KFC is banking heavily on a franchise-heavy model for expansion

Higher capital spend and higher operating expenses for company-owned restaurants on the one hand, and the ease in expansion through a franchisee model on the other, have encouraged many restaurant companies to shift towards a fully franchised model. Case in point McDonald’s. Globally McDonald’s is moving towards a situation where 95 per cent of its stores will be franchised.

KFC, that operates as a subsidiary of Yum! Restaurants in India since 1995, a year before of its biggest rival McDonald’s set foot in the country, seems to be moving in the same direction after years of indifferent growth. However, a franchise-based model can lead to less control of day-to-day operations, and KFC wants to maintain a certain level of standardisation in its stores. The transition therefore will be measured.

While it operated some 70 company-owned outlets till recently, KFC recently handed over 13 existing restaurants in Kerala and Goa to Devyani International, one of its two franchisee partners. The company doesn't have a definitive date to complete the transition but says the move is in line with its global strategy.

As the quick service restaurant (QSR) chain from the southern US, synonymous with its fried chicken, steps on the gas, it is also placing the iconic Colonel Sanders at the forefront of its communication strategy. The sudden aggression is not without reason. Rival McDonald’s is yet to sort out its franchise woes; people are eating out more and indeed they are also eating in more. With online restaurant aggregators and delivery platforms such as Zomato, Swiggy and Foodpanda getting aggressive, the potential to grow has never looked better.

While KFC entered India a year before McDonald’s opened its first outlet in Delhi’s Vasant Vihar through franchise partner Connaught Plaza Restaurants, since then, McDonald's has clearly taken the lead with over 700 restaurants across the country (2017). KFC, meanwhile, remained a distant number two in the burger market with nearly half the number of outlets that its rival from Chicago operates.

The Kentucky-headquartered restaurateur, however, has accelerated its growth in the past two years. Despite a slow start, it is now adding 40 to 50 outlets a year, while McDonald’s is struggling to keep its business afloat in the crucial northern market. McDonald's presence in the east is in jeopardy too — due to its long-standing battle with the key franchise partner in the region. In fact, the management has already declared the outlets in India’s north and east — operated by Connaught Plaza Restaurants — as unauthorised and has refused to give guarantee for the quality of food served there. The ugly spat, on since mid-2013, even saw many McDonald's outlets downing shutters in the larger north Indian market for days in September 2017.

Samir Menon, managing director, KFC India

With a new outlet in Kerala, KFC has finally reached 100 towns in the country that has close to 500 towns with population of 1,00,000 or more. Samir Menon, managing director, KFC India, however, wants to keep the recent spurt in its expansion plan exclusive of McDonald’s slide in the two regions. It is part of KFC’s overall growth strategy, he says. “It is unfortunate that they (McDonald’s) had to face difficulties and we sympathise with them. If an opportunity opens up, where we can tap a site, we grab that. We have not taken the foot off the pedal. We will open up in seven-eight cities annually. Last year, we added 40 stores and the pace of expansion will be faster this year,” he said.

Large swathes of the market are still under-penetrated, he accepts. KFC has less than one store per million in India.

The numbers are in stark contrast to some of the larger markets in the South Asia region. In countries such as Thailand, China and Vietnam, the penetration of QSRs is higher than that in India. The average spend per customer, too, is quite low in India. As per a recent report by TechnoPak and FICCI (Federation of Indian Chambers of Commerce and Industry), the average spend per customer per visit at a QSR outlet — and that includes home-grown brands like Haldiram’s — is Rs75-Rs200 ($1-2.5). For China the comparable figure stands at over $170. Today, the brand has around 380 outlets in India with 80 per cent of them operated by its two large franchise partners — Devyani International from the stable of RJ Corp. and Sapphire Foods. While Devyani operates a bunch of franchises for brands including KFC, Pizza Hut, Costa Coffee and Vaango, the Mumbai-headquartered Sapphire Foods operates 250 outlets of Pizza Hut and KFC in Sri Lanka and India, including in Delhi.

In line with its global strategy, KFC in India is now promoting its iconic face Colonel Sanders — conceptualised on its founder Harland Sanders — as its brand ambassador. It has launched an aggressive campaign this year with the Colonel focusing on prime time television slots. The 'human' face of the brand and regular television advertising has helped it stay top of mind, says Menon.

KFC is also working overtime to keep the taste of its flagship fried chicken close to the original. That said, menu expansion will be part of the journey forward. The core menu — comprising fried chicken, wraps and burgers — will be supplemented with new items that satisfy local tastes and preferences. It would help draw a new set of customers who would have otherwise walked into a local restaurant.

Online ordering of its products is on the rise and is growing at a pace faster than its dine-in business. As per FICCI, restaurant chains are growing at 21 per cent CAGR (compound average growth rate) and are expected to touch Rs620 billion in size by 2022 from Rs235 billion in 2017. KFC today gets 14 per cent of its sales from the online ordering and delivery channel, says Menon.

 

The brand has posted year-on-year double digit growth in same store sales since mid-2016, except the eight months between October 2016 and June 2017, when the growth rate ranged between 2 and 9 per cent. In total, it has posted nine consecutive quarters of growth after a prolonged lull in the QSR industry, when all major player faced hardships.