KFC: DOING CHICKEN RIGHT IN THE U.S. FAST FOOD INDUSTRY

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KFC DOING CHICKEN RIGHT IN THE U.S. FAST FOOD INDUSTRY


Based on the case study, an industry analysis identifies the following issues which serve as a driving force in the U.S. fast food industry. These factors shape the market environment for each fast food outlet as it portrays current trends which are emerging and trends already in place in this competitive environment


Industry sales growth in the U.S. fast food industry is falling. This occurs as the industry is maturing. As a result there is intensive competition among fast-food chains. Market share gains are increasingly achieved by taking customers away from existing competitors rather than by attracting new customers into the industry.


There is also a significant amount of industry consolidation. Significant merger and acquisition activity during the last decade has consolidated many fast-food chains within the same organization. Some of the most notable acquisitions are Pillsbury


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S acquisition of Burger Kings, General Food of Burger Chef, United brand’s acquisition of Baskin Robbins Great Western’s acquisitions of Shakey’s Pizza and PepsiCo acquired Pizza Hut and Taco Bell.


The globalization of the fast food industry has seen many of the top 0 fast-food chains have expanded aggressively abroad as a means of growing sales outside of the U.S. market.


Diversification of fast-food outlets (e.g., McDonalds, Wendys, Arbys, and Hardees have aggressively marketed a variety of chicken sandwiches, and Hardees has introduced fried chicken).


Customers are increasing health conscious in the United States. This has increased pressure on fast-food chains to offer products with lower fat content and cholesterol.


There is also greater consumer demand for a wider variety of menu offerings and food selection.


As most consumers are experienced, repeat buyers they are familiar with their favorite chains products. Therefore, competitors are increasingly turning to promotions, price reductions and other techniques to attract repeat customers.


There is a huge consumer demand for fast-food in non-traditional outlets (e.g., shopping malls, airports, etc.).


Profit margins are also lower as operating costs increase along with pressure from competitors lower pricing strategies.








PORTER’S MODEL


The Porter’s five forces model is a composite of five competitive forces that can assess the state of competitiveness in a given industry. Based on the model below, an assessment of the U.S. fast food industry is compiled.


The rivalry among competing sellers. This is the strongest of the five competitive forces. In the U.S. fast food industry there is intense rivalry and competition for market share among existing fast foods. There is also low customer switching costs which increase pressure on chains to attract customers through advertising, new product offerings and price discounts. Another significant point faced among competitors is the slowing industry sales growth.


The potential entry of new competition (weak force). New entrants to a market bring new production capacity and substantial resources with which to compete. However in the U.S. fast food industry, new entrants face high entry barriers. Economics of scale deter entry as it forces new entrants to enter at a cost advantage point which results in lower profitability. Many customers have strong loyalty to individual fast food chains therefore a potential entrant needs to have the adequate resources for advertising and sales promotions to build its own customer base which is a slow and costly process. New entrants need to face high fixed costs of market entry as the existing fast foods in the U.S. have the advantage of the best and cheapest suppliers of food items, equipment built years earlier at lower costs, favorable locations and lower borrowing costs.


Competitive pressure from substitute products (strong force). Substitute products are a strong force in the U.S. fast food industry because there are a variety of eating alternatives available such as dinner houses, pizza outlets or even sandwich chains. Customer switching costs are low therefore it is easier for customers to make the switch.


Competitive pressure resulting from supplier bargaining power and supplier-seller collaboration (weak force). In the U.S. fast food industry suppliers have little or no bargaining power because there are many suppliers in the market with the capability to fulfill orders as the items needed by the fast food industry such as paper and plastic are standardized commodities, hence readily available.


Competitive pressures stemming from customers. This is a strong force in the U.S. fast food industry as the customers have substantial leverage. This is because customer switching costs are low. Customers are also price and quality sensitive as a result if they are unhappy with the price or the quality of a product they can delay purchases or buy from a competitor restaurant.


According to Porter’s model, the U.S. fast food industry is not attractive. Three of the five forces (substitute products, competitors and customers) are strong. It is an intensely competitive industry with low profit margins. The industry growth rate is slowing and there is high market share among the fast food industry. It would be considered a “cash cow” industry using the Boston Consulting Group matrix. The segment market share is in the most attractive position because of their ability to leverage assets and lower costs through economies of scale (e.g., McDonalds, Burger King, Taco Bell, Wendy’s Red Lobster, Pizza Hut and KFC). It is certainly an unattractive industry for new entrants, which have to overcome high fixed costs of entry, economies of scale disadvantages, strong brand recognition among existing chains and the risk of strong retaliation by existing competitors who will only increase advertising and promotions to reinforce their position in the U.S. fast food industry.


It is apparent that in order to be successful in the U.S. fast food industry any emerging competition needs to match up to the industries key success factors of having product quality and consistency, quality service, maintaining cleanliness, enhanced perceived value and have low operating costs.


KFC’S RESOURCES AND CAPABILITIES


Am analysis of KFC’s internal environment based on the case study is assesses. The following key points have been identifies


STRENGTHS


A key strength for KFC is the very fact that customers are loyal to the brand. This is evident as KFC held a worldwide market share of over 70 percent in both sales and restaurant. This naturally leads to KFC having gained strong customer awareness and to be the market share leader. Also apart from having been in the fast food industry since 154, has enable them to have proprietary recipes and technology. KFC also has strong marketing expertise foundation within the U.S, fast food industry which foreign fast food companies will face difficulty in developing.


WEAKNESSES.


Many of the KFC outlets are aged, small, have limited seating and cater for take out diners only. KFC also lacks product innovation beyond chicken. KFC has a reputation for poor service and lack of cleanliness.


The external market environment factors are also identified to assess KFC’s capabilities.


OPPURTUNITIES


As part of KFC’s effort to sustain its sales growth, KFC should consider new market bases by focusing on international expansion. KFC can also take steps towards the development of a lunch day promotion which focuses on its menu offerings as a complete and wholesome lunch meal, It should also expand its all-you-can-eat buffets to more outlets across the nations. As consumers’ preference changes to a choice of healthy food, KFC should introduce a new product line focusing on roasted chicken. KFC can also diversify into non chicken products to cater to increase their menu offering which result in giving customers more choice for dining at their restaurants. As KFC is expanding to locations outside the U.S. steadily and gaining much popularity abroad, they need to include the promotion of ethnic foods in their menu. KFC can also look into expansion plans of new outlet to be located in non traditional locations such as colleges and airports. As KFC has ongoing efforts of building new restaurants, in suburbs (traditional locations) it is suggested that KFC considers the promotion of home delivery in order to accommodate customers in need of faster take out services.


THREATS


One of the major threats faced by KFC is the entry of upscale food chains who are aggressively promoting non fried chicken such as Chick-fill-A, Kenny Rogers and Boston Chicken. KFC’s menu is limited in variety compared to many of its competitors such as Mc Donald’s and Wendy’s. These competitors along with other sandwich chains have begun to introduce chicken sandwiches. Hardee’s, a sandwich chain has started to offer fried chicken as part of their menu offers to customers. This can affects KFC, which competes exclusively within the chicken segment.





STRATEGIC RECOMMENDATIONS FOR KFC


CORPORATE LEVEL STRATEGY


Based on the findings reported in KFC’s market environment, the corporate level strategy could focus on expansion into international markets to deflect further declining margins reflected in the increasing maturity in the U.S. fast food industry. KFC’s corporate strategy goal should be to maintain market share and leadership by seeking contemporary business ventures that create long term benefits.


BUSINESS LEVEL STRATEGY


KFC’s business strategy goal should be to gain and maintain sustainable competitive advantage in business environment since they are in the maturity stage. This can be achieved by adopting a product leadership strategy where KFC’s concentration is to offer customers food that is high in quality by encouraging innovation in the menu offering.


OPERATIONAL LEVEL STRATEGY


KFC’s operational level strategy should focus on its product, price, distribution and promotional strategy.


PRODUCT STRATEGY


KFC needs to concentrate on the development of its mature core product fried chicken and fries. Product choice would change little, since the menu has remained true to its core items. However it could extend its product offering by planning and testing for an innovative bank of new products by utilizing existing technologies and tools in place. These products should be close to the brands core proposition. It would help generate new revenue to the organization without sacrificing the sales of core products. The inclusion of new products adapted to local culture should also be brought into the market as part of KFC’s products offering,


For example In Mexico, KFC could introduce a nachos wrap burger with salsa dressing.


In Malaysia, KFC could offer chicken porridge as part of the menu.


In China, KFC can include chicken soup as part of a set meal.


PRICE STRATEGY


KFC’s pricing strategy goal should be to make their product affordable and a good value to their customers. In order to achieve this, KFC’s pricing structure should be set to match or beat competitors. By matching competitors pricing, KFC can offer customers a zero based switching cost. Thus inducing customers to view KFC as an alternative to their favored fast food choice. Having said that, effective pricing is not an easy task as it could cost an organization a lost in sales or even generate an increase in revenue.


DISTRIBUTION STRATEGY


As KFC is in the maturity stage, it should concentrate on building more intensive distribution methods. Attractive franchise contracts should be applied to retain some competent franchisees, since franchise is a very common contractual form for the fast food industry. Loss of franchisees could not only undermine the Company’s business, but also help the competitor if they jumped the boat to the competitor. KFC should use the benefits of franchising to maximize profits as franchises incur most of the start up costs, therefore KFC can expand more quickly through company owned restaurants. Franchisees also provide a steady stream of royalty to organization well into the future.


KFC should not only focus on Latin America but also on other international markets. This way it can maximize possible economic crisis in one region with the profits of another region.


PROMOTION STRATEGY


KFC’s promotion strategy should emphasis on its brand differences and benefits to customers. It should formulate an advertising strategy that when customers see the word ‘KFC’, they are automatically associated as a wholesome meal plan for customers and viewed as affordable with good product value, It should deflect customers from focusing on fried chicken but view KFC as a wholesome meal plan. KFC should increase sales promotions in order to encourage brand switching among customers. This can be done via in store promotions such as coupons with every meal purchase, scratch and win competitions, back to school goodie bags with every purchase of set meals and even include a kids menu.


SUMMARY


KFC is capable of succeeding in the U.S. fast food industry by taking advantage of the industrys key success factors as KFC has high product quality and consistency, customers love KFCs product despite the fact that it is fried and it has gained a strong brand name and customer loyalty.


KFCs leading market share in the chicken segment strengthens consumer awareness, gives it a location advantage, and creates economies of scale in marketing and distribution of its core product. .


KFC can also use maximize opportunities to benefit from technology, management, and market sharing with Pizza Hut and Taco Bell through its parent company, PepsiCo, Inc.


It has further opportunities to low operating costs by sharing the distribution of food products and supplies with Pizza Hut and Taco Bell. Finally KFC also has strong expertise and experience in doing business outside of the United States. It has a strong brand image in other countries across the region. REFERENCE


Jain, Subash C 1, Marketing Planning & Strategy 6th Edition, South-Western College Publishing


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