What Do KFC and Pizza Hut Conjure Up Abroad? Are They American Symbols? Or Have They Become Global Brands Tricon, the company that owns them both, is betting on the latter.
(FORTUNE Magazine) – In early October, on the first Muslim holy day after American warplanes began the bombing campaign in Afghanistan, thousands of protesters spilled out onto the streets of Karachi. Armed with sticks and bats, intermittently chanting "Death to America," they made their way through the streets of Pakistan's largest city, smashing windows and setting fire to a bus and several cars along the way. The mob's objective was the U.S. consulate. But police barricades and tear gas turned them back. So they went looking for the next-best option: Colonel Sanders.
To the demonstrators, it didn't matter that the nearby KFC, one of 18 in Pakistan, was locally owned. The red, white, and blue KFC logo was justification enough. Though the owners of the restaurant had tried to cover the KFC signs in an attempt to protect their property, their effort was futile; the protesters set fire to the restaurant before being dispersed by police.
"You have no choice but to operate in a world shaped by globalization," Andy Grove wrote in FORTUNE in 1995. "Adapt or die." That maxim is truer today than ever, especially for companies like Coke, McDonald's, Gillette, and Kodak, companies that own the great, ubiquitous--but aging--American brands. Tricon Global Restaurants, which owns not only KFC but also Pizza Hut and Taco Bell, is another good example. For companies like these, growth in the U.S. is now measured in the low single digits--at best. So if they want to grow, they will have to go global.
As, indeed, they have. Look no further than KFC. Founded 50 years ago as Kentucky Fried Chicken by the late Colonel Harland Sanders, the chain has around 5,000 U.S. restaurants--and 6,000 abroad. It has 158 franchises in Indonesia, which has the world's largest Muslim population. (Three were also looted in the days after Sept. 11.) It has a restaurant in the holy city of Mecca, Saudi Arabia. In all, KFC has stores in more than 80 countries, including Japan, Australia, Egypt, Mexico, Malaysia, and Swaziland. In China, where KFC has more than 500 restaurants, Tricon is opening, on average, ten new stores a month.
And it's not about to slow down, Sept. 11 or no. Just days after the Karachi incident, Tricon CEO David Novak reaffirmed to Wall Street analysts that overseas growth would continue unabated--and downplayed the potential impact of an anti-American backlash. As Novak sees it, the company's long-standing presence in so many countries makes it an accepted part of the landscape, and therefore less likely to be a major target. "We're going to have some radical situations," he told Fortune, "but not to the extent that we think it's going to alter our business plan." Then again, what choice does he have? As with so many U.S. companies, continued globalization is, quite simply, the key to Tricon's future.
Tricon was born in 1997, when PepsiCo decided to spin off its restaurant division and refocus on its core beverage business. Prior to the spinoff, the fast-food business--which included the three chains Tricon now owns--had been a laggard; the assumption was that an executive team focused solely on restaurants would get better results. And it has. Margins are up--from 11.6% to just over 15%. Revenues ($7.1 billion in 2000) and profits ($860 million) have grown steadily. The stock (the symbol is YUM) took some hits last year but has rebounded nicely, doubling since August 2000.
Clearly those good things have come about in large part because Tricon is committed to international growth. Since it was formed, Tricon has opened more than 5,100 restaurants--of which nearly 3,200 have been abroad. It plans to open more than 1,000 stores a year overseas for the foreseeable future. Indeed, its 30,000-plus outlets in more than 100 countries are the most of any restaurant company in the world. "A lot of people talk about being international, but they don't have the infrastructure to really get it done," says Novak, 49. "We now have the people, the brands, and the presence."
Like most successful global companies, Tricon believes that business, like politics, is local. As a practical matter, that means that Tricon can't just open restaurants based on the U.S. model and expect success. It has to adapt to local tastes and negotiate changing cultural and political climates. In Japan, for instance, KFC sells tempura crispy strips. In northern England, KFC stresses gravy and potatoes, while in Thailand it offers fresh rice with soy or sweet chili sauce. In Holland the company makes a potato-and-onion croquette. In France it sells pastries alongside chicken. And in China the chicken gets spicier the farther inland you travel. "Most companies are not really jumping up and down now and saying, 'We're an American company,' " says Clayton Tolley, CEO of global-branding firm Addison Whitney. "More and more, if it's only an American brand without a regional appeal, it's going to be difficult to market."
You can see that quite clearly in England, where Tricon has reestablished itself in a market in which the KFC brand had become stale and tired. Over the previous decade, the growth of the European businesses of Pizza Hut and KFC had slowed dramatically. The novelty of fried chicken as an alternative to fish and chips had long since worn off. Indeed, the company found itself competing in a distinctly Americanized atmosphere. Take, for instance, the KFC at the Teesside Park shopping center outside the industrial town of Middlesbrough in northeastern England. The new KFC shares a parking lot with TGI Friday's and Frankie & Benny's New York Italian Restaurant and Bar. Across the service road are McDonald's and Burger King. KFC's American roots are virtually meaningless. "It was a novelty at first, but it's just another restaurant really," says one woman in her late twenties eating an Original Recipe value meal. "They're all American, aren't they?"
Paradoxically, one key to Tricon's revival in England--and its future prospects in the rest of Europe--was the willingness of the corporation to take more control over the franchises. Then again, maybe that's not such a paradox; part of the trick for any large franchise operator is to allow local flexibility while maintaining quality control and a central marketing message. So: Tricon shut down franchisees that didn't meet the company's standards. It introduced new products into the British market, getting away from the old "chicken in a bucket" concept. And it established company-owned restaurants in such countries as France, Holland, and Germany--hoping to demonstrate success and inspire new, ambitious franchisees to join up.
In China, on the other hand, the situation feels much different. Indeed, an A.C. Nielsen survey last year found that KFC is the most recognized foreign brand in China, ahead of Coke and McDonald's. The profits for Tricon's Greater China operation (which includes Taiwan and Hong Kong) increased 47% last year. It just opened its 500th KFC restaurant in mainland China in early October. By the end of the year there will be 540 KFCs and 65 Pizza Huts in 130 cities--even though the cost of a KFC value meal is equivalent to about six hours of the average person's salary. "We know that the business in China will be bigger than it is in America someday," says Novak.
Some of that success can be attributed to the fact that the company's brands got in early. KFC opened the first fast-food chain in China in 1987, and Pizza Hut was there by 1990. But the real key has been the deft management of Sam Su, who heads up the company's China operation. Although he grew up in Taiwan, Su had never been to China before he arrived in December 1989, just months after the Tiananmen Square demonstrations. At the time, there were only four KFCs in China. Though the government wanted Western investment, it was still wary. Su, 49, a tall, deep-voiced man with a Wharton MBA and a background in engineering, saw great potential but knew that it would be a long process. "From a very early stage I realized that this was going to take my lifetime, and the lifetimes of a lot of other people," he says.
To strike the right balance of East and West, Su decided he needed employees who combined an understanding of the Chinese mindset with Western business training, so he recruited from Taiwan and from Chinese communities in the U.S. and Canada. This has been useful in both figuring out local consumer preferences and navigating the political environment. The mood of the government sometimes shifts as quickly as the Shanghai landscape, where a massive reshaping of the city produces a changed skyline every six months. There are still no laws on franchising, but there are myriad laws on almost everything else, which are often enforced at the whim of government officials both high and low. Much of the cost of doing business is in developing relationships with these officials--and doing business with the government as a partner. KFC alone is divided into a web of 18 different companies, many of which are joint ventures with rotating, government-appointed chief executives. And despite long relationships, unforeseen complications can still crop up--as when KFC had to stop serving mashed potatoes this past spring after the government suddenly realized it didn't have a standard for dried potato-powder imports and stopped shipments. (The company has worked out a solution and will have mashed potatoes back in restaurants by December.) "Let's put it this way," says Pete Bassi, Tricon's international president. "Whenever I'm in China, I'm usually visiting some government official, thanking him for something he did for us."
Tricon's headquarters in China is on the 21st floor of an office building in the southwestern corner of Shanghai, near the confluence of six major traffic arteries. Since Su and his team moved in a few years ago, three major shopping centers have sprung up nearby. On a Monday afternoon in October, one of the four KFCs within sight of Su's office--a fifth is on the way--is the setting for some community outreach. A group of 25 low-income senior citizens from the neighborhood have been invited for a program of culture and KFC. After sitting through a speech by a local politician and a traditional dance performance celebrating a good harvest, the seniors brighten as a group of kindergarten-age girls perform a pantomime.
KFC has been particularly successful at wooing children in China, actually surpassing McDonald's in popularity there. It has done so not only by stealing a page from the competition--it offers special kids' meals and builds playgrounds inside the restaurants--but also through clever marketing. On this day, all the children in the packed restaurant light up when the hostesses bring out an actor dressed as "Chicky." Chicky, a friendly chicken character created by KFC in Asia especially to appeal to children, has been hugely popular.
The idea for the character actually emerged in Thailand, another successful market for Tricon. With nearly 300 KFCs and 100 Pizza Huts, Thailand is one of the company's ten largest markets outside the U.S. It is also the unlikely location of a brand war between Western-style pizza chains, and a place where Tricon has learned something about the complications of managing a global network of ambitious franchisees. And it puts a new twist on a question that seems awfully relevant right now: Do people really care whether the brands are American?
Bill Heinecke is the son of American expats who came to Thailand almost 40 years ago. At 18, Heinecke got a $1,200 loan to start a cleaning service in Bangkok and launched an entrepreneurial career that has made him a multimillionaire. His business empire now runs hotels and sells everything from golf clubs to airplanes. The largest part of his empire, however, is the food group, which was built around Heinecke's ownership of Thailand's Pizza Hut franchise. He bought the rights for the franchise for $5,000 in 1980. At the time, pizza was unheard of in Thailand, and cheese was not a popular part of the diet. Yet by 1999 Heinecke had built a chain of 116 restaurants. Providing a virtual monopoly in the pizza market, he was the perfect franchisee for Tricon. But then chicken came between them.
Heinecke's desire to become a franchisee for an Australian chain called Chicken Treat clashed with Tricon's rule that none of its franchisees could compete with its other brands. Last fall the two sides settled a contentious legal battle by agreeing that Heinecke could keep his pizza restaurants and rebrand them under a different name. In March Heinecke reopened his restaurants as a new, but familiar, concept called The Pizza Company. So far, he says, the restaurants are busier than before the switch.
Although Heinecke is American born, he became a Thai citizen several years ago, and one of the arguments he makes for his chain is bluntly nationalistic. Supporting his restaurants, he claims, means supporting a Thai business over the big American corporation. That is clearly a raw topic for Hester Chew, Tricon's managing director in Thailand. "Tricon is an American brand, but we've done a lot for Thailand," he says. He points out that Tricon buys 85% of its ingredients locally, and was just named the best employer in Thailand in a survey of Asian workers. He calls Heinecke's criticisms nationalistic cheap shots. "They accuse me of being nationalistic, and I guess I am if being the largest user of fresh milk in the country and employing Thai farming families is nationalistic," retorts Heinecke.
The real question, of course, is whether customers care. The answer seems to be: not really. After all, The Pizza Company may be Thai owned, but it's still a Western-style restaurant chain. Since last February, Tricon has opened up a whopping 87 Pizza Huts, often placing them directly in the path of Pizza Company locations. On a recent Saturday afternoon in Siam Square, where a Pizza Hut and a Pizza Company stood across the street from each other, customers were crowded into each, blissfully unaware that they were taking part in a standoff.
Of course, if the worst thing that happens in the course of growing an international business is a regional pizza skirmish, the folks at Tricon will be happy. The worst case, obviously, would be a backlash on a wider scale against what Colonel Sanders represents--the face of American business. During this tense time, Tricon is taking precautions to protect its employees. Executives have stopped wearing "logo-wear" identifying them as Tricon employees. The company monitors events through an international security service that allows them to stay one step ahead of the media when trouble flares up. Bassi consults with franchisees in hot spots on a regular basis. When there's an incident, the company reviews its options but often defers to the judgment of the local businessmen. Right now Tricon is advising them to stay out of the spotlight.
Ultimately, though, there's not much Tricon can do except hope for the best. "I'm sure we'll have the ebbs and flows of the political climate as it evolves," says CEO Novak. But he's confident that KFC and Pizza Hut transcend nationalism. "I don't think we're viewed as a different culture; I think we're a part of the culture."