Colonel Sanders’ March on China

By Carlye Adler
Qiandaohu
Monday, Nov. 17, 2003

It’s lunchtime in Qiandaohu, a tiny fishing and tourist town deep in China’s coastal Zhejiang province. While visitors are off exploring the famous local lake and its 1,000 green islands, residents hang out at the new KFC the only fast-food restaurant in a place better known for its freshwater shrimp and fish. Hu Hongyi, a 30-year-old accountant, brings his wife and 10-month-old son to the eatery every three or four days. “I like the flavors and it’s reasonably priced,” he says. Local high school student Wang Hongting, another KFC habitu, says, “The food isn’t cheap, but it’s kind of fashionable.” Indeed, during the restaurant’s grand opening in September, eight security guards had to be brought in to help manage the swarm of customers. “This happens every time KFC opens a new store,” says Wang Weiming, manager of the Qiandaohu KFC.

China has often seemed a land of dashed dreams for foreign companies eager to sell to 1.3 billion mainland consumers. But for KFC, this frontier has proved unexpectedly bountiful. Colonel Sanders, the goateed (and quite dead) Southern gentleman who is KFC’s founder and marketing icon, rules the country’s fast-food roost. Since opening its first mainland outlet in Beijing in 1987, the fried-chicken chain has gone on to become the most recognized global brand among urban consumers in China, according to an ACNielsen survey in 1999. KFC says more than 2 million Chinese eat at its stores every day, and KFC’s parent, Yum! Brands, which also owns Pizza Hut and Taco Bell fast-food restaurants, isn’t stopping there. After flooding the country’s largest urban areas with KFC outlets, the U.S. company is now on an expansion tear in the hinterlands, trying to reach smaller cities like Qiandaohu (pop. 45,000). “We open over 250 KFC restaurants a year [in China] and expect to do that for many years to come,” says Yum chairman and CEO David Novak, who is based in Louisville, Kentucky. Yum executives are so confident of their footing in China that they are introducing to the mainland market what has heretofore been unthinkable cuisine: Mexican fast food, sold under the Taco Bell brand.

The People’s Republic is proving to be the perfect antidote for sluggish growth in the company’s principal American market, where the fast-food business is as saturated as deep-fryer fat. Yum has 5,500 KFC outlets in the U.S., and through most of 2003 those outlets that have been open for more than a year were reporting negative sales growth due to intense competition and consumers who are trying to cut down on fried foods. Among the company’s Stateside woes, says Lehman Bros. analyst Mitchell Speiser, “service times are slow and the food isn’t seen as contemporary.” The U.S. president of KFC resigned in September. To make matters worse, Pamela Anderson, the ex-Baywatch┬áTV actress, recently joined a boycott of KFC led by People for the Ethical Treatment of Animals. The animal-rights group says KFC’s suppliers drug and scald the chickens, and sear off their beaks with hot blades before slaughtering them in an inhumane manner. “If people knew how KFC treats chickens, they’d never eat another drumstick,” Anderson wrote in an Oct. 15 letter to operators of Canadian KFC outlets. (KFC says it deals only with suppliers that maintain high standards of animal welfare.)

In China, where there are more than 900 KFC restaurants and at least one new branch opening every other day, the outlook is much sunnier. The mainland now constitutes about 15% of Yum’s operating profits ($273 million in the third quarter of 2003) and accounts for approximately 40% of its international business, according to Speiser. And because China’s population is about five times that of the U.S., the company figures this is just the corporate equivalent of an appetizer. “There should be tens of thousands of KFCs, Pizza Huts and Taco Bell Grandes here,” says Sam Su, Yum’s China president, over a Pepsi in the KFC across the street from his Hong Kong office. Su, who was born in Taiwan and educated at the Wharton School, joined the KFC team in 1989; he has since succeeded where others have failed. American fast-food chains such as Popeyes Chicken & Biscuits and Dunkin’ Donuts tried to establish China operations but were forced to retreat, in part because they didn’t cater well enough to the palate of the Chinese consumer. By contrast, KFC has even outperformed fast-food giant McDonald’s. KFC outlets outnumber Golden Arches by more than 3 to 2 in the mainland.

Part of KFC’s triumph can be attributed to its first-mover advantage. The company’s initial outlet opened in Beijing within sight of Chairman Mao’s mausoleum in Tiananmen Square in 1987, a time when many Chinese still wore blue Mao suits and refrigerators were transported by tricycles. There were no fast- food restaurants anywhere on the mainland. (McDonald’s debuted in Shenzhen in 1990 and came to Beijing in 1992.) The company made some early missteps: for example, KFC’s advertising slogan “finger-lickin’ good” was mistranslated into Chinese characters that meant “eat your fingers off.” But China was opening up to the outside world, and KFC benefited from the curiosity of citizens about all things Western. Its clean, brightly lit restaurants, fast service and smiling counter help were so unusual that people held wedding parties there.

At the same time, KFC had something other than the novelty factor going for it the main item on the menu was familiar to Chinese. “You don’t have to be a genius to sell chicken in China,” says Jim Bryant, who brought Subway sandwich shops to China. But Novak, the Yum CEO, says success wasn’t quite that simple. Over the years, “we stayed in touch with consumers’ needs,” he says, adding that KFC did a better job of “staying relevant” in China than it did in the U.S. Though KFC still offers its mainstay “original recipe” fried chicken, the company has tweaked just about every other menu item to suit mainland tastes. For example, KFC in China recently switched from white meat to dark in its chicken burgers. “Foreign visitors have complained,” admits Qun Wang Jamieson, KFC public-affairs director of greater China. But sales of the sandwiches have doubled since the switch. KFC also discovered that side dishes that work in the West, such as coleslaw and mashed potato, aren’t popular in China. The company is currently replacing its traditional sides with seasonal vegetables, including a salad of shredded carrot, fungus and bamboo shoot. Other items tailored for the mainland include congee (rice porridge) and a soup made of spinach, egg and tomato. “We live here, we’re Chinese. We see what people prefer,” says Ben Koo, KFC vice president of new concepts in Shanghai.

The secret of Yum’s strategy, though, is not just what dishes it sells but its understanding of China’s increasingly affluent consumers. Last year KFC opened the country’s first drive-through restaurant in Beijing, astutely recognizing the opportunity presented by the mainland’s increasing car culture. Pizza Hut now offers a delivery service to capitalize on an emerging generation of Chinese yuppies who want to watch a DVD or play a video game while eating supper on the couch. And Yum does a good job attracting children potential customers for life to its stores. To win their affection and loyalty, it created Chicky, a fluffy chicken mascot, specifically for Asian markets. The move is working: in Qiandaohu the KFC restaurant does on average two birthday parties a night, and the employee who dresses up as Chicky is so popular that he can’t attend every one. Take that, Ronald McDonald.

Maybe it doesn’t take a genius to sell chicken in China, but steak chalupas and chili cheese burritos? Yum’s latest effort is a Chinese iteration of Taco Bell in Shanghai, where the company is trying to repeat its KFC and Pizza Hut success with Mexican fare. Little of the Taco Bell formula has been imported from the U.S. The Shanghai outlet, which opened last May, is called Taco Bell Grande. It’s a fancier, sit-down restaurant, a concept that is gaining traction in China with the popularity of T.G.I. Friday’s, the Hard Rock Cafe and Tony Roma’s. Not surprisingly, much of the food at Taco Bell Grande is only vaguely authentic. Caesar salad is on the menu, and there are no hard-shell tacos (research found mainlanders don’t like them). There are burritos, quesadillas and enchiladas, but “to be very frank, people can’t remember all the names,” says Yum director Jamieson.

Yum developed the Taco Bell Grande menu after more than a year of experimenting in a test kitchen in Shanghai and collecting feedback from several Taco Bell outlets in Singapore which have since closed. Mexican food might prove to be a tough sell. “I remember from my high school geography class that we were told all Mexico had for food was chili, corn and beans,” says Beijing resident Li Xiaoming, 25. “How could they possibly create any tasty fast food out of those ingredients?” Despite the odds, the ever-ambitious Yum plans to open additional Taco Bell Grandes in Shanghai next year. It’s also considering a China launch for two of its other U.S. brands, A&W All-American Food and Long John Silver’s fish and chips. In the meantime, it will continue to push KFC deeper into the country’s interior, in cities similar in size or smaller than Qiandaohu. Will it work? “It’s a huge market; 60-65% of the Chinese population is in towns and villages,” says Darryl Andrew, managing director of Synovate China, a market-research firm in Hong Kong. “But it’s a tough market to crack and it’s a challenge to get the products to an affordable level.”

KFC will also have to fend off a stampede of competitors. McDonald’s is planning to open an additional 100 restaurants a year on the mainland, and U.S.-based Church’s Chicken will roll out stores in two major cities in 2004. Even chains that previously flopped in China, including Popeyes, are enticed again. There are also the inevitable domestic copycats to contend with. An 80-outlet, Shanghai-based chain called YongHe King uses KFC’s familiar red-and-white color scheme and even has a Colonel Sanders look-alike in its logo.

Su, Yum China president, acknowledges the existence of the newcomers and copycats but insists that he sees their imitations as a compliment. Indeed, if Yum’s latest culinary ventures pan out, he may soon find himself up against a raft of local chefs hawking Chinese knockoffs of chili cheese burritos. Mmm, finger-lickin’ good.

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