K F C To Focus On Innovation; Targets Youth To Build Brand Loyalty & Fight Competition

KFC has come a long way since being pelted with stones on its debut in 1995, having emerged as Yum! Restaurant's largest restaurant chain and McDonald's biggest challenger in the country. Yet, analysts feel that the American fast-food major has its toughest challenge yet ahead-of reaching its target of having 500 outlets by 2015, which could be daunting in the face of growing competition and slowing economy.

KFC plans to grow on four fronts-geographical reach, food menu, serving hours and customer base, with particular focus on the Indian youth.

"There is massive headroom for growth in India," says Niren Chaudhary, managing director of Yum! India, which also licenses quick-service restaurant chains Pizza Hut and Taco Bell to franchisees. After all, organised food retail accounts for barely 2% of the massive $90-billion, or approx 4.5 lakh crore, overall food business in the country.

"But it (growth) is dependent on high volumes, since margins are low," says Chaudhary. Hence, KFC wants to serve 50 cities through 500 stores by 2015, up from just over 150 stores now. Second, it wants to move from being a lunch and dinner vendor to an all-day joint, and will look a breakfast and after-dinner options.

Then, it wants to look beyond its staple of burgers (KFC had just three options in its menu when it came to India) to serve nearly 100 different items. And fourth, it wants to reach a wider consumer base by having low-priced dishes and stepping up home delivery.

Launched as a premium fast food chain, KFC now has a starting price of 25, or the cost of a college canteen meal.

The fried chicken chain, which plans to expand its vegetarian and liquid refreshment offerings, will also focus on innovation to attract the Indian youth who is driving the consumer market. "Brands targeted at youth need to be aspirational and innovative," says Chaudhary. These qualities help a brand establish in the youth mind, he says.

The challenge for KFC is to be noticed in an increasingly crowded market, where few brands have built brand loyalty and a repeatable set of customers.

To widen its appeal, KFC will need to constantly fine tune its food menu, provide add-ons (some outlets offer free wireless internet access) and keep an eye on quality (French fries are no more than seven minutes old when served).

"We need to constantly evolve our strategy in this dynamic market," says Sandeep Kataria, Chief Marketing Officer of Yum!, which owns the KFC brand worldwide.

He points to the addition of KFC's new grilled chicken range as a step in this direction. It reflects a shift towards healthier meals and snacks-so a grilled rather than deep fried chicken option for which KFC is traditionally renowned.

According to some estimates, city-bred Indians eat out around once every 45 days on average, while in the West it is once every 48 hours. With economy still growing at a healthy pace despite recent slowdown, incomes on the rise and the growing middle class being increasingly dominated by aspiring young consumers, there is huge scope for growth in the restaurant business.

But competition is intensifying too.

Nando's, a South African chain specializing in chicken dishes, will have 35 or 40 units in India by next year, says a company official. Also, a bunch of local chains such as Bangs, Hot Chix, Chic Punch and BFC are all looking to eat into KFC's share by expanding rapidly. McDonalds, meanwhile, plans to double its India presence by 2015.

Another challenge in this business is the low margins. While restaurant business has gross margins of 50-60%, according to some estimates, but factors such as people costs, real estate and rising food expenses result in net margins of barely 15-20%. "We have to deal with first world costs and third world leases-rentals," says Chaudhary.

Analysts say KFC needs high volumes to ensure that its business is profitable as prices are low. "Brands like KFC walk a tightrope they need to have uniform pricing across the country for the same product, even when real estate and input costs can be much higher in a Mumbai or Delhi," says Pinakiranjan Mishra, Partner, Retail and Consumer Products, Ernst and Young.

So far KFC has remained unscathed though-company officials say KFC has not had to shutter a single store for being unprofitable yet. And it can draw from its experience in China-where it has grown into a chain of more than 3,500 stores in less than 25 years since its entry in 1987-to meet its India plans. For example, KFC China expanded its menu to include unorthodox options such as egg tarts, shrimp and fish to attract free-spending youth to its stores.

"We learnt two concepts from China - move as fast as you can be the first in an area if possible, and make the concept as broad as possible," says Chaudhary.

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