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KFC Corporation

KFC Corporation

1441 Gardiner Lane
Louisville, Kentucky 40213
U.S.A.
Telephone: (502) 874-1000
Toll Free: (800) 225-5532
Web site: http://www.kfc.com

Wholly Owned Subsidiary of Yum! Brands, Inc.
Incorporated: 1955 as Kentucky Fried Chicken
Employees: 24,000
Sales: $520.3 million (2007 est.)
NAIC: 722110 Full Service Restaurants

THE EARLY LIFE OF COLONEL SANDERS

SANDERS FIRST FRANCHISE IN 1952

NEW MANAGEMENT FOR KENTUCKY FRIED CHICKEN

STOCK PLUMMETS IN 1970

HEUBLEIN MAKES CHANGES

PROFITS AND EXPANSION

PEPSICO BUYS COMPANY IN 1986

FRANCHISEE PROBLEMS WITH NEW PARENT COMPANY

INTERNATIONAL SUCCESS

GROWTH UNDER TRICON/YUM! BRANDS

PRINCIPAL COMPETITORS

FURTHER READING

KFC Corporation operates the worlds largest chain of chicken restaurants, Kentucky Fried Chicken, with some 11,000 restaurants in locations in 80 countries and territories across the globe. Headquartered in Kentucky, where the brand originated, the company receives about half its profits from international sales. KFC has some 5,300 domestic restaurants. The largest unit in its international division is its China operation, which comprises over 1,600 restaurants. KFC Corp. is wholly owned by Yum! Brands, Inc., which also operates the Pizza Hut, Taco Bell, Long John Silvers, and A&W restaurant chains.

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 Sanderss father in 1896, Sanderss 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 did not 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 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 Sanderss 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 states governor; second, he developed a unique, quick method of spicing and pressure-frying chicken. Due to his regional popularity, the Harland Sanders Court and Café received an endorsement by Duncan Hiness Adventures in Good Eating in 1939.

Sanders Court and Café was Kentuckys 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, Sanderss hand was once again forced: in the early 1950s, plans for Interstate 75 would bypass Corbin entirely. Though Sanders Café 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 persuaded several other restaurant owners to add his Kentucky Fried Chicken to their menus.

In 1955 Sanders incorporated and the following year took his chicken recipe to the road, doing demonstrations onsite 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. By 1963 Sanderss recipe was franchised to more than 600 outlets in the United States and Canada. Sanders had 17 employees and traveled 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 Sanderss 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: Hes 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 foodservice companies. It trailed such giants as Howard Johnson, but was ahead of McDonalds 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 prefabricated 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 Colonels concept of a sit-down Kentucky Fried Chicken dinner to a stand-up, take-out store emphasizing fast service and low labor costs. By 1970 this idea created 130 millionaires, all from selling the Colonels famous pressure-cooked chicken. Such unprecedented growth came with its cost, however, as Brown remarked in Business Week: At one time, I had 21 millionaires reporting to me at eight oclock 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.

COMPANY PERSPECTIVES

KFC Corp., based in Louisville, Kentucky, is the worlds most popular chicken restaurant chain, specializing in Original Recipe, Extra Crispy, Twister, and Colonels Crispy Strips chicken with homestyle sides.

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 companys 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 Im confused by the talk and high finance discussed at these meetings.

CEO Brown spent the rough year of 1970 shoring up his companys 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 companys 1970 financial overhaul, Brown commented, You never saw a more negative bunch. If Id have listened to them in the first place, wed 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 Chickens 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

Heublein planned to increase Kentucky Fried Chickens 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 Chickens 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 Heubleins marketing team in 1971, to chair the ailing Kentucky Fried Chicken. Richard Mayer, vice-president of marketing and strategic planning for Heubleins grocery products, took charge of the Kentucky Fried Chicken U.S. division.

KEY DATES

1930:
Harland Sanders opens Court and Café Restaurant.
1952:
Sanders makes first franchise deal.
1955:
Kentucky Fried Chicken incorporates.
1964:
Sanders sells business to John Brown and Jack Massey.
1971:
Company merges with Heublein, Inc.
1982:
R.J. Reynolds acquires Heublein.
1986:
PepsiCo buys Kentucky Fried Chicken division.
1991:
Name is changed to KFC Corporation.
1997:
PepsiCo spins off KFC as part of restaurant management company Tricon.
2002:
KFC parent Tricon changes name to Yum! Brands.

Mayer found that the product mainstay, fried chicken, was not 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 Heubleins 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 Colonels basics. Sticking to a limited menu kept Kentucky Fried Chickens costs down, allowing the company time to recoup. Timing was fortunate on Kentucky Fried Chickens turnaround; it happened just in time for Colonel Sanders to witness. After fighting leukemia for seven months, Harland Sanders died on December 16, 1980.

PROFITS AND EXPANSION

Miles and Mayers 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 McDonalds could compete. Yet while many industry insiders were crediting the team with victory, Mayer was not so quick to join in. As he noted in Nations Restaurant News, People keep talking about the turn-around at KFC. Id 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 Nations 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 dont roll out a flavor-of-the-month.

PEPSICO BUYS COMPANY IN 1986

Mayers 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 the companys superior performance and its 198085 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 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 PepsiCos successful Pizza Hut delivery system as an example. By late 1986 Donald E. Doyle, succeeding Mayer in the post of Kentucky Fried Chickens 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 Chickens 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 Peoples 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 PepsiCos international strength and foodservice 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, PepsiCos corporate hand seemed to come down too heavily for franchisee comfort.

In July 1989, CEO and Chairman Richard Mayer resigned to become president of 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 Bennigans, 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 PepsiCos contract renewal. Among the issues debated was PepsiCos 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 KFCs long-term interest to settle the dispute without litigation, Cranor believed, and with good reason. In August 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 Sanderss 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 KFCs 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 Chickens control of total operating units to 32 percent. The corporation also added Canadas Scotts 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 Colonels 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-through window, managers office, and company headquarters.

INTERNATIONAL SUCCESS

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, between 1988 and 1992, sales and profits for the international business nearly doubled. In addition, franchise relations, always troublesome in the domestic business, ran smoothly in KFCs 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 foods 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.

Nontraditional service, often stemming from successful innovations instituted in the companys international operations, was seen as a way for KFC to enter new markets. Delivery, drive-through, carryout, 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 21st century, executives believed KFC had to change its image. We want to be the chicken store, Cranor stressed in a 1991 Nations Restaurant News. Cranors goal was total concept transformation, moving KFC to a more contemporary role.

New product introductions were part of the companys 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 companys new CEO, David Novak, also decided to test Colonels Kitchen, a clear imitation of the Boston Market format. To counter McDonalds and Burger Kings 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 KFCs 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, which took place in the fall of 1997.

GROWTH UNDER TRICON/YUM! BRANDS

KFC had benefited from the hands-on management style of David Novak, who became head of Tricon. In the year before the spinoff, KFC had surprised investors with an increase in profits of over 20 percent. Novak attributed the chains perseverance in spite of general stagnation in the domestic fast-food market both to strategic menu changes, such as the Mega-Meal and chicken pot pie, and to a more friendly and encouraging corporate culture. Novak spent three days a week on the road, often sleeping in the homes of franchisees, and he cultivated a friendly and inclusive corporate culture along the lines of Wal-Mart and Mary Kay. Novak seemed to have a deft touch, shepherding in some successful innovations, such as a chicken sandwich that brought in 30 percent more sales than anticipated. Nevertheless, the chicken business was touchy. While the chicken sandwich sold well, it may have eaten into sales of other KFC products. KFCs bottom line was also propped up by sales of company-owned restaurants to franchisees. In 1999, the chain had domestic sales of $3.2 billion, which was almost equivalent to the combined sales of its top four competitors. Boston Market, which had been a strong competitor only a few years earlier, was in bankruptcy in 1999. While there were some good things happening in the domestic market, overall, fast-food chicken was no longer an expanding area, and at home, KFC was stuck in flat or 2 to 3 percent sales growth.

KFCs parent Tricon came up with one solution to low growth beginning in 1998, opening what it called multibrand stores which combined two or three of the Tricon chains. By 2002, Tricon had developed 1,375 multibrand stores. Tricon changed its name in 2002 to Yum! Brands, and it acquired two more restaurant chains, the seafood restaurants Long John Silvers, and the hamburger and root-beer chain A&W. This opened up some more possibilities for multibranded stores. In 2003, KFC Corp. got a new top executive, Gregg Dedrick, who succeeded Cheryl Bachelder. David Novak still headed the parent company. While total sales reached $4.8 billion in 2002 and KFC controlled some 46 percent of the U.S. fast-food chicken market, the brand was still seen as troubled. Issues regarding the healthfulness of its predominantly fried food, and of KFCs treatment of animals, had dogged the company in recent years. In 2004, parent Yum! told KFC that it could not open any more multibrand restaurants (of which there were almost 1,000) until its domestic same-store sales figures improved.

While the domestic market was far from vibrant, KFC continued to do very well internationally, especially in Asia. By 2001, Kentucky Fried Chicken was the most recognized foreign brand in China, where the company had 500 restaurants. KFC also had about 300 outlets in Thailand, and more than 150 in Indonesia. The company adapted its recipes to local tastes, and successfully navigated the differing political and regulatory climates abroad. Tricons profits increased by close to 50 percent for its combined China operations in 2000, a figure not dreamed of by any domestic divisions. By 2006, KFC had 1,700 restaurants in China, more than tripling in five years. Profit and sales figures saw increases of over 25 percent for some quarters, while comparable figures domestically were 1 and 2 percent. KFC significantly outsold McDonalds in China, and by 2006, KFC was opening a new Chinese outlet every 22 hours. Yum!s boss David Novak told Business Week (October 30, 2006) that he hoped to eventually have as many KFC restaurants in China as in the United States. There is no one else in China expanding at this level with the returns we are generating, he told the magazine. Thus while the U.S. market had continued to slumber for KFC in the years it had been run by Tricon/Yum!, overseas KFC was a powerful force.

Frances E. Norton
Updated, Susan Windisch Brown
A. Woodward

PRINCIPAL COMPETITORS

McDonalds Corporation; Faircloth Food Services, Inc.; Popeyes Chicken and Biscuits.

FURTHER READING

Colonel Sanders Bowing Out, New York Times, August 8, 1970.

Cooking Up Profits, Southern Style, Business Week, June 24, 1967.

Corporate Meets the Colonel in KFCs Entrepreneurial Cranor, Nations Restaurant News, November 18, 1991.

The Education of Hicks Waldron, Forbes, December 8, 1980.

A Finger-Lickin Good Time in China, Business Week, October 30, 2006, p. 50.

Franchising: Too Much, Too Soon, Business Week, June 27, 1970.

Garber, Amy, Bruised but Not Battered, Nations Restaurant News, July 7, 2003, p. 4.

Heublein May Buy Kentucky Fried via Stock Swap, Wall Street Journal, January 22, 1971.

Heublein Merger Plan with Kentucky Fried Is Ratified by Holders, Wall Street Journal, July 9, 1971.

Hume, Scott, KFC to Stick with What Its Finally Doing Right, Advertising Age, June 27, 1983.

Jargon, Julie, McDs Slips in China, Crains Chicago Business, March 6, 2006, p. 1.

Jeffrey, Don, Peter Romeo, and Rick Van Warner, KFC Company Profile (a multiple-article series), Nations Restaurant News, December 15, 1986.

Keegan, Peter O., KFC Shuns Fried Image with New Name, Nations Restaurant News, February 25, 1991.

________, KFC Takes Step Back to Move Forward, Nations Restaurant News, November 18, 1991.

Klein, Frederick C., John Y. Brown, Rich and Taking It Easy, Wall Street Journal, April 1, 1975.

Koeppel, Dan, The Feathers Are Really Flying at Kentucky Fried, Adweeks Marketing Week, September 3, 1990.

Martin, Richard, Collins to Sell 209 KFC Units to PepsiCo for $123 Million, Nations Restaurant News, September 24, 1990.

OKeefe, Brian, What Do KFC and Pizza Hut Conjure Up Abroad? Fortune, November 26, 2001, p. 102.

Paperniek, Richard L., Tricon Profits Rise Despite Sales Dip, Nations Restaurant News, May 8, 2000, p. 5.

PETA Kills Anti-KFC Suit, Plans Worldwide Protest, Nations Restaurant News, September 8, 2003, p. 3.

Prewitt, Milford, Cranor Answers KFC Critics, Nations Restaurant News, November 27, 1989.

________, Mayer Flies KFC Coop; PepsiCo Names Cranor, Nations Restaurant News, July 31, 1989.

Rudnitsky, Howard, Leaner Cuisine, Forbes, March 27, 1995, pp. 4344.

Sellers, Patricia, Pepsicos Shedding Ugly Pounds, Fortune, June 26, 1995, pp. 9495.

________, Pepsis Eateries Go It Alone, Fortune, August 4, 1997, p. 27.

________, Why Pepsi Needs to Become More Like Coke, Fortune, March 3, 1997, pp. 2627.

Smith, Rod, Restaurant Veteran to Lead KFC, Feedstuffs, September 22, 2003, p. 16.

Spielberg, Susan, Yum Halts Co-Branding of KFC Chain in U.S., Nations Restaurant News, December 20, 2004, pp. 1, 10.

Success Story: Potential Ruin Is Turned to Boom, New York Times, March 22, 1964.

Tanzer, Andrew, Hot Wings Take Off, Forbes, January 18, 1993, p. 74.

Tricons Fast-Food Smorgasbord, Business Week Online, February 11, 2002.

Zuber, Amy, Wall Street Pans Yums 4th Qtr Outlook As Anything but Tasty, Nations Restaurant News, October 21, 2002, p. 1.

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KFC Corporation

KFC Corporation

P.O. Box 32070
Louisville, Kentucky 40232
U.S.A.
(502) 456-8300
Fax: (502) 454-2195

Wholly Owned Subsidiary of PepsiCo, Inc.
Incorporated:
1955 as Kentucky Fried Chicken
Employees: 160,000
Sales: $6.4 billion (1996)
SICs: 5812 Eating Places

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 PepsiCos 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 Sanderss father in 1896, Sanderss 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 didnt 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 Sanderss 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 states 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 Hiness Adventures in Good Eating in 1939.

Sanders Court and Cafe was Kentuckys 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, Sanderss 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 Sanderss 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 Sanderss 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: Hes 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 McDonalds 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 prefabricated 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 Colonels 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 Colonels 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 oclock 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 shopsthough 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 companys 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 Im confused by the talk and high finance discussed at these meetings.

CEO Brown spent the rough year of 1970 shoring up his companys 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 companys 1970 financial overhaul, Brown commented, You never saw a more negative bunch. If Id have listened to them in the first place, wed 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 Chickens 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 Chickens 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 Chickens 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 Heubleins marketing team in 1971, to chair the ailing Kentucky Fried Chicken. Richard Mayer, vice-president of marketing and strategic planning for Heubleins grocery products, took charge of the Kentucky Fried Chicken U.S. division.

Mayer found that the product mainstay, fried chicken, wasnt 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 Heubleins 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 Colonels basics. Sticking to a limited menu kept Kentucky Fried Chickens costs down, allowing the company time to recoup. Timing was fortunate on Kentucky Fried Chickens 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 Mayers 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 McDonalds could compete. But while many industry insiders were crediting the team with victory, Mayer wasnt so quick to join in. As he noted in Nations Restaurant News, People keep talking about the turn-around at KFC. Id 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 Nations 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 dont roll out a flavor-of-the-month.

PepsiCo Buys Company in 1986

Mayers 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 KFCs 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 PepsiCos successful Pizza Hut delivery system as an example. By late 1986 Donald E. Doyle, succeeding Mayer in the post of Kentucky Fried Chickens 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 Chickens 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 Peoples 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 PepsiCos 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, PepsiCos 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 Bennigans, 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 PepsiCos contract renewal. Among the issues debated was PepsiCos 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 KFCs long-term interest to settle the dispute without litigation, Cranor believedand 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 Sanderss 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 KFCs 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 Chickens control of total operating units to 32 percent. The corporation also added Canadas Scotts 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 Colonels 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, managers 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 KFCs 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 foods 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 companys 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 Nations Restaurant News. Cranors goal was total concept transformation, moving KFC to a more contemporary role.

New product introductions were part of the companys 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 companys new CEO, David Novak, also decided to test Colonels Kitchen, a clear imitation of the Boston Market format. To counter McDonalds and Burger Kings 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 KFCs 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 PepsiCos 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 McDonalds, so it remained to be seen if the new parent company would refresh KFCs image and profits.

Further Reading

Colonel Sanders Bowing Out, New York Times, August 8, 1970.

Cooking up Profits, Southern Style, Business Week, June 24, 1967.

Corporate Meets the Colonel in KFCs Entrepreneurial Cranor, Nations Restaurant News, November 18, 1991.

The Education of Hicks Waldron, Forbes, December 8, 1980.

Franchising: Too Much, Too Soon, Business Week, June 27, 1970.

Heublein May Buy Kentucky Fried Via Stock Swap, Wall Street Journal, January 22, 1971.

Heublein Merger Plan with Kentucky Fried Is Ratified by Holders, Wall Street Journal, July 9, 1971.

Hume, Scott, KFC to Stick with What Its Finally Doing Right, Advertising Age, June 27, 1983.

Jeffrey, Don, Peter Romeo, and Rick Van Warner, KFC Company Profile (a multiple-article series), Nations Restaurant News, December 15, 1986.

Keegan, Peter O., KFC Shuns Fried Image with New Name, Nations Restaurant News, February 25, 1991.

, KFC Takes Step Back to Move Forward, Nations Restaurant News, November 18, 1991.

Klein, Frederick C., John Y. Brown, Rich and Taking It Easy, Wall Street Journal, April 1, 1975.

Koeppel, Dan, The Feathers Are Really Flying at Kentucky Fried, Adweeks Marketing Week, September 3, 1990.

Martin, Richard, Collins to Sell 209 KFC Units to PepsiCo for $123 Million, Nations Restaurant News, September 24, 1990.

Prewitt, Milford, Cranor Answers KFC Critics, Nations Restaurant News, November 27, 1989.

Prewitt, Milford, Mayer Flies KFC Coop; PepsiCo Names Cranor, Nations Restaurant News, July 31, 1989.

Rudnitsky, Howard, Leaner Cuisine, Forbes, March 27, 1995, pp. 43-44.

Sellers, Patricia, Pepsicos Shedding Ugly Pounds, Fortune, June 26, 1995, pp. 94-95.

, Why Pepsi Needs to Become More Like Coke, Fortune, March 3, 1997, pp. 26-27.

Success Story: Potential Ruin Is Turned to Boom, New York Times, March 22, 1964.

Tanzer, Andrew, Hot Wings Take Off, Forbes, January 18, 1993, p.74.

Frances E. Norton

updated by Susan Windisch Brown

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"KFC Corporation." International Directory of Company Histories. 1998. Encyclopedia.com. 30 Jun. 2016 <http://www.encyclopedia.com>.

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KFC Corporation

KFC Corporation

P.O. Box 32070
Louisville, Kentucky 40232
U.S.A.
(502) 456-8300
Fax: (502) 454-2195

Wholly Owned Subsidiary of PepsiCo, Inc.
Incorporated:
1955 as Kentucky Fried Chicken
Employees: 160,000
Sales: $6.70 billion
SICs: 5812 Eating Places

KFC Corporation is the largest fast-food chicken operator, developer, and franchiser in the world. KFC, a wholly owned subsidiary of PepsiCo, Inc., operates over 5,000 units in the United States, approximately 60 percent of which are franchises. Internationally, KFC more than 3,700 units, of which two-thirds are also franchised. Among the 65 countries where KFC conducts business, Australia, Canada, Japan, Mexico, and New Zealand are its strongest markets. 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.

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 Sanderss father in 1896, Sanderss 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 didnt tolerate Harland. Sanders left home and school when he was twelve years old to work as a farm hand for four dollars a month. At age fifteen he left that job to work at a variety of jobs, including painter, 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 Sanderss 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 states 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 Hiñess Adventures in Good Eating in 1939.

Sanders Court and Cafe was Kentuckys 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, Sanderss 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 auctionjust enough to pay his debts.

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, Sanderss white mustache and goateeand the cane he carriedbelied the young mans energy he threw into his work. 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 Sanderss recipe was franchised to more than 600 outlets in the U.S. and Canada. Sanders had seventeen 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.

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 Sanderss 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: Hes 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, Business Week described. Retail outlets reached all fifty 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 companiesit trailed such giants as Howard Johnson, but was ahead of McDonalds 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 colonels 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 colonels 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 oclock 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. For example, multiple franchisee Richard Thomas sold his stores to the company for cash, took a 30-day vacation, then returned to Brown looking for a challenge. Thomas was put in charge of the newly acquired H. Salt Fish & Chips and did so well, he decided to return to the franchise business.

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 shopsthough 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 1969then 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 companys first large-scale loan package ($30 million plus a $20 million credit line). He affected a style change as well, convincing Brown to stop wearing a string tie to work.

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 Im confused by the talk and high finance discussed at these meetings.

CEO Brown spent the rough year of 1970 shoring up his companys 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 companys 1970 financial overhaul, Brown commented, You never saw a more negative bunch If Id have listened to them in the first place, wed 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 planned to increase Kentucky Fried Chickens 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 Chickens 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 Heubleins marketing team in 1971, to chair the ailing Kentucky Fried Chicken. Richard Mayer, vice-president of marketing and strategic planning for Heubleins grocery products, took charge of the Kentucky Fried Chicken U.S. division.

Mayer found that the product mainstay, fried chicken, wasnt 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 Heubleins 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 colonels basics. Sticking to a limited menu kept Kentucky Fried Chickens costs down, allowing the company time to recoup. Timing was fortunate on Kentucky Fried Chickens 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.

Miles and Mayers 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 U.S. and 1,400 units in 54 foreign countries, no other fast-food chain except McDonalds could compete. But while many industry insiders were crediting the team with victory, Mayer wasnt so quick to join in. As he noted in Nations Restaurant News, People keep talking about the turn-around at KFC. Id 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 Nations 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 dont roll out a flavor-of-the-month.

Mayers 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 KFCs 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 PepsiCos successful Pizza Hut delivery system as an example. By late 1986 Donald E. Doyle, succeeding Mayer in the post of Kentucky Fried Chickens 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 Chickens 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 Peoples Republic of China was the most notable new market secured in 1987; KFC was the first American fast-food chain to open there.

Imperative to the success of Kentucky Fried Chicken was the establishment of successful relations with the numerous franchisees. Most of them lauded parent PepsiCos 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 which 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, PepsiCos 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, where he had begun his career nearly thirty years earlier in sales and product management. 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 twelve years earlier, took over as CEO. Kyle Craig, formerly with Burger King, Steak & Ale, and Bennigans, began in an advisory role, later stepping up to become president of KFCUSA.

Within months Cranor was meeting with franchisee leaders in Louisville to defend parent PepsiCos contract renewal. Among the issues debated was PepsiCos 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 KFCs long-term interest to settle the dispute without litigation, Cranor believedand 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 Sanderss 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 creating new products linked to the cornerstone fried chicken concept, and getting them out quickly through franchisee stores. Hot Wings, brought out in 1990, was KFCs 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 Chickens control of total operating units to 32 percent, versus the franchisees 68 percent. The corporation also added Canadas Scotts 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 stripesbut this time wider and on an angle, implying movement and rapid service. While the colonels 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, managers office, and company headquarters.

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 pre-tax 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 KFCs international markets. To continue capitalizing on their success abroad, KFC undertook an aggressive construction planan average of one non-U.S. unit is built per day, and it is expected that by 1995 the number of international units will exceed those in the U.S.

Non-traditional service, often stemming from successful innovations instituted in the companys 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 Nations Restaurant News. Cranors goal was total concept transformation, moving KFC to a more contemporary role. With nearly 8,500 restaurants in operation worldwide, KFC Corporation was well on its way.

Further Reading

Success Story: Potential Ruin is Turned to Boom, New York Times, March 22, 1964; Cooking up Profits, Southern Style, Business Week, June 24, 1967; Franchising: Too Much, Too Soon, Business Week, June 27, 1970; Colonel Sanders Bowing Out, New York Times, August 8, 1970; Heublein May Buy Kentucky Fried Via Stock Swap, Wall Street Journal, January 22, 1971; Heublein Merger Plan with Kentucky Fried Is Ratified by Holders, Wall Street Journal, July 9, 1971; Klein, Frederick C., John Y. Brown, Rich and Taking It Easy, Wall Street Journal, April 1, 1975; The Education of Hicks Waldron, Forbes, December 8, 1980; Hume, Scott, KFC to Stick with What Its Finally Doing Right, Advertising Age, June 27, 1983; Jeffrey, Don, Peter Romeo, and Rick Van Warner, KFC Company Profile (a multiple-article series), Nations Restaurant News, December 15, 1986; Prewitt, Milford, Mayer Flies KFC Coop; PepsiCo Names Cranor, Nations Restaurant News, July 31, 1989; Prewitt, Milford, Cranor Answers KFC Critics, Nations Restaurant News, November 27, 1989; Koeppel, Dan, The Feathers Are Really Flying at Kentucky Fried, Adweeks Marketing Week, September 3, 1990; Martin, Richard, Collins to Sell 209 KFC Units to PepsiCo for $123 Million, Nations Restaurant News, September 24, 1990; Keegan, Peter O., KFC Shuns Fried Image with New Name, Nations Restaurant News, February 25, 1991; Keegan, Peter O., KFC Takes Step Back to Move Forward, Nations Restaurant News, November 18, 1991; Corporate Meets the Colonel in KFCs Entrepreneurial Cranor, Nations Restaurant News, November 18, 1991.

Frances E. Norton

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"KFC Corporation." International Directory of Company Histories. 1993. Encyclopedia.com. 30 Jun. 2016 <http://www.encyclopedia.com>.

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