MKT2401 ASIAN MARKETS AND MARKETING MANAGEMENT

Group Project KFC versus McDonald s in China

Prepared for: DR XIAO PING Prepared By: Class A1 Group 7 TOH KIAN HONG (U081494H) GOH WEI-EN DAVID (U081472R) MUHAMMAD HASAN BIN ABDUL KADER (U075519X) DEVONN TEO YONG PING (U077760J) JOLIE WAI CHUNG LAI (A0075904B)

Table of Contents
1 2 2.1 3 INTRODUCTION INDUSTRY ANALYSIS OVERVIEW MARKET SEGMENTATION 2 2 2 2 3 3 3 4 4 4 4 4 4 5 6 7 7 7 7 8 8 8 8 9 9 10 10 11 11 11 11 11 11 11 12 12 12 13

3.1 TARGET SEGMENTS 3.1.1 KFC 3.1.2 MCDONALD S 4 PRODUCT

4.1 F OOD OFFERS 4.1.1 MAIN MEALS 4.1.2 SIDE DISHES & BEVERAGES 4.2 ORDERING METHODS 4.3 WEB EXPERIENCE 5 6 7 PRICE PLACE PROMOTION:

7.1 SALES PROMOTION: 7.1.1 KFC 7.1.2 MCDONALD S 7.2 ADVERTISING 7.2.1 KFC 7.2.2 MCDONALD S 8 9 SWOT ANALYSIS SUGGESTIONS AND RECOMMENDATIONS

9.1 KFC 9.2 MCDONALD S 10 11 CONCLUSION APPENDIX

11.1 PORTER S F IVE FORCES ANALYSIS 11.1.1 BARGAINING POWER OF SUPPLIERS 11.1.2 BARGAINING POWER OF BUYERS 11.1.3 THREAT OF SUBSTITUTES 11.1.4 BARRIERS TO ENTRY 11.1.5 COMPETITIVE RIVALRY 11.2 NON-MARKETING ISSUES 11.2.1 OPERATIONS 11.2.2 SUPPLY CHAIN 12 BIBLIOGRAPHY

1 Introduction
Kentucky Fried Chicken (KFC), being one of the world's largest fast-food chains, owns and franchises more than 16,200 outlets in about 100 countries. Including more than 5,100 locations in the United States, and more than 3,000 in China1. McDonald, on the other hand, is the world's number one fast-food company by sales, with more than 32,400 restaurants serving burgers and fries in more than 100 countries, including nearly 14,000 Golden Arches locations in the US, and more than 1100 locations in China 2.

With only about half the restaurants in China, McDonalds is far less successful than KFC even though it has always been the market leader in US, where KFC had trailed behind.

2 Industry analysis
2.1 Overview
Chinas restaurant industry closed 2005 with total revenue reaching USD100 billion. 2005 represented yet another year of double-digit growth for the industry. In 2009, outlet numbers in the fast food industry grew by 5%, and the fast food sector is expected to grow at a Compound Annual Growth Rate of 10% in terms of sales value.

In 2009, Yum! Restaurants (KFCs parent group) China and McDonalds China continue to be the two leading companies in the market, although they have been increasingly challenged by local brands. A detailed analysis using Porters Five Forces is found in the Appendix.

3 Market Segmentation
China has a large population and while it still consists of a large group of rural population, the urban population is the one that represents the bulk of their gross domestic product. KFC and McDonalds have established themselves well in the Tier 1 cities and are now looking for furthur expansion into the smaller Tier 2 cities 3, which offers increasing consumer markets and are located close to the coastal provinces in Eastern part of China. In these urban cities, the average per capita food expenditure in the year 2004 is about 2,700 and it has been growing consistently for the past decade.

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http://www.kfc.com.cn/kfccda/News/news_content.aspx?id=49 http://online.wsj.com/article/SB10001424052702303601504575153702832556686.html 3 http://www.jljgroup.com/index.php?id=111&lang=en

3.1 Target Segments

3.1.1 KFC KFC adopted a selective segment selection strategy. KFCs main target segment is youths in large Chinese urban centers. Children are the deciding factor in a family visit to a fast food restaurant. As children forms the bulk of its regular customers, adults often visit simply because their child likes it. In addition, with the successful enforcement of One-Child-policy, Chinese parents are now willing to spend more money on their little emperors for fast food meals. To continue attracting this target segment, KFC adopted a mascot Chicky4 specifically developed for the children in Chinese market. It adopts a motto of study hard, play hard to encourage the children. Children hostess are also employed to entertain the kids and KFC always incorporates toys with their Kid Combo.

For the older youths, various campaigns were held to involve them through participation in sponsoring sporting events, essay competitions and other contests. It has also developed partnership with schoolteachers and parents, successfully influencing youths opinions. 3.1.2 McDonald s McDonalds adopted a comprehensive segment selection strategy to pursue and dominate the market. It has multiple target segments, and there was no clear emphasis on a single segment.

Similar to KFC, McDonalds targets the children as their main customers and they form the bulk of their customer base. McDonalds also included free toys into their Happy Meals, and constantly introduce new collectibles aiming to attract younger customers. Free mini ice cream cones were given out to any children that visit McDonalds.

McDonalds on the other hand recognizes a growing concern on the healthiness of food. McDonalds introduces healthier choices as a major competitive advantage over KFC since most of its products are fried. McDonalds have strived for a menu that is more nutrition based and health focused, such as using less oily foods and more vegetables.

Another target segment includes the young working customers that are constantly on the move. McDonalds aims to provide great taste and quick service without affecting their busy work schedule. Teenagers also like to visit McDonalds as an affordable hangout with friends.

4http://www.morris.umn.edu/academic/anthropology/chollett/anth%203204/Class%20Presentations.0

9/KFC%20in%20Beijing.ppt

4 Product
4.1 Food offers
In terms of the variety of food choices on the menu, KFC offers much more options compared to McDonald's in China. They also have a greater number of foods that are tailored for the China market. In addition, KFCs primary products are made from chicken and it is more popular than beef (McDonalds primary product) among Chinese consumers. 4.1.1 Main meals In terms of burgers, KFC mostly sell chicken burgers whereas McDonald's mostly sell beef burgers. Both have introduced healthier food choices to their menu, such as non-fried chicken patties. In terms of localization, KFC has introduced local dishes such as chicken wrap with Beijing duck sauce, century egg porridge with lean meat, and also Ma Po chicken with rice, on the other hand McDonald's China has none in the current period. 4.1.2 Side dishes & beverages Both KFC and McDonald's sell healthy variants such as cup corn and fruit juices. KFC won McDonald's in terms of the number of localized food offers. Some locally adapted food examples by KFC include egg and vegetable soup, grass jelly milk tea, fried dough sticks and soya bean milk.

4.2 Ordering methods

KFC allows customers to order online or through the phone, allowing customers to pay on delivery or through bank accounts with its various partnering banks in China. KFCs delivery service is only valid from 10am to 10pm daily and orders above 35 will have their delivery charges waived. McDonald's only allows phone ordering and payment is to be made on delivery. McDonald's delivery service operates on a 24-hour basis and delivery charges apply regardless of order amount. KFCs ordering site has a feature, which allows users to change the menu names to English in addition to displaying all products in both English and Chinese descriptions. McDonald's displays all its food products in only Chinese language. Additionally, McDonald's offers drive-thru service for drivers to buy, pay and collect without leaving their vehicles, a channel which KFC doesnt currently utilize.

4.3 Web experience

KFC partnered with sina.com to create a website for users to post online what they think is an event that exemplifies the beauty of life and the website also allow for other users to vote and decide which event they will like most to see being brought in reality. It also utilizes social media through partnerships with renren.com, an online networking platform similar to Facebook but targeted at China users to engage the young crowd. It has promoted a healthier image through sponsorship of a national youth basketball event. To connect with the younger 4

crowd, there is also a music portal on their website that allows users to vote on which songs they would like to hear in KFC restaurants in China. KFC also has other free items for download on the web such as screensavers and wallpapers.

McDonald's provides an online subscription to its newsletter, which also disseminates out the latest discount coupons. On its website, it tries to engage users by providing a link to download their commercials, creative video submissions and also MTVs created by their celebrity endorsements such as Wang Lee Hom.

5 Price
Margins are often low in the fast food industry; hence both KFC and McDonalds operate through sheer volume to meet profitability. Customers are also generally price sensitive, thus as a result, pricing strategy becomes a crucial factor in determining their sales.

As KFC and McDonalds core products are different, the food that they sell varies in variety. Hence, a fluctuation in price might not necessarily affect or cause a switch in consumer preference. Both companies have similar pricing strategies and both tries to mimic each others price movements.

A demand-based approach was used to determine the pricing. Bundled price such as the Extra Value Meals by McDonalds was introduced to reduce cost and create a price discrimination to encourage more sales.

In 2008, mounting commodity costs have caused both KFC and McDonalds to raise their food prices, offsetting the rising costs of ingredients. McDonald's quietly published new price quotes at its outlets for almost all of its products. KFC has also increase the pricing, as it is unable to absorb the costs on a long-term basis.5

During the economic crisis in 2009, both KFC and McDonalds have fared well as they did not face any dropping sales. Although the average Chinese are spending less, both restaurant chains have managed to continue to appeal to its customers through the use of promotions and coupons as second-degree price discrimination. They understand that customers are seeking for the best value in the most convenient way. McDonald's has slashed its prices significantly to deal with the cutthroat competition in China. McDonalds have been using this chance to benefit from consumers switching over to lower-priced goods. It has driven down its prices
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http://www.chinadaily.com.cn/china/2008-08/21/content_6955919.htm

and is dedicated to providing quality food with great value. McDonalds has been a rare beneficiary of the downturn, where the company reported that sales had climb despite every other industry reported a sharp downturn.6

6 Place
KFC has a presence in every major Chinese market, including Beijing, Shanghai, Guangzhou, Liaoning, Jiangsu, Zhejiang, Sichuan, Fujian, and Guangdong. KFC generally selects locations near major ports of metropolitan centres as this allows them to create a strategic network of government and port authority contacts, material suppliers, and distribution resources before going to riskier locations. As such, they begin by selection sites found in coastal areas before moving inwards. The interior regions of China remain largely untapped.

KFC also selects location sites that are near poultry suppliers and have transport facilities to bring the supplies to the restaurant. This focus on clinching strategic deals and partnerships, such as with Animal Production and the Beijing Tourist Bureau allowed them to hedge political risks while securing an important supply of poultry. Their strategy involves the use of major joint ventures by partnering likewise with similar local firms. While they are now leaning towards minor joint ventures and franchises, it maintains majority joint ventures and wholly-owned subsidiaries at each key location.

McDonalds opened its first store in Beijing, at the southern end of Wangfujing Street near Tiananmen Square. This was a strategic move as Tiananmen Square is the centre of all public policies in China and hence its tactical location led to it becoming an important landmark in Beijing by the summer of 1994. Due to McDonalds strategic location choice, by locating it near a crucial political centre, it soon appeared frequently on national television programmes, and this provided free publicity.

McDonalds employs a hedging strategy, one of localisation and expansion. They establish special relations with local schools and neighbourhood committees. McDonalds presents them with gifts and scholarships. This allows McDonalds to further enhance its local presence. At its outlet near Tiananmen Square, they hoist the Chinese national flag every morning in front of the restaurant. They even organised a special flag-raising ceremony on September 26, 1994, in anticipation of the Chinese National Day (October 1). This ceremony was then turned into an important news story as the Liberation Army soldiers guarding the

http://www.nytimes.com/2009/02/06/business/worldbusiness/06mcdonalds.html?_r=1

national flag at Tiananmen Square were invited to participate in this. As such, we see how the localisation strategy is cleverly coupled with actions that generate free media publicity.

As such we can see the differences in the initial criteria and thought processes that go into deciding where KFC or McDonalds open their outlets. KFC places more emphasis on operational efficiency while McDonalds focuses on high visibility.

7 Promotion
In order for a business to succeed, it is necessary for it to alternate its promotional strategies according to the demographics before entering a country. KFC and McDonalds both implemented their promotional strategies accordingly in their own way using advertising and sales promotion. McDonalds mascot, Ronald McDonald, was even once paired up with a female mascot named Aunt McDonald in Beijing.

7.1 Sales promotion

7.1.1 KFC One of the reasons KFC is more popular in China than McDonalds is because KFC has better coupons than McDonald's.7 Even though McDonalds has printable coupons from their website, the discounted-based promotions that KFC offer are more intensive. The coupons are apparently so good that Chinese KFC's are occasionally mobbed by coupon-holders8. By constantly offering coupons, KFC sends out a friendlier and caring impression, as if KFC is trying to help its customers get through tough times especially in this economy, and it is easier for customers to feel the connection between themselves and KFC.

KFC has a special offer for students where they can apply for a student card issued by KFC, and enjoy exclusive discounts9. 7.1.2 McDonald s McDonalds does not offer as much coupons as KFC. McDonalds only offers coupons when they come out with new products10. From February to March 2010, in response to KFCs fierce sales promotions tactics, McDonalds accepted fried chicken wing coupons issued by its competitors like KFC and Burger King. When chicken wing coupons are presented at McDonalds, customers not only get to enjoy a lower price for chicken wings, but they also get an additional 10% discount.11

http://www.kfcyouhui.com/ http://www.gadling.com/2010/06/05/why-does-china-love-kfc-more-than-mcdonalds/ 9 http://www.kfcyouhui.com/event_show.aspx?id=300 10 http://www.mcdonalds.com.cn/mclub/coupon_print2.aspx 11 http://www.chinadaily.com.cn/business/2010-02/26/content_9509294.htm

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7.2 Advertising
7.2.1 KFC KFC mainly uses localized advertisements, whereas McDonalds often use international advertisements. Customer values of a specific culture often play an important role when the marketers try to make decisions on entering a foreign market12. Values such as care for elders, support, respect and love between family members, are weighted heavily in the Chinese culture, thus KFC has been including these values in their TV advertisements. For example, one of KFCs television commercial tells a story about an employee of a KFC restaurant who was taken care of by her grandmother when she was young. After she grows up, she carefully helps another grandmother, to persuade her granddaughter who was choosy about food to have more vegetables in order to keep healthy13. 7.2.2 McDonald s McDonalds promotional strategy is to brand globally, advertise locally14, aiming to cater to different culture and demographics. McDonalds advertising in China is extremely different from its advertising in the U.S. or other countries. According to McDonalds, television commercials in China are only shown between shows, and that people tend to change channels after watching one show. Showing advertisements on television was seen as meaningless, and thus the first advertisement from McDonalds only came in Fall of 1994. Instead, McDonalds relied heavily on print ads that were featured in newspapers and magazines.

8 SWOT Analysis
Strengths KFC Localization strategy in all aspects of KFCs operations. This has translated to a large variety of product offerings and adaptations. They have chicken & rice meals. The wide acceptance of poultry and rice in regular Chinese meals has propelled KFC to success. KFC also enjoyed a first mover advantage in the Chinese market. Weaknesses KFC KFCs weaknesses lie in their operations.
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McDonalds Strategic location choice of outlets (e.g. Tiananmen Square), which has led to positive publicity in the form of public relations, picked up by the national media. This has led to national publicity even in areas where McDonalds have yet to have a presence.

McDonalds Meals are viewed as snacks (xiaochi) as

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Doole, L., Lowe, R. (2008). International Marketing Strategy Zhang, A. T. (2005). The policy of KFC s cross-culture marketing. Market Modernization 14 Sandler, D.M. and Shani, D. (1991), Brand globally but advertise locally? An empirical investigation , International Marketing Review

There are no 24-hour delivery service and no drive-thru outlets in China. There are only 89 dine-in 24hour outlets. The lack of

opposed to full meals. The Chinese food system if based on a basic division of fan (grains & starches) and cai (vegetable

a 24-hour delivery reduced KFCs ability to and/or meat) and has to be prepared in an reach all consumers (accessibility) and hence may over time lose top-of-mind recall from existing customers. appropriate amount of both. McDonalds hamburger a patty of meat between layers of bread is not a properly prepared meal. Opportunities There is a general growing appetite for all things foreign, or Western (yang). This makes it easier for customers to accept and patronise any Western restaurants initially. China remains to be the largest market, with many cities, especially the inland and more rural areas, untapped. The untapped markets continue to provide large market potential. Threats Lower barriers of entry now exist for foreign companies to do business in China. This has led to an influx of other American, as well as Japanese, outlets. Not only are they entering the market, they are planning to do it quick and expand aggressively, such as the case of MOS Burger i. New local companies are also starting up fast food restaurants and concepts modelled after that of KFC and McDonalds. Even existing food outlets are introducing a fast food concept and takeaway options to appeal to this target segment.

9 Suggestions and Recommendations

9.1 KFC
The localization of their food menu has been one of the strongest competitive advantages for KFC over McDonalds. Therefore, KFC should continue to introduce new varieties of popular variation of Chinese dishes. Given that KFC is seen more as a local eating-place due to its localized food menu, inline with their positioning, they can further introduce ingredients from Chinese herbology, which helps to project a healthier image. For example, they can introduce black sesame seeds to their burger bread or include red dates to their hot tea.

Due to the increasing income of Chinese customers in Tier 1 cities, more of them are able to purchase their own vehicles therefore a drive-through may also be popular given the compatibility of KFCs operations in providing fast service and food preparation of its products. As people may be unwilling to travel late at night, a 24hour delivery service should be implemented in its Tier 1 cities, as there is a vibrant night crowd that would utilize this feature. 9

Based on the Five Forces analysis (Appendix), the threat of substitutes is high as there is relatively low switching cost amongst its target segment. To mitigate this issue, KFC should consider introducing loyalty programs to retain its customers. For example, KFC can introduce a loyalty card program which awards its customers a stamp for every 50 spent and for every 10 stamps collected, consumers can redeem for a free meal worth 50. This helps to induce repeat purchases and also would be attractive to more price sensitive consumers, as KFC food is not regarded as a cheap food in China. KFC should also increase their range of healthy food choices as the Chinese market is becoming more health-conscious.15

9.2 McDonald s
From the book Golden Arches East, McDonalds in East Asia by James L. Watson, The Chinese food system is based on a basic division of fan (grains and other starches) and cai (vegetable and/or meat dishes). McDonalds burgers comprises of meat patties and bread are not considered a properly balanced meal to the Chinese market.

Using beef as a main ingredient in most of their product range puts it as a disadvantage compared to KFC, the further lack of localization of its menu has resulted in losing favor with the majority of the locals. As exemplified by KFCs success, McDonalds should introduce more localized dishes and staple ingredients such as rice.

To better engage their target segment that also comprises of the youth, they should consider advertising on specific social media platforms in China such as renren.com, which KFC is already utilizing.

10 Conclusion
Mcdonalds dominance in the fast food industry is found worldwide except in China, where KFC is very popular. KFC gained a first mover advantage in China, building on its successful entry into Southeast Asian markets. KFCs success was also due to its good management practices where they formed local partnerships, hired mostly locals and came up with localized menus. Even in terms of advertisements and promotional activities, KFC uses a more rational appeal based on customers values and perceptions. Mcdonalds will have to adjust its policies and come up with greater variety in its menu to suit to the local culture and taste preferences. Whereas, for KFC to continue to be a market leader in China, it needs to deal with the incoming threats of competition from smaller restaurants, as well as introduce healthier choices to cater to the health conscious society.

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http://www.just-food.com/analysis/food-makers-catering-to-local-tastes-in-china_id110151.aspx

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11 Appendix
11.1 Porter s Five Forces Analysis
11.1.1 Bargaining power of suppliers The bargaining power of suppliers in the Chinese fast food industry would be relatively low with the main ingredients of fast food products being easily available with the large number of suppliers in China, who compete fiercely, pushing prices of inputs down. Also chained outlets such as KFC and McDonalds with their numerous outlets hold significant bargaining power, simply due to their sheer size and purchasing ability, and this greatly puts suppliers in a weak bargaining position, especially so when switching costs for these companies are low. 11.1.2 Bargaining power of buyers The bargaining power of buyers in this industry would be low. While fast food consumers face low switching costs and are able to switch to other food substitutes easily, the large number of individual buyers ensures that bargaining leverage of buyers remains low. 11.1.3 Threat of Substitutes The threat of substitutes for fast food products remain high, with chained fast food accounting for only 13% of total sales in 2009 in the consumer foodservice industry. Full-service restaurants (both independent and chained) account for 73% of the consumer foodservice industry, and pose a threat to fast food outlets. 11.1.4 Barriers to Entry While barriers to entry is generally low in the fast food industry, substantial levels of investments must be made to ensure a system of systemisation, process standardisation and equipment automation to compete on the level of multinational companies such as KFC, McDonalds and Ajisen Holdings Ltd and this can be an added form of barriers to entry for new entrants. The rising cost of rent and labor in China is expected to rise in the coming years, and this might prove to be another barrier for entrants especially with the current low profit margins for this industry. Hence only operators having considerable economies of scale can keep other costs low to maintain its profit margin, and this would be another barrier for new entrants. 11.1.5 Competitive Rivalry The level of competitive rivalry in the Chinese fast food industry is very high. Most fast food companies have been aggressive in opening new outlets, with KFC opening 378 outlets in 2009 and McDonalds opening 135 new outlets. Local competitors such as Ajisen Holdings and KungFu Catering have also been rapidly expanding. Due to the fierce competition, price competition is one of the key characteristics of this industry, with major players choosing to 11

reduce their selling price by 10%-30% in 2009.

11.2 Non-Marketing Issues

11.2.1 Operations KFCs restaurant operation management is governed by a system called CHAMPS, which ensures that a consistently high standard of operations is met. Cleanliness: Consumer surveys have shown that one of the most important reasons for consumers frequenting KFC is in its interior environment and cleanliness (especially that of its toilet facilities) Hospitality: At KFC, patrons are warmly greeted by employees who are trained to do so. Prior to the mid 1990s this practice was unheard of. Accuracy: KFC team members are trained to ensure order accuracy by repeating an order after it has been placed by a customer. Maintenance: Regular equipment maintenance is the responsibility of each KFC restaurant, and a local repair team is on-call daily to ensure preventive measures are taken periodically. Product Quality: Among Chinese customers, product quality ranks top for repeat purchases. Evaluating supplier quality ensures KFC quality of food; crewmembers are trained to cook products in a standard process and unsold products are discarded. Speed: KFC trains its employees to satisfy an order within 60 seconds, and its expected to be done with a smile on a face consistent throughout the day. 11.2.2 Supply Chain KFC and McDonalds both faced the same set of market conditions at their respective entries into China, but both approached the problems differently.

McDonalds essentially outsourced their distribution and logistics function through a thirdparty strategic partner based in the US. McDonalds replicated its supply chain, bringing its key suppliers in other markets to China.

KFC on the other hand, built and controlled its own logistics and warehousing capabilities by teaming up with local joint venture partners, finding local suppliers from which to procure its key inputs. As chicken is consistent among countries, KFC has managed to benefit from such a low cost strategy.

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12 Bibliography
1. KFC China - http://www.kfc.com.cn/ 2. McDonalds China - http://www.mcdonalds.com.cn/ 3. http://www.kfc.com.cn/kfccda/News/news_content.aspx?id=49 4. http://online.wsj.com/article/SB10001424052702303601504575153702832556686.h tml 5. http://www.morris.umn.edu/academic/anthropology/chollett/anth%203204/Class %20Presentations.09/KFC%20in%20Beijing.ppt 6. http://www.jljgroup.com/index.php?id=111&lang=en 7. http://www.chinadaily.com.cn/china/2008-08/21/content_6955919.htm 8. http://www.mcdonalds.com.cn/mclub/coupon_print2.aspx 9. http://www.chinadaily.com.cn/business/2010-02/26/content_9509294.htm 10. http://www.nytimes.com/2009/02/06/business/worldbusiness/06mcdonalds.html?_ r=1 11. http://www.kfcyouhui.com/ 12. http://www.gadling.com/2010/06/05/why-does-china-love-kfc-more-thanmcdonalds/ 13. http://www.kfcyouhui.com/event_show.aspx?id=300 14. Doole, L., Lowe, R. (2008). International Marketing Strategy, Zhang, A. T. (2005). The policy of KFC s cross-culture marketing. Market Modernization 15. Sandler, D.M. and Shani, D. (1991), Brand globally but advertise locally? An empirical 14. Investigation, International Marketing Review 16. Fujimura, Naoko, and Shunichi Ozasa. "Mos May Open 200 China Outlets on Rice Burger Demand (Update1)." BusinessWeek - Business News, Stock Market & Financial Advice. 15 Mar. 2010. Web. 31 Oct. 2010. http://www.businessweek.com/news/2010-03-16. /mos-may-open-200-chinaoutlets-on-rice-burger-demand-update1-.html

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