Kentucky Fried Chicken and the Global Fast-food Industry
Introduction: YUM Brands
YUM Brands, Inc. formerly known as TRICON Global Restaurants, Inc. is located in Louisville, Kentucky. TRICON Global was formed from Pepsi Company when it was spun off on May 7, 2002 (which included Pizza Hut, Taco Bell and KFC). After the acquisition of Long John Silvers and A & W, on May 7, 2002 TRICON Global Restaurants formerly changed their name to YUM to reflect its expanding portfolio of restaurants and its ticker symbol on the New York Stock Exchange. Yum Brands is the worldwide leader in multibranding, which offers consumers more choice and convenience at one restaurant location. Today YUM is the world’s largest quick service restaurant (QSR) company based on the number of system units, with nearly 33,000 restaurants in over 100 countries, with 1,975 of them multibranded world wide. YUM is made up of six operating companies, which include: KFC, Pizza Hut, Taco Bell, Long John Silvers, A & W and YRI (YUM Restaurants International). YUM is organized around five restaurant concepts, which are KFC, Pizza Hut, Taco Bell, Long John Silvers and A & W.
Instead of competing directly with McDonald’s or Chili’s, Yum! Brands’ three different businesses – KFC, Taco Bell, and Pizza Hut – target three nonhamburger segments of the restaurant industry. KFC offers its traditional, distinctive-tasting fried chicken recipes, along with its golden rotisserie-cooked chicken and the growing health-conscious segments. Taco Bell seeks to carve out a position in the growing Tex-Mex fast-food segment. Pizza Hut has traditionally competed by offering restaurant-style, sit-down pizza meals (, 2003).
Kentucky Fried Chicken (KFC)
KFC was founded in 1955, by who developed his secret 11-spice recipe and method of pressure frying chicken. At the year end of 2002, KFC was the leader in the U. S. Chicken QSR segment with a 46 percent market share. At the end of 2002 KFC had 5,472 units in the U.S. and 6,890 units outside the U.S. Approximately 23% of the U.S. restaurants and 22% of the non-U.S. restaurants are owned by YUM. KFC restaurants offer fried chicken under the names Original Recipe, Extra Tasty Crispy. Other entrée items include chicken sandwiches, the Twister, crispy strips, popcorn chicken, chicken pot pies. KFC side items include biscuits, mashed potatoes, gravy, coleslaw, corn, macaroni, potato wedges, French Fries (outside the U.S.) and deserts ( 2003).
Potential Synergies
Synergy according to and (1998), aims at achieving the fullest possible fit between firms. It is the policy best suited to optimizing bonding between alliance partners as well as to promoting learning between them. The idea of synergy is that the whole is greater than the sum of its part. The key idea of this policy is that the positive aspects of the various cultures are preserved, combined, and expanded upon to create a new whole ().
In the mid-1970s, PepsiCo started buying fast-food chains to leverage its growth and hoping to provide synergies as outlets for its soft drink and snack products. The first acquisition occurred on November 7, 1977, when PepsiCo merged Pizza Hut Inc. into the company’s restaurant subsidiary through the exchange of PepsiCo’s capital shares for each Pizza Hut common share. On June 20, 1978, the company merged Taco bell into a subsidiary through the exchange of 1.43 PepsiCo’s capital shares for each Taco Bell common share. The exchange was valued at about 8 million. PepsiCo continued its restaurant investment by acquiring Kentucky Fried Chicken for approximately 1 million in cash on October 1, 1986 (). After the acquisition of KFC, PepsiCo started selling its products in all KFC restaurants. KFC on the other hand, gained access to PepsiCo’s management expertise. PepsiCo relocated its marketing skills through the repositioning of PepsiCo’s marketing managers to the headquarters of KFC. The products of KFC were advertised alongside with those of PepsiCo’s products.
Added Value that PepsiCo brought to KFC
The added value that PepsiCo brought to KFC were its marketing prowess, low-cost source of beverages, shared advertising expenditures, and shared management. The acquisition of KFC by PepsiCo has provided KFC with heavy and sufficient amount of financial back up. Inexpensive advertising is consistent with PepsiCo’s image. Under the management of PepsiCo, KFC experienced a continuous growth both in the domestic and international markets. Among PepsiCo’s core competencies were significant financial resources, celebrity endorsements, ability to create new and innovative product, and ability to build and keep brand equity. Branding and new product innovations are considered as the core competencies of PepsiCo. Branding is important for PepsiCo. Its products are competing in a market where differentiation is hard to achieve without brand differences. PepsiCo uses its brand equity and celebrity endorsements to create value for its customers. KFC products were advertised alongside with Pepsi-Cola products. This strategy resulted in the advertising economies of scale and a better image for KFC.
PepsiCo’s Acquisition of KFC
In 1986, KFC was acquired by PepsiCo. PepsiCo at the time was trying to widen its restaurant segment. Before acquiring KFC, PepsiCo has made previous acquisitions – Pizza Hut and Taco Bell. PepsiCo has a consumer product orientation. PepsiCo found out that marketing fast food is similar to the marketing of its products like soft drinks and snack foods.
In the late 1970s. PepsiCo, manufacturer of Pepsi Cola and other soft drinks, began considering ways to increase fountain sales for its soft drink line because fountain drinks have a much higher margin than do either grocery sales or vending machine sales. A solution that PepsiCo implemented was to acquire several fast-food outlets –Taco Bell, Pizza Hut, and KFC – as a way to ensure exclusivity of its products. Acquiring these new outlets added to Pepsi’s fountain sales. However, it also causes damage to PepsiCo. Several large fast-food chains, including McDonald’s signed exclusive agreements with Coca-Cola, Pepsi’s primary and bitter competitor. These agreements were viewed as responses to Pepsi’s moving downstream in the channel and becoming their competitor. From the compound relationship perspective, PepsiCo started out in a simple supplier relationship with fast-food outlets. When the company bought Taco Bell, Pizza Hut, and KFC, it then became a supplier and a competitor of all the fast-food outlets it did not own. As a result, a long-time customer, such as McDonald’s no longer wanted to buy cola from a competitor, so it bought from Coca-Cola. Twenty years later, Pepsi sold its retail fast-food businesses to be in a better position to sell its soft drinks at other restaurants. Adding a new relationship with the fast-food companies led to the loss of a previously important relationship with several of them (. and 2007).
When Yum! Brands was part of PepsiCo, restaurants were just one portion of a larger company that also includes Frito-Lay snacks and its traditional soft drinks. Senior management at PepsiCo were asking themselves how well did their various restaurant businesses fit with their other snack food and soft drink units. PepsiCo’s management faced the additional task of ensuring that the restaurant business work well with its beverage and snack food units. Throughout much of the 1980s and 1990s, the restaurant business was an important part of PepsiCo’s overall strategy. Increasing competitive pressures and slowing down of the restaurant industry’s overall growth rate, however, made it increasingly difficult for PepsiCo to compete effectively in the industry. The strategic benefits that PepsiCo could once bring to the restaurant industry – marketing prowess, low-cost source of beverages, shared advertising expenditures, and shared management – became difficult to sustain when PepsiCo’s beverage business began to lose significant market share to arch rival Coca-Cola, especially in markets in the United States. By the mid to late 1990s, severe competition and declining profit margins on both fronts – beverages and restaurants – made it increasingly difficult for PepsiCo to compete effectively in both businesses simultaneously. Deciding that it needed to sharpen its competitive focus and to raise capital for its beverage business, PepsiCo’s senior management decided to sell its restaurant operations as a way to exit the restaurant business ().
Conclusion
PepsiCo acquired Kentucky Fried Chicken in 1986, primarily to expand its quick service restaurant arm and to increase its soft drinks sales. PepsiCo bought restaurants in order to provide synergies as outlets for its soft drink and snack products. PepsiCo brought different added value to KFC through its acquisition. KFC benefited from the management and marketing expertise of PepsiCo. Other added values that PepsiCo brought to KFC were low cost of beverages, shared advertising expenditure, and shared management. In addition, KFC also had a sufficient financial back up from PepsiCo to expand internationally, particularly in China. KFC benefited from PepsiCo’s core competencies such as significant financial resources, celebrity endorsements, ability to create new and innovative product and ability to build and keep brand equity. However, PepsiCo faced many challenges both domestic and international that led the management to give up Pizza Hut, Taco Bell and KFC in 1997. PepsiCo’s acquisition of KFC, Pizza Hut and Taco Bell resulted in a competition against McDonald’s –which was a long-time customer for Pepsi Cola. Increasing competitive pressures and slowing down of the restaurant industry’s overall growth made it difficult for PepsiCo to compete effectively in the industry. The added value that PepsiCo brought to KFC, Pizza Hut and Taco Bell became harder to sustain when PepsiCo started to lose significant market share to its bitter competitor, Coca Cola. PepsiCo decided to sell its restaurant operations because it needed to sharpen its competitive focus and to raise capital for its beverage business. Overall, I can say that the acquisition of KFC by PepsiCo has its advantages and disadvantages. It was successful at first. However, the competition and different challenges made PepsiCo to rethink its strategy. Keeping KFC and other restaurants would damage PepsiCo in the long run. I think that the acquisition was successful but the spin off was the better strategy for both KFC and PepsiCo.
References
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