kfc china case study

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KFC’s Radical Approach to China

• Mary L. Shelman

To succeed, the fast-food giant had to throw out its U.S. business model.

Reprint: R1111K

Global companies face a crucial question when they enter emerging markets: How far should they go to localize their offerings? Typically they try to sell core products or services pretty much as they’ve been sold in Europe or the United States, with headquarters calling all the shots—and usually with disappointing results.

The authors, both of Harvard Business School, examined why KFC China has been able to find fertile ground in a market that is notoriously challenging for Western fast-food chains. KFC’s executives believed that the dominant logic behind the chain’s growth in the U.S.—a limited menu, small stores, and an emphasis on takeout—wouldn’t produce the kind of success they were looking for in China. KFC China offers important lessons for global executives seeking guidance in determining how much of their existing business model to keep in emerging markets—and how much to throw away.

Global companies face a critical question when they enter emerging markets: How far should they go to localize their offerings? Should they adapt existing products just enough to appeal to consumers in those markets? Or should they rethink the business model from the ground up?

• David Bell is a Harvard Business School professor and chairs its marketing unit.
• MS Mary L. Shelman is the director of the Agribusiness Program at Harvard Business School.

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Strategy Case Study: Analyzing the Success of KFC in China

Table of Contents

KFC Globalization Strategy

One of the secrets behind KFC’s global success is due to how it adapts its business to different countries and cultures while also standardizing other aspects of its operations at the same time. What this means is that the company standardizes some critical branding and operational aspects of the company, but carefully localizes various other aspects of its business model to adapt to local variables. This is known as a transnational strategy which we have covered in a separate guide .

Adopting such a hybrid strategy often allows companies to bank on advantages from both approaches simultaneously. Localization of strategies can be particularly important for large countries such as China which have a strong culture and local traditions. In fact, China is so large and diverse that there are significant differences in subcultures even within the country. Different regions of China have different local variables that may even be unique to them. We will explore in further detail how KFC has successfully cracked the code while competitors like McDonald’s have struggled.

Before delving into the specifics of how KFC won over China, we need to complete the first step in strategy analysis, which is to explore the internal and external factors that influence the success of a business. Most of the facts and figures presented in this case study are taken from the company’s Annual and Sustainability Reports for 2021.

Overview of KFC in China

How did KFC enter China?

KFC entered China in 1987 through a joint venture with two local partners. One of them was Beijing Tourist Bureau, which held 27% of ownership, and the other was Beijing Food Production, which held 13%. The remaining 60% remained under KFC. This was a time when governmental regulation on foreign ownership in China was still quite strict. Hence, the company had no other option but to partner with these local entities. However, this partnership came with the added benefit of allowing the company access to the connections of these entities within the government which made KFC’s entry in China smooth and successful.

There were some changes made to foreign ownership regulations in the 1990’s which allowed the company to dissolve the joint venture structure. The fact that the company had established a good foothold in the market by then, with a strong distribution network, stores, fleet, and flow of operations, helped it set out further on its own.

What is KFC Called in China?

KFC is called ‘Kendeji’ in China and as one may infer, it is an approximate transliteration using a close pronunciation of ‘Kentucky’. The official name of the company is written as 肯德基 in Chinese (Kěn Dé Ji in Pinyin). This isn’t a literal translation since it is more common for foreign companies in China to adopt the closest phonetical words corresponding to the original foreign name of the company. The actual meaning of the Chinese characters in KFC China’s official is as follows.

The choice of Chinese characters by foreign brands is often an effective signal of the company’s values and intended positioning strategy. What we can infer from the meanings of each individual character and their combines meaning is that KFC China aims to invoke a perception of trust and dependability in the minds of local Chinese customers. This is a particularly interesting choice, especially in the light of frequent food safety scandals in the food retailing industry of China, which we shall cover in subsequent sections.

KFC also has an unofficial nickname in China. Some people refer to it as ‘Kai Feng Cai’. This is a play on words as this name is taken from it’s initials, while also represents a popular dish in local cuisine. This another testament to the local association of KFC in China. The company has embraced this nickname in recent times by giving this name to its line of ready-to-cook meals.

Key Facts and Statistics About KFC China

Detailed analysis of various aspects of the company’s strategy, business model and performance in China shall follow in the subsequent sections. However, here’s a quick recap of some interesting facts and statistics about the company’s operations in China.

• KFC’s revenue in China was just over USD$7 billion in 2021
• The company operates 8,500 stores in the country
• It opens around 3 new stores per day on average
• Around 15% of the company’s stores in China are operated by franchisees
• There are 8,500 KFC stores in China, as of 2022
• KFC China sources the materials needed for its operations from 800 suppliers, as of 2022
• Delivery orders typically account for about 20% of total sales
• However, this increased to around 30% as a result of Covid-19

Growth of KFC in China

To say that KFC is ‘popular’ in China would be an understatement. The company has been far ahead of other international fast food retail chains in China since the 1990’s and continues to consolidate its position further. It must be recognized that right from the time of its entry in this market, KFC China successfully positioned its brand as being in tune with Chinese culture. In comparison, the localization efforts of McDonalds’s came a few years after its entry. This was a case of ‘too little, too late’ for McDonald’s as KFC made good use of its 3-year head-start to consolidate its position.

The success of KFC in China is exemplified by the fact that the company opens an astounding average of 3 new stores per day here! What makes this stat even more astonishing is the fact that these numbers are post-Covid!

The exponential growth achieved by the company can be better understood by looking at the number of stores under its banner in China. This is illustrated in the graph below. The company started gradually by establishing only 11 stores in its first 5 years of operations in this market. This was then scaled up to 100 stores within a decade. The next few years saw hundreds of stores being added every single year to reach almost 2,500 stores within a 20-year span.

As shown in the graph, the growth took a small hit during the few years following global financial crisis of 2008. However, it bounced back even stronger and hit a period of its highest growth during the next decade. As of the time of this case study in 2022, the KFC operates 8,500 stores in China. In comparison, McDonald’s only has about 4,000 outlets in China, which is barely half the number of outlets as KFC.

KFC China’s operations and profitability took a fairly big hit starting from the first quarter of 2020 due to the Covid-19 pandemic. This led to temporary store closures in many places and even permanent closures in some. During the peak of the pandemic in 2020, KFC had to close nearly 35% of its stores. However, the company has bounced back from this setback and looks to be back on track with its strategic vision of continuing to expand its presence in China by opening even more stores in 2022 and beyond.

Geographic Spread of KFC in China

When evaluating the growth of KFC in China, a key factor that needs to be taken into consideration is geography. Being a very large country, there is a high level of diversity in demographic variables for different regions of the country. The different cities in the countries are often separated by economists into four tiers based on economic growth, gross domestic product and geographic reach.

The Tier 3 and 4 cities often have a lower economic output, which also means that cost of labor would be less. It is also common to see lower populations and different social classes and levels of employment in these cities when compared to Tier 1 and 2 cities. While other foreign brands like McDonald’s have hesitated and stayed away from establishing outlets in lower tier cities due to lower perceived profitability, KFC has ventured and expanded much further in these areas as well. This distinction is also important to consider in the context of KFC’s success in China. More detailed discussion on this shall follow in subsequent sections.

Who Owns KFC China?

KFC China shares the same brand colors and imagery that all branches under the global fast-food restaurant chain of KFC have. However, it operates independently without direct influence or intervention from the branches in other countries. Unlike in other countries, KFC China’s ownership comes under Yum China which indirectly owns the subsidiaries operating the KFC brand in China.

This parent company is incorporated in the state of Delaware in the US. In other words, KFC’s operations in China are subject to the income tax regulations of both the US and China. The company effectively pays an income tax rate of 25% to Chinese authorities, plus an extra 10% withholding tax on the earnings which it repatriates out of the country (to its parent company). In contrast, companies which operate mainly in the US are subject to a flat corporate income tax rate of 21%.

However, not all stores in China are owned and operated directly by Yum China. Approximately 15% of the company’s stores in China are operated through franchising agreements with channel partners. KFC makes money from its franchisees by receiving both upfront franchise fees as well as on-going royalties such as a percentage of their sales.

KFC China Food Safety Issues and Scandals

KFC China has had its fair share of food safety issues and scandals over the years. In 2012, the company lost a lot of sales revenues due to a scandal related to claims that it was using antiviral drugs and growth hormones in its chickens. As this was in violation of food safety laws, the government launched a detailed investigation covering the use of antibiotics in food items.

The company had to fight an uphill battle to restore both consumer and government trust in its brand. KFC China also faced some controversy over food safety standards in 2015 when one of its suppliers was shut down due to claims of supplying expired meat. These kinds of issues increase consumer resistance towards the company, especially seeing as it is a foreign brand, a fact which invites additional scrutiny and concerns over trust in China.

SWOT Analysis for KFC in China

Based on our KFC China SWOT analysis, we have identified some key points that play a significant role in the company’s continued success in China.

Due to its adoption of the transnational strategy, the company benefits from using a well-established and recognizable global brand, while also reaping the rewards of adapting various elements of its business to suit local consumption patterns.

Another strength gained by the company solely due to this strategy is the fact that it does not need to look to management of the parent company in the US for decision-making. This allows the company to make quicker adjustments to capitalize on local trends.

The company has a key strength in procurement thanks to its strong presence in the country. Having so many stores in the country gives the company significant buyer power which often provides it the upper hand in negotiations with suppliers. The company has benefited even further in this regard through the central procurement model of its owner Yum China which also had other major restaurant chains such as Pizza Hut and Taco Bell under its banner.

The type of product which the company specializes in also gives it an edge over competitors like McDonald’s or Burger King. Fried chicken is a more generic and relatable product for Chinese customers as compared to hamburgers, which are obviously more alien to Chinese traditional cuisine.

Apart from price negotiation through high volume of purchases, the consolidation of the procurement function also gives the company an easier way to manage its extensive supplier network with better quality control and standardization measures.

The company has also managed to secure strategic locations for its stores which give it access to a greater level of footfall and customer traffic. This strength can also be traced back to the company’s first-mover advantage of being one of the first foreign food retail brands in the country. The company’s early entry to the market allowed it to lock-in prime locations before they competition became too high.

KFC no longer has the novelty factor which it used to have during its initial introduction to the country. Additionally, its excessive focus on localization of menu choices makes it more difficult for the company to stand out amongst a sea of local, home-grown restaurants.

The huge network of stores which the company has in China can be as much of a liability as it is a strength since it needs to invest more time and resources into managing this network. This is especially necessary when overseeing the operations of franchised stores and ensuring that they match the standard brand values of the company.

Opportunities

The changes to the ownership regulations in China in the 1990s was one of the first opportunities that the company immediately capitalized on. While the company had entered the market in a joint venture with local partners, it used this chance to dissolve the joint venture and consolidate ownership. This helped the company with faster and more efficient decision-making.

Another opportunity for the company in this market the relatively lower competition in lower tier cities since other foreign brands were predominantly focused on urban areas. The companies to make effective use of this opportunity to date as evidenced by the exponential increase in the number of stores year after year.

The size of the country and it’s population, combined with the fact that it is a growing economy with increasing disposable wages and less market saturation all provide a good climate for large companies to invest and grow rapidly. KFC has benefited greatly from these trends as part of its market penetration strategy, and the continued increase in its number of stores in the country is further proof of this.

The large size of the population and diversity in cuisines and tastes between different region also provide an obvious opportunity for market expansion through product diversification. KFC China also makes very effective use of this opportunity, as we shall cover in subsequent sections.

Food scandals and claims of contamination, adulteration or even diseases being spread through the operations of food retailers is a fairly common occurrence in China. This poses a major threat which can damage the trust in the brand. An isolated incident in a local area can have a significant negative impact on how the company is perceived across the country. In fact, KFC has already faced issues with foodborne diseases such as E. coli, Hepatitis A and Salmonella in its supply network. Another scandal took place in July 2014. The Chinese authorities closed restaurants in Shanghai following rumors of using expired meat. The brand broke the contract with their current supplier and tried to fix their good reputation.

The spread of diseases such as the Covid-19 pandemic in recent times or the African Swine Flu prior to that all have larger impacts in the food retail industry than in other sectors. The impact may not just be a disruption to operations; it might affect the profit margins directly. An example of this is how the price of protein and poultry went up drastically in China in 2019 due to the spread of the African Swine Flu.

It is important for the company to keep a tight control of its supply chain quality and effectiveness to protect itself against scandals and bad publicity. Negative incidents in the supply chain are especially harmful in the food retailing industry due to the direct impact that it has on health and safety of the consumers. KFC China has had some bad experiences in this regard, such as the failure of some of its upstream poultry suppliers to comply with the company’s established standards.

During the pandemic, many provinces had put tough measures in place to discourage travel. This was especially enforced during period of holidays, such as the Chinese New Year holiday in 2022. This was a tough pill for the company to swallow since holiday season is often the most profitable time of the year for the company. This was set against the backdrop of the fact the company had already suffered significantly due to operational restrictions caused by the pandemic.

The fact that the company leases nearly 8,500 properties in China opens the door to a lot of uncertainty. This includes various factors such as swings in the real-estate market and disputes over property ownership and inheritance which could disrupt store operations. Additionally, the company faces a huge risk since the Chinese government has the authority to obtain ownership and control of any land plots and the buildings which it considers to be in the interest of the public. There is usually no legal provision which the tenant can use to even claim compensation.

Another operational risk faced by the company arises from the fact that it deals with a large amount of cash as a part of its day-to-day operations. This opens the company to instances of fraud, theft and other forms of misconduct which are often difficult to detect and prevent.

PESTLE Analysis of KFC in China

Here’s our summary of the key points of external environment of KFC in China, using the PESTLE analysis tool. Detailed discussion of these points can be seen in the relevant subsections below.

The internal political environment of China is quite stable in terms of the party in power making the legislations. However, the government in known for making new sweeping changes on short notice. Often, the interpretation and application of new regulations is not clearly set out and there could be differences in enactment at local government levels. This element of uncertainty has a strong impact on KFC’s revenue in China. As we’ve mentioned before has spread out and expanded to the various tier levels in China which means that the company also has to deal with different local jurisdictions and administrative departments as well. Exposure to this level of uncertainty poses some difficulty to the vision of standardization which companies like KFC aim to achieve for better efficiency in operations.

On an international level, the situation becomes more difficult as the country often has soft escalations with both neighboring countries and those in the West, especially the US. For instance, the political tensions between China and US in 2020 led to various new policies being enacted by the Trump administration which affected businesses operating in China. Some specific examples include the Clean Network program which was launched with an aim of protecting U.S. telecommunication and technology infrastructure and the banning of transactions through certain software and applications which were associated with China. The list of banned applications included popular payment gateways such as Alipay, QQ Wallet and WeChat Pay. This was detrimental to operations of companies offering these payment options, including KFC for which sees a significant portion of digital orders and digital payments. In 2021, digital orders accounted for around 86% of total sales, and digital payments and mobile payments contributed to about 98% of total sales.

Despite all its efforts to come across as a brand which is well in-tune with local customs and traditions, there is no escaping the fact that the company is a well-recognized global brand originating in the West, and US specifically. This has created problems for the company in the past, such regional protests and boycotts from some segment of customers in China in the aftermath of political disputes regarding the claims of territories in the South China Sea.

Historically, the culture and traditions of Chinese consumers has encouraged them to pursue to long-term savings and makes them sensitive to price. Often, this mindset also leads them to seek out the best deals and promotions. More recently though, Chinese consumers are starting to show higher levels of individualism in their buying choices and are less price-sensitive compared to before. However, they are still more price conscious when compared to their counterparts in Western countries.

The tier system discussed in previous sections also points to an economic disparity across the country. Different regions are characterized by different levels of income and standard of living. Such differences in socio-economic backgrounds of consumers have implications on the type of products and price points that appeal to them. At the same time, it also represents differences for KFC in terms of the labor market which they can draw talent from.

Chinese consumers are found to be more willing to pay a higher price point for products that are perceived to be novel and foreign. This may have been the factor which guided the strategy of McDonald’s and other similar foreign brands to not localize their business as much as KFC did. The mistake in calculation of these other companies, and where KFC has done well, is that the novelty factor wears off soon unless products are being constantly innovated. In fact, the company is so good at keeping this novelty factor that it has invested resources in remodeling its stores regularly. In 2022, the company reported that nearly 78% of its outlets in China were remodeled or built in just the previous five years.

In terms of demographics, it is safe to conclude that the younger generation of customers often find fast-food brands such as KFC more appealing than older age groups. KFC has done well to make itself especially appealing to different target segments such as youth, rising middle class, teenagers, and college students. It has achieved this by choosing its marketing and advertising strategy carefully. Often, the company’s commercials show KFC products being shared in social settings and depicting KFC Stores as places where people can gather socially. The impact of this positioning strategy is noticeable in the fact that many Chinese eat KFC for Christmas as a social tradition, although perhaps not to the extent that this practice is common in Japan.

In recent times, the age structure of consumers in China has changed significantly. The one-child policy has led to a significant decrease in the fertility rate of the country. This has led to an increase in proportion of the older population segment. When combining this factor with the previous identified one about stronger preference for KFC from younger customers, the implication is obvious.

KFC can expect to see a proportion decline in its revenue as the average age of customers in the country increases further. However, against this background, the company has also done well to diversify its customer base through increased menu options and this another factor we shall touch upon in subsequent sections of this case study.

Technological

Technology has become increasingly accessible in recent times, and this is no different for the Chinese market. Many consumers in China are starting to show a preference for enhanced shopping experiences through greater digital interaction. The broader access to technology and the increasing trend of online shopping also contributed to this. This factor is noticeable through the fact that nearly 86% of the company’s total sales in China in 2021 were through digital orders. KFC China also relies on digital R&D centers to support its technological capabilities and capture customer value better. Three new R&D centers were established in 2021 alone.

The digital presence of KFC China is strong enough that it can run a massive loyalty program with 330 million members (this user base is shared with other brands under the Owner Yum China). This allows the company to reap the rewards in the form of higher order frequency and customer loyalty.

KFC China also uses a sophisticated artificial intelligence algorithm called the “Super Brain,” which combines and integrates data gathered through everyday store operations. This data is analyzed to improve the decision-making capability of the restaurant managers. The company has even experimented with proprietary smart watches and smart glasses to closely monitor the real-time operations and process flows. This is supposedly for the purpose of making suitable adjustments to staff schedules and improve management efficiency.

On the flip side, such an approach does pose various questions in terms of data privacy and excessive monitoring of personnel. One might expect similar resistance to the use of facial recognition data by business to provide new services. China is one of the early adopters of the application of facial recognition technology for mobile payments and it has since become commonplace. While acceptance of this technology was rapid in the early stages, consumer resistance has been growing in recent years . Such kinds of reactions by customers affects how well KFC China can undertake digital transformation efforts in the country.

In China, there are several food-safety laws which lay down detailed guidelines and rules for food safety assessment, standards, production, inspection, and distribution. In the wake of several scandals in the supply chains of different players in the food industry, violations of established regulations often draw financial, administrative, or even criminal penalties. KFC has been on the receiving end of such sanctions on multiple occasions. However, it is a testament to the popularity of KFC in China that such scandals have failed to make a significant negative dent on the company’s presence in the country.

While we touched upon increasing adoption and advancements in terms of technology in the previous section, this is accompanied in parallel by an increase in regulatory measures in the areas of information security and protection. The laws and requirements covering data privacy and cybersecurity have been tightened in recent times.

It is also worth noting that the laws in China do not always offer the same type or extent of protection which is expected and even taken for granted in the US. This is particularly true in the field of intellectual property rights. Apart from vagueness in the coverage of these rights, there is also a noticeable inconsistency in the enforcement of these laws at different levels of government and across different regions of the country. In fact, there many restaurants in the country which use imagery imitating established brands such as KFC and McDonald’s, seemingly without legal repercussions.

Environmental

A key environmental factor of importance in China is the increasing awareness about the negative impact of non-sustainable and single-use packaging. Going back to the point of long-term orientation, which is emphasized in traditional Chinese culture, generation of unwanted wastes is highly discouraged. KFC China has tried to overcome this by gradually replacing some of its plastic packaging with paper-based and biodegradable alternatives.

The company claims that it reduced nearly 9,300 tons of plastic waste and 4,320 tons of paper waste in 2021. However, this is a measure that nearly every other competitor has also announced as taking, so it does not distinguish the company from others. There is definite room for innovation in this regard which can further cement the company’s popularity in the country.

There is also an increasing awareness of and demand for better nutrition and healthier product choices from consumers in China. To cater to this trend, KFC China opened some specialty stores promising to deliver on a healthy concept model. This was done under the ‘K Pro’ brand, which was launched in 2017. In place of items which used fried chicken, healthier alternatives such as salads, paninis, and juices.

Porter’s Five Forces Industry Analysis of KFC in China

We have analyzed the food retailing industry in China based on Porter’s five forces model and summarized it in the figure below. Please read the detailed discussion of each of the factors to better understand the logic behind our assessment.

Industry Rivalry (High)

The main foreign brands which represent a higher level of industry rivalry for KFC China are McDonald’s, Burger King and Domino’s Pizza. Pizza Hut and Taco Bell are other foreign brand competitors, but they do come under the same parent company as KFC China (Yum China).

Some local Chinese fast-food competitors include chains such as Daniang Dumpling, Kungfu, Zhen Kong Fu and Malan Ramen. These have seen an increase in popularity in recent years. However, a factor that works against these local chains is that they do not often gave the benefit of standardized cooking methods and ingredients that KFC China does due to the incredible efficiency of its operations. There are also Asian brands like Home Original Chicken, Hua Lai Shi and Dicos which offer American-style dishes such as burgers and chicken nuggets, often at cheaper prices.

Apart from strong competition from these large foreign and local chains, the rivalry in the industry is further intensified by the convergence in grocery, convenience, deli, and restaurant services. As such, industry rivalry in fast food retailing in China is considered to be high.

Bargaining Power of Buyers (Very High)

With fast food restaurants, the obvious factor which gives more power to the buyers is the lack of any effective switching costs. In recent times, companies have tried to increase their bargaining power by offering membership and loyalty programs. In fact, KFC China’s loyalty program is quite large with nearly 330 million members, as we have covered previously. There is also a significant overlap between the menus and specific food items between the different options in the market. This also results in better bargaining power for the buyers. As such, we consider the bargaining power of buyers in fast food retail in China to be quite high.

Bargaining Power of Suppliers (Low)

The SWOT analysis of KFC in China in the earlier section established the fact that company enjoys a stronger hand in price negotiations with its suppliers due to its high-volume purchases and centralized procurement model. While the growth of the company’s scale of operations and number of stores is accompanied by a similar increase in the number of local suppliers, the proportion for the two increases has not been the same.

While the number of stores nearly tripled in the decade between 2010 to 2020, the increase in the number of suppliers was less than double (from around 500 in 2010 to about 750 in 2020). This comparatively lower increase in the number of suppliers can be taken to imply a much stronger position for the company during negotiations with suppliers. As such, the bargaining power of suppliers is evaluated as being low.

Threat of Substitutes (High)

As identified in the PESTLE analysis of KFC China in the earlier section, there is a growing trend of health-consciousness among consumers in China. This drives up the demand for substitutes which are healthier food choices for the customers. KFC seems to be fighting this threat by offering healthy seasonal vegetables in its menu. It’s K Pro is also an attempt to directly tackle this threat.

While the ‘fast-food’ concept does stay true to its name and offer a quick turnaround between making an order and getting the food, there is an even faster substitute that fast-food companies need to be weary of. In China, many convenience stores and even groceries have a section of food products which were pre-packaged earlier in the day or just the previous day. This represents a good substitute option for the working population seeking to get a quick lunch while avoiding the queues at restaurants. KFC China’s launch of KaiFengCai series of ready-to-cook meals can be seen as a way for the company to expand further into what were previously substitutes. Overall, the threat of substitutes is considered to be moderate to high.

Threat of New Entrants (Low)

The cost of entering this market in China is fairly high with significant investments being required to establish the necessary infrastructure, stores, distribution network, food safety certifications etc. This makes it difficult for new entrants to come and challenge the major established market players. Having said that, the threat of new entrants for food retailers in China mainly comes from new forms of product distribution and delivery.

In recent times, China has seen an increase in the number of food delivery aggregators, and new forms of food retail and delivery services such as ghost kitchens, cloud kitchens and shared kitchens. These new entrants often hold a high novelty factor and try to offer a wider range of cuisines and novelty dishes which can pull customers away, especially in urban areas. As we have covered in previous sections though, the novelty factor is one that often wears away quickly, and this has been observed in the food retail sector in China in the past. Hence, the threat of new entrants is considered to be somewhere between low to medium.

KFC China Localization Strategy

General overview of kfc china vs us.

The most important feature of KFC’s localization strategy in China is its significant commitment to embracing the local culture through targeted adaptation efforts. This is most noticeable in terms of the menu options offered in its outlets in China as compared to the US.

It works in the company’s favor that Chinese customers perceive the company as being better than the average fast-food store. It is not considered a ‘cheap’ dining option, which is often the association that most fast-food chains including KFC have in other markets. Instead, the customers place it somewhere in between casual dining and fine dining. This is entirely down to the company’s transnational strategy of combining its globally recognizable branding with localization at nearly point possible.

Another difference between the two countries is in the style of cooking. In China, boiling is the more preferred technique of cooking rather than deep frying. There are also differences in Chinese table manners compared to the US, ranging from obvious aspects such as the usage of chopsticks to more obscure differences such as the general approach to consumption of food. Chinese consumers frequently gather to sit together and eat in comparatively larger groups than in America. KFC China offers a greater variety of choices in its menu as compared to KFC in America and this is better suited to the local trend of eating food in larger groups because these customers like to order and share several dishes with each other.

Whereas consumers in the US may hesitate in consenting to the use of facial recognition technology, Consumers in China area already used to this, as identified in our PESTLE analysis. Despite some resistance to the use of such technology emerging in recent times, this application of technology does not appear to be going out of trend in China in the near future. This is another difference in the digital presence and user interaction aspects of KFC in China vs America.

Another distinction is that the company focuses mainly on chicken-based products in North American markets. In China (and several other markets) the company also offers beef and pork products. However, it is worth nothing that the company’s focus on chicken gives it another edge over McDonald’s because Chinese consumers show a greater preference for chicken compared to beef (which McDonald’s has a greater focus on).

Localization of Menu Options

As we touched upon several times in earlier parts of this case study, localization of the menu and available items to suit local tastes and preferences is the cornerstone of KFC’s strategy in China. The staple food items consumed by a lot of people in China are rice, porridge, and noodles. In comparison, consumers in the US and other Western cultures show a greater preference of bread and wheat-based items as their main source of nutrition. KFC China has paid attention to this factor and various other local tastes and preferences and carefully adapted a localized menu which must be recognized as a critical success factor for the company. Here are some localized items which are available in KFC China but in the US and most other markets.

• Matcha Ice Cream
• Soy Sauce Chicken
• Sandwiches With Prawns
• Soymilk Drinks
• Chicken Tendon Skewers
• Fried Dough Savories
• Rice-Based Meals
• Fried Dough Sticks
• Egg & Vegetable Soup
• Chilli Beef Pancake
• Dragon Twister
• Grass Jelly Milk Tea
• Shrimp Burgers
• Egg Custard Tarts
• Fish Ball Soup
• Soup Dumplings (Xiao Long Bao)
• Fried Donut Stick (Youtiao)
• Beef Noodles
• Seasonal Vegetables
• Bamboo Shoots
• Lotus Roots
• Tree Fungus Salad
• Pickled Chinese Cabbage
• Smelly Tofu
• Skewered Meat
• Preserved Eggs (Cantonese-style Pidan)

However, the company has not abandoned its conventional Western-style products altogether. It does offer them in parallel since the perception of a certain level of foreignness is what allows the company to charge a higher price point than local competitors. This is also part of the hybrid transnational strategy that we explained at the beginning of this case study.

KFC China even localizes products for different regions and provinces within the country based on local tastes. For instance, its products in Shanghai are less spicy compared to its menu in Sichuan and Hunan to better suit local preferences in each of these regions. Similarly, the company also added Wong Lo Kat herbal tea to its menu only in the Guangdong provide as this is one of the oldest brands of herbal tea which is widely popular in this region.

The company’s commitment to localization of its menu items runs so deep that the company has even established its own seasoning facilities. To ensure the authenticity of its flavors, the company also makes use of traditional Chinese spices including aniseed, Chinese cinnamon and sesame oil.

The company has also set up a massive 27,000 square-foot ‘innovation center’ in Shanghai which focuses on coming up with new recipes, cooking methods and menu items. The company has also set up a food advisory committee to lobby for support in its favor. KFC China also began selling a range of products branded as ‘local street food’ in 2019. This included options like chuan, boiled skewers.

Apart from introducing local menu items, the company also fuses some dishes together to introduce more innovative and partly localized products. One of its new additions is prepared similar to the traditional dish known as Peking Duck with chicken being substituted instead. This dish also makes use of sweet sauce that is made using fermented flour as this is the condiment used in Peking Duck.

It is worth noting that KFC China has made a conscious decision to not completely localize its menu options and give up its foreign brand status completely. Instead, the parent company of KFC China spun off a completely new brand known as Dongfang Jibai (which means East Dawning) based on the business model of KFC to exclusively serve Chinese Food.

Localization Aspects in the Supply Chain

As we had covered in our earlier KFC China SWOT analysis, a key strength of the company is its central procurement system through which group sales are centralized. This provides several benefits such as better management and control of the supply chain, while also putting the company in a better position to protect against food safety issues and scandals which were a key threat identified for this market.

For the most part, KFC China sources its chicken and other necessary materials locally. Its network of nearly 800 local independent suppliers account for almost 90% of the requirements of the company. Due to the large scale of the company’s operations, it has a dedicated team of almost 1,400 employees who are focused solely on supply chain management activities. However, their roles within the supply chain system range from safety, quality assurance, and procurement management to delivery, logistics, and even engineering.

The company has also invested heavily in integrating its logistics in China, which is evidenced by ongoing acquisition of properties to establish new logistics centers, with 3 new hubs being set up just in 2021. The company also relies on its network of 32 logistics centers which it operates in close coordination with independent distributors to move material and products around the country.

The company has also put in place agreements with local delivery aggregators to have their products listed on and ordered through their respective platforms. This further expands the sales network and reach of the company.

Localization of Store Design

The company also localizes its store design and undertakes frequent remodeling to ensure that it is staying in tune with customer expectations and local trends or preferences. As we mentioned earlier, almost 78% of KFC China stores have been remodeled or built between 2017-2022. Other examples of the company’s localization in terms of store design include themed restaurants which focus on certain specific aspects of Chinese culture.

As part of localization of store designs, KFC China set up some themed restaurants in partnership with the National Museum of China and the Palace Museum. This collaboration granted KFC the rights for usage of imagery and interactive displays of historical and traditional Chinese culture and artefacts in selected stores. Another example is a restaurant in Chengdu which has a distinct theme which recognizes the contributions of the poet Du Fu who was a native of this city.

Apart from localization of aesthetic elements in its stores, some other store design choices of the company also seemed to be well-suited to this market. For instance, we identified in the PESTLE analysis that Chinese consumers are increasingly technology-savvy and are also becoming more conscious of environmental impacts. The company’s decision to trial some pilot projects in which photovoltaic panels were installed in its stores to generate solar energy also capitalizes on these trends.

Some other distinct store decorations used by the company include placement of Cantonese-style redwood palace lanterns in its stores. The company also updates the theme and design of its stores with special decorations for certain occasions, such as the Chinese New Year and other traditional festivals.

Having covered localization of store design, it is also worth pointing that KFC brought over something from other markets, which was new to China. This was the inclusion of toilets in its facilities, which were also air conditioned. During the early years of the company’s operation in the country, such kinds of amenities were not common in public spaces and definitely not within local restaurants. This helped the company cultivate an image of luxury during its early days, although it has repositioned as a value-for-money option in recent times.

Variation in Pricing

As we identified earlier, Chinese consumers are typically more willing to pay a higher price for the products which they perceive as novel and foreign. This has allowed the company to charge a higher price in China as compared to other markets.

Overcoming Consumer Resistance

It was identified in our PESTLE analysis of KFC China that Chinese consumers are more sensitive to price. Compared to the US where KFC and other fast-food chains are already considered good ‘value-for-money’ options, KFC China charges a higher price point, as we have also mentioned earlier in this case study. Comparing these two points, it can be inferred that KFC China faced a greater value barrier of convincing consumers in China that its products still represent better ‘value-for-money’ for them when compared to other foreign and local brands.

Overcoming consumer resistance often requires educating consumers. In this regard, KFC is often quick to act on issues related to food safety standards and denounce outlandish claims such as the rumor that it was using ‘mutated’ chickens. In the wake of an earlier scandal, the company even put out a message on the paper placemats in its stores highlighting the steps that it was taking to ensure food safety in its supply chain. This proactiveness has allowed the company to weather the storm and recover fairly quickly from temporary drops in market value when such scandals come up.

Another strategy which the company uses to overcome consumer resistance is to focus on community development as part of its corporate social responsibility efforts. It seems to be picking and choosing specific initiatives which paint is as a part of the local community, instead of being just another foreign brand.

The KFC SWOT analysis in an earlier section of this case study revealed that Chinese consumers are becoming more wary about the incursion of technology such as facial recognition. Since the company makes use of this technology at the moment in many of its stores (even claiming that due to ‘positive feedback’, they have expanded this option to 1,600 KFC restaurants across China in 2021), it would do well to pay heed to changing trends and make adjustments to its services accordingly.

Concluding Remarks

This case study of KFC China’s success shows how the company has adapted its overall strategic outlook with locally driven tactics to consolidate its position in the market.

KFC China’s localization strategy has been comprehensive, starting from tangible elements like products (in the form of a locally driven menu) and store design (such as its themed restaurants and frequent remodeling), and extending to intangible elements such as payment systems (through the support of various local payment providers and facial recognition for payments) and advertisements.

Another thing that stands out is that KFC China expanded rapidly, yet organically to ‘lower tier’ cities, whereas competitors like McDonald’s hesitated, perhaps due to the perception of lower economic value. The fact that KFC expanded to the lowest tier of cities often means that it is the first foreign brand that residents of those localities experience. This continues to provide first mover advantage to the company, even to this day.

The market share of KFC China has remained high over the years. It is clear that China loves KFC, and that the company’s unassailable lead will hold strong for many more years to come. Even various food scandals over the years have failed to put a dent in the reputation and population of KFC in China.

In conclusion, the company’s strategy in China is an exemplary case study on the benefits of transnational strategy and how to execute it well.

<Disclaimer: The company logos used in this case study are registered to KFC>

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KFC’s Explosive Growth in China

Homogenization has made it easy for fast-food joints to circle the globe, spitting out carbon copies of themselves, their burgers, and their fries along the way. But in the most populous country in the world, a fast-food giant stepped off the conveyor belt and found unprecedented success by being different, not by being the same.

In the Harvard Business School case "Yum! China," professor David E. Bell and Agribusiness Program director and senior researcher Mary Shelman examine how Yum! Brands , the parent company of KFC and Pizza Hut, outperformed McDonald's and became the largest restaurant company in mainland China.

The case describes how Yum! China succeeded and expanded by staying local on many levels. It keeps close ties to the Chinese government, hires local management, sources food from within the country, and changes the menu to suit Chinese tastes and style of eating.

A Matter Of Scale

One key issue the case examines is "how to implement the rollout of a fast-food chain involving so many stores across such a vast—and regionally different—country," says Bell, who teaches the case in the School's annual Agribusiness Seminar .

Both KFC and Pizza Hut restaurants in China differ markedly in many ways from their Western counterparts. And while Pizza Hut has done very well for itself with nearly 500 restaurants in 120 cities (as of December 2010), KFC's performance has been finger-lickin' incredible. Since the first piece of fried chicken (available in dark meat only, to the disappointment of many an American tourist) was served at a Beijing KFC in 1987, the number of KFCs in China has grown to over 3,000, in 650 cities, with one new restaurant opened a day.

"If I could have written any case in the world, this would have been the one I would have picked," says Shelman, a Kentucky native with more than a passing interest in Colonel Sanders. "Not only is this the story of a successful entry into China by a Western company, this case provides a glimpse of how quickly Chinese diets are changing as incomes improve. Because China is so big this has a huge impact on the rest of the global food system. What happens in China, what Chinese people eat, impacts what you and I pay for food."

What happened in China with Yum! Brands, and with KFC in particular, had a lot to do with China division chairman and CEO Sam Su. "He really flexed the model," says Shelman. This was in part due to KFC being owned by PepsiCo when it first came to China. PepsiCo was not a fast-food company, so Su was given more managerial freedom.

Along with being lucky, Su is smart, driven, and visionary—a classic entrepreneur. But he's also humble. "There's no room for ego," Su explained in the case. "China doesn't have the same culture of individualism that is present in the United States."

Su's strategy was that KFC "would not be seen as a foreign presence but as part of the local community… Our opportunity was to take the best ideas from the US fast-food model and adapt them to serve the needs of the Chinese consumer."

Initially this involved hiring the right people. For Su this meant Chinese managers who read and spoke the language, who understood the restaurant business and the Chinese consumer, but who also had experience in the Western way of doing business. "It was a foot in both worlds," Shelman says. "They knew firsthand the Western model but they also understood the challenges of operating in this Chinese, very traditional, very evolving market."

The people Su brought on board were also close in a way Shelman found surprising when she spent time with them when researching the case.

"There was huge camaraderie evident in the way that the top management team interacted with each other … they bantered back and forth and poked fun at each other," Shelman says. "They'd be walking down the hall jostling, pushing, laughing. This is a group that has worked together a long time—unusual in a country where experienced management talent is at a premium ."

It turns out that unusual employee interactions, at least in comparison with Western business decorum, are the norm at Yum! Brands, something Shelman experienced when she accompanied then-COO Mark Chu to one of KFC's Shanghai locations. "You walk into a restaurant and not only do [the employees] recognize him, but they love him as well."

And so the employer-employee relationship has more a feel of family. "In the United States, if you don't show up at work, what happens? You get fired," says Shelman. "In China, where many of the company's 250,000 employees are college students working their first job, it's like, 'Oh we understand that sometimes you feel like skipping class. If you decide to skip work—please call in and let us know, so we can make sure your job is covered.'"

Trained labor, it turns out, is a very valuable asset even in a land of 1.3 billion-plus people.

"Chu's acceptance and appreciation for these young employees is exceptional for Western companies to see," says Shelman. Younger employees, for example, are encouraged to socialize over company-provided video games on their breaks. This practice serves several purposes: It eases the minds of parents anxious about sending their children out into the world, provides crucial social skills for young adults who grew up in single-child households, creates lifelong Yum! Brands customers, and develops a culture of customer service in a country where there was none.

The restaurant management program is similarly focused. "You're a college graduate," says Shelman. "You're recruited for that position. You're very carefully developed to be able to do all these different jobs in the restaurant. And it's perceived as something that you would do your entire life."

Along with training and retaining quality employees, another key factor in KFC's success was Su's early decision to downsize his own career. Originally hired to cover the northern Asia-Pacific region, he departed from the usual managerial growth path of taking on larger geographic assignments and instead argued that he should focus exclusively on China. Early on, he decided that Yum! should develop a national footprint—supported by a company-owned distribution system since third-party suppliers didn't exist—instead of growing in geographic chunks through franchising.

Su sourced products from within China whenever possible. This was no easy feat early on as the supply chain for chicken, for example, included multiple vendors providing a handful of birds each. Food safety is a big concern for Chinese consumers, and it was Su's decision to build the supply chain from the ground to help ensure quality. "We work with our suppliers to build their capabilities. We stress the importance of knowledge transfer, and even arrange for them to go overseas to learn," Su said in the case.

The Chinese Way

"One of the lessons I take away from this case is that to do China, you have to do China," says Shelman. "It's a large, complex, and dynamic market that deserves single-minded attention." That attitude extends from the boardroom of Yum! Brands to the menus in KFC restaurants. A small number of items would be familiar to Western visitors—mashed potatoes, corn on the cob, fried bone-in chicken—but most would not. The Chinese KFC menu may include fried dough sticks, egg tarts (which Shelman raves are "to die for"), shrimp burgers, and soymilk drinks, as well as foods tailored to the tastes of specific regions within China.

The large selection of menu items is meant to appeal to the Chinese style of eating, in which groups of people share several dishes. But it's also part of the "New Fast Food" initiative Su developed in 2005 in response to concerns about the role of fast-food restaurants in the obesity epidemic—concerns that he shares and takes responsibility for. "We have been too greedy, too shortsighted," Su said, referring to the traditional high- volume, low-choice fast-food model.

Su believes that offering a wider variety of foods will help patrons make healthier choices. The KFCs in China have also limited the amount of money saved on combo meals, and have completely eliminated supersized items. Exercise is actively promoted inside the chain; as of 2010 the youth programs and competition it sponsored had over 260,000 participants in 438 cities.

KFC succeeded in China both because it was not McDonald's and because in many ways it decided it wouldn't be KFC either—which brings up another key question. "With the benefit of 20/20 hindsight…how do you avoid the mistakes of the American fast-food model?" asks Bell. "Put another way, if McDonald's and KFC were to start over in the United States knowing what they know now, how would their model differ?"

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• August 31, 2018 Economy

How KFC Changed China and How China Changed KFC

This is the first of several historical case studies that illustrate how important aspects of Chinese political economy have evolved over the first 40 years of the country’s Reform and Opening policies .  Later this year Two Fen will publish a series of in-depth essays on China’s economic transformation to commemorate this 40 th anniversary.

Just south of Tiananmen Square in Beijing is Qianmen, a stately imperial gate from the Ming dynasty. Just west of Qianmen is China’s first Kentucky Fried Chicken. 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. Thousands of Beijingers braved the two-hour wait in freezing weather when it opened, and the store had to call in police to help maintain order. That day , KFC sold 2,200 buckets of chicken and made 83,000 yuan.

By 1988, the Qianmen branch was already KFC’s top-selling location among the restaurant’s 9,000-odd outlets. Average daily revenue at Qianmen exceeded 20,000 yuan, doubling to 40,000 yuan on busy days. The People’s Daily  at the time quoted a KFC executive who said the company’s success “shows that China’s reform policies are good” and “Chinese people’s living standards are really improving.” Since then, KFC has become one of the most recognizable American brands in China, boasting over  5,600 restaurants in 1,200-plus cities and generating $5 billion in revenue in 2017. China is one of the few countries where KFCs outnumber McDonald’s.

Today, the first floor of that Qianmen restaurant still operates as a KFC, but much else has changed. KFC China is now owned by Yum China (Yum Brands was the parent company from 1997-2016 and PepsiCo had owned it previously) and is operated separately from other KFCs. Although Yum China is listed in New York and headquartered in Texas, it’s virtually a Chinese company.

The history of American fried chicken in China is a prism through which we can examine a key aspect of China’s reform and opening over the last 40 years—the dramatic changes in consumer markets and the services industry. That KFC was one of the first major experiments in China’s opening to the West has not been lost on the Chinese government. In commemorating the various milestones  in China’s progress since reform and opening began in 1978, the official Chinese media proudly touts KFC as one of the many important “firsts.”

Indeed, 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.

1980s: First-Mover Advantage

KFC was not only the first foreign fast-food purveyor in China but, more importantly, it was also a pioneer of the fast-food restaurant experience . In the mid-1980s, most Chinese still ate at home  or in the dull “socialist canteens” of their work units, where meals were either free or subsidized. Eating out was reserved for rare celebratory occasions like wedding banquets. The “American fast-food” concept was so foreign that when the Qianmen KFC opened, some Chinese customers waited for table service, asked servers for chopsticks, or brought their own pots for carry-out.

Still, the novelty and the aspirational “Western lifestyle” were highly appealing, convincing Chinese customers to dole out more than 7 yuan for a combo meal  of two pieces of fried chicken, mashed potato, coleslaw, and a dinner roll—even though the average monthly wage  in Beijing was just 100 yuan in 1987. Crucially, in comparison to other dining options back then, the Qianmen KFC was spotless, cheerfully decorated, air-conditioned, and had excellent customer service—much better than what the average Beijinger was used to.

This kind of quality control was embedded in KFC’s business model. 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). It’s essentially the difference between maintaining internal control versus outsourcing to others to run different restaurants—and the result was a consistency in standards that won over Chinese customers.

KFC grew quickly and attracted urban consumers—particularly women, children, and young professionals—and became a magnet for tourists and out-of-town visitors. Fried chicken became so popular that dark humor went around that KFC laced its chicken with opium to get Chinese hooked on foreign products again. The Qianmen KFC restaurant was such a sensation  that every Sunday, its third floor would be booked for weddings . In his book KFC in China: Secret Recipe for Success , Warren Liu, a onetime KFC executive, believed that the company’s foresight, despite the risks, to enter the Chinese market so early continued to generate “substantial competitive advantage” for decades.

It was also important for KFC’s China management, particularly its East Asia regional manager  Wang Dadong, to make a point about opening their first store in Beijing, China’s political and cultural capital. Rather than locating in the more economically and socially liberal cities in southern China, which was what McDonald’s did  in 1990 in Shenzhen, Wang wanted to show that even the more conservative and staid political capital could accept Western food.

As an early testament to KFC’s sterling brand in China, it weathered the Tiananmen Square crackdown in June 1989. In fact, the Qianmen location served as both a gathering place for the student demonstrators to hold meetings  and later as a makeshift barracks  for PLA soldiers who were ordered to “clean up the square.” Soon after the upheaval, the Qianmen restaurant was one of the first Western businesses to reopen, citing “contractual obligations” (KFC had paid upfront  for a ten-year lease). This came at a time when most American businesses decided China presented too much political or reputational risk. But KFC’s business appeared neutral, and both sides of a bitter political dispute were happy to appropriate its space.

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. This national expansion helped achieve economies of scale and locked in cheaper domestic suppliers for 97% of inputs. That the company was able to build a domestic supply chain so quickly is quite remarkable, demonstrating to other late entrants that this was possible in China.

Beyond the supply chain, KFC’s early foray into second- and third-tier cities meant that it could easily secure prime real estate for its restaurants. It was also an easy sell politically. During the heady days of reform and opening, ambitious local officials eagerly embraced the “arrival” of a Western brand to demonstrate that their province or city was connected to the global market. KFC’s national strategy paid off. As the Chinese economy grew and household incomes rose, more and more Chinese became KFC customers (see Figure 1).

1990s: Outcompeting Domestic Rivals

The jovial Colonel’s spectacular early success also meant that KFC had a bullseye on its back, as homegrown imitators  sprung up to cash-in on a rapidly growing fast-food market in China. This shouldn’t have been a surprise, as local competitors had their own advantages. They often could achieve lower costs and were intimately familiar with local market conditions. And because intellectual property enforcement was basically non-existent back then, local competitors could replicate KFC’s business model and branding in some respects. Moreover, the Chinese state also got behind the domestic players as it sought to bolster the domestic services sector, incorporating the fast-food industry into its economic planning in the Eighth Five-Year Plan (1991-1995) and issuing Fast Food Development Guidelines in 1996.

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!” Ronghua recorded strong sales in the early 1990s and expanded rapidly across the country. Many Western firms faltered in the early days of reform and opening— Jeep’s ill-fated joint venture (JV) is a well-documented example—because they failed to adapt their production to local conditions, underinvested in their local labor force, or did not know the market as well as domestic firms.

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.” This was possible in part because when foreign investment regulations relaxed further in the early 1990s, KFC decided to abandon its Chinese JV partners and struck out on its own. Meanwhile, KFC had already established  a distribution network, built a cold-chain system, assembled a truck fleet, and perfected an operations structure that enabled the chain to increase turnover while opening hundreds of stores. Processes and supply chains are much harder to copy than logos and slogans.

This management and systems advantage helped KFC establish a leading position in the China market (see Figure 2). According to CCTV, the introduction of KFC to China  not only “popularized the idea of ‘fast food,’ it also transformed thinking about dining concepts, management methods, and more.” Last year, the People’s Daily credited Western fast-food chains  with the introduction of “standardized management” to the Chinese restaurant industry and celebrated how  reform and opening allowed Chinese chains to “draw lessons” from foreign brands.

That KFC stood victorious was a validation of its model of internal control and imposing strict standards across all of its operations, from the supply chain to the brick and mortar stores. It was a system perfected in the United States and successfully transplanted to the China market. While not exactly technology transfer in the pure sense, this kind of knowledge transfer is of equal importance in building successful operations in new markets. Moreover, KFC showed that low cost alone does not necessarily win the market—Chinese customers were willing to pay a premium for a superior product and a unique experience.

2000s: Deeper Localization

KFC couldn’t keep its business model under wraps for too long, however. Once the basic ingredients of an operational model have been figured out, they can be applied by any number of fast-food enterprises. And that is exactly what happened in the mid-2000s, when local upstarts  like Lihua and Zhen Gongfu that made quick Chinese meals, as well as foreign entrants like the Taiwanese fried chicken brand Dicos and the Japanese noodle chain Ajisen, began to develop their own supply chains and efficient operating systems in China. Slowly but surely, KFC’s first-mover advantage faded as domestic firms figured out the secret sauce of their operations system and restaurant experience. Competitive threats began to multiply.

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.

The American brand had lost some of its luster, which meant that KFC had to further localize to adapt to these new dynamics. Localization wasn’t new to KFC, given that it already relied on a predominantly domestic supply chain and hired local labor. But localization is more than simply understanding Chinese consumer preference for dark thigh-meat over white breast-meat , for example. In this new environment, deeper changes were needed. Sam Su, a KFC China executive from 1989-2015, described the strategy  as KFC “would not be seen as a foreign presence but as part of the local community…Our opportunity was to take the best ideas from the US fast-food model and adapt them to serve the needs of the Chinese consumer.”

As part of that strategy, KFC went through several iterations of its slogan to establish a different identity. For instance, in 2004, the brand said it was “based in China, integrated into life,” and in 2008, it said it would “make new fast-food, change for China.” 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. The company also experimented with “micro” localization to account for specific regional palates and taste preferences. For example, KFC spicy chicken is a touch spicier in chili-loving provinces like Sichuan and Hunan. Chinese KFCs were also early adopters of now-ubiquitous offerings like home-delivery and 24-hour service.

Another benefit of KFC’s localization strategy was the ability to mitigate political risk. Western brands are susceptible to boycott and slander during surges of economic nationalism, which tends to be inflamed by uncontrollable events. When the Chinese embassy in Belgrade was bombed by the United States in 1999, anti-American protests spread across China, and mobs trashed two KFCs in the city of Changsha. An executive at the time said local managers at KFC’s other outlets defused further retaliation  by arguing that they were basically a Chinese company, using local suppliers and labor. Again in 2016, following the ruling by the International Court of Arbitration against China’s territorial claims in the South China Sea, groups of “patriotic” Chinese unfurled banners  outside a dozen KFC outlets urging a boycott. But both state and commercial media tamped down these protests and urged nationalists to redirect their anger. In both cases, KFC’s sales picked up after only a blip.

Localization also helped KFC overcome more serious business-related issues. In 2005, KFC’s China operations suffered two unprecedented negative events—the discovery of a carcinogenic dye  in two of its chicken products and a dip in poultry consumption resulting from an avian flu outbreak. Yet KFC still managed to increase its profit while opening hundreds of new stores in China that year, a positive outcome that its parent Yum Brands  attributed to  not only KFC’s operational and supply chain expertise in China, but also to its China-specific advertising spend.

Challenges of a Maturing Market in the 2010s

Localization has certainly helped KFC fare better in China than it otherwise would have. But KFC China has lately experienced a difficult few years  of uneven growth due to intensifying competition, rising labor costs, and growing health-consciousness among Chinese consumers. Figure 2 above shows how KFC gradually lost market share over the late-2000s and 2010s. The increasingly mature Chinese fast-food market meant that, compared to 2005, KFC experienced more fallout and took longer to recover from major food safety scares regarding  chicken-growth hormones  in late 2012, another avian flu outbreak in mid-2013, and suppliers that delivered expired meat  in late 2014.

As a result, same-store sales for Yum Brands’ China Division (of which KFC represented around 75% of the operating profit) declined 13% in 2013 , 5% in 2014 , and 4% in 2015 . Yum attributed this dip to short-term consumer concerns, and demonstrated its long-term commitment to the China market by continuing to open hundreds of new stores each year.

KFC China’s fortunes began to turn around in 2016, when Yum China spun off  from Yum Brands to focus entirely  on the continued expansion of KFC and other restaurant concepts in the China market. 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 focused approach to China reaped dividends. KFC China’s same-store sales stopped declining and instead grew 3% in 2016  and 5% in 2017 . In 2017, Yum China recorded revenue growth from $4.7 billion to $5 billion on the back of 408 new store openings (with a 9% increase in system sales). Last year, KFC also decided to go more upscale and opened KPRO in Hangzhou, a restaurant that offers healthy premium food aimed at affluent young professionals and hipsters rather than families with children.

But gone are the halcyon days when KFC sat atop the Chinese fast-food chain. Figure 3 below compares the last three years of KFC China revenues. It’s clear that KFC’s revenue as a proportion of total industry revenue has declined but looks to be stabilizing. So, while KFC will likely continue to record absolute year-on-year growth, a mature market and new entrants mean that it is unlikely to experience much improvement in its market share.

Seen in the context of 40 years of reform and opening—during which KFC transformed from an expensive novelty to a market trailblazer to a localization pioneer to a first-among-many-equals in an intensely competitive industry—the latest spin-off of Yum China seems to simply signify the increasing, and perhaps inevitable, convergence of Chinese and American business.

KFC’s success in China must also be couched in the successful policies associated with reform and opening. China’s fast-food market would not be as developed without opening to KFC, and KFC’s business would not be as profitable without entering China. Trailblazers like KFC imported to China best practices on how to manage a restaurant chain, build a nationwide supply chain, and maintain high levels of customer service and dining experience. KFC also showed other American restaurants—like McDonald’s—that China’s market was possible to crack.

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Secrets to KFC's Dominant Success in China

By Sean Silverthorne

Updated on: June 20, 2011 / 5:41 PM EDT / MoneyWatch

It turns out the answer is not so clear cut. Cars, for example, can be competitive global products with minor tinkering such as switching the steering wheel from one side to the other. Hospitality is another industry where a consistent focus on customer satisfaction pays off everywhere from Kansas City to Kuala Lumpur.

But an alternative approach to global strategy is to customize offerings for local audiences, just as fried chicken powerhouse KFC, owned by Yum! Brands , has done in China, where it opens a store a day. KFC, which served its first meal there in 1987, has been successful by ignoring traditional fast-food wisdom, where a cookie cutter approach is used for everything from the makeup of the menu to the architecture of the buildings.

Here are three things KFC did differently, as chronicled in a recent case study at Harvard Business School.

• Focus on China . Where many fast food franchises in Asia try to duplicate a Western experience, KFC decided to promote itself as a local organization rather than as an outside presence. So instead of importing Western managers, KFC hires college students who understand the Chinese consumer but also have experience in the American way of doing business. All food is locally sourced.
• Adapt the product to local tastes . Other than dark-meat chicken sandwiches and some "original recipe" options, American diners will find very little that is familiar on the menu, which includes such local delicacies as egg tarts, shrimp burgers and congee (rice porridge). Competitors including McDonald's and Popeyes Chicken & Biscuits offer much more Western-style menus.
• Reactive to local concerns . As alarm mounts in China about what Western diets are doing to the health of the local population, KFC has reacted with a healthier menu and by sponsoring exercise and youth events.

Related Reading

• Globalization: Are We There Yet? Do You Have a Real Strategy Yet?
• Flat World -- or Globaloney?
• Will Globalization be a Victim of Imploding Economies?

Sean Silverthorne is the editor of HBS Working Knowledge, which provides a first look at the research and ideas of Harvard Business School faculty. Working Knowledge, which won a Webby award in 2007, currently records 4 million unique visitors a year. He has been with HBS since 2001.

Silverthorne has 28 years experience in print and online journalism. Before arriving at HBS, he was a senior editor at CNET and executive editor of ZDNET News. While at At Ziff-Davis, Silverthorne also worked on the daily technology TV show The Site, and was a senior editor at PC Week Inside, which chronicled the business of the technology industry. He has held several reporting and editing roles on a variety of newspapers, and was Investor Business Daily's first journalist based in Silicon Valley.

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KFC China: Building Competitive Advantages through Digitization

By: Chen Lin, Chi Zhang

Since entering China in 1987 with its first restaurant in Beijing, KFC has been a great success and has become the largest quick-service restaurant (QSR) in the country. In 2015, Joey Wat was named…

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• Publication Date: Jun 30, 2020
• Discipline: Marketing
• Product #: CB0031-PDF-ENG

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Since entering China in 1987 with its first restaurant in Beijing, KFC has been a great success and has become the largest quick-service restaurant (QSR) in the country. In 2015, Joey Wat was named Chief Executive Officer of KFC China. In the following year, Yum China (NYSE: YUMC) spun off from Yum! Brands and became an independent, publicly traded company. To expand KFC China's business one step further, Joey Wat had to navigate through a rapidly changing and increasingly competitive landscape. With China's rising economy and personal income levels, many more fast-food chains and snack choices entered the market and competition intensified. Moreover, over the years consumers were increasingly attracted to not only healthy diets, but also an enjoyable consumption experience. As Gen Z customers become the largest consumer base, they have shifted their focus more to value, personalized experience, and a sense of engagement in their food purchases, beyond just affordability and speed. For KFC, other issues were added to the challenge too: a high employee turnover rate and rising rent and labor costs. With highly standardized products and a stable ticket average, how should KFC move forward amid the new and challenging dynamics to achieve a breakthrough? KFC China had started its digital ecosystem early and built up powerful digital capabilities. Under Joey Wat's leadership, KFC China made various attempts to drive productivity, reduce costs, and constantly improve the customer experience. How did digitalization help with these accomplishments? How did KFC China carry out the digitalization? Would digitalization continue to benefit the business in the future?

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This case will help students:

Understand the QSR New Retail model and the challenges and opportunities brought by digital technologies to the service industry, especially the QSR industry;

Identify ideas of digital transformation based on the customer journey design, and understand the value digitalization creates for customers and businesses;

Understand the impact of digital technology on store operations and service quality;

Learn a framework for service innovation;

Identify key factors in digital transformation.

Jun 30, 2020

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Connecting the virtual and real worlds for China’s Gen Z

KFC Re:Store

Overview & key takeaways

We were asked by KFC, China’s biggest restaurant brand, to help turn around declining store traffic and business performance. The goal was to focus on positioning the brand favorably with young Chinese consumers through a virtual experience. 

Services Experience & Commerce

Industry Retail & Consumer Goods

Market China

Visitors in five weeks

Interactions in five weeks

Burgers sold in one week

The challenge

KFC is the largest, most successful restaurant brand in China, with over 9,000 restaurants in 1,800 cities. Like every fast-food business, the brand relies on casual footfall. Young consumers hanging out with friends are key audiences who must be constantly recruited.

But by 2022 store traffic was suffering and business performance had declined by 16%. Innovation had helped the brand win with young Chinese consumers. But technologies (and generations) never stand still.

Gen Z has evolved: hanging out with friends is increasingly a virtual experience. 50% agree “I spend more time hanging out with friends in gaming environments than in the real world.”

Many spend more time styling their avatars than themselves. How could KFC thrive in a world where a key consumption occasion was disappearing?

The approach

We created a virtual store experience hosted on China’s most popular platform for young people, QQ.

Made with Unreal Engine 4, the KFC Re:Store combines traditional Chinese craft, cutting edge technology, and deep platform understanding.

BRING THE SWAG

We designed avatar costumes and merchandise, tailormade furniture, a virtual pet named Fengwan, and even our own currency, Chicken Coins — a first for the platform. Users can run virtual businesses and earn Chicken Coins to pay for virtual furniture and other assets.

MAKE IT SOCIAL

Users can dance, play, and hang out with friends and a virtual Colonel Sanders (the first non-player character on the platform). Within five weeks, 850M chats with Colonel Sanders took place.

KEEP IT SEAMLESS

180M virtual KFC food items have sold in five weeks, but what matters most is turning the virtual store into a real-world revenue driver. In a world first for the platform, users can order in the metaverse and have their order delivered in the real world.

The outcome

The revolutionary borderless-commerce approach enjoyed a successful beta. Within just five weeks, KFC Re:Store saw 19M visitors making 4.3B interactions. Within one week, 4M burgers were sold. KFC Re:Store officially launched on the QQ platform in July. Triumphantly, we picked up a Bronze Lion, Asia’s only Lion, in Cannes Creative Commerce.

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Globalisation and its Challenges in China: case studies of KFC

CHEN, Wei (2013). Globalisation and its Challenges in China: case studies of KFC. In: CHEM Conference , 2013. CHEM Conference. (Unpublished)

The purpose of this research is to explore the importance of product localisation of western fast food in China market. China is an emerging market providing huge potential for MNEs’ global expansion. However, because of social and cultural differences, it is an immense challenge for western companies to choose right marketing strategy when they move into China market. Culture has a significant influence on Chinese customers’ behaviour and loyalty. This study uses KFC as a case study to investigate fast food products localisation and adaptation in international market. The reason of using KFC is because it was the first western fast food company moved into China and now the market leader in China. The primary sources of data were collected via questionnaires and group interviews. The finding reveals that the product localisation plays a crucial role in KFC’s success and secures its competitive position in the sector. This research provides valuable suggestions for western fast food companies when they develop their international strategies.

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Postgraduate Dissertation

Marketing strategy exploring a case study of the kfc china.

Chinese fast food industry is growing at a very alarming rate which has further increased its competitiveness and subsequent attractiveness to foreign companies like KFC who finally decided to venture into this market. Given the success and failure stories KFC China has had in the Chinese market the research has sought out to analyse the market strategies it has been implementing since its entry in 1987. This study has found out that with the increasing change in consumer preferences over time, especially amongst the older generation, KFC has to become more innovative to ensure that they deliver to them the healthier alternatives they prefer. The research has also further discovered that KFC considered using of joint venture market entry mode as the ideal model of venturing the Chinese market, as it minimised the risk factor. However, after being comfortable with the Chinese fast food market dynamics, it changed to licensing and franchising. More so, the research also highlights that in order to ensure its sustainability in China, KFC targets all consumers segments, both young and old alike. It has delivered on this by offering a variety of high quality cuisines to fit each group. On the other hand, the study also depicts that when setting prices for their foods, the company also pays close attention to prices of rival products, the firm’s economies of scale, target market and its respective social classes. Finally, the company also engages in several promotional strategies including in-store-sales promotion especially during breakfast, home delivery, provision of free coupons, advertising of the KFC products, carrying an elaborative KFC public relations campaign and holding of events and experiences.

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Global (English)

Dentsu group ( english | 日本語 ), dentsu creative china: kfc re:store.

visitors on QQ, China's most popular platform

interactions on the platform

burgers sold in one week

KFC is the largest and most successful restaurant brand in China. Launched in 1987, the brand has grown to encompass over 9,000 stores in 1,600 cities.

A steady stream of innovation has kept the brand relevant and engaging, while building direct relationships with hundreds of millions of young Chinese customers in three key ways; Transforming In-Store | Transforming Commerce | Transforming Delivery

Like every fast food business, KFC relies on casual footfall. Young consumers hanging out with friends are key audiences who must be constantly recruited.

But by 2022, store traffic was suffering and business performance had declined by 16%. Innovation had helped the brand win with young Chinese consumers. But technologies (and generations) never stand still.

Gen Z have evolved: hanging out with friends is increasingly a virtual experience. 50% agree "I spend more time hanging out with friends in gaming environments than in the real world.".

Many spend more time styling their avatars than themselves. How could KFC thrive in a world where a key consumption occasion was disappearing?

DENTSU CREATIVE China created a virtual store experience hosted on China's most popular platform for young people, QQ.

Using Unreal Engine 4, the KFC Re:Store combines traditional Chinese craft, cutting edge technology and deep platform understanding.

They designed avatar costumes and merchandise, tailormade furniture, a virtual pet named Fengwan and even its own currency, Chicken Coins - a first for the platform. Users can run virtual businesses and earn Chicken Coin to pay for virtual furniture and other assets.

Users can dance, play, and hang out with friends and a virtual Colonel Sanders (the first non-player character on the platform). Within five weeks, 850M chats with Colonel Sanders took place. 

180M virtual KFC food items have sold in five weeks, but what matters most is turning the virtual store into a real world revenue driver. In a world first for the platform, users can order in the metaverse and have their order delivered in the real world.

This revolutionary borderless commerce approach is in Beta today and will launch to all in July, establishing a new commercial model for brands in the QQ platform.

Dentsu Creative

Dentsu Creative is Dentsu's sole global creative network that transforms brands and businesses through the power of Modern Creativity. 2022's Cannes Lions Agency of the Year, it is made for integration with Dentsu's Media and Merkle networks through Horizontal Creativity. 9,000 creatives across the globe are connected to dentsu’s Media and CX experts to deliver ideas that Create Culture, Shape Society, and Invent the Future.

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Comprehensive evaluation of newly cultivated land sustainable utilization at project scale: A case study in Guangdong, China

• Research Articles
• Published: 17 April 2024
• Volume 34 , pages 745–762, ( 2024 )

Cite this article

• Chang Guo 1 , 2 ,
• Xiaobin Jin 1 , 2 , 3 ,
• Xuhong Yang 1 , 2 , 3 ,
• Weiyi Xu 1 , 2 ,
• Rui Sun 1 , 2 &
• Yinkang Zhou 1 , 2 , 3  

Cultivated land plays a pivotal role in ensuring national food security, particularly in populous nations like China, where substantial investments are made to develop cultivated land as a counterbalance to construction-occupied areas. Consequently, long-term, effective monitoring of the utilization of newly cultivated land becomes imperative. This study introduces a comprehensive monitoring framework, designed for refined scales, that leverages remote sensing data. The framework focuses on the sustainable utilization of newly cultivated land, emphasizing utilization sustainability, productivity stability, and landscape integration. Its effectiveness was validated through a case study in Guangdong province, China. The results revealed satisfactory utilization sustainability and improved productivity stability of newly cultivated land in Guangdong, though landscape integration showed sub-optimal results. Furthermore, the comprehensive evaluation categorized the newly cultivated land into three levels and eight types. The study recommends enhancing the site selection process for newly cultivated land and improving the long-term monitoring, as well as incentive and constraint mechanisms, for their utilization. This study can provide a scientific reference to bolster the implementation of cultivated land protection policies, thereby contributing significantly to high-quality economic and social development.

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School of Geography and Ocean Science, Nanjing University, Nanjing, 210023, China

Chang Guo, Xiaobin Jin, Xuhong Yang, Weiyi Xu, Rui Sun & Yinkang Zhou

Key Laboratory of Coastal Zone Exploitation and Protection, Ministry of Land and Resources, Nanjing, 210023, China

Jiangsu Land Development and Consolidation Technology Engineering Center, Nanjing, 210023, China

Xiaobin Jin, Xuhong Yang & Yinkang Zhou

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Foundation: National Natural Science Foundation of China, No.42271259

Author: Guo Chang, specialized in sustainable land use.

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Guo, C., Jin, X., Yang, X. et al. Comprehensive evaluation of newly cultivated land sustainable utilization at project scale: A case study in Guangdong, China. J. Geogr. Sci. 34 , 745–762 (2024). https://doi.org/10.1007/s11442-024-2225-z

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Received : 19 July 2023

Accepted : 04 January 2024

Published : 17 April 2024

Issue Date : April 2024

DOI : https://doi.org/10.1007/s11442-024-2225-z

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ORIGINAL RESEARCH article

This article is part of the research topic.

Broadband Seafloor Sediment Acoustic Property and Multi-Parameter Geoacoustic Model

Correlation between acoustic velocity and physical parameters of sea floor sediments: A case study of the northern South China Sea Provisionally Accepted

• 1 Key Lab of Submarine Geosciences and Prospecting Techniques, College of Marine Geo Sciences, Ocean University of China, China
• 2 Laboratory for Marine Mineral Resources, Qingdao National Laboratory for Marine Science and Technology, China
• 3 National Engineering Research Center of Offshore Oil and Gas Exploration, China
• 4 Key Laboratory of Marine Geology and Metallogeny, First Institute of Oceanography, Ministry of Natural Resources, China

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As the interface between seawater and the seabed, superficial sediments on the seabed are an important part of the marine acoustic field environment and are indispensable for marine resource investigations. Studying sediments several meters to hundreds of meters below the seafloor is highly valuable and important. This study processes and analyses the water depth, topography and bottom data and obtains the shallow bottom profile and topographic map of the northern continental slope of the South China Sea (SCS). The study analyzes the influence of physical parameter (including density, porosity, and grain size) on the acoustic velocity in sediments. Single-parameter and dualparameter models are established to further examine this influence. The results show that porosity and density have greater influences on the acoustic velocity of sediments than does grain size. Finally, the acoustic properties of several typical stations with water depths are tested to analyze the variations in the acoustic properties of the shallow sediments in the northern SCS. The results show that the influence of each parameter on the prediction of the acoustic velocity of the sediment is in the following order: porosity>density>grain size. This study analyses and reveals the reason why the seafloor sediments in the local area cause the acoustic properties to change greatly. It may be caused by changes in the sediment type, lithology along with the depth. And the other reason is the development of interlayer in the land slope of the northern SCS.

Keywords: The northern South China Sea, Physical parameter, acoustic velocity, density, Porosity, Grain size

Received: 15 Dec 2023; Accepted: 12 Apr 2024.

Copyright: © 2024 Zhang, Xing, Zhou, Han, Li and Liu. This is an open-access article distributed under the terms of the Creative Commons Attribution License (CC BY) . The use, distribution or reproduction in other forums is permitted, provided the original author(s) or licensor are credited and that the original publication in this journal is cited, in accordance with accepted academic practice. No use, distribution or reproduction is permitted which does not comply with these terms.

* Correspondence: Prof. Lei Xing, Key Lab of Submarine Geosciences and Prospecting Techniques, College of Marine Geo Sciences, Ocean University of China, Qingdao, 266100, Shandong Province, China

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