Entrance and Expansion of KFC in China Research Paper

Introduction

The fast food industry has continuously posted growth for long, despite the various challenges that have bogged the global economy. Part of the growth has seen the industry players expand their markets and establish themselves as multinational companies. One such company that has registered growth and significant expansion is the Kentucky Fried Chicken, also known as KFC.

The American fast food store chain is ranked as the second largest globally in the industry after its main competitor, McDonald’s. KFC established its presence in different countries of the world in seeking to sustain further growth, including China. The Chinese market is considered as one of the fastest growing markets in the world.

The Chinese market boasts of a significant market size given that China is the most populated country in the world. This paper seeks to discuss the internationalization of KFC in general and make direct comparisons with its entry into China.

The paper will elaborate on the actual timing of the internationalization, the entry mode used by the company, as well as an exclusive evaluation of the company’s performance in both the Chinese and other international markets.

The Timing of KFC’s Internationalization

According to Krug (419), the first international branch of KFC was opened in 1969 in Japan. The year 1969 was mainly chosen because the company was still in its early stages of growth and expansion.

In general, the fast food industry was less developed and there was limited thinking beyond national borders. Most players in the industry were concentrating on expanding to cover all the states in America in order to enhance their domestic market leadership.

It is prudent to point out that KFC became the first fast food chain of restaurants to go international by venturing outside the American market at the time. Any date earlier than 1969 would have proven to be less viable for KFC to internationalize because the company was yet to fully expand and cover the local American market.

There was need for all the players, including KFC, to concentrate more on building a stronger customer base in the domestic market given that the industry was also immature at the time. Additionally, by 1969 the American market was beginning to fully mature.

Most of the leading industry players, including McDonald’s, had established their presence in virtually all the parts of the USA as domestic competition stiffened. Time was rife for the companies to begin thinking of alternative markets other than the domestic market that was maturing.

Thus, KFC had to make an internationalization move in 1969 in order to take advantage of the foreign market before its American rivals could make the same move. There is an advantage that comes with firms exploiting new markets before their competitors do the same. It was obvious that the next move that the firms could make would be exploiting the international market since the domestic American market was maturing.

KFC’s move, therefore, was to act fast and open branches in foreign markets in order to capture the markets and seal them from possible competition from their domestic rivals in case they made similar moves and established branches in the same markets.

Other foreign markets that KFC entered immediately after its initial internationalization include England, Mexico, Hong Kong, and Australia among other countries. In the case of Australia, the market was rife at the time KFC ventured although it was largely untapped (ADU para 7). Only small-scale players, particularly Chinese restaurants, existed in the country towards the end of the 1960s (ADU para 3).

Thus, KFC’s decision to move into the market was aimed at filling the void that existed at the time. The company was hoping to introduce a variety of menus to provide the market with a richer alternative that lacked at the time of its entry.

The timing was perfect for KFC as the firm needed to act with haste in order to limit the chances of its domestic competitors, mainly McDonald’s, from venturing and establishing itself into the Australian market. Today, Australia serves as one of KFC’s biggest and profitable international markets.

The Mexican market, on the other hand, attracted KFC mainly because of its magnitude as well as the economic stance of the country. Mexico has a huge population that exceeds 90 million. This translates into a fairly lucrative market. Additionally, Mexico’s proximity to USA influenced the decision by the company to venture into the market and exploit its potential (Kelley para 30).

The Timing of KFC’s Entry into China

KFC entered the Chinese market for the first time on November 12, 1987. KFC’s choice of 1987 as the appropriate date for entering China was influenced by the fact that China was undergoing political and economic reforms at the time. The Communist revolution began in China in the 1980s with the main objective of ensuring that the country created a convenient environment for economic growth.

China’s policy and system prior to the 1980’s did not allow for market competition, particularly from foreign firms. The economy was virtually closed and the government controlled a majority of companies and industries that existed then.

The communist revolution, however, succeeded to institute positive economic changes that have helped in putting China at its present position as one of the major economies in the world. The revolution came with the opening up of the economy to competition from outside. The Chinese government allowed privatization of most of the companies that it held and competition among various industries started showing.

The opening up of the economy to foreign firms saw some of the draconian rules that previously hindered foreign ownership of businesses being eliminated. The ruling political class promoted the idea of accessing overseas markets with the aim of borrowing technical know-how in order to spur growth.

Chinese authorities also allowed economic integration of their country, giving China a chance to seek membership in regional and global trade organizations.

Thus, the choice of 1987 by KFC to establish itself in the Chinese market was appropriate because it was at the opportune time when the reforms were taking place. There were hopes that it would eventually be possible for a foreign firm such as KFC to successfully operate in the market with the new reforms that were being undertaken.

The choice of the date was also most convenient for KFC because any delays would have seen its main competitors in the industry, particularly McDonald’s, take the opportunity to establish operations in the market ahead of KFC.

It is critical to note that while the Chinese authorities were undertaking the economic and industrial reforms, most American and other foreign firms from the developed world were waiting with a lot of optimism to launch into the market. The earlier these firms established themselves in the market the better the chances they created for themselves to lock out their competitors.

It was more difficult for the company to venture into this market compared to KFC’s entry into other international markets. While KFC succeeded to enter into other international markets earlier in the late 1960s, it was impossible for the firm to do the same in China.

The closed economic system that was pursued by China prior to the communist revolution of the 1980s made it difficult for any foreign firm to venture into the market. Even with the revolution and the eventual venture by KFC into the market in 1987, it was still difficult for the company to run its business in China with little interference from the authorities.

The Initial International Market for KFC

KFC first launched its international business in Japan. It followed up its global expansion by establishing operations in other countries, including England, Hong Kong, New Zealand, South Africa, as well as Australia and Mexico. These markets were specifically chosen because of various reasons as expounded below:

Sales Expansion

Rapid growth in international tourism at the time of KFC’s expansion influenced the decision by the company to expand its operations and venture into international markets. Most countries had abolished trade and travel barriers and the global economy was flourishing at the time.

These conditions offered an opportunity for KFC to expand its operations into these countries. There was growing need for KFC to seek other markets in order to extend its business operations and growth as the domestic American market was maturing.

KFC’s main target as it expanded into the international arena was to serve the American citizens who either resided in these foreign countries or visited the countries for various reasons. Additionally, KFC was targeting the nationals of these countries to form a perfect market for its business.

These efforts were all aimed at expanding the company’s total sales. All these countries have stable economies that comprise of a significant middle class. KFC was targeting this growing middle class population because they are the leading consumers of fast foods (Yu 19).

Geographic Diversification

KFC’s international expansion was to increase geographic diversification of the company (Yu 19). In particular, the choice of Japan, England, Australia, Mexico, and New Zealand, among the other countries was based on the economic upturn of these countries. This was strategically done to hedge the company against instances of economic downturn.

In other words, spreading its business in various countries helped KFC spread its investment risk and remain safer compared to a scenario where the company could have targeted a single country or two only. These countries offered KFC a better and safer business environment to sustain growth and expansion of the company with their steady economic stance.

Acquisition of Labor and Resource

The American fast food industry, from where KFC originates, was much-advanced by the time the firm was executing its expansion program. In other words, the US fast food industry could not be compared to countries such as Japan, England, and Australia. Operations in the USA are relatively expensive because of its advanced status and high competition.

Operational costs such as wages, salaries, and rent rates for the fast food restaurants were higher in the US than in the other countries that KFC had identified for its expansion.

The internationalization move, thus, targeted to acquire cheaper labor as well as affordable resources in these countries (Yu 19). In turn, the reduced operation rates would enable KFC to improve its profit margin and enhance its competitive advantage over other rivals (Chu para 3).

Worldwide Brand Recognition

There was need for KFC to internationalize in order to build a worldwide recognition of its brand (Yu 21). Firms were looking for opportunities to capture foreign markets in order to extend their dominance as competition intensified in the domestic American market.

In particular, countries such as Japan, England and Australia belong to the first world and are more likely to be visited by Americans and other people from across the world. Thus, these economies are critical in terms of launching global brand recognition.

China as the Choice of International Market

The choice of China by KFC as the appropriate international market was because of various reasons, which include the following:

Market

China has a lucrative market for fast foods owing to her large population size that currently exceeds the 1.34 billion mark. China is the world’s most populous country and its population size equally means that the market potential is lucrative. With a huge market, KFC’s main target of launching into the market was to make huge profits for the company and enabling the company to grow its global revenue base (Li-Yong 39).

Labor

China’s huge population also offers adequate cheap labor. There was cheap and readily available semi skilled labor in China that KFC was targeting to benefit from.

It is easier for the firm to make huge profits because its operation costs would significantly be reduced with the presence of cheap labor. Equally, this provides an opportunity for the company to enhance its competitive capabilities because it can afford to reduce its prices because of the low operation costs.

Economic Growth

One evident feature about the Chinese market, and which mainly attracted the company to target its expansion towards the country, is the potential economic growth of the country (Li 1). It was only going to be a matter of time before China eventually stood out as one of the global economic superpowers with a massive market size and available labor.

KFC targeted to benefit from the anticipated economic boom that has seen a sharp increase in the country’s middle class society. It is prudent to point out that the middle class society has often turned out to be the greatest consumer of fast foods. Thus, as China continues to grow economically, its middle class population is also swelling in size. This phenomenon implies increasing demand for fast foods.

Western Culture Imitation

The Chinese people are notable for aping the western culture and the general way of life. This was among the main reasons that pushed KFC into developing interest in the Chinese market. KFC determined that it would be easier for the Chinese to adopt the practice because the young people in the western world find it fashionable to visit and dine in the fast food chain of restaurants.

KFC, therefore, focused its expansion program towards China knowing well that there would be little resistance on the part of the consumers. Often, food is a sensitive commodity to export internationally owing to variations in tastes and the general lifestyle of people. However, it was not going to be a challenge in the case of China to establish operations on the part of KFC because it would be an easy task to convert the consumers.

Market Competition

The country’s fast food market and industry was less developed at the time of KFC’s entrance into the Chinese market. Additionally, none of the leading American fast foods restaurants had established their operations in the country by 1987.

KFC, thus, targeted to utilize its experience and expertise in the industry to benefit from the market’s huge potential. The company was seeking to capitalize on the market such that it would be far ahead in the competition by the time its main competitors in the industry, mainly from the United States of America, thought of venturing into China.

The main reasons that attracted KFC into the Chinese market were the same common reasons that attracted the firm to other international markets. There are minimal differences between the main reasons for venturing into China and the reasons for venturing into England, Australia or Mexico.

International Market Entry Mode

Japan

KFC launched its operations in Japan through a joint venture with Mitsuoishi Shoji Kaisha Ltd. Use of joint ventures was chosen in the case of the Japanese market because political considerations in the country only allowed such entry modes as the most feasible.

It was difficult for any foreign firms to get permission to operate in Japan if they attempted to enter the market on their own without collaborating with any local organization (Hill and Jones 269). It was, thus, only practicable for the company to adopt the joint venture mode of entry as it had no any other alternatives.

England

KFC used the franchising strategy to enter the English market. KFC issued up to 14 franchising licenses to launch its operations in the market. The choice of franchising in the case of England was influenced by the non-existent business barriers.

England created a free environment that allowed more investment from both local and foreign firms, unlike in the case of Japan where the government was limiting foreign firms from directly establishing their businesses. Franchising, in this case, became the best choice for KFC as it targeted to spread faster into the market.

It is also less costly to adopt a franchising mode of market entry because the company does not directly involve its capital in investing in assets, such as acquiring buildings for restaurants and hiring staff. Instead, the franchisees directly meet all the related costs (Alon and McKee 78).

Hong Kong

KFC’s entry into the Hong Kong market took place in 1973 through a partnership deal. The partnership saw the firm open up 11 branches. However, business performance was poor and the company eventually closed shop in the market after two years (Phillips, Doole, and Lowe 263).

The choice of partnership as the appropriate market entry mode in Hong Kong was influenced by the social culture of the market. It was appropriate for KFC to use a local brand in Hong Kong to try to win the market effectively. A direct entry into the market by KFC would have most likely seen the market shun its services by considering it alien more than local food outlets.

Australia

KFC directly ventured into the market by building its own restaurants and managing them (Dixon 134). In essence, KFC established its wholly owned subsidiaries in Australia as opposed to using franchising or entering into joint ventures and partnerships.

This decision was chosen mainly because of the small cultural distance between Australia and the USA, which is KFC’s traditional home country. The fact that Australia did not have restrictive regulations against foreign business investments also influenced the choice of direct ownership over other alternatives.

Mexico

KFC ventured into Mexico through direct ownership. This type of market entry mode was influenced by Mexico’s existing regulations at the time. The regulations did not protect patents, information, or technology that was transferred to franchises in Mexico. Additionally, Mexico did not allow royalties. This made it difficult for KFC to consider other alternatives of launching into the market.

China Entry Mode

KFC’s entry into the Chinese market was by way of joint ventures with local Chinese firms. The government of China chose its main joint partner in the initial instance of KFC’s entrance. KFC, therefore, entered China through a joint venture with the Government Poultry Department.

However, the joint venture faced challenges that eventually saw KFC adopt the Tourist Department as its main next partner in the venture. KFC also replicated the partnership with several other local firms to extend its grip on the local Chinese market.

The main reason for KFC’s choice of joint venture as the main entry mode into China was influenced by the strict government regulations that existed at the time.

The system that was in place required all foreign firms interested in operating in China to form joint ventures with the local firms before being allowed to operate in the market. In this regard, KFC’s choice of joint ventures was mandatory because the firm had no other alternatives from which to choose the entry mode.

Nonetheless, the ongoing economic reforms in China at the time eventually saw the government regulation requiring foreign firms to use joint ventures as an entry mode to the market removed. In the 1990s, it was no longer a mandatory requirement for foreign businesses to form joint ventures with local firms.

This prompted KFC to shift its entry mode. The firm bought out its partners and put to an end any further plans of entering into joint ventures. KFC settled on regular chain model as its perfect mode of entering China as it bought out the local partner firms.

This was mainly caused by the limited skills in management amongst the local population (Kogut 320). KFC also considered this option because it provided an avenue for the company to guard its secretive recipe closely.

The regular chain model was dropped in 1992 in favor of the franchise model. KFC had, however, to wait for about eight years before it could issue other franchising licenses. The initial franchising license failed to produce positive results and the company halted its franchising program until 2000 when it began issuing the licenses to franchisees.

Evaluation of the International Market Entry Modes

Japan

The use of joint ventures to gain foothold of the Japanese market was the right option for KFC. A joint venture was the most appropriate entry mode to introduce KFC to the local market given the variations in cuisine types between the American and Japanese cultures.

Additionally, the existing government regulations would not have allowed for direct market entry for KFC. The initial joint venture plan eventually enabled KFC to gradually adopt the Japanese market and establish itself as one of the significant fast food chain of restaurants.

An alternative to the joint venture would have been the use of franchising. However, this would not have been very effective like the joint venture eventually turned out to be because it would have required the franchisees to adopt KFC’s standard menu.

This would have probably backfired given the difference in food tastes and choices between the Japanese and American cultures. Additionally, a franchise mode of market entry would have seen local Japanese restaurants rebrand into KFC colors. These colors would have been interpreted to mean foreign business.

England

The franchising mode of market entry that was applied in England was the most appropriate for this market. The American and English cultures are very close, including the language of use. Thus, franchising was the best model to apply in the case of England. It meant that there would be little resistance from the market in terms of viewing KFC restaurants as non-English and alien even as the franchisees adopted the KFC colors and logos.

A franchising mode of operation was the best choice for England because there were no regulatory restrictions in England barring foreign firms from exploring the domestic market as was the case in Japan. It allowed the firm to spread faster within the market by opening more branches. KFC gave out up to 14 franchise licenses in the initial instance, for example. This made KFC open 14 branches at a go.

A different entry mode, such as a joint venture, would not have been as effective as the use of franchising because it would not have necessarily allowed for the use of KFC brand and logo. The partner would probably have insisted on the continued use of the original brand colors and name. A joint venture would equally have been more expensive on the part of KFC compared to franchising.

Using a joint venture, depending on the agreement entered, would have forced KFC to make capital contributions towards its business operation in England. However, such costs are eliminated in the case of franchising because the franchisees take charge of some requirements, such as acquiring restaurant buildings, paying rents, as well as acquiring staff.

In other words, franchising mode of business enabled KFC to achieve faster results in the English market than would have been the case had the company opted for joint venture or direct market entry strategies. The main characteristics of the English market, including close cultural practices with America, and the lack of regulatory restrictions enhanced the overall performance of KFC in England further.

Hong Kong

The strategy choice of using partnership as the entry mode for venturing into Hong Kong was the least appropriate option for KFC. It is worthy pointing out that the firm’s 11 branches that had opened up in the market for the first time in 1973 eventually shut down in 1975 after only two years in business. The companies failed to capture the Hong Kong market and continuously incurred losses, prompting the firm to shut down.

In particular, the use of partnership mainly failed to register the appropriate results because KFC never had the direct influence and decision power in the joint venture. Instead, the local partner took direct charge and controlled the joint venture. In other words, KFC did not have enough influence to determine the running of the business.

The best alternative that the company should have adopted in seeking to enter Hong Kong should have been use of franchising. This would have allowed the franchisees ample flexibility to adopt the KFC menu and other standard operations while integrating them with their own local practices and menu. A gradual introduction of KFC would have enabled the fast food chain of restaurants to establish itself strongly in the Hong Kong market.

This would have seen them promptly address any market challenges that could have arisen as a result of branding the KFC colors and logo because the franchising agreement allows the franchisees to run the business directly. Franchisees incur the overall loss in case the franchising venture collapses, and therefore they are more concerned about proper management as opposed to joint ventures.

Australia

The direct ownership entry mode that KFC applied as it launched into the Australian market was not the best choice. The best alternative should have involved franchising rather than direct investment given the minimal foreign investment restrictions on the part of the Australian authority.

With a franchising mode of entry, KFC would have spent less of its capital since it would not have required acquiring land and building up its own premises. Instead, the company would have relied on the input of its local franchisees to set up its market operations.

A direct venture also involves hiring workers and closely following on the management of the business to the ensure operations run accordingly. This is quite challenging given the business magnitude of KFC that straddles across all the continents in the world. A direct venture is also slower when it comes to expanding in order to cover the entire market. Australia is a large country that covers an expansive area of space.

It was impractical to expect the firm to cover a substantial area within a short time because direct investment involves spending a company’s own resources. However, using franchising would have seen the company establish more branches, thus covering a wider area of the market while spending less and requiring little time to achieve its objective.

Mexico

The strategic choice of using direct business venture to launch into the Mexican market was the most appropriate for KFC. Mexico pursued a closed system of economy that basically did not offer protection to foreign firms at the time of KFC’s expansion into the country. There were no specific laws to protect royalties and such business agreements that would have made franchising or partnerships more viable.

Despite the fact that KFC’s only existing option for expanding into Mexico involved adopting the direct investment mode, this mode was less effective. This forced KFC to acquire its own assets, such as land, and build up its stores. KFC’s expansion into the market was definitely at a slow pace because of the expenses involved in buying land and setting up buildings.

The investment risks involved are also high given that the firm directly owns the assets it uses. The direct investment mode is also less appropriate because of the strong anti-Americanism sentiments that are largely common in Mexico (Kim 5). Most Mexicans do not feel attached to Americans, thus they are less likely to buy from KFC owned restaurants knowing very well that their revenues will go back to America.

Closely related to the anti-Americanism sentiments in Mexico is the fact that KFC owned restaurants stand a greater risk of being attacked by radical terror groups. This is a trend that has already been witnessed in the country, with an example being an incident in 1994 in which the radical anti-American groups attacked a McDonald’s restaurant (Kim 5).

Evaluation of the Entry Mode in China

The market entry mode of joint ventures was the most appropriate that KFC could use in its entry into the Chinese market. The Chinese feel proud about their local brands and do not easily embrace foreign brands. Thus, KFC was enjoying the advantage of integrating itself into the market by collaborating with a local firm (Chu para 4).

The joint venture was providing an appropriate cover to KFC, preventing it from being harshly received by the local market. Had KFC entered directly into the market, chances are that the market could have envisioned KFC as a purely foreign business and it could have easily been shunned in favor of the other local industry players.

The joint venture market entry mode was equally beneficial to KFC because it offered the right opportunity for KFC to study the market in advance. The local firms that entered into partnership with KFC had firsthand knowledge about the Chinese market and its characteristics. Their planning and operations were in line with what the local market preferred.

This was beneficial to KFC by virtue of the fact that the company would have been forced to spend significant resources and time studying the market and its characteristics had it entered directly into the market.

The joint ventures, therefore, helped KFC minimize its initial expenditure and, instead, use the funds in other important areas. KFC acquired strategic information and details about the main challenges of the market, the main competitors, and the general taste of the Chinese market when it comes to fast foods.

Joint ventures helped KFC deal with the aspect of hiring local employees with the right expertise to enable it launch its business successfully in the Chinese market. With the local partners that KFC collaborated with already having been players in the industry, KFC determined the appropriate labor force to employ in their business with ease.

These partners had already been existent in the business and they had a clear understanding of the right qualifications and skills that their workers needed before being employed. The local firm in the partnership already employed some of the workers. It was, therefore, easier to only convert them into becoming the employees of the venture.

It would not have been much easier for KFC being a foreign firm to easily acquire the right workers with the necessary expertise and experience had it ventured directly into the Chinese market. The aspect of language and culture would have posed the greatest challenge for KFC given that it is an American firm attempting to manage a Chinese workforce within the Chinese market.

The joint venture mode of entry into the Chinese market cushioned KFC against the high risk that comes with operating in a foreign market. Being a joint venture, both KFC and the local Chinese brand shared the business risk of their operations. In other words, KFC’s capital expenditure was halved, with its business partner meeting the other half.

Such an arrangement was less risky compared to one where KFC would have opted to launch its operations directly in the Chinese market. KFC would have been forced to acquire its own assets, such as strategically located buildings and renovating them to the needed standards of its restaurants. In some instances, it would have been forced to acquire land and put up its own business buildings that are more expensive and risky.

In the first instance when KFC initially entered into the Chinese market, it collaborated with the Government Poultry Department as its main partner in the local market. This was beneficial to KFC in terms of protecting the joint business from unfair regulations and business competition. It was more likely for foreign business firms to be treated unfairly by the government given the history of the Chinese government at the time.

The business conditions and environment that the foreign firms got into were not as favorable as was the case with the local firms. Joint ventures with local firms, therefore, allowed KFC to operate in a friendly business environment that provided the same conditions as other local businesses.

The joint operations involving KFC equally allowed the firm to make profits in the market because the government was interested in ensuring that the local firms became profitable.

Conclusion

The Kentucky Fried Chicken, commonly referred to as KFC, first adopted internationalization of its business in 1969. The American fast food chain of restaurants launched its first international branch in Japan. It immediately followed the initial internationalization process by opening up other international branches in England, Australia, Hong Kong, New Zealand, as well as South Africa and Mexico.

The gradual pace at which the domestic American market was maturing mainly influenced the internationalization decision by KFC. Different international markets offered varying challenges to KFC’s operations

. The firm was restricted to partnering with a local brand in order to form a joint venture in Japan. This was occasioned by the government regulations that did not allow foreign firms to directly operate in the country.

KFC launched its operations through franchising in England. The regulations in England did not bar any such foreign firms from operating in the country. KFC ventured into China in 1987 through joint venture. The Chinese government strictly followed a closed economic system that barred foreign business enterprises from operating directly in the domestic market.

This strategy was the best for KFC, however, as it provided full protection of its business interests in the country. The company was forced to enter into a partnership with a government agency. This move directly limited business risks for KFC.

Works Cited

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This research paper on Entrance and Expansion of KFC in China

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