Kentucky Fried Chicken and the Global Fast-Food Industry

Kentucky Fried Chicken and the Global Fast-Food Industry

Case Analysis

1.0 Source Problem

The change in demographic trends in the past two decades has seen an overall increase in costs for KFC and other fast food chains. Due to immense price competition and saturation of the US market, KFC is unable to raise its prices to cover the increased costs. The slower US population growth rate, oversupply of fast food chains and the minuscule 1% growth in the US restaurant industry per year has resulted in KFCÐŽ¦s focus on expansion of their international markets.

2.0 Secondary Problems

2.1 Short Term

Ñ"Ь New product introductions are slow.

Ñ"Ь Market research inefficiency. Eg. Germans were not accustomed to buying takeout or ordering over the counter. McDonalds performed better in this aspect.

Ñ"Ь Crispy strips and chicken sandwiches cannibalized the fried chicken sales.

2.2 Long Term

Ñ"Ь Differences between the PepsiCo and KFC corporate strategy and culture.

Ñ"Ь PepsiCo/KFC poor relationship with franchisees.

Ñ"Ь Increased competition from direct and indirect competitors.

Ñ"Ь Reduction in market share in the US market.

Ñ"Ь Risks involved in international operations: long distances made it difficult to control quality and service, increased transportation and other resource costs, and time, culture and language differences increased communication and operational problems.

Ñ"Ь Fast food sales grew at a slower rate (5%) in comparison to other sectors in the restaurant industry.

Ñ"Ь Shortage in staff.

Ñ"Ь Higher costs and poor availability of prime real estate.

Ñ"Ь Increased labor costs. Intense competition made it difficult to increase prices to cover these increases in cost.

Ñ"Ь Other chicken chain competitors differentiate their products. For example Boston Market introduces new restaurant chain that emphasized roasted chicken rather than fried chicken.

3.0 Analysis

The Five Forces Model

The five forces model of competition expands the arena for competitive analysis.

Industry rivalry - High

Ñ"Ь Rivalry is the main force or threat to current and future profitability.

Ñ"Ь When outsiders can acquire weak firms in the industry and launch aggressive, well-funded moves to transform themselves into major industry players. Eg. McDonalds buying Boston Market.

Ñ"Ь As competitors become more diverse in terms of their visions, strategic intents, objectives, strategies, resources and countries of origin. Eg. WendyÐŽ¦s and other firms gaining momentum in the Latin American market.

Ñ"Ь Customer switching costs are low. Exit barriers are high.

Ñ"Ь The number of competitors has increased in recent decades, and competitors become more equal in size and capability. McDonalds, WendyÐŽ¦s, Burger King etc. are the major players in the fast food industry with similar capabilities.

Threat of new entrants ÐŽV Low

Ñ"Ь Evidence suggests that KFC have always found it difficult to identify new competitors. This is unfortunate, in that new entrants often have the potential to be quite threatening to incumbents. One reason new entrants pose such a threat is that they bring additional production capacity. Unless the demand for a good or service is increasing which it is not in the fast-food industry, additional capacity holds consumersÐŽ¦ costs down, resulting in less revenue and lower returns for industry firms. Often, new entrants have substantial resources and a keen interest in gaining a large market share. As a result, new competitors may force existing firms to be more effective and efficient and to learn how to compete on new dimensions

Ñ"Ь Direct competitors such as Boston Market, Popeye and Chick-fil-A pose significant threat to KFCÐŽ¦s dominance in the near future. In the case of Boston Market, it differentiates it self from KFC by focusing on roast chicken meals, and gaining customers who do no frequent KFC.

Bargaining power of suppliers ÐŽV Medium

Ñ"Ь Increasing prices and reducing the quality of products sold are potential means through which suppliers can exert power over firms competing within an industry. If a firm is unable to recover cost increases through its pricing structure, its profitability is reduced by its suppliersÐŽ¦ actions. A supplier group is powerful when:

Ñ"е It is dominated by a few large companies and is more concentrated than the industry to which it sells. Tyson Foods in Mexico.

Ñ"е Satisfactory substitute products are not available to industry firms;

Ñ"е Industry firms are not a significant customer for the supplier group;

Ñ"е SuppliersÐŽ¦ goods are critical to buyersÐŽ¦ marketplace success;

Ñ"е The effectiveness of suppliersÐŽ¦ products has created high switching costs for industry firms

Ñ"Ь KFC being a major player in the industry, it has some bargaining power. Increase bargaining power enables KFC to negotiate lower prices from suppliers.

Ñ"Ь Tyson Foods is the primary chicken supplier in Mexico, however, it also supplies KFCÐŽ¦s competitors including McDonalds and Burger King in Mexico.

Bargaining power of buyers ÐŽV Medium

Ñ"Ь Firms seek to maximize the return on their invested capital. Buyers (KFC customers of an industry or firm) want to buy products at the lowest possible price, at which the industry earns the lowest acceptable rate of return on its invested capital. To reduce their costs, buyers/customer bargain for higher quality, greater levels of service and lower prices. These