Location strategy of Kung Fu Fast Food Chain

By | February 16, 2013

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1.      Introduction

 

1.1    History and vision of Kung Fu Fast Food Chain

The Kung Fu Fast Food Chain is under the management of Kungfu Catering Management Co., Ltd which was set up as early as 1994 and through 17 years focus on the Chinese fast foods industry under the brand name of “Zheng Kung Fu (means real kung fu in Chinese)”. At the beginning of the business, the industry was largely occupied by the western fast food giants while no Chinese counterpart could successfully expand their footprint in a country wide scale because of the lack of technological and management support. With the rapid growth of the economy which brings about one of the largest fast food market in the world, Kung Fu Fast Food with the vision to standardize the Chinese food and explore the possible route for the Chinese fast food and becoming the leader of the Chinese fast food, the company had begun an ambitious expansion in China while at the same time focus on the research and development of the topic: “standardization” of Chinese foods. With this vision, Kung Fu invested heavily in the development of three standard operation systems which are special for the Chinese fast foods, they are: standard logistic production, standard cooking equipments and standardized restaurant operation. The leading excellent and yet still improving operation management provides powerful support to fast expansion of the Kung Fu Fast Food Chain. As of today, the company has already had 421 franchised restaurants in 12 provinces. And this number grows in a fast speed with more and more people knowing the brand which attracts investors into the franchise business.

 

 

 


Figure 1 Expansion Kung Fu Fast Food Chain in China

Source: zkungfu.com 2011

 

1.2    Market segments and positioning

Since the starting of the first store, Kung Fu Fast Food has been concentrating on the offering of nutrient and delicious rice fast foods, which has a broader customer based than the currently popular western fast food such as Pizza, hamburger, sanwich due to the long rice food history in China. With the rapid growth of number of the franchise restaurants all over China, Kung Fu Fast Food has been persisting in the product positioning while continuously expanding their product mix along the nutritious Chinese rice food strategy. And regarding the marketing segments, due to the the product nature and the non-low cost position, the Kung Fu Fast Food has well segmented the fast food market and has chosen the urban white collars who have increasing health diet awareness and a focus life quality and their needs in health Chinese fast food could not be well met by the current Chinese fast food industry.

 

 

2.        Challenges

 

2.1    Economic factors

 


China’s economy is huge and expanding rapidly. In the last 30 years, the rate of Chinese economic growth has been almost miraculous, averaging 8 percent growth in Gross Domestic Product (GDP) per annum. The economy has grown more than 10 times during that period, with Chinese GDP reaching 3.42 trillion US dollars in 2007. China already has the biggest economy after the United States and most analysts predict China will become the largest economy in the world this century. In 2010, China’s GDP growth was 10.456 percent, totaling US$ 5,745.13 billion (economywatch.com 2010). The Chinese government has been very ambitious to prove its economic and political power to the rest of the world in term of rapid industrialization and economic growth even at the cost of quality of people’s life and environment degradation. One of the key problems here is the sky high housing price which has been getting closed to the US housing price level as the figure below shows.

Figure 2 A Comparison between China and US housing Price

Source: chinatells.com 2011

In a survey conducted by Tsinghua University on the Chinese white collar workers eighty percent of civil servants and white-collar workers feel great or extreme pressure and over sixty percent said the major pressure comes from buying a house. The health index of white-collar workers in China between 2009 and 2010 stands at 76.1, which is lower than it should be considering their age, educational background and medical care, according to an anonymous director of a health care department at a first class hospital in Shanghai (1x1y.com 2010). The above factual data indicates that the majority of the white collar workers that the Kung Fu Fast Food Chain is targeting at do earn a lot than the lower class in the society but they are under great financial pressure in term of contributing the majority of their income in housing, education children and health. As a result, they will tend to cut cost in food, cloth and travel in which expense could be saved to some degree by choosing the lower priced alternatives and substitutes. Therefore, the pricing of the services and products offered by the fast food restaurants will greatly influence the purchasing decisions not only to the lower income level customers but also to the targeting market segments, the white collar workers.

 

2.2    Cultural factors

 

2.2.1            Business dinning considerations

 

With the faster pace and increased pressure in business, work has been penetrating largely into people’s life. And hence dinning is no longer all about choosing food and eating on one’s own. There is no business talk in China without at least one trip to a restaurant. Sometimes, a trip is made to the restaurant even before any business discussion take place! Inevitably, the restaurant will always be one with good dining environment and it likely to be hosted in a private room. There is an elaborate seating arrangement for a Chinese business meal. There are fixed seating positions for the host and the guest and then they are seated again according to seniority. This is a very important aspect of a formal dinner and it is important that the business men follow the rules accordingly. In addition, it is observed that Chinese in the north part of China are more adhering to the formal seating arrangement while the Chinese in the south are less demanding for such formal settings (chinese-culture.net 2010). The strong work related dinning culture will bring great challenge to the fast food restaurants which aims at providing regular dinning service to the white collar workers who are more normally quite busy at work in the nowadays business world in China. Hence, the fast food restaurants also need to take into consideration of such business needs of its target customers.

 

2.2.2            North and south dinning sub culture differences

 

Culture could usually refer values, beliefs, attitudes, languages symbols, rituals, behaviors, and customs to a group of people and passed from one generation to the next. And the term subculture refers to cultural variations that exist within a single nation (Peoples & Bailey 2010, p. 25). The dinning culture is an important in the Chinese culture. Also the sub dinning culture differences in China between the north China and south China is claimed to be quite different. In the north, fried food and much salty and spicy food are widely accept among the people which may probably due to the cold weather in the north during the long winter; in contrast in the south, steamed and less salty food and dishes are more preferred. In the case of Kung Fu Fast Food Chain, its major food products are with Canton (one of the most south provinces) features in term of have the steam foods and soups occupying the menu of the restaurant. The company may have difficulties in deciding whether it should introduce changes and adoptions to the menu or the way the same dish is cooked. If the company sticks to the principle of standardization of its food, there could be possibilities that its food and menu may not be popular in some provinces and cities in which sub culture in term of food preference could be quite distinct.

 

2.2.3            Explosion of car culture and traffic difficulties

 

As proposed by Dayle Hayes,Rachel Laudan (2009, p. 50) the background of fast food restaurant is that, during the twentieth century, urbanization, more leisure and increasing prevalence of auto mobiles enabled the emergence of a broad-based restaurant culture accessible to consumers from every social class. In expensive lunch counters, coffee shops, diners, and cafeterias served a population that was increasing “on the go”. And in this point, fast food restaurant phenomenon since its emergence in the history has reflected the explosion of a car culture that could be traced back to the 1940. In China, the history seems to be repeating again. China’s auto market last year continued the sales surge that helped it oust the U.S. auto market from its top spot in 2009. Sales of passenger cars, buses and trucks in China rose 46% in 2009 to 13.6 million, beating out U.S. vehicle sales of 10.4 million. The growth pace of China’s auto market was the fastest in more than 10 years, according to the China Association of Automobile Manufacturers, and continued to soar in the first six months of 2010 – jumping 30.45% (moneymorning.com 2011). While the car user number is increasing, it could be good and bad news to the fast food restaurants. On one hand, with the explosion of car numbers in China especially in the major large and medium sized cities, people now would drive to a specific restaurant if they consider it as a good place for dinning which means that a restaurant could attract more customers if it is attractive to customers; but on the other hand, traffic jams often occur in large and populous cities where the highways are always full of buses, cars and people, in this way, the restaurants with good access would be more preferred in particularly in time of traffic difficulties.

 

2.3    Intense rivalry in the established fast food companies

 

Rivalry in the established players which refers to the level of competition among existing firms (Klein & Iammartino 2010, p. 139) is one of the five competitive forces identified by Michale E. Porter (1980) in his famous Porter’s five forces analysis model. The impacts of intense rivalry among the established competitors could be immediate, direct and influential to the existing player because even without other four forces such as substitutes and threat of entry, intense rivalry between existing competitors will still limit potential returns (Cook & Larréché 1989, p. 44).

 

2.4    Threat from potential entry

 

Potential Entry Potential entry refers to the situation of expected entry of new firms into the industry. This situation acts as threat to the existing firms who, with a view to avoiding the actual entry of new firms, tend to lower their price to drive away the potential entrants (Jain & Ohri 2011, p. 272). The fast and rapid growth of the Chinese fast food industry will attract more entrants in the coming future. According to the research report “China Fast Food Market Analysis”, China is the second leader in terms of fast food consuming markets after the US. On the back of large consumer base and increasingly changing food appetite, the domestic fast food industry in China has been witnessing tremendous growth. Presently, the country accommodates over 150 fast food chains and 3-4 Million stores. Moreover, with the changing consumer preferences, rising income levels, increase in young population, and the availability of standardized food, the domestic fast food industry in China is expected to surge at an annual growth of around 13% during 2011-2014 (rncos.com 2011). What is more the low investment requirement and policy incentives also contribute to the easy entry of the potential competitors.

 

2.5    Logistic difficulties in Tianjin city

 

Because of the strategic planning, Kung Fu Fast Food Chain tends to set up logistic center in the capital city for the future support of the restaurants that usually locate surrounding the capital city. To the Tianjin city, the case is a little bit different and special, it is similar to Beijing which is governed as a direct-controlled municipality, one of four such designations, and is, thus, under direct administration of the central government, and therefore at the very beginning the company had not planned to build up a logistics center in the city then it is arranged that the restaurants will share the logistic center with Beijing which is two hours dive away from Tianjin. But with the increase of the number of restaurants (currently there are four restaurants in the city), rapid expansion in the Beijing city and also the anticipated increasing demand in the Tianjin city, now the logistics management and supply chain seems not able to share the same logistic center in Beijing meet the future development of the business in the Tianjin city.

 

2.6    Lack of brand awareness in the new and emerging markets

One more major challenge that Kung Fu Fast Food Chain has during its fast expansion is the lack of brand awareness especially in the new and emerging markets. Brand awareness refers to a person’s ability to identify the brand, within a product category, in sufficient detail to make a purchase. It has two components: brand recognition and brand recall (Bannock, Davis & Trott 2003, p. 37). Brand recognition refers to the fact that the customer remembers, or recognizes the brand or brand name (Finch, Ogden & Agden 2006, p. 216). As a matter of fact, though Kung Fu Fast Food Chain currently has 421 franchised restaurants, since the large cities such as Beijing, Shanghai and Guangzhou have a large proportion of the total outlets, and many medium and small cities are not having enough of outlets, the brand recognition is not high in these cities.  And in term of brand recall which refers to the proportion of the target audience that can recall an advertisement and its contents (Saxena 2009), similar case happens, even though the Kung Fu Fast Food has invested heavily to advertise its brand in some national wide media which will help increase the brand recognition, in order to be more effective, more advertisements and promotion efforts would be needed which need to be more localized because only repetitive advertisements would help strengthen the brand in the mind of the customers and increase the chance to be recalled while people think of having breakfast, lunch or dinner.

 

3.        Solutions

3.1    Location factors

 

Table 1 Location factors and the weight

Location factorsWeightDescriptions
Proximity to customers20%Uptown, Closed to office building, shopping mall, or inside airport
Industrial competition10%Need to be closed to more competitors
Wage rates5%Medium wages could be accepted
Proximity to suppliers15%Need to have fluent access to suppliers
Local dining cultures10%There has been successful Cantonese style fast food in the area

 

To select locations for new Kung Fu Fast Food Chain restaurants avoid some of the mentioned problems and challenge, various factors need to be identified and considered before making the final decision regarding where the new restaurants should be located. What is more, these factors should be evaluated on a weighted basis and in this study we are recommending the above weighted located factors to be considered by the Kung Fu Fast Food Chain. The first location factor mentioned is the proximity to customer which because the market segment the company has poisoned at the urban white collars that have increasing health diet awareness and a focus on life quality, therefore the new restaurants should be in the places such as in the uptown, closed to office building, shopping mall, or inside airports. This is considered to be the most important factor that is why we have allocation 20% weight in it. The second location factor is industrial competition or closeness to competitors, the new stores should be closed to more competitors to increase the chance of brand exposure to the potential customers and increase the brand recognition and recall, this is also important and we attach 10% weight in it. The wage rate is less important. Another key factor is the proximity to suppliers as the restaurants need to have fresh raw materials to produce the food products to the customers. And also the local dining culture needs to be taken into account and we usage a simple way to measure such cultures to see whether people there will accept the Kung Fu Fast Food Chain food culture: number of existing Cantonese style fast food in the area.

 

3.2    Requirement of specific site characters

 

3.2.1            Visibility – High Requirement

 

As mentioned above, one key challenge that Kung Fu Fast Food faces in its expansion in the new market in China is the lack of brand awareness, hence besides the need of increased advertisement and promotional effort the company can also use the restaurants to promote the company brand.

 

3.2.2            Access – High Requirement

 

As mentioned above, due to the traffic congestion, the restaurants with good access would be more preferred in particularly in time of traffic difficulties. And because of the fact that many fast food restaurants would be located in the large trade areas such as a shopping mall, it is important that a fast food restaurant is located near (although not necessarily on) one or more major arteries, people in the more remote reaches of the trade area can get to the location more easily. Similarly, travelers passing through the area generally stick to major streets and highways -and the opportunity for them to dine at a fast food restaurant facilitated to the extent that the retail location is in close proximity to such streets and highways (cityofames.org 2003).

 

3.2.3            Ingress – Medium to High Requirement

 

Ingress is access for entering a property, and egress is the means of exiting a property. In the development of a commercial property such as a shopping or retail center, multiple means will usually be provided for ease of entering and exiting the property (Roark,B. & Roark, R. 2006, p. 68). But since within a single shopping center ingress and egress level for different levels and sites (closeness to the main pass way) could be varied, it is also important to locate the restaurants in locations with good  ingress feature.

 

3.2.4            Synergy – Medium Requirement

 

When we use the word “competition”, it usually has a negative connotation but not all business is competition. Synergism refers to the idea that the business of one store will enhanced because of the proximity to other businesses in term of increased sale because of the increased exposure to the potential customers (Arduser 2003, p. 91). The synergy requirement for Kung Fu Fast Food Chain is medium for two major reasons: firstly, the company could use the high synergy to attract more potential customers and increase the customer base and brand awareness, with the increased brand recognition the expansion of the chain food restaurant will be strongly supported; secondly, in the major well developed cities, the Kung Fu Fast Food Chain could also select some locations that are not in the popular trade areas but with good parking conditions and low in leasing prices, the can work because people can actually drive to such locations to have lunch or dinners provided that it is not too far away.

 

3.2.5            Security – Low Requirement

 

Though security usually would not be too much of a problem for a chain restaurant, but it would still be advisable that the company could check with the local people, neighboring stores and local police station regarding the historical and current status of the security in the restaurants. If the location is to be seated within a trade area, the security problems will be minimized, but if the location is in the street, basic security check will be necessary.

 

3.2.6            Parking – Medium

 

As analyzed above, traffic jams often occur in large and populous cities where the highways are always full of buses, cars and people, in this way, the restaurants with good access would be more preferred in particularly in time of traffic difficulties, and thus together with the good transportation and access restaurants need to have enough of parking space nearby to attract the customers.

 

3.3    Set u a new logistic center in Tianjin city – using center of gravity

 

As mentioned earlier with the increase of the number of restaurants (currently there are four restaurants in the city), rapid expansion in the Beijing city and also the anticipated increasing demand in the Tianjin city, now the logistics management and supply chain seems not able to continue to share the same logistic center in Beijing and meet the future development of the business in the Tianjin city, here one solution will be to establish a new logistic center in Tianjin city. In order to identify the best location for the new logistic center, let us first look at the location details of the four existing restaurants of the Kung Fu Fast Food Chain and also the key location of the train station from which the raw material will be transported.

Train station

 


Figure 3 Locations of Kung Fu Fast Food Chain in Tianjin city

l  Address of Site A: Level 1, no. 256 Time Square, West An’shan road, Nankai district, Tianjin, China

l  Address of Site B: no. 199, Nanjing Road, Heping district, Tianjin, China

l  Address of Site C: no. M001, Langxiang Street, no. 88, Construction Road, Heping District, Tianjin, China

l  Address of Site D: 1st & 2nd floors, Haihe parking building, no.6, south river road, Hongqiao District, Tianjin, China.

 

We will decide the location of the new logistic center by using the center of gravity analytical tool:

 

 

 

Solution:

 

Table 2 center of gravity analysis

Site ASite BSite CSite D
Xa =10Xb = 30Xc = 25Xd = 60
Ya = 30Yb = 30Yc = 30Yd = 10
Wx = 100Wy = 120Wc =130Wd =80

X = (10*100+30*120+25*130+60*80)/(100+120+130+80) =29.42

Y= (30*100+30*120+30*130+10*80)/(100+120+130+80) = 26.28

 

Hence according to the center of gravity analysis, the location for the new logistic center will be at: (29.42, 26.28).

 

4.        Evaluations & conclusions

 

The above study identified three major types of challenges that currently Kung Fu Fast Food Chain has encountered in its strategic plan to expand in China to promote the Chinese fast food though standardization: competitive threat (threat from potential entry and intense rivalry in the established fast food companies), macro environmental factors related issues (dining culture, transportation conditions), product and branding related issues. Though from the perspective of operation management, not all these problems could be resolved by operation management or our topic, the choice of optimum locations for the new restaurants; our solutions do try to help the Kung Fu Fast Food Chain to contain some of the issues. We provide two major methods to help identify the optimum locations for the new Kung Fu Fast Food Chain restaurants. The first if the weighted factor rating in which we identify five important location factors reviewed as following:

 

 

Location factorsWeightDescriptions
Proximity to customers20%Uptown, Closed to office building, shopping mall, or inside airport
Industrial competition10%Need to be closed to more competitors
Wage rates5%Medium wages could be accepted
Proximity to suppliers15%Need to have fluent access to suppliers
Local dining cultures10%There has been successful Cantonese style fast food in the area

The fact that these factors are weighted is to accentuate the importance of these location factors to the decision making of the locations selection. And the second solution that we advise is to build up a new logistic center in Tianjin, in which the company’s expansion is limited due to the logistic problems, and the determination of the locations is calculated by a center of gravity method.

 

Two major kind of limitations are identified: firstly, the location strategy does not address the location food culture differences, there is necessity for the company to review its product strategy to see whether the company should stick to the product standardization or allow some localization and differentiation of the products according to the local needs which is a strategy that is even widely applied by KFC and McDonald in a global wide scale, it standardization such a rule that must be followed strictly? The second limitation is about the determination of the new logistic center in Tianjin, since only four existing restaurants are taken into account but company will soon open more restaurants, it may not be safe to only consider the four existing restaurants.

 

 The End.

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