Why is KFC losing money? Is it safe?

Kentucky Fried Chicken or KFC brings a glow to any chicken lover’s face. The restaurant chain had its humble beginnings during the great depression when Harland Sanders started selling fried chicken at his restaurant in Kentucky. He was quick to realise the potential of franchising in this business and the first franchisee outlet was started in the early 1950s. The company eventually got sold off to spirits firm Heublin, before being finally acquired by PepsiCo in 1986. In 1997, Pepsi co. spun off its restaurant business as Tricon Global Restaurants (also includes Pizza Hut and Taco Bell), which later changed its name to Yum! Brands. Yum! Brands is presently a public listed company in US.
 

KFC has over 17000 outlets with presence in 105 countries & territories around the world. However, despite such a wide diversity in locations, two regions form the critical part of its success story: US and China. KFC was the first US restaurant to foray into China as early as 1987, when the wings of liberalisation were beginning to gather pace under Deng Xiaoping. That move paid rich dividends as China is its most profitable market today, contributing about half of its global sales. The company operates self-owned restaurants in China operated by fully owned subsidiary KFC China unlike in US where it follows the franchise model. Operating company outlets has a very big advantage as it ensures larger profit margins during periods of market expansion. On the other hand, during a turmoil it increases the financial risks for the shareholders of the firm. KFC appears to be on similar ground in China.

Yum! Brands, the parent company, reported 5% increase in world-wide sales last year but the share price has dropped from levels of $74.75 in November to current levels of $64 in less than 3 months, a sharp drop of 14.5%. This fall started after reports emerged about presence of excess growth hormones and antibiotics in chicken served by KFC in China. Though KFC managed to get clearance from Chinese authorities after passing the blame to its local suppliers, it has lost consumer confidence. Sales in China dropped by 41% in the last quarter of 2012 as compared to 21% increase in the same quarter in the previous year. Chinese consumers are increasingly becoming more quality conscious in urban areas largely due to the rising per capita income and are exhibiting preference for luxury brands and goods.
 
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The two main Chinese suppliers being investigated by the authorities are Liuhe Group which supplies to KFC and Yingtai Food Group (supplier to McDonalds) and it is estimated that such chicken (with high antibiotics) was supplied in 2010 and 2011 as well. These antibiotics were used largely to reduce the breeding time and increase turnover for the suppliers. With more than 4000 KFC outlets in China, Yum! Brands has a lot more at stake in this ongoing food scandal. At present, KFC has stopped supplies from Liuhe Group, but it has created serious problems for managing its supply chain especially with plan of opening another 500 outlets in 2013. There has been increased demand for chicken from local restaurants as well as western chains like McDonalds that has plans of opening 600 outlets in China. KFC has also come under attack from Greenpeace, in recent times, which has questioned the sustainability of its model over its consumption of cardboard and paper leading to destruction of the Amazon rain forest.
 
Global food and beverages companies have always claimed to maintain the same quality standards world-wide. Increasingly though, that doesn't appear to be true. In the past, in India, Pepsi Co. and Coca-Cola were found to have pesticides in their beverages and despite much hue and cry, both brands continue to retain the same suppliers while also being endorsed by celebrities. KFC in China though has acted otherwise possibly due to the impact its Chinese consumers make on the bottom-line of the company. 
 
The issue brings across an important question to the minds of the Indian consumer:

Is KFC maintaining quality standards in India? What do you feel ?
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KFC follows a franchise model in India unlike China which further increases the risk of a similar problem. Furthermore, for most of the outlets in eastern India, frozen chicken is supplied from a Calcutta based poultry farm, raising further doubt whether such chicken is safe for consumption considering the distance involved in transport. The case might be similar for outlets in other parts of the country as well. It can only be hoped that the Indian food authorities are as active as their Chinese counterparts and the safety concerns of the Indian consumer are being adequately looked into.
 
Till then, let’s hope that KFC chicken is indeed “finger lickin’ good”!  

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Why is KFC losing money? Is it safe?

by Abhirup Bhattacharya time to read: 4 min
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