Seeking Alpha
Profile| Send Message|
( followers)  

Everyone seems to be trying to come up with their own secret to success for doing business in the Chinese marketplace. In his book, KFC in China: Recipe for Success, Warren Liu aims to do just that. KFC is the market leader in China’s quick food services industry, and as Vice President of Yum! Brands Greater China, and a member of the Executive Committee from 1997-2000, Warren instilled many of the winning practices that helped KFC achieve such tremendous success.

JB: Warren, to start with can you provide our readers with an overview of your book KFC in China: Recipe for Success (Wiley,2008)?

WL: Since 2000, KFC has been the single largest restaurant chain in China. How did an American fast food brand rise to such high plateau in a country known for its thousands of years of distinct culinary history? How did KFC, at best a follower in other markets around the world, overtake other international and domestic brands in China? My book aims primarily to identify and investigate the factors which have contributed to KFC’s success in this very unique marketplace. The book describes the context behind the company’s 20 year history in China, followed by an examination, chapter by chapter of the key factors which contributed to its success including characteristics of the leadership team on the ground, its business strategy, and the implementation of that strategy touching upon local partnerships, franchise and JV partnerships, government relations, localization, supply-chain and back end functions and the establishment of an effective corporate culture. The book provides insight into key management successes and strategies that are applicable for executives and students of business interested in doing business in China.

JB: Mainland China is the number one market for Yum! Brands and KFC China alone has contributed to over 20 percent of global revenue for Yum! Brands. You joined the team in the late 90s shortly after KFC first began franchising in China. How do you believe you positioned yourself differently from the popular McDonald’s China franchise or others like Burger King that have been successful in other Asian markets like Singapore, but have yet to expand significantly throughout Mainland China?

WL: KFC has been positioned in China as a Western brand, even an American brand, with Chinese characteristics – a conscientious decision made at the beginning of KFC’s initial entry into China in 1987. Over the years, KFC China’s branding strategy has been modified through product localization and differentiated marketing practices. While McDonald’s entered China in 1990 and has remained a distinctively American brand since, KFC’s success can be attributed greatly to the fact that it has re-positioned itself, over time as a foreign brand with local characteristics. From an advertising perspective, specifically TV advertising, the divergence in branding strategies is rather pronounced. While McDonald’s continues to focus on the young and hip by placing emphasis on individual expression, relying on young sporting stars and pop stars as brand spokespersons, KFC expanded its target market focus to include family and friends of all age brackets, reflecting its business volume growth and brand maturity in the process.

JB: During the localization process, I’ve observed that some foreign brands that are low-end in their home markets instead promote themselves as high-end brands in China, for example ABInbev’s Budweiser brand beer. Localization is certainly a key aspect of any food and beverage MNC’s market entry strategy. How are you able to localize the KFC experience for the Chinese market, having it both suit local tastes yet also position itself as a higher-end alternative to traditional family dining?

WL: The eventual brand perception of KFC is based on circumstances and context. When KFC opened its first restaurant by Tiananmen Square in Beijing in November of 1987 it became an instant success. This was not because KFC positioned itself at a higher brand level, but instead was because of its very unique brand proposition as perceived by Chinese consumers back in the late 1980s; the eventual brand perception of KFC by Chinese consumers is based on circumstances and context. The fact that the cost of a KFC meal in those days was considered very high by local standard led to a perceived brand image that KFC is of a higher level than it is perceived in America. So, as you can see, the evolution of KFC’s brand perception by Chinese consumers began as a result of circumstances, rather than deliberate strategy formulation. Additionally, prices were kept high for consumers, because at that time there was a high cost structure for doing business in China and those high costs had to be passed on to the end consumer in order for the restaurant to be profitable. KFC in China has adopted a localized approach by localizing staffing, localization of menu and localization of management practices.

JB: Logistics and supply chain management challenges are unavoidable in China due to its vast size and different levels of development across various regions. KFC China has nearly 2,600 restaurants in over 550 cities – how did you overcome these challenges?

WL: The way KFC managed its distribution system in China is one of the main contributors to KFC’s success. Before KFC formulated the logistics strategy for its China operations, KFC was confronted with two fundamental facts:

  1. Up until the end of this century, roads in China, especially highway infrastructure were vastly inferior compared to any of the developed countries. At the beginning of the century, China had less than 20,000km of highway. The great majority of the highway system in China today is the direct result of construction done since 2000 which now amounts to approximately 60,000km.
  2. Lack of 3rd party logistics service providers that offer storage, transport, and delivery services across all provinces. Even today there are very few firms with this capability.

Presented with these two challenges, KFC adopted an approach that relied on existing assets – warehouses, trucks, workforces that were inherited from local JV partners. KFC then injected its own quality control and management systems. Within a few years the operations standards of these warehouses and trucking services were up to KFC’s global standards. With distribution and logistics resources directly and completely under KFC's own control, KFC was able to expand further, and faster, than its competitors; thereby establishing competitive advantage through business volume, scale, cost efficiency, and brand leadership. A captive supply chain complements KFC China's business strategy of rapid expansion through scale and speed; without which the successful execution of KFC's strategy in China would have been impossible.

JB: I understand that during the early years the KFC leadership team was primarily composed of ethnic Chinese expats, but hiring local talent quickly became a priority. In terms of talent management, how did you go about attracting, training and retaining exceptional employees?

WL: One thing that sets Chinese quick service restaurant industry workers apart from their counterparts in developed nations is their intense desire to learn and be more than trained. To achieve this goal, employee training in China for KFC took two forms. First, there is in-restaurant training up to the level of restaurant manager. Above the level of restaurant manager, KFC devised a centralized approach to restaurant management training. Back in the 1990s, KFC established a centralized training center in China. The best operating managers from all over China were brought there and were put on a rotational assignment (1-2 years). They become “teachers” and students therefore are able to better relate to their teachers who are all well versed in the world of restaurant operations. These faculty members also contribute to the assembly and development of teaching materials. The end result is a process of self-renewal and continuous improvement. Because the approach is practical and cost effective, KFC is able to efficiently train, motivate and retain rising talents while simultaneously strengthening their company loyalty.

JB: Other multinationals such as Omega, adidas, L’Oreal, and General Motors have been far more successful in China than many other foreign companies. What do you think these companies have in common with KFC in their unprecedented success?

WL: I believe much of what has led to the success of these firms is industry and company specific; however, I can identify five common factors:

  1. Speed of decision making and action implementation. For any company that chooses to do business in China, their success rests heavily on their ability to adapt quickly;
  2. Related to speed of change, the local management team must be able to deal with this fast-paced environment and be confident making quick decisions;
  3. Importance of working effectively with the Chinese government. Since China entered the WTO in 2004 the importance of government relationships has declined, but when compared with other developed economies it still remains a key factor to a company’s success;
  4. Brand perception: the Chinese concept of mianzi commonly translated as “face” or image is a crucial aspect of consumers’ purchasing decisions. Companies like the ones you mentioned have been able to tap into this cultural factor to build brand equity in China;
  5. Channels of distribution: For many years, the entire retail and wholesale distribution system at all levels was largely in the hands of the Chinese government. Such a distribution system is complex, inefficient and requires a lot of relationship building. With recent modernization of China’s retail industry, traditional involvement of the government has declined; however, for those who choose to target western China for future growth, distribution-related issues will remain a critical challenge for years to come.

Source: Interview with Warren Liu, Author of 'KFC in China: Recipe for Success'