#94 Yum-my Chicken

YumAs the English edition of the Chinese newspaper Renminbao (People’s Daily) reports, fourth quarter sales at Yum! Brands, the parent company of Kentucky Fried Chicken (KFC) and Pizza Hut have significantly declined. What has happened in the Middle Kingdom that not only has a huge love for chicken dishes, but also for foreign brands, a market that has been promising nothing but growth for the fast food giant? It all started out with a media report on China’s national TV station CCTV in December 2012. The broadcast alleged that some poultry farms, among them suppliers to KFC, ignored regulations by using hormones and antibiotics, and triggered unfavorable media attention and social media activity. An investigation by authorities in Shanghai only resulted in some vague recommendations concerning a strengthening of KFC’s supply chain, but no fine was assessed and no further action was taken. Unfortunately, as is often the case in such circumstances, the good news got much less media coverage than the original bad news. And so the Chicken scare started to nest in the minds of the Chinese consumers. As the Economist reports in its February 9th issue, KFC’s January sales in China fell by a dramatic 41 %. What makes this even worse is the fact that Yum! doesn’t operate under the usual franchise system in China, but owns most of its stores. With currently approximately 5000 restaurants in 800 Chinese cities, this is a costly development to digest – probably worse than eating a big bucket of deep fried poultry. KFC’s example just shows how tricky it can be to operate in far-away markets. Cultural, geographical and legal distance make it very difficult to first perceive and interpret the early warning signals correctly and then to react quickly and appropriately. Often in such cases, foreign companies quickly pick up the stigma of being an imperialist monster that has no respect for the local environment and whose only interest is exploitation of the local market. Or, in this case in the words of the Economist, to be the “Yucky Kentucky”!

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5 Responses to “#94 Yum-my Chicken”

  1. George Fleming Says:

    Interesting to see that small failures regarding dishonesty, ethics & cleanliness can easily plunder an international powerhouse such as YUM. As you will see in my comment on your McDonalds post, YUM was having huge financial success in 2011.

  2. Christian Taferner Says:

    I don’t really think that the main problem here is a difference in culture or market. It’s simply because KFC and Pizza Hut use hormones and antibiotics in their poultry farms. They may do the exact same thing in their home country, but in america, it’s seems that nobody gives a damn about that. And i also think that every fastfood chain does that. It’s not even a secret. For example McDonalds uses ammonium hydroxide to “wash” its meat used for the burgers. UK star chef cook Jamie Oliver made a video about that: http://www.youtube.com/watch?v=twOj0XNCyaY
    We already expirienced a lot of food scandals, for example SARS, wich first occured in chicken farms in southern china chicken farms. I understand that this whole scandal about antibiotics in meat has certain effects on the benefit of YUM but it’S not specifically a cultural thing, because we expirience these scandals all around the world, without probably even knowing it.

  3. Jessica Binder Says:

    Hi all,

    Concerning the above blog I would like to apply the model of Hofstede’s Cultural Dimensions.
    But firstly I want to give you a short overview of the scores Hofstede attributes to China.

    High Power Distance (80)
    Low Individualism (20)
    Medium Masculinity: China (50)
    higher Uncertainty Avoidance: (60)
    Very High Long Term Orientation: (118)

    First of all it is to say that such a media report which happened in China in the case of Yum! would causes the same consequences all over the world.
    But here it is important to focus on the reaction of the company. If these bad stories are spread you only could make the best of it.
    Referring to the case of Yum! in China they made the big mistake that the company didn’t react in the right way.

    To meet the Chinese expectations they have to focus more on their cultural behaviour and to adjust their PR campaigns due to this.
    To go through the cultural aspects of the Chinese people I would like to use the Hofstede’s dimensions:

    High power distance:
    In the case of Yum! it’s not so important to focus on this dimension. The only fact which should be considered is that Chinese people are very delegated by their bosses and whether their bosses’ opinions are right or not the people believe it.

    Low individualism:
    This fact is quite interesting because in China the collectivism is very marked. This means for Yum! that Chinese people are tend to be followers and believe whatever they hear from other people. So in this case the people heard this bad news about Yum! and believe it because everyone do! A Chinese person never would stand up and express its opinion.

    Medium Masculine:
    Concerning the case of Yum! we can point out that Chinese people take care about their health and they really love high quality food which is from good sources. In this case this fact was not given anymore.

    Higher uncertainty avoidance:
    The uncertainty avoidance dimension expresses the degree to which the members of a society feel uncomfortable with uncertainty and ambiguity which is given in the Chinese culture.
    They always try to minimize the occurrence of unknown and unusual circumstances.
    Concerning Yum! exactly that was the problem. Nobody knows if the media report has a real content or not. Moreover no further actions were taken by the government or by the firm to solve this problem and so the people were still uncertain.

    So my recommendation for the company Yum!, due to the cultural aspects of the Chinese people is to make a clear statement. Show the people that the quality is still very good and there are a lot of misunderstandings which are now being solved.

    Without doing that the turnover will decrease further on and the people will be leaved in uncertainty.

  4. Claudia Maier Says:

    I am very surprised about the fact that KFC’s sales fell by 41% in China. KFC usually adapt their products very well to the target country. They also follow the strategy “standardize where possible, adapt where necessary”. In 2012 there were over 18,000 KFC outlets in 120 countries around the world, especially in the United States and China. It wouldn’t be possible to be successful in both markets with the same products. In China KFC adapted its menu to suit local tastes, offering such items as rice congee, egg custard tars and tree fungus salad, with an average of 50 different menu items per store. Chinese consumers enjoy spicy chicken whereas the Americans prefer fried salty food.

    I totally agree with your statement that it could be very tricky to operate in far-away markets and that cultural, geographical and legal distance could make it very difficult to interpret early warning signals. But why isn’t this a problem for MC Donalds? MC Donalds is also a fast-food chain, which operates in different countries and cultures and adapt their food to local needs. In my point of view, MC Donalds is a best practice example of being successful worldwide with a global strategy and local adaptations. They consider all 4 P’s in the local country strategy. As you can see in the blog post of MC Donalds, there are many different advertisements with different messages.

    As you can see in the graph of the five dimensions of Hofstede, USA is a very individualistic (91%) (http://geert-hofstede.com/united-states.html) culture and China a very collectivistic culture (80%) (http://geert-hofstede.com/china.html).
    Here you can see, that companies should inform themselves about the different dimensions of the culture to choose the right communication message (like MC Donalds does).

    Of course, I also think that the food scandal is one of the reasons for the decrease in sales but not the only one. If there would be a country manager in each country, which controls the activities in the country, such a scandal could be avoided. They also should inform themselves better about local needs and the dimensions in this country. I think it’s amazingly difficult to compete against the fast-food giant MC Donalds, but KFC and Pizza Hut could learn from MC Donalds and maybe they could stop the decrease in sales and become successful again.

  5. Michael Sattler Says:

    Kentucky Fried Chicken (KFC) is presenting a perfect example in this post how dangerous it could be to change the basic strategy for the internationalization process. In addition to the post and the very insightful comments on the culture (regarding to Hofstede) and competition with McDonalds, it is really interesting for me to focus on the fact, that KFC owns most of the stores in China instead of fostering their approved franchising concept. This change in their strategy has different consequences on their cost structure and the overall risk of the expansion process in China. [1].

    Regarding to the Hofstede references in the comments I would like to add the fact that this index will change over time and that the chines food customer is changing. This rapid changes on the Chinese food industry, and certainly in different other industries too, are resulting in an increasing sophistication of Chinese diners and increasing competition with local rivals. KFC has focused on the traditional localized menu, which was a real success factor over the last years but now they have to face a change in how the customer want to eat. [2]

    Therefore it is an important experience and fact for me that each internationalization strategy, regarding all steps from the first internal assessment to choosing the right target markets and entry mode with the appropriate execution is not the final destination of the process. All this factors have to be reevaluated over time. For the example of KFC it is the product (food, dining experience) which should evaluated if it is appropriate for the rapid changing market.

    Finally it is certainly a critical point that the supply chain of KFC has lacked of quality and food safety controlling mechanisms, causing a negative impact on the reliability of the brand and the product. Furthermore the really insufficient reaction and steps to compensate this process shows that the localized subsidiary and the headquarter of KFC completely had misinterpreted the situation which was negatively evaluated by consumers with high sense of collectivism.

    However this aspect will not influence the opinion and attitude of the customer over a too long time, if the company is working on their mistake. The critical fact are mainly the rapid growing quick-service chains with similar dishes and concepts , lower cost-structures and providing a more convenient dining experience with localized, unique ways of cooking.
    Therefore in my opinion KFC has to change its strategy to bring back its strength and to be nearer to the changing demands of their customers.

    Best regards
    Michael Sattler

    [1] http://www.businessweek.com/articles/2013-05-14/should-kfc-rethink-its-china-strategy
    [2] http://www.businessweek.com/articles/2013-05-16/kfc-loses-its-touch-in-china-its-biggest-overseas-market

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