Kentucky Fried Chicken and the Global Fast-Food Industry1

Jeffrey A. Krug University of Illinois at Urbana-Champaign Kentucky Fried Chicken Corporation (KFC) was the world's largest chicken restaurant chain and third largest fast-food chain in 2000. KFC had a 55 percent share of the U.S. chicken restaurant market in terms of sales and operated more than 10,800 restaurants in 85 countries. KFC was one of the first fast-food chains to go international in the late 1950s and was one of the world's most recognizable brands. KFC's early international strategy was to grow its company and franchise restaurant base throughout the world. By early 2000, however, KFC had refocused its international strategy on several high growth markets, including Canada, Australia, the United Kingdom, China, Korea, Thailand, Puerto Rico, and Mexico. KFC planned to base much of its growth in these markets on company-owned restaurants, which gave KFC greater control over product quality, service, and restaurant cleanliness. In other international markets, KFC planned to grow primarily through franchises, which were operated by local business people who understood the local market better than KFC. Franchises enabled KFC to more rapidly expand into smaller countries that could only support a small number of restaurants. KFC planned to aggressively expand its company-owned restaurants into other major international markets in Europe and Latin America in the future. Latin America was an appealing area for investment because of the size of its markets, its Common language and culture, and its geographical proximity to the United States. Mexico was of particular interest because of the North American Free Trade Agreement (NAFTA), which went into effect in 1994 and created a free-trade zone between Canada, the United States, and Mexico. However, other fast-food chains such as McDonald's, Burger King, and Wendy's were rapidly expanding into other countries in Latin America such as Venezuela, Brazil, Argentina, and Chile. KFC's tasks in Latin America were to select the proper countries for future investment and to devise an appropriate strategy for penetrating the Latin American market. PepsiCo, Inc. Corporate Strategy PepsiCo, Inc. was formed in 1965 with the merger of the Pepsi-Cola Co. and Frito-Lay Inc. The merger created one of the largest consumer-products companies in the United States. Pepsi-Cola's traditional business was the sale of soft-drink concentrates to licensed independent and company-owned bottlers that manufactured, sold, and distributed Pepsi-Cola soft drinks. Pepsi-Cola's best-known trademarks were Pepsi-Cola, Diet Pepsi, and Mountain Dew. Frito-Lay manufactured and sold a variety of leading snack foods that included Lay's potato chips, Doritos tortilla chips, Tostitos tortilla chips, and Ruffles potato chips. Soon after the merger, PepsiCo initiated an aggressive acquisition program, buying a number of companies in areas unrelated to its major businesses such as North American Van Lines, Wilson Sporting Goods, and Lee Way Motor Freight. However, PepsiCo lacked the management skills required to operate these businesses, and performance failed to live up to expectations. In 1984, chairman and chief executive officer Don Kendall restructured PepsiCo's operations. Businesses that did not support PepsiCo's consumer-product orientation (including North American Van Lines, Wilson Sporting Goods, and Lee Way Motor Freight) were divested. PepsiCo's foreign bottling operations were then sold to local businesspeople who better understood their country's culture and business practices. Last, PepsiCo was organized into three divisions: soft drinks, snack foods, and restaurants. Restaurant Business and Acquisition of KFC PepsiCo believed that the restaurant business complemented its consumer product orientation. The marketing of fast food followed many of the same patterns as the marketing of soft drinks and snack foods. Pepsi-Cola soft drinks and fast-food products could be marketed together in the same television and radio segments, thereby providing higher returns for each advertising dollar. Restaurant chains also provided an additional outlet for the sale of Pepsi soft drinks. Thus, PepsiCo believed it could take advantage of numerous synergies by operating the three businesses under the same corporate umbrella. PepsiCo also believed that its management skills could be transferred among the three businesses. This Practice was compatible with PepsiCo's policy of frequently moving managers among its business units as a means of developing future executives. PepsiCo first entered the restaurant business in 1977 when it acquired Pizza Hut. Taco Bell was acquired one Year later. To complete its diversification into the restaurant industry, PepsiCo acquired KFC in 1986. The acquisition of KFC gave PepsiCo the leading market share in the chicken (KFC), pizza (Pizza Hut), and Mexican-food (Taco Bell) segments of the fast-food industry.

Source: (edited from) Cases in Strategic Management, Strickland and Strickland, McGraw-Hill/Irwin 12th edition.

KFC and the Global Fast-Food Industry

Management Following its acquisition of KFC, PepsiCo initiated sweeping changes. It announced that the franchise contract would be changed to give PepsiCo greater control over KFC franchisees and to make it easier to close poorly performing restaurants. Staff at KFC was reduced in order to cut costs and many KFC managers were replaced with PepsiCo managers. Soon after the acquisition, KFC's new personnel manager, who had just relocated from PepsiCo's New York headquarters, was overheard in the KFC cafeteria saying, "There will be no more homegrown tomatoes in this organization." Rumors spread quickly among KFC employees about their opportunities for advancement within KFC and PepsiCo. Harsh comments by PepsiCo managers about KFC, its people, and its traditions; several restructurings that led to layoffs throughout KFC; the replacement of KFC managers with PepsiCo managers; and conflicts between KFC and PepsiCo's corporate cultures created a morale problem within KFC. KFC's culture was built largely on Colonel Sanders's laid-back approach to management. Employees enjoyed good job security and stability. A strong loyalty had been created among KFC employees over the years as a result of the Colonel's efforts to provide for his employees' benefits, pension, and other non-income needs. In addition, the southern environment in Louisville resulted in a friendly, relaxed atmosphere at KFC's corporate offices. This corporate culture was left essentially unchanged during the Heublein and RJR years. In contrast to KFC, PepsiCo's culture was characterized by a much stronger emphasis on performance. Top performers expected to move up through the ranks quickly. PepsiCo used its KFC, Pizza Hut, Taco Bell, Frito-Lay, and Pepsi-Cola divisions as training grounds for its executives, rotating its best managers through the five divisions on average every two years. This practice created immense pressure on managers to demonstrate their management skills within short periods in order to maximize their potential for promotion. This practice also reinforced the feelings of KFC managers that they had few opportunities for promotion within the new company. One PepsiCo manager commented, "You may have performed well last year, but if you don't perform well this year, you're gone, and there are 100 ambitious guys with Ivy League MBAs at PepsiCo's headquarters in New York who would love to have your job." Unwanted effects of this performance-driven culture were: employee loyalty was often lost and turnover was higher than in other companies. Kyle Craig, president of KFC's U.S. operations, commented on KFC's relationship with its corporate parent: The KFC culture is an interesting one because it was dominated by a lot of KFC folks, many of whom have been around since the days of the Colonel. Many of those people were very intimidated by the PepsiCo culture, which is a very high performance, high accountability, highly driven culture. People were concerned about whether they would succeed in the new culture. Like many companies, we have had a couple of downsizings which further made people nervous. Today, there are fewer old KFC people around and I think to some degree people have seen that the PepsiCo culture can drive some pretty positive results. I also think the PepsiCo people who have worked with KFC have modified their cultural values somewhat and they can see that there were a lot of benefits in the old KFC culture. PepsiCo pushes their companies to perform strongly, but whenever there is a slip it, performance, it increases the culture gap between PepsiCo and KFC. I have been involved in two downsizings over which I have been the chief architect. They have been probably the two most gut-wrenching experiences of my career. Because you know you're dealing with peoples' lives and their families, these changes can be emotional if you care about the people in your organization. However, I do fundamentally believe that your first obligation is to the entire organization. A second problem for PepsiCo was its poor relationship with KFC franchisees. A month after becoming KFC's president and chief executive officer in 1989, John Cranor addressed KFC's franchisees in Louisville in order to explain the details of the new franchise contract. This was the first contract change in 13 years. It gave PepsiCo greater power to take over weak franchises, relocate restaurants, and make changes in existing restaurants. In addition, restaurants would no longer be protected from competition from new KFC units and PepsiCo would have the right to raise royalty fees on existing restaurants as contracts came up for renewal. After Cranor finished his address, there was an uproar among the attending franchisees, who jumped to their feet to protest the changes. KFC's franchise association later sued PepsiCo over the new contract. The contract remained unresolved until 1996, when the most objectionable parts of the contract were removed by KFC's new president and CEO, David Novak. A new contract was ratified by KFC's franchisees in 1997. PepsiCo's Divestiture of KFC, Pizza Hut, and Taco Bell PepsiCo's strategy of diversifying into three distinct but related markets-soft drinks, snack foods, and fast-food restaurants-created one of the world's largest

KFC and the Global Fast-Food Industry

consumer product companies and a portfolio of some of the world's most recognizable brands. Between 1990 and 1996, PepsiCo's sales grew at an annual rate of more than 10 percent, surpassing $31 billion in 1996. PepsiCo's growth, however, masked troubles in its fast-food businesses. Operating margins (operating profit as a percent of sales) at Pepsi-Cola and Frito Lay averaged 12 and 17 percent, respectively, between 1990 and 1996. During the same period, margins at KFC, Pizza Hut, and Taco Bell fell from an average of more than 8 percent in 1990 to a little more than 4 percent in 1996. Declining margins in the fast-food chains reflected increasing maturity in the U.S. fast-food industry, more intense competition, and the aging of KFC and Pizza Hut's restaurant bases. As a result, PepsiCo's restaurant chains absorbed nearly one-half of PepsiCo's annual capital spending during the 1990s, but they generated less than one-third of PepsiCo's cash flows. This meant that cash had to be diverted from PepsiCo's soft drink and snack food businesses to its restaurant businesses. This reduced PepsiCo's corporate return on assets, made it more difficult to compete effectively with Coca-Cola, and hurt its stock price. In 1997, PepsiCo decided to spin off its restaurant businesses into a new company called Tricon Global Restaurants, Inc. The new company was based at KFC's headquarters in Louisville, Kentucky (see Exhibit 1). PepsiCo's objective was to reposition itself as a beverage and snack food company, strengthen its balance sheet, and create more consistent earnings growth. PepsiCo received a one-time distribution from Tricon of $4.7 billion, $3.7 billion of which was used to pay off short-term debt. The balance was earmarked for stock repurchases. In 1998, PepsiCo acquired Tropicana Products, which controlled more than 40 percent of the U.S. chilled orange juice market. Because of the divestiture of KFC, Pizza Hut, and Taco Bell, PepsiCo's sales fell by $11.3 billion and its assets fell by $7.0 billion between 1997 and 1999. Profitability, however, soared. Operating margins rose from 11 Percent in 1997 to 14 percent in 1999, and return on assets rose from 11 percent in 1997 to 16 percent in 1999. By focusing on high-cash-flow market leaders, PepsiCo raised Profitability while decreasing its asset base. FAST-FOOD INDUSTRY According to the National Restaurant Association, food-service sales increased by 5.4 Percent, to $358 billion, in 1999. More than 800,000 restaurants and food outlets made up the U.S. restaurant industry, which employed 11 million people. Sales were highest in the full-service, sit-down sector, which grew by 7 percent, to $121 billion. Fast-food sales grew at a slower rate, rising by about 5 percent, to $110 billion. Fast-food sales surpassed the full-service sector during the mid-1990s; however, maturation of the fast-food sector and rising incomes among many Americans helped full-service restaurants again overtake fast-food outlets as the largest sector in the restaurant industry. The full-service and fast-food segments were expected to make up about 65 percent of total food-service industry sales in 2000. Exhibit 1 Tricon Global Restaurants, Inc., Organization Chart, 2000

Tricon Global Restaurants, Inc. Corporate Offices (Louisville, Kentucky) Andrall E Pearson Chairman of the Board David C. Novak, Chief Executive Officer

KFC USA (Louisville, Kentucky) Terry D. Davenport, Chief Concept Officer Charles E. Rawley, Chief Operating Officer

Pizza Hut (Dallas, Texas) Michael S. Rawlings, President and Chief Concept Officer Michael A. Miles, Chief Operating Officer

Taco Bell USA (Irvine, California) Peter C. Waller, President and Chief Concept Officer Robert T Nilsen, Chief Operating Officer

Tricon Restaurants, International (Dallas, Texas) Peter Bassi, President

KFC and the Global Fast-Food Industry

Major Fast-Food Segments Eight major segments made up the fast-food sector of the restaurant industry: sandwich chains, pizza chains, family restaurants, grill buffet chains, dinner houses, chicken chains, non-dinner concepts, and other chains. McDonald's, with sales of more than $19 billion in 1999, accounted for 15 percent of the sales of the nation's top 100 restaurant chains. The second-largest chain-Burger King-had less than a 7 percent share of the market. Sandwich chains made up the largest segment of the fast-food market. McDonald's accounted for 35 percent of the sandwich segment, while Burger King ran a distant second, with a 16 percent market share. Despite continued success by some chains like McDonald's, Carl's Jr., Jack in the Box, Wendy's, and White Castle, other chains like Hardee's, Burger King, Taco Bell, and Checkers were struggling. McDonald's generated the greatest per store sales about $1.5 million per year. The average U.S. chain generated $800,000 in sales per store in 1999. Per store sales at Burger King remained flat, and Hardee's per store sales declined by 10 percent. Franchisees at Burger King complained of leadership problems within the corporate parent (London-based Diageo PLC), an impending increase in royalties and franchise fees, and poor advertising. Hardee's corporate parent (CKE Enterprises), which also owned Carl's Jr. and Taco Bueno, planned to franchise many of its company-owned Hardee's restaurants and to allow the system to shrink as low-performing units were closed. It also planned to refocus Hardee's strategy in the southeastern part of the United States, where brand loyalty remained strong. Dinner houses made up the second largest and fastest-growing fast-food segment in 1999. Sales of dinner houses increased by more than 13 percent during the year, surpassing the average increase of 6 percent among all fast-food chains. Much of the growth in dinner houses came from new unit construction, a marked contrast with other fast-food chains, which had already slowed U.S. construction because of market saturation. Much of the new unit construction took place in new suburban markets and small towns. Applebee's and Red Lobster dominated the dinner-house segment. Each chain generated more than $2 billion in sales in 1999. The fastest-growing dinner houses, however, were chains generating less than $500 million in sales such as On The Border, The Cheesecake Factory, O'Charley's, Romano's Macaroni Grill, and Hooters. Each of these chains increased sales by more than 20 percent in 1999. Increased growth among dinner houses came at the expense of slower growth among sandwich chains, pizza chains, grilled buffet chains, and family restaurants. Too many restaurants chasing the same customers was responsible for much of the slower Growth in these other fast-food categories. However, sales growth within each segment differed from one chain to another. In the family segment, for example, Friendly's and Shoney's were forced to shut down restaurants because of declining profits, but Steak n Shake and Cracker Barrel each expanded its restaurant base by more than 10 percent. Within the pizza segment, Pizza Hut and Little Caesars closed under performing restaurants, but Papa John's and Chuck E. Cheese's continued to aggressively grow their U.S. restaurant bases. The hardest-hit segment was grilled buffet chains, which generated the lowest increase in sales (less than 4 percent). Dinner houses, because of their more upscale atmosphere and higher-ticket items, were better positioned to take advantage of the aging and wealthier U.S. population, which increasingly demanded higher-quality food in more attractive settings. Even dinner houses, however, faced the prospect of market saturation and increased competition in the near future. Chicken Segment KFC continued to dominate the chicken segment, with sales of $4.4 billion in 1999 (see Exhibit 3). Its nearest competitor, Popeyes, ran a distant second, with sales of $1 .0 billion. KFC's leadership in the U.S. market was so extensive that it had fewer opportunities to expand its U.S. restaurant base, which was only growing at about 1 percent per year. Despite its dominance, KFC was losing market share as other chicken chains increased sales at a faster rate. KFC's share of chicken segment sales fell from 71 percent in 1989 to less than 56 percent in 1999, a 10year drop of 15 percent. During the same period, Chick-fil-A and Boston Market increased their combined market share by 17 percent (see Exhibit 4). In the early 1990s, many industry analysts predicted that Boston Market would challenge KFC for market leadership. Boston Market was a new restaurant chain that emphasized roasted rather than fried chicken. It successfully created the image of an upscale deli offering healthy, "home-style" alternatives to fried chicken and other fast food. In order to distinguish itself from more traditional fast-food concepts, it refused to construct drive-throughs and it established most of its units outside of shopping malls rather than at major city intersections.

KFC and the Global Fast-Food Industry

Exhibit 3 Statistics for Top U.S. Chicken Chains Growth Rate 4% 10% 16% 18% 9% 7% Growth Rate 1% 6% 11% 10% 5% 3%

Sales (In Millions) KFC Popeyes Chick-fil-A Boston Market Churchs Total Number of U.S. restaurants KFC Popeyes Chick-fil-A Boston Market Churchs Total Sales Per Unit ($000s) KFC Popeyes Chick-fil-A Boston Market Churchs Total Exhibit 4 1999 1994-99 ! 1989-99 ! 1999 837 847 1,055 997 598 844 Growth Rate 3% 3% 5% 7% 4% 4% 1999 5,231 1,165 897 858 1,178 9,329 1999 $4,378 $986 $946 $855 $705 $7870

Market Shares of Top U.S. Chicken Chains Based on Annual Sales Popeyes Chick-fil-A Boston Market Churchs Total KFC 55.6% 12.5% 12% 10.9% 9% 100% -9.8% 1.3% 3.8% 4.2% 0.5% -15.2% 0.5% 5.8% 10.9% -2.0%

On the surface, it appeared that Boston Market and Chick-fil-A's market-share gains were achieved primarily by taking customers away from KFC. Another look at the data, however, reveals that KFC's sales grew at a stable rate in the 1990s. Boston Market, rather than drawing customers away from KFC, appealed primarily to consumers who did not regularly frequent KFC and wanted healthy, non-fried chicken alternatives. Boston Market was able to expand the chicken segment beyond its traditional emphasis on fried chicken by offering non-fried chicken products that appealed to this new consumer group. After aggressively growing its restaurant base through 1997, however, Boston Market was unable to handle mounting debt problems. It soon entered bankruptcy proceedings. McDonald's acquired Boston Market in 2000, following acquisition of Denver, Colorado-based Chipotle Mexican Grill in 1998 and Columbus, Ohio-based Donatos Pizza in 1999. McDonald's hoped the acquisitions would help it expand its U.S. restaurant base, since the U.S. was approaching saturation with McDonald's locations. Chick-fil-As growth came primarily from its aggressive shopping-mall strategy where it was capitalizing on the trend to establish large food courts in shopping malls. Despite gains by Boston Market and Chick-fil-A, KFC's customer base remained loyal to the KFC brand because of its unique taste. KFC has also continued to dominate the dinner and take-out segments of the industry.

KFC and the Global Fast-Food Industry

Popeyes replaced Boston Market as the second-largest chicken chain in 1999. Popeyes and Church's had traditionally followed similar strategies-to compete head-on with other "fried chicken" chains. Popeyes, however, was in the process of shifting its focus to Cajun fast food, after it successfully launched its Louisiana Legends OnePot Cajun Meals of jambalaya, gumbo, shrimp, and crawfish etoufee. Church's was determined to distinguish itself by placing a heavier emphasis on its "made-from-scratch" southern image. In 1999, it broadened its menu to include buffalo chicken wings, macaroni and cheese, beans and rice, and collard greens. Chick-fil-A focused on pressurecooked and char-grilled skinless chicken breast sandwiches, which it had traditionally sold to customers in sit-down restaurants in shopping malls. As more malls added food courts, however, malls became less enthusiastic about allocating separate store space to restaurants. Therefore, Chick-fil-A began to open smaller units in shopping mall food courts, hospitals, and colleges as a way of complementing its existing sit-down restaurants in shopping malls. It also began to open freestanding units in selected locations. Demographic Trends A number of demographic and societal trends influenced the demand for food eaten outside of the home. During the last two decades, rising incomes, greater affluence among a greater percentage of American households, higher divorce rates, and the fact that people married later in life contributed to the rising number of single households and the demand for fast food. More than 50 percent of women worked outside of the home, a dramatic increase since 1970. This number was expected to rise to 65 percent by 2010. Double-income households contributed to rising household incomes and increased the number of times families ate out. Less time to prepare meals inside the home added to this trend. Countering these trends, however, was a slower Growth in the U.S. population and an oversupply of fast-food chains that increased consumer alternatives and intensified competition. Baby boomers aged 35 to 50 constituted the largest consumer group for fast-food restaurants. Generation Xers (ages 25 to 34) and the "mature" category (ages 51 to 64) made up the second and third largest groups. As consumers aged, they became less enamored with fast food and were more likely to patronize dinner houses and full-service restaurants. Sales of many Mexican-food restaurants, which were extremely popular during the 1980s, began to slow as Japanese, Indian, and Vietnamese restaurants became more fashionable. Ethnic foods in general were rising in popularity as U.S. immigrants, which constituted 10 percent of the U.S. population in 2000, looked for establishments that sold their native foods. The greatest concern for fast-food operators was the shortage of employees in the 16-to-24 age category. Most Americans in this age category had never experienced a recession or an economic downturn. During the 1970s, Americans experienced double-digit inflation, high interest rates, and high unemployment, as well as two major oil crises that resulted in gas shortages. The U.S. economy began to expand again during the early 1980s and continued to expand almost unabated through 2000. Unemployment was at its lowest point in more than two decades, and many high school and college graduates, especially those in business and engineering, enjoyed a robust job market that made it more difficult for fast-food operators to find capable employees. Labor costs made up about 30 percent of a fast-food chain's total costs, second only to food and beverage costs. Intense competition, however, made it difficult for restaurants to increase prices sufficiently to cover the increased cost of labor. Consumers made decisions about where to eat partially based on price. Therefore, profit margins were squeezed. In order to reduce costs, restaurants eliminated low-margin food items, increased portion sizes, and improved product value to offset price increases. Restaurants also attempted to increase consumer traffic through discounting, by accepting coupons from competitors, by offering two-for-one specials, and by making limited-time offerings. Costs could also be lowered and operations made more efficient by increasing the use of technology. According to the National Restaurant Association, most restaurant operators viewed computers as their number one tool for improving efficiency. Computers could be used to improve labor scheduling, accounting, payroll, sales analysis, and inventory control. Most restaurant chains were also using point-of-sale systems that recorded the selected menu items and gave the cashier a breakdown of food items and the ticket price. These systems decreased serving times and increased cashier accuracy. Chains like McDonald's and Carl's Jr. converted to new food preparation systems that allowed them to prepare food more accurately and to prepare a great variety of sandwiches using the same process. Higher costs and poor availability of prime real estate was another trend that negatively affected profitability. A plot of land suitable for a normal-sized freestanding restaurant cost between $1.5 and $2.5 million. Leasing was a less costly alternative to buying. Nevertheless, market saturation decreased per store sales as newer units cannibalized sales from existing units. As a result, most food chains began to expand their U.S. restaurant bases into alternative distribution channels in hospitals, airports, colleges, highway rest areas, gas stations, shopping mall food courts, and large retail stores or by dual branding with other fast-food concepts.

KFC and the Global Fast-Food Industry

While the news media touted the benefits of low-fat diets during the 1970s and 1980s, consumer demand for beef began to increase again during the 1990s. The U.S. Department of Agriculture estimated that Americans ate an average of 64 pounds of red meat each year. The growing demand for steak and prime rib helped fuel the growth in dinner houses that continued into 2000. According to the National Restaurant Association, other food items that were growing in popularity included chicken, hot and spicy foods, smoothies, wraps and pitas, salads, and espresso and specialty coffees. Starbucks, the Seattle-based coffee retailer, capitalized on the popularity of specialty coffees by aggressively expanding its coffee-shop concept into shopping malls, commercial buildings, and bookstores such as Barnes & Noble. Starbucks increased its store base by 28 percent in 1999, the greatest increase of any major restaurant chain. International Fast-Food Market As the U.S. market matured, many restaurants expanded into international markets as a strategy for growing sales. Foreign markets were attractive because of their large customer bases and comparatively little competition. McDonald's, for example, operated 46 restaurants for every I million U.S. residents; outside the United States, it operated only I restaurant for every 3 million residents. McDonald's, KFC, Burger King, and Pizza Hut were the earliest and most aggressive chains to expand abroad beginning in the late 1950s. By 2000, at least 35 chains had expanded into at least one foreign country. McDonald's operated the largest number of restaurants (more than 12,000 U.S, units and 14,000 foreign units) in the most countries (119). In comparison, Tricon Global Restaurants operated more than 20,000 U.S. and close to 30,000 non-U.S. KFC, Pizza Hut, and Taco Bell restaurants in 85 countries. Because of their early expansion abroad, McDonald's, KFC, Burger King, and Pizza Hut had all developed strong brand names and managerial expertise in international markets. This made them formidable competitors for fast-food chains investing abroad for the first time. Exhibit 5 lists the world's 35 largest restaurant chains in 2000. The global fast-food industry had a distinctly American flavor. Twenty-eight chains (80 percent of the total) were headquartered in the United States. U.S. chains had the advantage of a large domestic market and ready acceptance by the American consumer. European firms had less success developing the fast-food concept, because Europeans were more inclined to frequent more mid-scale restaurants, where they spent several hours enjoying multi-course meals in a formal setting. KFC had trouble breaking into the German market during the 1970s and 1980s because Germans were not accustomed to buying take-out or ordering food over the counter. McDonald's had greater success penetrating the German market, because it made a number of changes to its menu and operating procedures to appeal to German tastes. German beer, for example, was served in all of McDonald's restaurants in Germany. In France, McDonald's used a different sauce on its Big Mac sandwich that appealed to the French palate. KFC had more success in Asia and Latin America, where chicken was a traditional dish. Aside from cultural factors, international operations carried risks not present in domestic-only operations. Long distances between headquarters and foreign franchises made it more difficult to control the quality of individual restaurants. Large distances also caused servicing and support problems. Transportation and other resource costs were sometimes higher than encountered domestically. In addition, time, culture, and language differences increased communication and operational problems. As a result, most restaurant chains limited expansion to their domestic market as long as they were able to achieve corporate profit and growth objectives. As companies gained greater expertise abroad, they turned to profitable international markets as a means of expanding restaurant bases and increasing sales, profits, and market share. Worldwide demand for fast food was expected to grow rapidly during the next two decades. because rising per capita incomes worldwide made eating out more affordable for greater numbers of consumers. In addition, the development of the Internet was quickly breaking down communication and language barriers. Greater numbers of children were showing up with computers in their homes and schools. As a result, teenagers in Germany, Brazil, Japan, and the United States were equally likely to be able to converse about the Internet. The Internet also exposed more teenagers to the same companies and products, which enabled firms to more quickly develop global brands and a worldwide consumer base. KENTUCKY FRIED CHICKEN CORPORATION Marketing Strategy Many of KFC's problems during the 1980s and 1990s surrounded its limited menu and inability to quickly bring new products to market. The popularity of its Original Recipe Chicken allowed KFC to expand through the 1980s without significant competition from other chicken chains. As a result, new product introductions were not a critical part of KFC's overall business strategy. KFC suffered one of its most serious setbacks in 1989 as it prepared

KFC and the Global Fast-Food Industry

to introduce a chicken sandwich to its menu. KFC still experimented with the chicken sandwich concept when McDonald's test-marketed its McChicken sandwich in the Louisville market. Shortly after, McDonald's rolled out the McChicken sandwich nationally. By beating KFC to the market, McDonald's developed strong consumer awareness for its sandwich. This significantly increased KFC's cost of developing awareness for its own sandwich, Exhibit 5 Chain 1. McDonald's 2. Pizza Hut 3. KFC 4. Subway Sandwiches 5. TCBY 6. Domino's Pizza 7. Burger King 8. T.G. 1. Friday's 9. Baskin-Robbins 10, Dunkin' Donuts 11 Wendy's 12. Sizzler 13. A&W Restaurants 14. Popeyes 15, Chili's Grill & Bar 16. Little Caesars 17. Dairy Queen 18. Taco Bell 19. Carl's Jr. 20. Outback Steakhouse 21. Hardee's 22. Applebee's 23. Arby's 24. Church's Chicken 25. PizzaExpress 26. Denny's 27. Mos Burger 28. Taco Time 29. Yoshinoya 30. Loterria 31. Orange Julius 32. Quick Restaurants 33. Skylark 34, IHOP 35. Red Lobster Global Coverage of the World's 35 Largest Fast-Food Chains in 2000 Headquarters Location Oakbrook, Illinois Dallas, Texas Louisville, Kentucky Milford, Connecticut Little Rock, Arkansas Ann Arbor, Michigan Miami, Florida Dallas, Texas Glendale, California Randolph, Massachusetts Dublin, Ohio Los Angeles, California Livonia, Michigan Atlanta, Georgia Dallas, Texas Detroit, Michigan Edina, Minnesota Irvine, California Anaheim, California Tampa, Florida Rocky Mt., North Carolina Overland Park, Kansas Ft. Lauderdale, Florida Atlanta, Georgia London, England Spartansburg, South Carolina Tokyo Eugene, Oregon Tokyo Tokyo Edina, Minnesota Brussels Tokyo Glendale, California Orlando, Florida No. of Countries Parent Country with Restaurants United States United States United States United States United States United States United Kingdom United States United States United States United States United States United States United States United States United States United States United States United States United States United States United States United States United States United Kingdom United States Japan United States Japan Japan United States Belgium Japan United States United States 119 88 85 73 68 64 58 53 52 41 29 22 21 21 20 19 18 15 15 13 11 10 10 9 9 6 5 5 5 4 4 4 4 3 3

Source: Case writer research which KFC introduced several months later. KFC eventually withdrew the sandwich because of low sales. Today, about 95 percent of chicken sandwiches are sold through traditional hamburger chains. By the late 1990s, KFC had refocused its strategy. The cornerstone of its new strategy was to increase sales in individual KFC restaurants by introducing a variety of new products and menu items that appealed to a greater number of customers. After extensive testing, KFC settled on three types of chicken: Original Recipe (pressure cooked), Extra Crispy (fried), and Tender Roast (roasted), It also rolled out a buffet that included some 30 dinner, salad, and dessert items. The buffet was particularly successful in rural locations and suburbs. It was less successful

KFC and the Global Fast-Food Industry

in urban locations because of space considerations. KFC then introduced its Colonel's Crispy Strips and five new chicken sandwiches to appeal to customers who preferred boneless chicken products. KFC estimated that its Crispy Strips and chicken sandwiches accounted for $250,000 (30 percent) of the $837,000 in sales that KFC restaurants averaged. One of the problems with these items, however, was that they cannibalized sales of its fried-chicken items; they were less expensive and easier for customers to handle. The latter was especially appealing to drivethrough customers. Overcapacity in the U.S. market made it more difficult to justify the construction of new freestanding restaurants. Fewer sites were available for new construction and those sites, because of their increased cost, drove profit margins down. KFC initiated a three pronged distribution strategy that helped beef up sales. First, it focused on building smaller restaurants in nontraditional outlets such as airports, shopping malls, universities, and hospitals. It also experimented with units that offered drive-through and carryout service only, snack shops in cafeterias, scaled-down outlets for supermarkets, and mobile units that could be transported to outdoor concerts and fairs. Second, KFC continued to experiment with home delivery, which was already firmly established in the Louisville, Las Vegas, and Los Angeles markets. Third, KFC established "2-in-1" units that sold both KFC and Taco Bell (KFC/Taco Bell Express) or KFC and Pizza Hut (KFC/Pizza Hut Express) products. By early 2000, Tricon Global Restaurants was operating 700 multi-branded restaurants that simultaneously sold products from two of the three chains. It was also testing "3-in-1" units that sold all three brands. Refranchising Strategy When Colonel Sanders began to expand the Kentucky Fried Chicken system in the late 1950s, he established KFC as a system of independent franchisees. This strategy helped the Colonel minimize his involvement in the operations of individual restaurants and to concentrate on the things he enjoyed the most-cooking, product development, and public relations. The franchise system resulted in a fiercely loyal and independent group of KFC franchises. When PepsiCo acquired KFC in 1986, a primary objective was to integrate KFC's operations into the PepsiCo system to take advantage of operational, financial, and marketing synergies. This strategy, however, led to greater interference by PepsiCo management in franchise menu offerings, financing, marketing, and operations. This interference was met by resistance from KFC franchisees. PepsiCo attempted to decrease these problems by expanding KFC's restaurant base through company-owned restaurants rather than through franchising. It also used its strong cash flows to buy back unprofitable franchises. Many of these restaurants were converted into companyowned restaurants. By 1993, company-owned restaurants accounted for 40 percent of KFC's worldwide system. When PepsiCo spun off its restaurants into Tricon Global Restaurants in 1994, Tricon's new top management team began to sell company-owned restaurants back to franchisees they believed knew the business better than they did. By 2000, company-owned restaurants had fallen to about 27 percent of the total KFC system. International Operations KFC's early experiences operating abroad put it in a strong position to take advantage of the growing trend toward international expansion. By 2000, more than 50 percent of KFC's restaurants were located outside the United States. Historically, franchises made up a large portion of KFC's international restaurant base, because franchises were owned and operated by local entrepreneurs who had grassroots understanding of local language, culture, customs, law, financial markets, and marketing characteristics. Franchising was also a good strategy for establishing a presence in small countries like Grenada, Bermuda, and Suriname, which could only support a single restaurant. The costs of operating company-owned restaurants were prohibitively high in these small markets. Of the 5,595 KFC restaurants located outside the United States in 1999, 69 percent were franchised, while 21 percent were company-owned and 10 percent were licensed restaurants or joint ventures. In larger markets such as Mexico, China, Canada, Australia, Puerto Rico, Korea, Thailand, and the United Kingdom, there was a stronger emphasis on building company-owned restaurants. By coordinating purchasing, recruiting and training, financing, and advertising, fixed costs could be spread over a larger number of restaurants. Increased bargaining power also enabled KFC to negotiate lower prices from suppliers. KFC was also better able to control product and service quality. Latin American Strategy KFC operated 438 restaurants in Latin America in 2000 (see Exhibit 6). Its primary Presence was in Mexico, Puerto Rico, and the Caribbean. KFC established subsidiaries in Mexico and Puerto Rico beginning in the late 1960s and expanded through company-owned restaurants. Franchises were used to penetrate other countries in the Caribbean whose market size prevented KFC from profitably operating company-owned restaurants. Subsidiaries were later established in the Virgin Islands, Venezuela, and Brazil. KFC had planned to expand into

KFC and the Global Fast-Food Industry

these regions using company-owned restaurants. The Venezuelan subsidiary, however, was later closed because of the high Costs of operating the small subsidiary. KFC had opened eight restaurants in Brazil but decided to close them in 1999 because it lacked the cash flow needed to support an expansion program in that market. Franchises were opened in other markets that had good growth potential such as Chile, Ecuador, Peru, and Colombia. KFC's early entry into Latin America gave it a leadership position over McDonald's in Mexico and the Caribbean. It also had an edge in Ecuador and Peru. KFC's Latin America strategy represented a classic internationalization strategy. It first expanded into Mexico and Puerto Rico because of their geographic proximity, as well as political and economic ties, to the United States. From these regions, KFC expanded its franchise system throughout the Caribbean, gradually moving away from its U.S. base as its experience in Latin America grew. Only after it had established a leadership position in Mexico and the Caribbean did it venture Into South America. McDonald's pursued a different strategy. It was late to expand into the region. Despite a rapid restaurant construction program in Mexico during the 1990s, McDonald's still lagged behind KFC. But McDonald's had initiated a first-mover strategy in Brazil and Argentina, large markets where KFC had no presence. By early 2000, more than 63 percent of McDonald's restaurants in Latin America were located in these two countries. Wendy's pursued a slightly different strategy. It first expanded into Puerto Rico, the Caribbean Islands, and Central America because of their geographical proximity to the United States. The shorter distance to the United States made these restaurants easier to manage. Wendy's late entry into Latin America, however, made it more difficult to penetrate the Mexican market, where KFC, McDonald's, and Burger King had already established a strong presence. Wendy's announced plans to build 100 Wendy's restaurants in Mexico by 2010; however, its primary objective was to establish strong positions in Venezuela and Argentina, where most U.S. fast-food chains had not yet been established. COUNTRY RISK ASSESSMENT IN LATIN AMERICA Latin America comprised some 50 countries, island nations, and principalities that were settled primarily by the Spanish, Portuguese, French, Dutch, and British during the 1500s and 1600s. Spanish was spoken in most countries, the most notable exception being Brazil, whose official language was Portuguese. Catholicism was the predominant religion, though Methodist missionaries successfully exported Protestantism into many regions of Latin America in the 1800s, most notably on the coast of Brazil. Despite commonalities in language, religion, and history, however, political and economic policies often differed significantly from one country to another. Historically, frequent changes in governments and economic instability increased the uncertainty of doing business in the region. Most U.S. and Canadian companies were beginning to realize, however, that they could not overlook the region. Geographic proximity made communications and travel easier and quicker between countries, and the North American Free Trade Agreement (NAFTA) had eliminated tariffs on goods shipped between Canada, Mexico, and the United States. Mercosur-a customs union agreement signed in 1991 between Argentina, Paraguay, Uruguay, and Brazil-eliminated tariffs on trade among those four countries. Many countries such as Chile and Argentina had also established free-trade policies that were beginning to stimulate growth. These factors made Latin America an attractive location for investment. The primary task for companies investing in the region was to accurately assess the different risks of doing business in Latin America and to select the proper countries for investment. In 1992, researcher Kent D. Miller developed a framework for analyzing country risk that was a useful tool for analyzing the attractiveness of a country for future investment. He argued that firms must examine country, industry, and firm factors in order to fully assess country risk. Country factors addressed the risks associated with changes in the country's political and economic environment that potentially affected the firm's ability to conduct business. They included the following: 1. 2. 3. Political risk (e.g., war, revolution, changes in government price controls, tariffs and other trade restrictions, appropriation of assets, government regulations, and restrictions on the repatriation of profits). Economic risk (e.g., inflation, high interest rates, foreign exchange rate volatility, balance- of- trade movements, social unrest, riots, and terrorism). Natural risk (e.g., rainfall, hurricanes, earthquakes, and volcanic activity).

Industry factors addressed changes in the structure of the industry that inhibited the firm's ability to successfully compete in its industry. They included the following: 1. 2. 3. Supplier risk (e.g.. changes in quality, shifts in supply, and changes in supplier power). Product market risk (e.g., changes in consumer tastes and availability of substitute products). Competitive risk (e.g., rivalry among competitors, new market entrants, and new product innovations).

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KFC and the Global Fast-Food Industry

Firm factors examined the firm's ability to control its internal operations. They included the following: 1. Labor risk (e.g., labor unrest, absenteeism, employee turnover, and labor strikes). 2. Supplier risk (e.g., raw material shortages and unpredictable price changes). 3. Trade-secret risk (e.g., protection of trade secrets and intangible assets). 4. Credit risk (e.g., problems collecting receivables). 5. Behavioral risk (e.g., control over franchise operations, product quality and consistency, service quality, and restaurant cleanliness).

Exhibit 6

Latin America Restaurant Count McDonalds, Burger King, KFC, and Wendys McDonalds Burger King 108 148 57 85 398 80% 0 12 10 13 7 42 9% 25 0 25 5 55 11% 495 100% KFC 157 67 91 26 341 78% 19 18 17 6 0 60 14% 0 8 29 0 37 8% 438 100% Wendys 7 30 23 26 86 60% 3 0 0 33 0 36 25% 21 0 0 0 21 15% 143 100%

Mexico Puerto Rico Caribbean Islands Central America Regional subtotal % of total Colombia Ecuador Peru Venezuela Other Andean Andean region subtotal % of total Argentina Brazil Chile Paraguay and Uruguay Southern cone subtotal % of total Latin America total Total %

170 121 59 80 430 24% 21 7 10 83 6 127 7% 205 921 61 32 1,219 69% 1,776 100%

Source: Restaurant data obtained from corporate offices at McDonald's Corp. (as of December 1999), Burger King Corp. (as of June 30, 2000), Tricon Global Restaurants, Inc. (as of June 30, 2000), and Wendy's International (as of May 15, 2000). Many U.S. companies believed that Mexico was an attractive country for investment. Its population of 103 million was more than one-third as large as the U.S. population and represented a large market for U.S. goods and services. In comparison, Canada's population of 31 million was only one-third as large as Mexico's. Mexico's proximity to the United States meant that transportation costs between the United States and Mexico were significantly lower than to Europe or Asia. This increased the competitiveness of U.S. goods in comparison with European and Asian goods, which had to be transported to Mexico across the Atlantic or Pacific Ocean at significantly greater cost. The United States was in fact Mexico's largest trading partner. More than 80 percent of Mexico's total trade was with the United States. Many U.S. firms also invested in Mexico to take advantage of lower

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KFC and the Global Fast-Food Industry

wage rates. By producing goods in Mexico, U.S. goods could be shipped back to the United States or to third markets at a low cost. Despite the advantages of doing business in Mexico, Mexico only accounted for about 20 percent of the United States' total trade. Beginning in the early 1900s, the percentage of total U.S. exports going to Latin America declined as exports to other regions of the world such as Canada and Asia increased. The growth in economic wealth and consumer demand in Canada and Asia has generally outpaced Mexico for most of the last century. However, the volume of trade between the United States and Mexico has increased significantly since the North American Free Trade Agreement went into effect in 1994. A commonly held perception among many Americans was that Japan was the United States' largest trading partner. In reality, Canada was the United States' largest trading partner by a wide margin. Canada bought more than 22 percent ($154 million) of all U.S. exports in 1998; Japan bought less than 9 percent ($58 billion). Canada accounted for about 19 percent of all goods imported into the United States ($178 billion); Japan accounted for 13 percent ($125 billion). The perception that Japan was the largest U.S. trading partner resulted primarily from extensive media coverage of the long-running U.S. trade deficit with Japan. Less known to many Americans was the fact that the United States was running a balance-of- trade deficit with China that almost equaled the deficit with Japan. China was positioned to become the United States' largest trading partner in Asia within the next few years. The lack of U.S. investment in and trade with Mexico during the 20th century was mainly the result of Mexico's long history of restricting foreign trade and investment. The Institutional Revolutionary Party (PRI), which came to power in Mexico during the 1920s, had a history of promoting protectionist economic policies to shield Mexico's economy from foreign competition. The government owned or controlled many industries and many Mexican companies focused on producing goods for the domestic market without much attention to building exports. High tariffs and other trade barriers restricted imports into Mexico, and foreign ownership of assets in Mexico was largely prohibited or heavily restricted. Mexico's dictatorial and entrenched government bureaucracy, corrupt labor unions, and a long tradition of anti-Americanism among government officials and intellectuals also reduced the motivation of U.S. firms to invest in Mexico. The nationalization of Mexico's banks in 1982 led to higher real interest rates and lower investor confidence. This forced the Mexican government to battle high inflation, high interest rates, labor unrest, and lower consumer purchasing power during the early to mid-1980s. Investor confidence in Mexico, however, improved after 1988, when Carlos Salinas de Gortari was elected president. Salinas embarked on an ambitious restructuring of the Mexican economy. He initiated policies to strengthen the free-market components of the economy, lowered top marginal tax rates, and eliminated many restrictions on foreign investment. The privatization of government-owned companies came to symbolize the restructuring of Mexico's economy. In 1990, legislation was passed to privatize all government-run banks. By the end of 1992, more than 800 of 1,200 government owned companies had been sold, including Mexicana and AeroMexico, the two largest airline companies in Mexico, and Mexico's 18 major banks. More than 350 companies, however, remained under government ownership. These represented a significant portion of the assets owned by the state at the start of 1988. Therefore, the sale of government-owned companies in terms of asset value was still modest. A large percentage of the remaining government-owned assets was controlled by government-run companies in certain strategic industries such as steel, electricity, and petroleum. These industries had long been protected by government ownership. However, President Salinas opened up the electricity sector to independent power producers in 1993 and Petroleos Mexicanos (Pemex), the state-run petrochemical monopoly, initiated a program to sell off many of its nonstrategic assets to private and foreign buyers. North American Free Trade Agreement (NAFTA) Prior to 1989, Mexico levied high tariffs on most imported goods. In addition, many other goods were subjected to quotas, licensing requirements, and other non-tariff trade barriers. In 1986, Mexico joined the General Agreement on Tariffs and Trade (GATT), a world trade organization designed to eliminate barriers to trade among member nations. As a member of GATT, Mexico was required to apply its system of tariffs to all member nations equally. Mexico subsequently dropped tariff rates on a variety of imported goods. In addition, import license requirements were dropped for all but 300 imported items. During President Salinas's administration, tariffs were reduced from an average of 100 percent on most items to an average of 11 percent. On January 1, 1994, the North American Free Trade Agreement (NAFTA) went into effect. The passage of NAFTA created a trading bloc with a larger population and a larger gross domestic product than the European Union. All tariffs on goods traded between the United States, Canada, and Mexico were eventually phased out. NAFTA was expected to benefit Mexican exporters, since reduced tariffs made their goods more competitive compared to goods exported to the United States from other countries. In 1995, one year after NAFTA went into

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KFC and the Global Fast-Food Industry

effect, Mexico posted its first balance-of-trade surplus in six years. A large part of this surplus was attributed to greater exports to the United States. Despite its supporters, NAFTA was strongly opposed by farmers and unskilled workers. The day after NAFTA went into effect, rebels rioted in the southern Mexican province of Chiapas on the Guatemalan border. After four days of fighting, Mexican troops drove the rebels out of several towns the rebels had earlier seized. Around 150 peoplemostly rebels-were killed. Later in the year, 30 to 40 masked men attacked a McDonald's restaurant in the tourist section of Mexico City. The men threw cash registers to the floor, smashed windows, overturned tables, and spraypainted "No to Fascism" and "Yankee Go Home" on the walls. Such protests continued through 2000, when Mexican farmers dumped gallons of spoiled milk in the streets to protest low tariffs on imported farm products. Farmers also protested the Mexican government's practice of allowing imports of milk powder, corn, and wheat from the United States and Canada above the quotas established as part of NAFTA. The continued opposition of Mexican farmers, unskilled workers, and nationalists posed a constant threat to the stability of NAFTA. Another problem was Mexico's failure to reduce restrictions on U.S. and Canadian investment in a timely fashion. Many U.S. firms experienced problems getting required approvals for new ventures from the Mexican government. A good example was United Parcel Service (UPS), which sought government approval to use large trucks for deliveries in Mexico. Approvals were delayed, forcing UPS to use smaller trucks. This put UPS at a competitive disadvantage vis--vis Mexican companies. In many cases, UPS was forced to subcontract delivery work to Mexican companies that were allowed to use larger, more cost-efficient trucks. Other U.S. companies such as Bell Atlantic and TRW faced similar problems. TRW, which signed a joint venture agreement with a Mexican partner, had to wait 15 months longer than expected before the Mexican government released rules on how it could receive credit data from banks. TRW claimed that the Mexican government had slowed the approval process to placate several large Mexican banks. Issues in Mexico By 2000, there were signs that Mexico's economy had stabilized. Gross domestic product was increasing at an average annual rate of 24 percent, and unemployment had decreased to slightly more than 2 percent (see Exhibit 7). Interest rates and inflation were also low by historical standards (24 and 17 percent in 1999), far below their highs of 61 and 35 percent in 1995. Interest rates and inflation in Mexico were, however, still considerably higher than in the United States. Higher relative interest rates and inflation put continued pressure on the peso to depreciate against the dollar. This led to higher import prices and contributed to inflation. A number of social concerns also plagued President Zedillo's government. These included a lack of success in controlling organized crime surrounding the drug trade; high-profile political murders (e.g., the murder of a Roman Catholic cardinal at the Guadalajara air-port in 1993); and a high poverty rate, particularly in southern Mexico. These social problems, and voters' disenchantment over allegations of continued political corruption, led to strong opposition to the ruling PRI. In 2000, the PRI lost its first presidential election in five decades when Vicente Fox, leader of the opposition National Action Party, was elected president. Fox took office on December 1, 2000. Exhibit 7 Selected Economic Data for Mexico, 1994-99 Annual Growth Rate 2% 24% 22% 17%

1994 Population (millions) Gross domestic product Money supply (Ml) inflation (CPI) Money market rate Peso devaluation against U.S. dollar Unemployment rate 93 13% 4% 7% 17% 71% 3.6%

1995 91 29% 5% 35% 61% 44% 4.7%

1996 07 36% 43% 34% 34% 3% 3.7%

1997 96 27% 33% 21% 22% 3% 2.6%

1998 100 19% 19% 16% 27% 22% 2.3%

1999 102 21% 26% 17% 24% -4% n/a

Source: international Monetary Fund, International Financial Statistics, 2000.

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KFC and the Global Fast-Food Industry

RISKS AND OPPORTUNITIES KFC faced a variety of risks and opportunities in Mexico. It had eliminated all of its franchises in Mexico and operated only company-owned restaurants that enabled it to better control quality, service, and restaurant cleanliness. Company-owned restaurants, however, required more capital than franchises did. This meant that KFC would not be able to expand as quickly as it could using a franchised restaurant base. KFC still had the largest number of restaurants in Mexico of any fast-food chain. However, McDonald's was growing its restaurant base rapidly and was beating KFC in terms of sales. KFC's other major competitors included Burger King and El Pollo Loco (The Crazy Chicken). Wendy's had also announced plans to open 100 restaurants in Mexico by 2010, though Wendy's emphasis in Latin America continued to be in Venezuela and Argentina. Another threat came from Habib's, Brazil's second largest fast-food chain, which opened its first restaurant in Mexico in 2000. Habib's served traditional Middle Eastern dishes such as falafel, hummus, kafka, and tabbouleh at prices below KFC or McDonald's. It planned to open 400 units in Mexico between 2000 and 2005. Another concern was the long-term value of the peso, which had depreciated at an average annual rate of 23 percent against the U.S. dollar since NAFTA went into effect.. This translation risk lowered Tricon Global's reported profits when peso profits were translated into dollars. It also damaged Tricon Global's stock price. From an operational point of view, however, KFC's Mexico operations were largely insulated from currency fluctuations, because it supplied most of its needs using Mexican sources. KFC purchased chicken primarily from Tyson Foods, which operated two chicken processing plants in Mexico. Tyson was also the primary supplier of chicken to McDonald's, Burger King, Applebee's, and Wal-Mart in Mexico. KFC faced difficult decisions surrounding the design and implementation of an effective Latin American strategy over the next 20 years. It wanted to sustain its leadership position in Mexico and the Caribbean, but it also hoped to strengthen its position in other regions in South America. Limited resources and cash flow, however, constricted KFC's ability to aggressively expand in all countries simultaneously. What should KFC's Latin American strategy be? KFC's strategy in 2000 focused on sustaining its position in Mexico and the Caribbean, but postponed plans to expand into other large markets like Venezuela, Brazil, and Argentina. This strategy carried significant risk, since McDonald's and Wendy's were already building first-mover advantages there. A second strategy was to invest more capital in these large markets to challenge existing competitors, but such a strategy might risk KFC's leadership position in Mexico and the Caribbean. Another strategy was to focus on building a franchise base throughout Latin America, in order to build KFC's brand image and prevent competitors from establishing firstmover advantages. This strategy, however, was less effective in building a significant market share in individual countries, since market leadership often required a country subsidiary that actively managed both franchised and company owned restaurants and took advantage of synergies in purchasing, operations, and advertising. A country subsidiary could only be justified if KFC had a large restaurant base in the targeted country. References Direction of Trade Statistics, Washington, DC: International Monetary Fund. International Financial Statistics. Washington. DC: International Monetary Fund. Miller, Kent D. "A Framework for Integrated Risk Management in International Business, Journal of International Business Studies 23, no. 2 (1992), pp. 311-3 1. Quickservice Restaurant Trends. Washington, DC: National Restaurant Association.

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