#112 Big Trouble in Big China?
KFC has been in China for almost 30 years. The first of Yum Brands’ restaurants to move into China has reported sharp profit and revenue declines for their first quarter China business recently. Some media outlets such as the WSJ argue that, with competition increasing, the novelty character of brands such as KFC simply seems to wear off, while others such as Reuters reason that recent food scandals have hurt consumer perceptions of the brand. Yum Brands actually seemed to have done a decent job to cater to Chinese tastes by enriching their offering beyond the usual staples by offering localized variations and entirely new menu items, including coffee drinks. For a company that runs more than 6,000 stores, these are not trivial changes. Reality, however, is that the Chinese market is complex and adaptations to the market strategy have to be made constantly. The Chinese market has many moving pieces from being hyper-competitive to low brand loyalty to being very prone to ever-changing fads. Another cultural trait, the relatively distinct status orientation of Chinese culture makes Yum’s latest move an interesting one – the addition of high-priced Italian restaurants to its portfolio. Viewed from the rabbit hole of international marketing, the question seems to be how much of this development is rooted in the many idiosyncrasies of China and how much is just the normal maturity of a brand along the product life cycle?
November 28, 2015 @ 9:36 am
Introducing high-priced Italian restaurant to its otherwise low-price portfolio may turn out as a smart move. As China’s power distance is as high as 80, Yum didn’t have a decent offer for men in management positions before. Sure, workers go to KFC, but managers sure don’t because of the big power distance. In my opinion it will do Yum good to introduce this high-priced alternative. It wouldn’t surely not work in every country I think. In a country with low power distance a fast food chain doesn’t have to open up high-priced alternatives, because workers as well as managers go to the same fast food restaurant. In Austria for example, you will easily find managers in suits and ties eating Big Macs and fries from a serving tray. Therefore this move can not be just seen as a normal maturity of a brand along the product life cycle, it is because of the high power distance in China.
November 30, 2015 @ 2:40 pm
Instead of the previous author, I am not sure, if the high-priced Italian restaurant is such a good move for Yum’s portfolio. Yum is a brand that is known for its fast food restaurants, so I think it could be quite hard to make customers think that they offer a premium quality at their restaurants – especially, because of their food scandals in the past.
It is an interesting aspect to consider power distance in that question. However, as I mentioned, it is no sign of power to eat at a high priced restaurant from a fast-food chain.
Another aspect to consider in that issue is uncertainty avoidance. China is ranked quite low in this dimension of Hofstede, so new products and offers are accepted and adopted pretty fast. However, the food scandals affected consumer perceptions in a negative way which may also have the effect that the offers of Yum group are probably seen as uncertainty products, because of the negative effect on the consumer’s health. And both high and low uncertainty avoiding countries prefer products with a low uncertainty.
November 30, 2015 @ 9:02 pm
Both contributions of the last two authors seem to be very interesting for me.
But I also have to agree with Kerstin. I don’t think as well, that managers will have lunch in a highly priced Italian restaurant during business just to show the power they have. Although we can also identify that China is a more collectivistic society instead of an individualistic one – so that is another reason, why I think this will not proper work in the future.
Furthermore the Chinese people maintain on long term orientation – so if there already was a scandal – they will be skeptical and need their time to trust again.
And in my opinion it is not coherent. On the one hand they are experts in doing fast food and on the other hand they want to be a highly priced italian restaurant with a good food quality? I am not sure if the Chinese people will take that seriously. But we will see ….
November 30, 2015 @ 11:27 pm
As one of the first fast food chains KFC entered China and was quite succesful. One success factor was that they have always tried to adapt their menues to the local taste. Recently, the Yum company has experienced losses which is probably why they introduced high-priced Italian restaurants to their existing chains.
In my opinion at first sight this does not seem to be the best approach as China is a rather collectivist culture. Therefore I think that eating out in a fancy restaurant is probably not something that a large number of people enjoys as this would make them stand out from the crowd. On the other hand it is also true that China has a growing middle class which demands more and more luxury goods. This can be seen as an opportunity especially for Western products. The urban population is also growing, which may also change the cultural behaviour. From my point of view it cannot be said whether those chains will be succesful or not as the Chinese culture is very complex and is undergoing a demographic change at the moment.
sources:
http://keyhole.co/blog/4-critical-components-emerging-market-entry-kfc-china-case-study/
http://uk.businessinsider.com/chinas-rising-middle-class-will-create-opportunities-the-world-has-never-seen-before-2015-5?IR=T
December 1, 2015 @ 2:08 pm
From my point of view the introduction of Yum Brands’ high end Italien restaurants is a smart idea. That way the brand does not only approach to a new target group, but also manages to create a wider product portfolio. Since the Chinese market is very complex with high activities of competition it is vital for the brand to constantly adapt their strategy to changing consumer demands especially in order to deal with recent profit declines. As I see this there is already an enormous number of cheap fast food restaurants in china to choose from, which means that a new concept that focuses on high quality and higher prices can be a success factor.
Moreover, the higher price indicates for most consumers a higher quality, which is an important issue to consider when thinking about the brands’ recent food scandals. Chinese may be irritated and although they have a low uncertainty avoidance they are now looking for high quality products that definitely fulfil the health standards. On the contrary of the previous author I however think that implementing this new strategy that focuses on high quality is probably the best way to fight against uncertainties and in addition to regain the consumers’ trust.
In addition, China scores 87 in hofstedes dimension for long term orientation. This high score indicates that Chinese are willing to adapt traditions to changed situations. As a consequence this means that there is a high change that a high end Italian restaurant managed by a fast food brand will be accepted on the market, although this condition is rather untypical for the fast food market.
March 27, 2016 @ 12:46 pm
I agree that introducing high-priced Italian restaurant to its otherwise low-price portfolio may turn out as a smart move. In fact, KFC must introduce new products if they want to exist on the market. KFC needs to adapt to local culture by introducing local product and brands together with its well – known international brands. Otherwise they are facing sharp declines in profit.
A few years ago Mcdonalds opened its business in Bosnia. A market with strong local fast food restaurants. After just three years, they closed business in Banja Luka since they did not adapt to local market. McDonald’s closed because of high prices of popular food, which were not in accordance with the financial situation of the majority of citizens. The management tried to increase the revenue and popularity of this place by many prize contests but it wasn’t successful. One of the last activities in the restaurant was the organizing of children’s birthdays, but it was not enough to put it back on the line of popular places. Banja Luka citizens had different reactions on the departure of McDonald’s. Some of them think that it is bad that city will lose one of the most popular brands in the world.
“Simply put, their food was inappropriately priced for local citizens. A small ham or cheeseburger with all additions for eight BAM (about four euro) is too much for people in this country. Also, we don’t have habit to eat that kind of food; our traditional food is kebabs”, said one citizen in the front of restaurant.
On the other side, some citizens think that McDonald’s were never welcome in Banja Luka. It is, as some of them said, US food and it had to stay there. This restaurant for them was the symbol of US lifestyle.
“Banja Luka is recognisable in the world by its own kebab making style. Some of the tourists might have gone in McDonald’s, but all of them tried our kebab. They are coming to see our tradition and McDonald’s was just a restaurant, nothing special, said one of McDonald’s opponents.
Before opening in October 2012, McDonald’s renovated one building downtown Banja Luka and invested over 1.3 million euro. For the first 50 job openings in the restaurant they had over 600 applications. It was expensive, but most of the parents didn’t want to refuse their children a taste of the famous hamburger. But economic crisis in BiH caused the closure of many restaurants and other catering places for the same reason. McDonald’s is just one of them.
Resources: http://www.balkaneu.com/mcdonalds-close-banja-luka/
March 27, 2016 @ 2:10 pm
As a multinational company, KFC went to be global. They were aware to face differences in local market situation as for example, culture values, fast changing complex market, customer habits. However, an organization´s commitment to enter Chinese market existed.
When KFC entered China, a huge, complex and highly dynamic market KFC was prepared to adapt products, services and business practices to local needs. KFC adapted their products step-by-step to gain more customer satisfaction and to increase their profit by using a standardized local strategy. The company recognized different attitudes of customers and acted actively to fulfill expectations regarding regional cultures and flavors.
To extent the value chain within the company by implement a high priced Italian restaurant seems to be a part of their business strategy. Hence, differentiation and cost leadership are only two aspects for market attractiveness. Due to the fact that KFC is united in a company-group also with Pizza Hut they do know the Italian business. I would like to claim that they selected some aspects to target the market (size, location, price segment, evaluated risks).
Higher price level could indicate better quality, more healthy food and ingredients and status as for example; look I am able to pay more money because I am rich. Hofstede stated in his country comparison very clear that Chinese like to show their power distance what means, Chinese rationally evaluate to classify people in categories. Furthermore we find in Hofstede´s comparison confirmation about the natural percipience for adaption due to Chinese´s pragmatism.
Depends on different aspects, stated before, I would define that KFC´s move is more a part of a brand along the product life cycle in connection with approach for the local market.
BR
Anja
November 4, 2016 @ 9:36 pm
If you compare Hofstede’s five cultural dimensions between China and the USA, you will see that in almost every dimension there are huge differences between the two cultures. KFC as an American company faces a tough challenge by entering the Chinese market. However, they considered some crucial aspects such as adapting their food to the needs of the Chinese population which they may have done well. My personal opinion is that the Chinese are rather sceptical about any American influence. Therefore, it may not be intelligent to enter the Chinese market as an obvious American company using the brand name Kentucky Fried Chicken. In this point, I would like to agree with some comments stating that it is clever to introduce high-priced Italian restaurants. Italy represents European quality, which I believe is better accepted by the Chinse. However, they have always had experience in the low-price segment which they excel in. A change to the high-price segement might be challenging. Looking at the five dimensions, I would like to make some suggestions for KFC’s advertising in China. As China is a very masculine society, the company should convey that successful people go to KFC. For example by using very successful Chinese people as their testimonials. Moreover, China is highly collectivistic. Therefore, people in TV spots should always be shown in a group rather than alone. Another suggestion might be to organize events at KFC restaurants, where Chinese can particapate with their group of friends. China scores low in uncertainity avoidance. This states that people are not so loyal to brands. Therefore, money should not be “wasted” on building a strong brand, it should rather be spent for other ways that will make the Chinese repeat customers. As it was already stated in other comments, the fact that China is a very pragmatic culture (meaning they score low in long term orientation), it is a great opportunity for the introduction of high-priced Italian restaurants since people are likely to try out new things and adapt new traditions in such cultures. To sum up, it is extremely important to take into account cultural differences regarding every of the 4 P’s. KFC, however, did not fail to do that regarding the product by adapting it to the Chinese taste but they may have failed to match the other p’s. If they want to improve their performance, they have to consider cultural differences better. Otherwise it might be better to focus on the high-priced Italian restaurants and leave the market as KFC.
September 16, 2017 @ 7:35 am
I was surprised to read that the Colonel was losing support in one of the largest KCF markets. From what I had experienced in UAE, they were quite popular overseas ans assume they’d be even more so in China. KFC’s fried chicken was originally a natural fit for China’s tastes, and as a result it has had a long-standing presence there – as wholly owned subsidiaries, not even franchises. Blog #94 even cited a 41% decline in profit later that year. The idea of KFC modifying expanding its product offerings to also include coffee and Italian food initially seemed bizarre to me, until I thought about it in context of Yum also owning Pizza Hut and Taco Bell. But you posed a valuable question at the end of whether the decline in profit is a result of the complications of the Chinese market or more a reflection of a mature company. I think in fact it is a combination of both factors that together sufficiently justify the need for Yum Brands to evolve there. The prior supply scandals of 2012 didn’t help either. The changing economy of China with a rapidly expanding middle class requires Yum to reevaluate its strategy to stay relevant. Those households now have more disposable income and will look for ways to demonstrate their status. Chinese citizens trying new Italian food may be a way to show how internationally sophisticated their new money allows them to be. October 2015 blog #116 later discussed how Yum was restructuring to distance the Chinese market problems from its US home market. They planned to create a separate Yum Brands China. I looked more into how that worked out for them. CNN Money reported in July 2016, that they rebounded! Sales were up 44% over the same period the prior year. (Yan, 2016) While, Yum probably still has work to do to make up for other losses, hopefully their experiences in recent years have reminded them of the importance to staying agile in a complicated and quickly evolving market.
Apelthaler, Gerhardt. “#94 Yum-My Chicken.” Deadly Sins of International Business, 16 Feb. 2013, https://www.deadlysins.info/94-yum-my-chicken/.
Apelthaler, Gerhardt. “#116 China not so Yum-my anymore.” 29 Oct. 2015, https://www.deadlysins.info/116-china-not-so-yum-my-anymore/.
Yan, Sophia. “Yum Expects Stronger Growth as China Rebounds.” CNNMoney, Cable News Network, 14 July 2016, money.cnn.com/2016/07/14/investing/yum-china-2q-earnings/index.html.