KFC Corporation is the largest fast-food chicken
operator, developer, and franchiser in the world. KFC, a wholly owned
subsidiary of PepsiCo, Inc. until late 1997, operates over 5,000 units in the
United States, approximately 60 percent of which are franchises.
Internationally, KFC has more than 3,700 units, of which two-thirds are also
franchised. In addition to direct franchising and wholly owned operations, the
company participates in joint ventures, and continues investigating alternative
venues to gain market share in the increasingly competitive fast-food market.
In late 1997 the company expected to become a wholly owned subsidiary of Tricon
Global Restaurants, Inc., to be formed from the spin-off of PepsiCo's
restaurant holdings.
The Early Life of Colonel Sanders
Kentucky Fried Chicken was founded by Harland Sanders
in Corbin, Kentucky. Sanders was born on a small farm in Henryville, Indiana,
in 1890. Following the death of Sanders's father in 1896, Sanders's mother
worked two jobs to support the family. The young Sanders learned to cook for
his younger brother and sister by age six. When Mrs. Sanders remarried, her new
husband didn't tolerate Harland. Sanders left home and school when he was 12
years old to work as a farm hand for four dollars a month. At age 15 he left
that job to work at a variety of jobs, including painter, railroad fireman,
plowman, streetcar conductor, ferryboat operator, insurance salesman, justice
of the peace, and service-station operator.
In 1929 Sanders opened a gas station in Corbin,
Kentucky, and cooked for his family and an occasional customer in the back
room. Sanders enjoyed cooking the food his mother had taught him to make:
pan-fried chicken, country ham, fresh vegetables, and homemade biscuits. Demand
for Sanders's cooking rose; eventually he moved across the street to a facility
with a 142-seat restaurant, a motel, and a gas station.
During the 1930s an image that would become known
throughout the world began to develop. First, Sanders was named an honorary
Kentucky Colonel by the state's governor; second, he developed a unique, quick
method of spicing and pressure-frying chicken. Due to his regional popularity,
the Harland Sanders Court and Cafe received an endorsement by Duncan Hines's Adventures in Good Eating in
1939.
Sanders Court and Cafe was Kentucky's first motel, but
the Colonel was forced to close it when gas rationing during World War II cut
tourism. Reopening the motel after the war, Sanders's hand was once again
forced: in the early 1950s, planned Interstate 75 would bypass Corbin entirely.
Though Sanders Cafe was valued at $165,000, the owner could only get $75,000
for it at auction, just enough to pay his debts.
Sanders' First Franchise in 1952
However, in 1952 the Colonel signed on his first
franchise to Pete Harman, who owned a hamburger restaurant in Salt Lake City,
Utah. Throughout the next four years, he convinced several other restaurant
owners to add his Kentucky Fried Chicken to their menus.
Therefore, rather than struggle to live on his savings
and Social Security, in 1955 Sanders incorporated and the following year took
his chicken recipe to the road, doing demonstrations on-site to sell his method.
Clad in a white suit, white shirt, and black string tie, sporting a white
mustache and goatee, and carrying a cane, Sanders dressed in a way that
expressed his energy and enthusiasm. In 1956 Sanders moved the business to
Shelbyville, Kentucky, 30 miles east of Louisville, to more easily ship his
spices, pressure cookers, carryout cartons, and advertising material. And by
1963 Sanders's recipe was franchised to more than 600 outlets in the United
States and Canada. Sanders had 17 employees and travelled more than 200,000
miles in one year promoting Kentucky Fried Chicken. He was clearing $300,000
before taxes, and the business was getting too large for Sanders to handle.
New Management for Kentucky Fried Chicken
In 1964 Sanders sold Kentucky Fried Chicken for $2
million and a per-year salary of $40,000 for public appearances; that salary
later rose to $200,000. The offer came from an investor group headed by John Y.
Brown, Jr. a 29-year-old graduate of the University of Kentucky law school, and
Nashville financier John (Jack) Massey. A notable member of the investor group
was Pete Harman, who had been the first to purchase Sanders's recipe 12 years
earlier.
Under the agreement, Brown and Massey owned national
and international franchise rights, excluding England, Florida, Utah, and
Montana, which Sanders had already apportioned. Sanders would also maintain
ownership of the Canadian franchises. The company subsequently acquired the
rights to operations in England, Canada, and Florida. As chairman and CEO, Massey
trained Brown for the job; meanwhile, Harland Sanders enjoyed his less hectic
role as roving ambassador. In Business
Week, Massey remarked: "He's the greatest PR man I have ever
known."
Within three years, Brown and Massey had transformed
the "loosely knit, one-man show ... into a smoothly run corporation with
all the trappings of modern management," according to Business Week. Retail outlets
reached all 50 states, plus Puerto Rico, Mexico, Japan, Jamaica, and the
Bahamas. With 1,500 take-out stores and restaurants, Kentucky Fried Chicken
ranked sixth in volume among food-service companies; it trailed such giants as
Howard Johnson, but was ahead of McDonald's Corporation and International Dairy
Queen.
In 1967, franchising remained the foundation of the business.
For an initial $3,000 fee, a franchisee went to "KFC University" to
learn all the basics. While typical costs for a complete Kentucky Fried Chicken
start-up ran close to $65,000, some franchisees had already become
millionaires. Tying together a national image, the company began developing
pre-fabricated red-and-white striped buildings to appeal to tourists and
residents in the United States.
The revolutionary choice Massey and Brown made was to
change the Colonel's concept of a sit-down Kentucky Fried Chicken dinner to a
stand-up, take-out store emphasizing fast service and low labor costs. This
idea created, by 1970, 130 millionaires, all from selling the Colonel's famous
pressure-cooked chicken. But such unprecedented growth came with its cost, as
Brown remarked in Business Week:
"At one time, I had 21 millionaires reporting to me at eight o'clock every
morning. It could drive you crazy." Despite the number of vocal
franchisees, the corporation lacked management depth. Brown tried to use
successful franchisees as managers, but their commitment rarely lasted more
than a year or two. There was too much money to be made as entrepreneurs.
International Success in 1990s
Though KFC may have had problems competing in the
domestic fast-food market, those same problems did not seem to trouble them in
their international markets. In 1992 pretax profits were $92 million from
international operations, as opposed to $86 million from the U.S. units. Also,
in the five-year span from 1988 through 1992, sales and profits for the
international business nearly doubled. In addition, franchise relations, always
troublesome in the domestic business, ran smoothly in KFC's international markets.
To continue capitalizing on their success abroad, KFC undertook an aggressive
construction plan that called for an average of one non-U.S. unit to be built
per day, with the expectation that by 1995 the number of international units
would exceed those in the United States.
International sales, particularly in Asia, continued to
bolster company profits. In 1993, sales and profits of KFC outlets in Asia were
growing at 30 percent a year. Average per store sales in Asia were $1.2
million, significantly higher than in the United States, where per store sales
stood at $750,000. In addition, profit margins in Asia were double those in the
United States. KFC enjoyed many advantages in Asia: fast food's association
with the West made it a status symbol; the restaurants were generally more
hygienic than vendor stalls; and chicken was a familiar taste to Asian palates.
The company saw great potential in the region and stepped up construction of
new outlets there. It planned to open 1,000 restaurants between 1993 and 1998.
Non-traditional service, often stemming from successful innovations instituted in the company's international operations, was seen as a way for KFC to enter new markets. Delivery, drive-thru, carry-out, and supermarket kiosks were up and running. Other outlets in testing were mall and office-building snack shops, mobile trailer units, satellite units, and self-contained kiosks designed for universities, stadiums, airports, and amusement parks. To move toward the twenty-first century, executives believed KFC had to change its image. "We want to be the chicken store," Cranor stressed in a 1991 Nation's Restaurant News. Cranor's goal was total concept transformation, moving KFC to a more contemporary role.
New product introductions were part of the company's
plan to keep up with competitors. Having allowed Boston Market to grab a
significant portion of the chicken market, KFC tried to catch up with the
introduction of Rotisserie Gold Chicken. The company's new CEO, David Novak,
also decided to test Colonel's Kitchen, a clear imitation of the Boston Market
format. To counter McDonald's and Burger King's "value meals," KFC
brought out the "Mega-Meal dinner": an entire rotisserie chicken,
chicken nuggets, mashed potatoes, macaroni, Cole slaw, biscuits, and a
chocolate chip cake for $14.99. In 1995, KFC expanded the idea to
"Mega-Meal-For-One," and decided to test chicken pot pie and chicken
salad.
These moves gave a small boost to KFC's image, which
had grown somewhat out-of-date, and to its bottom line. However, problems with
the franchisees continued, and PepsiCo was not seeing the return on its assets
that it saw with its beverage and snack food divisions. PepsiCo was having
similar problems with its other restaurant subsidiaries, Taco Bell and Pizza
Hut, and decided the drain of capital expenditure was not worth it.
In 1996 the company prepared to rid itself of its
restaurant division by drawing together Pizza Hut, Taco Bell, and KFC. All
operations were now overseen by a single senior manager, and most back office
operations, including payroll, data processing, and accounts payable, were
combined. In January 1997 the company announced plans to spin off this
restaurant division, creating an independent publicly traded company called
Tricon Global Restaurants, Inc. The formal plan, approved by the PepsiCo board
of directors in August 1997, stipulated that each PepsiCo shareholder would
receive one share of Tricon stock for every ten shares of PepsiCo stock owned.
The plan also required Tricon to pay a one-time distribution of $4.5 billion at
the time of the spinoff. If approved by the Securities and Exchange Commission,
the spinoff would take place on October 6, 1997.
PepsiCo CEO Roger Enrico explained the move: "Our goal in taking these steps is to dramatically sharpen PepsiCo's focus. Our restaurant business has tremendous financial strength and a very bright future. However, given the distinctly different dynamics of restaurants and packaged goods, we believe all our businesses can better flourish with two separate and distinct managements and corporate structures." KFC and its franchisees did settle their contract disputes; according to a press release, "the crux of the agreement revolves around KFC franchisees receiving permanent territorial protection. In turn, KFC Corporation will have more direct influence over certain national advertising and public relations activities." Still KFC faced the need to renovate its restaurant buildings, and also faced stiff competition from Boston Market, Burger King, and McDonald's, so it remained to be seen if the new parent company would refresh KFC's image and profits.
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