Kfc China Case Study free essay sample

Expansion should be progressed in order to take advantage of China’s increasingly growing economy. Having an average growth rate of 8% in GDP and a population of 1. 3 billion (Li 2004), the China presents an increasingly large buying force. KFC China can take full advantage of this by introducing more franchises to increase growth and profits. In reference to Porter’s ‘Five Forces’ model, although there will be future competitive pressure from businesses in the industry, KFC’s localised menu appeals to consumers and will differentiate them from international competitors who haven’t redesigned their business model for Chinese business. Thus, KFC has a unique opportunity to offer an American style experience that is different from most other food establishments (Li 2004). By expanding, KFC China can increase the likelihood of long-term success. ‘KFC China will experience diminishing returns if it continues to expand into areas with lower spending power. ’ (Li 2012) Rather than expand through China in lower socioeconomic areas, graph 1 (adapted from Foster Partners Group 2012) suggests that KFC should focus on expansion into both advanced and developing cities where there will exist the highest percentage increase in mainstream consumers by 2020. There will be higher levels of disposable income in these cities particularly, thus facilitating an increase in consumers participating in the market and increasing profits. As expansion increases, more management issues and general problems are likely to arise including fragile franchisee management, vague brand development strategies and the lack of logistics and distribution outlets. (Woke, 2012). However, according to Bell and Shelman (2011), KFC China controls supply chain management issues with its own distribution system. Although expensive, this allows KFC China to continue to expand rapidly with its own warehouses, truck fleet and complex menu. Accordingly, the chance of long-term success has been improved through thorough planning. The expansion strategy has further chance of success if the current trend of increased independence of women within China continues. Female participation in the workforce is already at a high of 67% in China, and with the one-child policy still in place many women are now freed from caring for large families. Thus, one can assume that female workplace participation rates will increase in the future (Atsmon et al. 2012, p. 18-19) Hence, women will increasingly become attractive consumers themselves as they will not possess as much time to prepare home meals and may seek more take away meals from the office or home. If KFC China further consolidates on their already high market share of 40% (Bell and Shelman 2011) and product quality through the expansion strategy, the brand name will be strengthened. This considered, consumers will be more likely to purchase more KFC food, thus increasing growth and profits. The first challenge KFC China may face in relation to its localisation strategy is the risk of a backlash. ‘A highly visible company could easily become the target of a consumer or government backlash against the perceived negatives of fast food. ’ (Bell and Shelman 2011). With the current ongoing worldwide obesity epidemic, the likelihood of this happening is ever-increasing as parental and authority’s concerns rise. Patterson (2011) adds to this, stating that from 2010, obesity in China was at a high of 38% due to the increasing amounts of available fast food. This figure is rising as ‘Chinese are indulging their children because state policy has shrunk family sizes while economic progress has given urban families higher disposable incomes’ (Patterson 2011). If a backlash occurs, KFC China’s reputation will deteriorate, leading to cash flow problems, lower profits and decreased growth. To avoid this, KFC have developed the concept of a ‘†new fast food† that would be â€Å"nutritional and balanced† and promote â€Å"healthy living†Ã¢â‚¬â„¢ (Bell and Shelman 2011). In regards to their localisation strategy, another threat KFC China face is the possibility of competitors gaining more market share. Despite constant introductions of new dishes by KFC, competitors are slowly increasing their reputation amongst consumers according to Cho (2009), who claims competitors have been able to do this by going high-tech, with some introducing robots to prepare authentic Chinese dishes at high speeds. Further, there exists the threat of ‘other international fast foods and local knock-offs offer similar products at lower price points’ namely 30% below KFC China prices (Li 2012). Additionally, Li (2004) claims that fast food in China is a modern lifestyle now as opposed to a fad which it can be depicted as in the past. ‘The desire which is rooted in the years of isolation from the world to peep into the world outside has faded gradually since the opening of China. ’ (Li 2004). Hence, growth and profits have potential to decline in the future, a challenge which needs to be strategized against to ensure long-term success. The third obstacle facing KFC China is increasing operation costs. Ongoing primary and secondary market research into Chinese demographics is crucial to the business’ success, yet poses high costs. However, Simmons and Crawford (2013) observe that KFC have hired local managers who understand the Chinese consumer, the restaurant trade and Western business methods. This poses as a competitive advantage over international and local competitors due to these supervisory managers having a greater skill base compared to equivalent workers in other businesses. Furthermore, rental costs have increased and thus it has been predicted that KFC’s profit margins will decrease by 0. -1% per year for the next 5 years states Li (2012). To counteract these rising expenses, KFC China varies its prices among different locations to ‘generate extra revenue as consumers would not be sensitive to minor price increases. ’ (Flannery, 2011). This strategy will help minimize ongoing costs, thus sustaining profitability and growth. KFC China’s strategy of rapid expansion should be continued in order to meet the desires of the changing nature of the Chinese consumer, whereby there are increasing numbers of female workers and increasing incomes.