Last week, Yum! Brands (YUM), which owns KFC, reported that sales at stores in China open for at least a year fell 29 percent in April as concerns about the safety of its chicken and the spread of avian flu had customers steering clear of KFC restaurants. The company predicted the publicity fueling the revenue collapse would be “relatively short-lived,” but bird flu fears aren’t the only challenge facing Yum in its biggest overseas market.
Experts say the company that wowed the nation a quarter century ago is struggling to keep up with the increasing sophistication of Chinese diners and the fast growth of local rivals. Yum hasn’t stayed current with a rapidly changing China, says Mary Bergstrom, a Shanghai-based consultant. “While the menu has become more traditional, it hasn’t evolved with how consumers want to eat.”
In 1987, KFC drew crowds to its first Chinese store, in Beijing’s Tiananmen Square; Yum now operates KFCs nationwide, along with Pizza Hut outlets and the East Dawning and Little Sheep Asian fast-food chains. KFC became that nation’s largest fast-food chain—it has more than 4,200 restaurants in 850 cities across the mainland—because locals loved its fried chicken’s taste and its foreign cachet. Over the years, a drive to offer more local dishes, such as chili black fungus and fishball soup, has undermined KFC’s American identity even as local quick-service chains selling Chinese and Western dishes proliferate.
Yum also has yet to recover from government complaints in December that eight batches of its locally sourced chicken in 2010 and 2011 contained unacceptably high levels of antibiotics—a flashpoint in a nation where food quality is widely suspect. Yum apologized to Chinese consumers in a letter posted on KFC’s blog on Jan. 10, and the following month began airing commercials highlighting its commitment to food safety.
In April, Yum reiterated a forecast for a “mid-single-digit” decline in 2013 profit excluding certain items. Net income had risen 21 percent to $1.6 billion last year. “We’re disappointed with our results” in China, says company spokesman Jonathan Blum. “There’s no question we’ve hit a bump in the road.”
The stakes are high for Yum. The Louisville-based company generates more than half its revenue in China. As of 2011 it had a 39 percent share of the country’s 86.9 billion yuan ($14.1 billion) fast-food industry, according to the most recent data from researcher Euromonitor International. Its nearest rival, McDonald’s (MCD), had 15.6 percent.
Now KFC is in danger of losing what made it distinctive by loading up its menu with Chinese dishes. Two of three main items on KFC’s dinner menu are rice-based, including spicy prawn rice and beef rice. The third is a mushroom-chicken burger. Patrons craving something sweet can order sugared egg tarts. “You want to localize but also maintain your core brand DNA,” says Shaun Rein, Shanghai-based managing director of China Market Research Group. “The name of the game 10 years ago was localizing, but at this stage consumers are already sophisticated.”
Spokesman Blum says Yum’s localization strategy is working. “We have core items that are consistent around the globe, but then we meet the local taste palate wherever we operate,” he says. “It’s a menu that appeals to the Chinese consumer.”
Still, KFC will struggle to regain rapid growth as other Chinese quick-service chains offer similar dishes and replicate its store format, says Chiang Jeongwen, a Shanghai-based marketing professor at China Europe International Business School. Chains such as Chongqing-based Country Style Cooking Restaurant Chain (CCSC), which sells a set fried-chicken-and-rice lunch, are often cheaper and prepare food more suited to tastes in smaller cities, he says. “Local competitors have a unique way of cooking and are taking over some of these fast-food needs,” Chiang says. “There are so many options now vs. five years ago.”
Domestic chains are even moving in on KFC’s signature dish. Dicos, a fast-food chain owned by Taiwanese conglomerate Ting Hsin International Group, serves deep-fried chicken, chicken burgers, and wraps. The company, which runs 1,517 eateries in China, aims to have 2,500 locations by 2020, according to its franchise website. Another chain, Hua Lai Shi, sells fried chicken with fries or rice and such side dishes as corn cups and chicken bites. The operator of 1,500 eateries, mostly in smaller cities beyond Shanghai and Beijing, says it plans to expand by three to five new outlets a day.
Yum’s U.S.-based rivals are accelerating store openings in China, too. Burger King Worldwide (BKW) plans to have 1,000 stores, up from about 86 now, in five to seven years. McDonald’s, which already operates more than 1,700 restaurants in China, aims to open 300 this year and is focused on selling breakfast items and offering delivery service.