KFC is struggling to keep its share of the China fast food restaurant market. Pic: AP.

By Josh Bateman

For many multinationals, China is becoming an increasingly important market.  KFC is one foreign company which recognized the potential early and has had tremendous success there.  It first entered China in 1987 and today has almost 4,600 locations and enjoys a 40% market share.

However, over the last year couple of years, challenges such as the Avian flu, high levels of antibiotics in chicken, and various hygiene issues have damaged the KFC brand in China.  Company results have reflected this and management is now making efforts to try and regain its prominence.

Warren Liu, author of the books KFC in China: Secret Recipe for Success and China Key Success Factors, was a member of KFC’s China executive committee from 1997-2000 when the number of KFC restaurants grew more than four fold there. Speaking to Asian Correspondent, he said the Chinese market is comprised of a mix of the individual consumer, the economics, and the political system. He stressed the importance of putting what he calls, “the three vertices – people, strategy, and strategy implementation” – into context.  He said, “if companies hire the right people who understand the context, they are in a better position to succeed.”

One of the reasons why KFC was so successful during Liu’s tenure was because corporate headquarters empowered local management to make decisions.  Liu said, “time, as well as timing become very important.  In a fast changing, developing market such as China, how quickly companies reach and implement context-fitting decisions is very critical… Over the long term, the value of these decisions is converted into business results and competitive advantage.”

He added that management’s decisions to localize many aspects of the business, including logistics, suppliers, and marketing was a competitive advantage when he was with KFC.  He said, “is corporate management supportive of doing something different from the global standard?  Global standard has been adopted by many multinational corporations throughout their global operations. But in China, during the first (1978-1993) and second (1993-2002) phase of China’s economic reform, global standard often was a misfit for the local context.”

In China, it is also critical for companies to understand generational differences; what worked historically, may not be effective going forward.  Talking about KFC’s decor, Jia Meng, 19, a freshman university student in Beijing, said, “red makes me nervous.”  During the winter and Chinese New Year he said KFC’s traditional red color is warming as it is a sign of prosperity and happiness. However, during other times of the year, it makes him feel uncomfortable.

Jason Zhang, 24, a client service representative for an advertising firm in Beijing, compared KFC with McDonald’s: “McDonald’s is very bright and clear and makes me happy.  KFC doesn’t have the clown, which is funny and makes me happy.  I like McDonald’s culture and atmosphere… KFC’s decoration is just so so.  It’s logo is an old man.  I think the store was built by my grandfather.  I think the restaurant might be out of fashion.”

KFC is attempting to address these challenges by updating its store layouts, employee uniforms, product packaging, and product offering.  It also plans on enhancing its digital marketing and smart phone ordering capabilities.

Companies also need to understand that China is much more than just one homogenous market; it is comprised of many smaller, diverse markets.  The tier 2, 3, 4 cities with populations in the 1-10 million range are significantly different from the larger tier 1 cities where populations exceed 10 million.  Furthermore, the urban and rural areas also require different strategies.

Liu said, “today, for people who know China well, China is made up of at least half a dozen regional markets, and dozens, if not hundreds, of sub-markets, with significant differences in their geography, climate, population density, natural resources, dietary habit, linguistic tradition, social custom, even recent (post 1978) history of economic development.”

He said product demand today in the more populous eastern cities such as Beijing, Shanghai, Shenzhen, Guangzhou, and Hangzhou is similar to many other global cities.  However, cities in the central and especially western parts of of the country, plus many of China’s rural communities, still require localized product lineups and distribution channels.

Zhang compared the apparel industry to KFC when talking about the different markets across China as one reason for why KFC has historically been successful.  He said, “many local brands in China, especially sports brands, can’t compete with famous brands like Nike and Adidas in places like Beijing, Shanghai, and Shenzhen.  But many local Chinese brands will have luxury stores in the counties.  In [smaller cities such as] Xian, Chengdu and other developing areas, maybe where there is no Nike, local [sports apparel] companies can foster and build loyalty.  And maybe KFC has a similar strategy.”  He reminisced about his childhood when he saw KFC restaurants in the rural areas where McDonald’s did not have a presence.

In order for companies to implement effective branding strategies, they need to appreciate that China is comprised of many different domestic markets. They also need to understand the unique qualities of these fast-changing markets and adapt accordingly.

Josh Bateman is a journalist based in Asia.