P.O. Box 32070
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.
Stock Plummets in 1970
Several observations about franchise arrangements noted by stock market analysts and accountants in the late 1960s became widespread news by 1970. First, Wall Street noticed that profits for many successful franchisers came from company-owned stores, not from the independent shops--though this was not the case with Kentucky Fried Chicken. This fact tied in with a memorandum circulated at Peat, Marwick, Mitchell & Company, and an article published by Archibald MacKay in the Journal of Accountancy stating that income labeled "initial franchise fees" was added when a franchise agreement was signed, regardless of whether the store ever opened or fees were collected. Such loose accounting practices caused a Wall Street reaction: franchisers, enjoying the reputation as "glamour stocks" through the 1960s, were no longer so highly regarded. Kentucky Fried Chicken stock hit a high of $55.50 in 1969, then fell to as low as $10 per share within a year.
In early 1970, following a number of disagreements with Brown, Massey resigned. When several other key leaders departed the company, Brown found the housecleaning he planned already in progress. A number of food and finance specialists joined Kentucky Fried Chicken, including R. C. Beeson as chief operational officer and Joseph Kesselman as chief financial officer. Kesselman brought in new marketing, controlling, and computer experts; he also obtained the company's first large-scale loan package ($30 million plus a $20 million credit line). By August 1970 the shake-up was clear: Colonel Harland Sanders, his grandson Harland Adams, and George Baker, who had run company operations, resigned from the board of directors. Colonel Sanders, at 80, knew his limits. In a 1970 New York Times article, Sanders stated, "[I] realized that I was someplace I had no place being.... Everything that a board of a big corporation does is over my head and I'm confused by the talk and high finance discussed at these meetings."
CEO Brown spent the rough year of 1970 shoring up his company's base of operations. By September, Kentucky Fried Chicken operated a total of 3,400 fast-food outlets; the company owned 823 of these units. The company, once too large for the Colonel to handle, grew too mammoth for John Y. Brown as well. In July 1971 Kentucky Fried Chicken merged with Connecticut-based Heublein Inc., a specialty food and alcoholic beverage corporation. Sales for Kentucky Fried Chicken had reached $700 million, and Brown, at age 37, left the company with a personal net worth of $35 million. Interviewed for the Wall Street Journal regarding the company's 1970 financial overhaul, Brown commented, "You never saw a more negative bunch.... If I'd have listened to them in the first place, we'd never have started Kentucky Fried Chicken." Article author Frederick C. Klein included closing parenthetical remarks in which observers close to the company noted that "in engineering Kentucky Fried Chicken's explosive growth, Mr. Brown neglected to install needed financial controls and food-research facilities, and had let relations with some franchise holders go sour."
Heublein Makes Changes in 1970s
Heublein planned to increase Kentucky Fried Chicken's volume with its marketing know-how. Through the 1970s the company introduced some new products to compete with other fast-food markets. The popularity of barbecued spare ribs, introduced in 1975, kept the numbers for Kentucky Fried Chicken looking better than they really were. As management concentrated on overall store sales, they failed to notice that the basic chicken business was slacking off. Competitors' sales increased as Kentucky Fried Chicken's dropped.
For Heublein, acquisitions were doing more harm than good: Kentucky Fried Chicken was stumbling just when the parent company had managed to get United Vintners, bought in 1969, on its feet. In 1977 the company appointed Michael Miles, who was formerly responsible for the Kentucky Fried Chicken ad campaign at Leo Burnett and had joined Heublein's marketing team in 1971, to chair the ailing Kentucky Fried Chicken. Richard Mayer, vice-president of marketing and strategic planning for Heublein's grocery products, took charge of the Kentucky Fried Chicken U.S. division.
Mayer found that the product mainstay, fried chicken, wasn't up to the high quality Colonel Harland Sanders would expect. Miles and Mayer also faced the same problem John Y. Brown had not managed to surmount: relations with franchisees were sour. In the mid-1970s, the franchisees sold more per store than company-owned stores. Faring better without Heublein's help, they resented paying royalty fees to the ineffective corporate parent. To top that off, the stores were looking out of date.
Having unloaded well over 300 company-owned stores in the early 1970s, by the end of the decade Heublein began to buy some back from the franchisees. Renovation of the original red-and-white striped buildings began in earnest, with Heublein putting $35 million into the project. On the outside, Kentucky Fried Chicken facades were updated, while on the inside, cooking methods veered back to the Colonel's basics. Sticking to a limited menu kept Kentucky Fried Chicken's costs down, allowing the company time to recoup. Timing was fortunate on Kentucky Fried Chicken's turn-around; it happened just in time for Colonel Sanders to witness. After fighting leukemia for seven months, Harland Sanders died on December 16, 1980.
The 1980s: Profits and Expansion
Miles and Mayer's work culminated with the highly successful 1981 ad campaign, "We Do Chicken Right." A year later, in step with the fast-paced 1980s, R.J. Reynolds Industries Inc. acquired Heublein, giving Kentucky Fried Chicken another lift; the company had expansionary vision, capital, and the international presence to tie it all together. Kentucky Fried Chicken sales that year reached $2.4 billion. By 1983 the company had made impressive progress. With 4,500 stores in the United States and 1,400 units in 54 foreign countries, no other fast-food chain except McDonald's could compete. But while many industry insiders were crediting the team with victory, Mayer wasn't so quick to join in. As he noted in Nation's Restaurant News, "People keep talking about the turn-around at KFC. I'd really rather not talk about it. The turn-around is only halfway over."
With the entrance of R. J. Reynolds came the exit of Michael Miles, who resigned to become CEO of Kraft Foods; Mayer took over as chairman and CEO. Mayer continued on a cautious line for the next several years, refusing to introduce new products as obsessively as its competitors. "In the past two years," Mayer said in a KFC company profile in Nation's Restaurant News, "people have gone absolutely schizoid.... A lot of chains have blurred their image by adding so many new menu items." In further commentary, he added, "We don't roll out a flavor-of-the-month."
PepsiCo Buys Company in 1986
Mayer's conservatism gained him the respect of Wall Street and his peers in the fast-food industry. In 1986 soft-drink giant PepsiCo, Inc., bought Kentucky Fried Chicken for $840 million. Reasons cited were KFC's superior performance and its 1980--85 increase in worldwide revenue and earnings. The successful operator of the Pizza Hut and Taco Bell chains, PepsiCo did quite well introducing new products through those restaurants. It was just a matter of time before Kentucky Fried Chicken would be expected to create new products.
To foster new product introduction, in 1986 Kentucky Fried Chicken opened the $23 million, 2,000,000-square-foot Colonel Sanders Technical Center. In addition, the company began testing oven-roasted chicken through multiple-franchisee Collins Foods; further test-marketing of home delivery was undertaken using PepsiCo's successful Pizza Hut delivery system as an example. By late 1986 Donald E. Doyle, succeeding Mayer in the post of Kentucky Fried Chicken's U.S. president, inherited the task of developing new menu items.
The overall market for fast food seemed glutted by the late 1980s. PepsiCo CEO D. Wayne Calloway saw Kentucky Fried Chicken's national niche as secure for two reasons: first, with competition spurred by the large number of fast-food suppliers, weaker chains would inevitably leave the market; second, Kentucky Fried Chicken still had room to grow in the Northeast and Mid-Atlantic regions. Internationally, the company planned 150 overseas openings in 1987. Japan, a major market, had 520 stores, Great Britain had 300, and South Africa had 160. KFC International, headed by Steven V. Fellingham, planned to concentrate on opening units in a handful of countries where its presence was limited. The People's Republic of China was the most notable new market secured in 1987; KFC was the first American fast-food chain to open there.
Franchisee Problems with New Parent Company
Imperative to the success of Kentucky Fried Chicken was the establishment of successful relations with the numerous franchisees. Most of them lauded parent PepsiCo's international strength and food-service experience; KFC had its own inherent strength, however, according to franchisees, which the parent company would do well to handle with care. That strength was the sharing of decision-making.
In 1966, for instance, the Kentucky Fried Chicken Advertising Co-Op was established, giving franchisees ten votes and the company three when determining advertising budgets and campaigns. As a result of an antitrust suit with franchisees, in 1972 the corporation organized a National Franchisee Advisory Council. By 1976, the company worked with franchisees to improve upon contracts made when Brown and Massey took over. Some contracts even dated back to when Colonel Sanders had sealed them with a handshake. The National Purchasing Co-Op, formed in 1979, ensured franchisees a cut of intercompany equipment and supply sales. All of these councils had created a democratic organization that not only served the franchisees well, but helped keep operations running smoothly as Kentucky Fried Chicken was shifted from one corporate parent to another. As time passed, however, PepsiCo's corporate hand seemed to come down too heavily for franchisee comfort.
In July 1989, CEO and Chairman Richard Mayer resigned to return as president to General Foods USA. Mayer, who together with Mike Miles was credited for bringing Kentucky Fried Chicken out of the 1970s slump, departed as the company battled over contract rights with franchisees. John M. Cranor, an executive who had joined PepsiCo 12 years earlier, took over as CEO. Kyle Craig, formerly with Burger King, Steak & Ale, and Bennigan's, began in an advisory role, later stepping up to become president of KFC-USA.
Within months Cranor was meeting with franchisee leaders in Louisville to defend parent PepsiCo's contract renewal. Among the issues debated was PepsiCo's plan to revise the franchisee-renewal policy, which guaranteed operators the right to sell the business, and an automatic ten-year extension on existing contracts with reasonable upgrading required. It was in KFC's long-term interest to settle the dispute without litigation, Cranor believed--and with good reason. In August of 1989 franchisees had established a $3.6 million legal fund, averaging $1,000 per unit, to fight the battle in court if necessary. Cranor remained optimistic, relying on the history of positive relations with franchisees.
Despite contract battles and communication troubles, in the fall of 1990 Kentucky Fried Chicken called a one-day truce to celebrate in honor of Colonel Sanders's 100th birthday. Meanwhile, fast-food competitors with stricter organization were keeping up with changes in consumer demand and introducing new products at a dizzying rate. KFC, in contrast, had difficulty in creating new products linked to the cornerstone fried chicken concept, as well as in getting them out quickly through franchisee stores. Hot Wings, brought out in 1990, were KFC's only hit in a number of attempts, including broiled, oven-roasted, skinless, and sandwich-style chicken.
In late September 1990, Kentucky Fried Chicken increased its holding of company-owned stores by buying 209 U.S. units from Collins Foods International Inc.; Collins retained its interest in the Australian KFC market. The acquisition boosted Kentucky Fried Chicken's control of total operating units to 32 percent. The corporation also added Canada's Scott's Hospitality franchises to its fold, an increase of 182 units.
To update its down-home image and respond to growing concerns about the health risks associated with fried foods, in February 1991 Kentucky Fried Chicken changed its name to KFC. New packaging still sported the classic red-and-white stripes, but this time wider and on an angle, implying movement and rapid service. While the Colonel's image was retained, packaging was in modern graphics and bolder colors. New menu introductions were postponed, as KFC once again went back to the basics to tighten up store operations and modernize units. A new $20 million computer system not only controlled fryer cooking times, it linked front counters with the kitchen, drive-thru window, manager's office, and company headquarters.
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 rennovate 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.