Tuesday, July 10, 2012

Marketing Research Paper on Yum! Brands

How Yum! Brands Adopt their Multibrands Strategies in the Consumer Food Service Market in China

Brand portfolio 
Speaking about Yum! Brands, it is necessary to point out that is a fortune 500 corporation, that operates or licenses A&W, KFC, Pizza Hut, Long John Silver’s, and Taco Bell restaurants worldwide. The company is based in Louisville, Kentucky, nowadays, it is the world’s largest quick service restaurant company in terms of system units over 34,000 restaurants around the world in more than 100 countries and territories. The Yum! Brands global system sales totalled more than USD 9 billion in 2002 (Williams 2003). 

Despite the fact that the company has been created recently, to put it more precisely, practically ten years ago, Yum! Brands has managed to gain the large share of the world market of fast food restaurants. At the present moment the company unites several very powerful and well-known brands. KFC is one of the most popular brands that constitutes an essential part of the company. KFC is mainly known for its fried chicken and this product is a kind of the symbol of KFC. KC has a long history and is traditionally considered to be one of the most popular fast food restaurants competing with McDonalds.

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Another company that constitutes Yum! Brands is Pizza Hut which is a restaurant chain and international franchise based in Addison, Texas, specialized on American-style pizza along with side dishes which may vary depending on location and includes buffalo wings, breadsticks, and garlic bread. At the present moment, Pizza Hut is the world’s largest pizza restaurant chain. Its subdivision Pizza Hut delivery is specialized on the food services, notably on the delivery of products from Pizza Hut restaurants.

It is also worthy of mention that Pizza Hut operated in China since 1981, though initially the company entered Hong Kong market that was not a part of China at that epoch. It currently has 54 restaurants in Hong Kong, 34 being ‘express’ restaurants and 20 being full service restaurant. In recent years the company has started its expansion on Chinese mainland market as a part of the general strategy of Yum! Brands targeting at Chinese market. It should be said that the first Pizza Hut in Mainland China was the restaurant at Dongzhimen in Beijin, which was opened on December 1, 1990. The company progressed rapidly and in 2005 there were nearly 200 restaurants in more than 50 cities, such as almost all provincial capitals and large cities such as Shanghai, Tianjin, and others.

Also, Yum! Brands has Taco Bell Corporation which is also a fast food restaurant chain. Taco Bell serves food items that are mainly based on Tex-Mex cuisine. As a rule, the company encourages its diners ‘to think outside the bun’ by visiting its restaurants instead of hamburger-selling fast food chain of restaurants. At the same time, Yum! Brands keep growing and one of its recent creations is East Dawning. This company is Yum! Brands fusion of the KFC business model with Chinese cuisine, which is specifically targeting at the local fast food market. Unlike many other Asian fast food restaurants, East Dawning restaurants are more spacious and possess better lighting.

Market segmentation and positioning 
Naturally, Chinese market is very attractive for Yum! Brand and it attempts to gain a possibly larger share of this market. In actuality, Yum! Brands plans to open at least 400 restaurants in China. It should be said that building dominants brand sin China as well as international expansion at large was the strategic direction of the further development of Yum! Brands. It should be pointed out that each company that is a part of Yum! Brands has it sown market segment and positioning. In such a way, combining a variety of companies Yum! Brands can occupy the leading position in different segments of the market.

In this respect, it should be said that Pizza Hut, for instance, is marketed as dine-in restaurant serving sangria and escargot as well as the traditional pizza, including traditional toppings and others like tuna. In such a way, Pizza Hut focuses on the market of fast food restaurants being specialized on pizza and other related products. As for Pizza Hut delivery, it is important to underline that this company targets at the delivery of company’s products to customers either to household or office which is getting to be increasingly more important service in China, especially in the situation, when the lunch time of Chinese is getting to be more and more limited while the supply of services becomes widely spread, not in the last turn due to Pizza Hut Delivery.

Speaking about Taco Bell, it is necessary to underline that the company basically operates in the similar segment of the market as McDonalds but unlike such fast food hamburger-selling chains of restaurants, Taco Bell positions itself as a restaurant where the customers can eat different dishes in accordance with the company’s slogan ‘think outside the bun’. In such a way, Taco Bell may be viewed as an alternative to traditional fast food hamburger-selling restaurants like McDonalds.

Another company constituting a part of Yum! Brands, KFC, is a chain of fast food restaurants widely known in the entire world due to its famous fried chicken which is cooked in accordance with a specific recipe that is historically hidden from the wide public and which make the company’s product unique and really attracting for customers.

As for East Dawning, it should be said that this company is quite unique since it represents a symbiosis of a typical Western fast food restaurant with local, Oriental specificities. As a result, this chain of fast food restaurants is different from both Western and Oriental competitors that provides ample opportunity to occupy the leading and unique position in Chinese market.

Consequently, due to such a variety of products offered to the customers in Chinese market, as well as in any other country of the world, companies constituting Yum! Brands represent a serious power in fast food market occupying the leading positions in different segments of the market.

Concept and new product development 
In the current economic situation, it is obvious that Yu! Brands cannot progress and gain larger share of international market using only traditional products. In stark contrast, nowadays the necessity of changes has become as obvious as it has never been before. It is quite a natural process since the companies united under Yum! Brands target at entering new markets that is impossible in fast food market because different regions of the world have different gastronomic tastes and preferences. As a result, products that are popular in one country will not necessarily be accepted in another country. This is predetermined by the existing food culture that defines the preferences and tastes of the local population and which differ dramatically in different regions.

In this respect, China is not an exception. This is a unique country with a very original national cuisine that naturally needs certain adaptation from the part of Yum! Brands. In fact, this is exactly because of the local peculiarities, Pizza Hut has launched serving sangria and escargot along with traditional pizza and other-related products that are sold in other countries of the world. It is worthy of mention that such products sangria and escargot are close to the traditional Chinese cuisine and the introduction of these products which are new for Pizza Hut can lead to the growing popularity of its restaurants in China.

However, such changes of menu and products supplied to customers are not extraordinary and serious as the changes that have occurred in Taco Bell. It should be said that the company has changed its traditional positioning in the market. To put it more precisely, the Chinese Taco Bell restaurants are actually not fast food restaurants as in other countries throughout the world. Instead, they are full service restaurants called Taco Bell Grande that are more analogous to Mexican grill in the US. Unlike fast food restaurants, Taco Bell Grande, in addition to the traditional menu including taco and burritos, Chinese restaurants also serve other Mexican cuisine such as albondigas, i.e. meatball soup, grilled chicken, and alcoholic drinks such as Margaritas. Thus, Taco Bell restaurants are positioned as more prestigious restaurants in China compared to its traditional market position in other countries of the world.

Nonetheless, even such a significant change seems to be quite an ordinary thing compared to the development of a totally new chain of restaurants under the brand of East Dawning. It should be said that these restaurants are a kind of compromise between traditional Western and Oriental cuisines, or, to put it more precisely, Western and Oriental restaurants. This new chain of restaurants provides an opportunity for the local customers to benefit from Western quality of services and size and Oriental, notably Chinese, traditional cuisine.

These restaurants are more spacious and have better lighting. Chinese food is served exclusively but the chain focuses on the elements of Chinese cuisine that are more quickly and easier to prepare. In such a way, the philosophy of Western fast food restaurants is attempted to be settled on Chinese ground, adapting to local national cuisine, traditions and food preferences. As a result, by means of creation of the new company Yum! Brands attempt to enter Chinese market using adaptation of the traditional Kentucky Fried Chicken restaurants to Chinese cuisine.

Sources and distribution strategies
Naturally, taking into consideration the fact that the companies constituting Yum! Brands operate worldwide, they are traditionally oriented on the local sources to supply the restaurants with essential products and ingredients. In fact, such a strategy has a number of advantages. For instance, in such a way Yum! Brands can save costs on transportation of the essential products from different parts of the world. Moreover, speaking about Chinese market, it is worthy of mention that many products are substantially cheaper even compared to neighbouring Asian countries. At the same time, the use of local product stimulates local government to support the companies entering Chinese market since they buy the products of local producers. In such a way, Yum! Brands naturally acquire support of the local state due to the use of the products of Chines agriculture.

However, it is also necessary to agree that some products that are used uniquely Chinese restaurants cannot be imported from any other country of the world since it is economically unmotivated.

Furthermore, it should be pointed out that the company uses a traditional strategy of distribution of its products. Yum! Brands create chain of fast food restaurants throughout the country providing the high quality of services to a possibly larger number of people. Naturally, taking into consideration the relatively low experience of fast food consummation in China and relatively low level of income, the companies constituting Yum! Brands primarily focus on large cities and capitals. It is obvious that large cities, with a large number of population, are practically perfect places for the development of the chain of fast food restaurants since the number of customers in such cities is incomparably higher than in average or small towns.

Geographical spread 
In the result of the existing strategy of distribution of Yum! Brands products through the chain of restaurants placed in the largest cities of the country, the geographical spread of restaurants is disproportional and rather tends to be denser at the Eastern coast of the country where the largest Chinese cities, including Hong Kong – the first city where companies constituting Yum! Brands entered the local market, are situated.

To put it more precisely, it is possible to name Shanghai, Hong Kong, Beijing as the cities where practically all companies of Yum! Brands are represented. It is worthy of mention that Pizza Hut is one of the most widely represented companies which operates in Chinese market compared to other companies of Yum! Brands. For instance, in 2005 this company had nearly 200 restaurants in such cities as Shanghai, Tianjin, Chongqing, Guangzhou, Nanjing, Shenzhen, Hangzhou, Wuhan, and Changsha.

Obviously, at the present moment Yum! Brands are underrepresented in Western China and average cities of the country but the current market situation provides ample opportunities for the further growth even in the current geographical borders of the regions where its chains of restaurants operate.

Franchising and licensing 
Unquestionably, one of the most important points of the further development of Yum! Brands as well as its current position are franchising and licensing. Basically, the companies tend to unification and mutual support and the cases when local producers receive an opportunity to operate under the brand of Yum! Brands are quite rare. The reason is that the companies constituting Yum! Brands do not have a long experience of work in the local market, and what is more, of the work with local companies operating in the same segment of the market.

To a significant extent, this is the result of a low development of fast food industry in China before Yum! Brands and other Western companies entered the local market. This is why the local companies are considered to be not very reliable, and thus, the companies of Yum! Brand do not want take a risk of merging with some local fast food restaurants which are substantially weaker compared to Yum! Brands.

On the other hand, it is necessary to say that it is rather a question of time since Yum! Brands traditionally operate on the basis of franchise and licenses.

Risk management 
Despite a serious progress that Yum! Brands has made in China, it would be a mistake that its entering Chinese market was deprived of any risks and threats. In stark contrast, the companies constituting Yum! Brands faced serious obstacles while they entered the local market. In this respect, it is worthy of mention the opposition of the local population and quite unpopular image of fast food restaurants in the public eye.

In such a context, it should be said that the recent researches are quite noteworthy because they manage to trace the evolution of fast food industry at large and Yum! Brands in particular. At the same time, it is also extremely important to reveal the evolution of products used by Yum! Brands companies that are sold to their consumers. Basically, at the present days it is argued that initially natural components were used in food production. As the time passed, new technologies, especially in chemical industry, were implemented in the process of food production. Moreover, food became an object of mass production and in a combination with new technologies it resulted in the development of companies struggling for their share of the market of the food industry.

In fact, nowadays, artificial elements, which are used in food production, substitute natural elements. In the result, consumers are not informed about what they eat and the taste of food is deceptive because it can vary depending on chemical components used. Moreover, some specialists (Williams 2003) raise another extremely important problem. To put it more precisely, it is stated that companies involved in food production are not willing to reveal their commercial and technological secrets and the information about the process of food production and its ingredients is a kind of taboo. Thus, consumers lack information about food that leads to their deception.

Furthermore, since there is little information about food ingredients, neither consumers nor specialists can really define the extent to which the fast food is dangerous for human health. It is extremely disturbing because fast food industry is a dynamically growing industry and Yum! Brands is only a leader but not the only company operating in this niche of the market. This is why the companies of Yum! Brands are not alone in their struggle with the public opposition and they try to minimize the risk and negative results of such opposition in China.

Obviously, the problem raised cannot remain unsolved. It is extremely important to find some solution that could help people to be better informed about the ingredients of the fast food they regularly consume and whether it is safe for their health or not. However, this is where another problem, rises.

At first glance, the solution seems to be quite obvious – food producers should simply provide consumers and specialists with detailed information concerning the process and ingredients used in the food production. Naturally, it would probably solve the problem. In such a situation, consumers could know what they ate and they could make a free and conscious choice whether to eat or not the food suggested by fast food restaurants. Unfortunately, nowadays they are deprived of such a possibility, since artificial elements substituted natural ingredients and it is practically impossible to find the difference between natural food and one consisting of artificial ingredients. Moreover, consumers are simply deceived. Otherwise, they would probably react in a different way. Probably they would change their diet if fast food tasted differently, or if they really knew what they ate. It is obvious that artificial elements may be dangerous for their health.

For instance, it is not a secret that fast food causes obesity that is getting to be epidemic in the US. Obviously, this situation is evidence of the negative consequences of the lack of information about fast food, its processing and ingredients.

On the other hand, it is only one of negative consequences, while the negative effects may be much more serious. For instance, the wide use of artificial ingredients, including chemical elements, may have a number of side-effects, which may be disastrous for the health of some individuals. To put it more precisely, some elements may provoke allergy that may deteriorate individual’s health or even death of some individuals. Unfortunately, it is practically impossible to predict such consequences of fast food consumption because of the lack of information about food people eat. For instance, if an individual eats a beefsteak, it does not necessarily means that it contains beef, or some other natural ingredients. Instead, some artificial elements, which are potentially allergic, may be used.

Thus, it is obvious that the lack of information about ingredients of food and the use of artificial elements in its production may have disastrous consequences but the problem is aggravated by the fact that it also makes the proper treatment of health problems caused by food practically impossible. It is not a secret that it is necessary to find the cause of illness to cure patients efficiently.

This is why Yum! Brands attempt to be as open to the wide public as possible but it is worthy of mention that they remain open only as long as there is no threat to their commercial secrets.

At the same time, it should be said that the companies also faced a number of other problems and risks. For instance, in 2005, Sudan Red was found in some KFC products. As a result, the company had to launch a campaign in order to prove that its products are really safe and healthy and cannot cause any harm to the customers of KFC in China. In this respect, it is possible to remind that the state control in the country is quite strong and it was also used as one of the elements to prove or guarantee the safety of the company’s products which were carefully analyzed and researched by the local medical and state services.

Probably, the most serious risk KFC faced in China was the threat of Avian flue which dramatically affected the company’s sales. As the main product of KFC was and remains fried chicken the public panic fear before the consumption of chicken had decreased the sales of this product dramatically, to the extent that the company was in quite a difficult position. However, as the danger of anvian flue decreased the sales rates had started to grow steadily and at the present moment they are at a relatively high level, though the risk of further problems provoked by avian flue is quite serious. This is why the company has to constantly persuade the public that there is no risk of catching avian flue in a restaurant of KFC.

Case study: the new brand –East Dawning
Obviously, East Dawning may be considered as one of the most perspective companies among all companies constituting Yum! Brands. The fact that the company perfectly combines traditional Kentucky Fried Chicken restaurants with the national cuisine of China made these restaurants extremely popular and very perspective.

Naturally, the efficient analysis of the position of any company in the market implies SWOT analysis. Speaking about East Dawning it is possible to start SWOT analysis from the discussion of strengths of the companies.

Finally, it is necessary to analyze the company in the context of Porter’s five force model. In this respect, it is necessary to underline that East Dawning possesses a great supplier power they are constantly developing and progressing but still they cannot supply sufficient services for a larger number of customers because of the local peculiarities of the market which is not perfectly developed yet. As a result, the company supplies its services only to a limited amount of customers who possess sufficient financial resources.

On the other hand, customers buyer’s power is also getting to be quite limited and particularly sensitive to significant economic changes or crisis. What is meant here is the fact that a serious economic crisis would decrease dramatically the buying power of customers of both companies.

Furthermore, there remains a potential threat of substitutes since the companies operating in fast food industry that can potentially face a strong opposition from the part of the public. Also there is a threat from the main competitors that can simply substitute and replace the company from its segment of the market in China though it is worthy of mention that due its relatively unique position this risk is relatively low.

Nonetheless, it is necessary to remember about high degree of rivalry and competition that the company suffers from and in the future there will remain less and less room for further growth since such serious competitors as McDonalds would hardly lose an opportunity to gain a share of Chinese market of fast food restaurants.

Future prospect 
Regardless numerous and quite serious threats the companies constituting the Yum! Brands are currently facing their prospects are quite good. To put it more precisely, it is obvious that the competition from the part of such giants as McDonalds, being very strong, is, nonetheless, not an unsurpassable barrier in the way of Yum! Brands to the dominance in Chinese market. The current position of the companies reveal the fact that they have a large share of Chinese fast food market and there is substantial potential for the further growth.

The reason for such a statement is quite obvious. First of all, it should be said that Chinese market of fast food restaurants is nowadays underdeveloped and the fact that such giants as Yum! Brands are repressed only in the largest cities of the country means that there is a lot room for the further growth. Moreover, even the representation of the companies in the largest cities is not sufficient as the number of restaurants in such cities in China is incomparably lower than in other Asian countries or other developed countries of the world.

Practically, this means that the companies can grow in two main directions. On the one hand, they can grow within large cities increasing the number of restaurants. On the other hand, they can develop the chain of restaurants developing the network of fast food restaurants in all large cities and spreading it on average cities as well. Naturally, the future prospects should not be overestimated since the competition with such companies as McDonalds would only grow stronger since Chinese market of fast food restaurants is too attractive to refuse from it easily. At the same time, it is necessary to remember that China is still not a democratic country and the role of the government is very important. This is why there exist certain risks of changes the policy of Chinese government in relation to foreign companies, including Yum! Brands.

Finally, the successful realization of the plans of the further growth would inevitably face the problems such as Avian flue that means that the company should be ready to cope with these problems beforehand.

Strategic recommendations 
Thus, taking into account all above mentioned, it is possible to recommend to the Yum! Brands continuing the current strategy of the market expansion. At the same time, it is worthy of mention that it is extremely important to chose the right direction the companies should target at. In this respect, it should be said that the creation of East Dawning is a very good strategic concept that should be developed further. To put it more precisely, as Chinese market is very specific with strong traditions and unique food culture, it is quite natural that the products offered by Western companies such as Yum! Brands would be hardly accepted by Chinese people without any doubt or certain dissatisfaction. In stark contrast they would more gladly consume products that are typical for the local cuisine. The only condition here is that these products could be cooked fast and easy in order to maintain the general strategy of Yum! Brands as the companies that provide fast food services.

Furthermore, it is also possible to recommend focusing on mass consumer since China is the most populated country. Consequently, the mass consumption of the companies’ products in China would be quite profitable and very perspective for the further growth. In this respect, it is necessary to primarily focus on the large cities where the companies should offer products adapted for the local market and provide services of the highest quality typical for the Yum! Brands.

Finally, in order to minimize the risk of such problems as decrease of sales because of avian flue it is necessary to promote the companies where the quality and safety of food is guaranteed and customers can rely on Yum! Brands. In this respect, the close cooperation with state services may be quite helpful since they can provide evidence of the reliability of the companies.
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