KFC history in China

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I read an article about the history of KFC in China recently, and found the following points interesting:

The flagship restaurant, opened on November 12, 1987, stood three stories high, sat over 500 customers, and, at the time, was the largest KFC anywhere.

That stat seems to have come from a Straits Times article and is surprising to me. Even at three stories, I’d have thought it would have been smaller than the large American locations which have plenty of cheap land. Apparently even today, Starbucks stores in China are larger than American stores

China is one of the few countries where KFCs outnumber McDonald’s.

I’d want to see more recent data on this, but this site corroborates the above as of 2015.

KFC enjoyed significant first-mover advantage when it kickstarted China’s fast-food restaurant industry in the 1980s. It beat out local Chinese competition in the 1990s because of its increasingly sophisticated management techniques. And when faced with rising domestic competition and maturing consumer tastes in the 2000s, KFC adapted with significant localization efforts to avoid obsolescence.

The above paragraph is the main point of the article:

  1. KFC had first-mover advantage and enjoyed a Western image halo effect initially
  2. As that weakened, management quality helped it continue to succeed
  3. As that too weakened, localisation became the next growth lever

It insisted on retaining ownership of most of its China restaurants rather than franchise (even today only around 10% of China’s KFCs are franchises)

The ownership vs franchising approach has always been debated. You get more control by owning, but the drawback is the capital intensity and slower speed of expansion.

KFC China bet big and early by expanding rapidly outside of major cities, whereas competitors like McDonald’s tended to focus their initial efforts on the key metropolises.

Keep in mind this was while they retained ownership, rather than passing on the risk to franchisees

Ronghua Chicken, formed in 1991 and backed by a Shanghai state-owned enterprise, became KFC’s chief rival in the early “chicken wars.” It offered a cheaper, more localized menu, promising that “wherever there is a KFC, we will be there!”

Rather than KFC faltering in the face of domestic competition, it was Ronghua that folded by the early 2000s. According to the head of Ronghua at the time, it failed because of “a lack of the kind of well-developed system that KFC possesses which oversees every detail of the business, from making the product, to service, to site, to staff training and management.”

I’d have expected Ronghua to have won out. If you’d transplanted that scenario to the China of today, I think Ronghua would have. You see major Chinese brands finally outcompeting foreign ones through a combination of government support and better understanding of the market. I suppose it was just the wrong time for Ronghua.

Few competed with KFC head-on in fried chicken, but China’s fast-food market was fast maturing, leading to a plethora of choices that would eat away at KFC’s market share. The company also faced another challenge in shifting consumer perceptions: As Chinese consumers became wealthier and worldlier, their perception of KFC moved closer to that of Americans. The novelty was wearing off.

Competitive advantages wear off over time.

Breakfast is an important part of Chinese daily life, so in the early 2000s, KFC began introducing a wide variety of breakfast products tailored specifically to Chinese customers: soymilk drinks, savory fried dough (youtiao), and congee. Later the company also introduced rice-based meals to its lunch and dinner menus.

Ronghua failed despite localisation, so it’s interesting to see how localisation is being treated as the key factor for KFC in the 2000s. Again goes to show how it’s not just the idea but also the timing and luck.

Its current strategy is to aggressively expand into fourth-tier or even smaller cities with populations of around 2.5 million people or fewer—where costs are low, incomes are rising fast, and its brand retains greater consumer appeal because it’s still considered novel.

This sounds like a repeat of the initial ‘expand rapidly outside of major cities’ plan quoted above. With the changed mindset of the Chinese consumer on how they treat western vs chinese brands, it’ll be interesting to see if KFC can run the same playbook and still get results.

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