KFC Goes Upscale In Search Of Growth

KFC goes upscale

Nearly 3 months after announcing its first major overhaul since entering China in the 1980s, fast-food giant KFC (NYSE: YUM) is saying it plans to move upscale as part of a drive to reignite its sputtering growth in the market. This kind of repositioning looks quite shrewd, and plays to a more upscale image that overseas brands naturally receive due to their foreign status. KFC actually enjoyed such upscale status when it first came to China in 1987, when its clean restaurants, friendly service and and quality food were considered superior to the fare at many local eateries at that time. But as China’s economy has boomed and income levels have risen, KFC’s image has moved considerably downscale, and the chain is now considered quite average.

KFC first announced its China retrenchment in late March, and hometown rival McDonalds (NYSE: MCD) announced a similar move a short time later. (previous post) The original announcement was relatively broad, and didn’t include lots of details about how KFC intended to update its image. One of the biggest elements of the original announcement included putting more local items on the company menu, and promises of new store designs and uniforms.

Now we’re getting more details about the new look and KFC’s broader strategy for winning back customers who have abandoned the chain in favor of homegrown rivals and higher-end restaurants. Company executives say KFC aims to reposition itself as a more upscale brand that encourages people to sit and stay a while rather than gobble down their food and leave. Coffee chain Starbucks (Nasdaq: SBUX) has won phenomenal success through a similar strategy, positioning itself as a lifestyle choice for upwardly mobile yuppies rather than just a place to eat or gulp down a cup of coffee.

A highlight of the revamp will include a “dining room” concept aimed at making the new KFCs feel more like a home rather than a place to eat quickly and go. (English article) The new stores will include modern paintings on the walls and more plants and individual spaces to give diners more privacy. The new concept will also offer better wi-fi, a service that tends to attract higher-end customers and encourages people to stay longer. Such free wi-fi is a staple at Starbucks, and is one of the coffee chain’s biggest attractions after its comfortable sitting environment.

KFC has previously said it would open 700 new stores in China this year, and presumably the new design will be included in most of those. The company also plans to start revamping existing stores, and will introduce the improved wi-fi service in 2,000 of its 4,600 outlets nationwide by the end of this year.

As the earliest major foreign food chain to come to China, KFC experienced explosive growth in the market for much of its first 2 decades and is the nation’s largest operator with more than 6 percent of the market. But a recent scandal involving antibiotics and fears related to last year’s bird flu outbreak hurt the company, leading to an unprecedented 13 percent year-on-year decline in same-store sales last year.

I was surprised to read that Taiwanese fried chicken chain Dicos has slowly crept up on KFC, and recently surpassed McDonalds to become the nation’s second largest restaurant operator. That kind of challenge should give even more urgency to KFC as it attempts to fend off the challenge from this new generation of well-run lower-cost rivals. On the whole I quite like KFC’s decision to go upscale, as it attempts to regain its image as a more premium dining choice.

We’ll have to wait and see if the chain can really regain some of its former glory through this image overhaul. But its strong earlier track record in China gives me confidence that perhaps we could see KFC regain some momentum in the next 2 years and even return to earlier days of double-digit same-store sales growth.

Bottom line: KFC’s bid to reposition itself as a more upscale dining choice looks like a smart move that, with good execution, could see it return to double-digit same-store sales growth in the next 2-3 years.

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