for a new logistics center would be near the point (527, 539), quite near to the center of the city. But this has not taken into consideration of the cost factor. So the theoretically best location (527, 539) may not be assessable or reasonable to be the final location for the new logistics center and instead a nearby site if available could achieve both center-of-gravity and cost control objectives.

Reference

 

Arduser, L. 2003, Restaurant site location: finding, negotiating & securing the best food service site for maximum profit, Ocala: Atlantic Publishing Group, Inc

 

Brahm, L. J. 2002, China after WTO, Guangzhou: China international press

 

Chinavoc.cn 2007, 中国除了著名的八大菜系外的地方菜(Regional food in China besides the big eight dish classes), accessed on 30th Nov 2010, [online] available: http://news.chinavoc.cn/ChinaCulture/Files/200701/9020.html

 

Choi, S. C. 1991, Price Competition in a Channel Structure with a Common Retailer, Marketing Science, Vol. 10, No. 4 (Autumn, 1991), pp. 271-296

 

Heizer, J. H. 1996, Production and operations management, New York: Prentice Hall

 

Hsu, C. H. C. & Powers, T. F. 2002, Marketing hospitality, New York: John Wiley & Sons, Inc

 

Mcdonalds.com.cn 2010, McDonald Location List, accessed on 28 Nov 2010 [online] available: http://www.mcdonalds.com.cn/location/rest_list.aspx

 

Kfc.com.cn 2010, KFC 24 hour restaurants list, accessed on 28 Nov 2010 [online] available: http://www.kfc.com.cn/kfccda/24Hours/index.aspx

 

Porter, M. E. 1985, On competition, Boston: Harvard Business School Publishing Corporation

 

Reuter.com 2010, McDonald’s price rise points to inflation pressure, accessed on 28 Nov 2010 [online] available: http://www.reuters.com/article/idUSTRE6AG10P20101117

 

Russell, R. S. & Taylor, B. W. 2009, Operations Management: Along the Supply Chain, six edition, New York: John Wiley & Sons, Inc

 

Stats.gov.cn 2009, Per capita income in 2009, accessed on 28 Nov 2010 [online] available: http://www.stats.gov.cn/

 

Thompson, J. S. 1986, Site selection, accessed on 28 Nov 2010 [online] available:New York: Chain Store Publishing

 

Theglobeandmail.com 2010, Food prices drive China’s inflation rate to two-year high, accessed on 28 Nov 2010 [online] available: http://www.theglobeandmail.com/report-on-business/economy/food-prices-drive-chinas-inflation-rate-to-two-year-high/article1814145/

 

Tradingeconomics.com 2010, China Inflation Rate, accessed on 28 Nov 2010 [online] available: http://www.tradingeconomics.com/Economics/Inflation-CPI.aspx?Symbol=CNY

 

Zkungfu.com 2010, About Kongfu, accessed on 27 Nov 2010 [online] available: http://www.zkungfu.com/en/about.aspx

 

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