Assignment Case Study: Yum! Brands

Yum! Brands, Inc., was the world's largest fast-food company in 2004. It operated more than 33,000 KFC, Pizza Hut, Taco Bell, Long John Silver's, and A&W restaurants worldwide. It was the market leader in the chicken, pizza, Mexican, and seafood segments of the U.S. fast-food industry. Yum! Brands also operated more than 12,000 restaurants outside the United States. KFC and Pizza Hut ac-counted for more than 96 percent of the company's international restaurant base and managed restaurants in 116 countries. Among the first fast-food chains to go international in the late 1950s and 1960s, KFC and Pizza Hut were two of the world's most recognizable brands. Both KFC and Pizza Hut expanded through the 1990s by growing their restaurants into as many countries as possible. However, Yum! Brands realized that different countries offered different opportunities to contribute to the company's worldwide operating profits.

By 2004 Yum! Brands began to focus more attention on portfolio management in individual countries. It increasingly focused its international strategy on developing strong market share positions in a small number of high growth markets such as Japan, Canada, the United Kingdom, China, Australia, Korea, and Mexico. It also hoped to build strong positions in continental Europe, Brazil, and India. Consumer awareness in these markets, however, was still low and neither KFC nor Pizza Hut had strong operating capabilities there. China and India were appealing markets because of their large populations. From a regional point-of-view, Latin America was appealing because of its close proximity to the United States, language and cultural similarities, and the potential for a future World Free Trade Area of the Americas, which would eliminate tariffs on trade within North and South America. The most important long-term challenge for Yum! Brands was to strengthen its position in a set of core international markets while also developing new markets where consumer awareness and operating capabilities were weak.

Company History

Kentucky Fried Chicken Corporation

Fast food franchising was still in its infancy in 1952 when Harland Sanders began his travels across the United States to speak with prospective franchisees about his "Colonel Sanders Recipe Kentucky Fried Chicken:" By 1960, "Colonel" Sanders had granted Kentucky Fried Chicken (KFC) franchises to more than 200 take-home retail outlets and restaurants across the United States. Four years later, at the age of 74, he sold KFC to two Louisville businessmen for $2 million. In 1966 KFC went public and was listed on the New York Stock Exchange. In 1971 Heublein, Inc., a distributor of wine and alcoholic beverages, successfully approached KFC with an offer and merged KFC into a subsidiary. Eleven years later, R.J. Reynolds Industries, Inc., (RJR) acquired Heublein and merged it into a wholly owned subsidiary. The acquisition of Heublein was part of RJR's corporate strategy of diversifying into unre-lated businesses such as energy, transportation, food, and restaurants to reduce its dependence on the tobacco industry. In 1985 RJR acquired Nabisco Corporation in an attempt to redefine RJR as a world leader in the consumer foods industry. As RJR refocused its strategy on processed foods, it decided to exit the restaurant industry. It sold KFC to PepsiCo, Inc., one year later.

Pizza Hut

In 1958 two students at Wichita State University – Frank and Dan Carney – decided to open a pizza restaurant in an old building at a busy intersection in downtown Wichita. To finance their new business, they borrowed $500 from their mother. They called the restaurant the "Pizza Hut," a reference to the old tavern beside the market that they renovated to open the new business. They opened four more restaurants during the next two years. The Pizza Hut concept was so well received by consumers that they were soon licensing the concept to franchises. By 1972 the Carneys had opened 1,000 res-taurants and listed the firm on the New York Stock Exchange. In less than 15 years, Pizza Hut had become the number one pizza restaurant chain in the world in terms of sales and number of units. Internationally, they opened their first restaurant in Canada in 1968 and soon established franchises in Mexico, Germany, Australia, Costa Rica, Japan, and the United Kingdom. In 1977 they sold the business to PepsiCo, Inc. Pizza Hut's headquarters remained in Wichita and Frank Carney served as

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Pizza Hut's president until 1980. (It is interesting to note that Frank opened a Papa John's Pizza franchise in 1994. Today he is one of Papa John's largest franchisees).

PepsiCo, Inc.

PepsiCo believed the restaurant business complemented its consumer product orientation. The marketing of fast food followed many of the same patterns as soft drinks and snack foods. Pepsi-Cola and Pizza Hut pizza, for example, could be marketed in the same television and radio segments, which provided higher returns for each advertising dollar. Restaurant chains also provided an additional outlet for the sale of Pepsi soft drinks. In 1978 PepsiCo acquired Taco Bell. After acquiring KFC in 1986, PepsiCo controlled the leading brands in the pizza, Mexican, and chicken segments of the fast-food industry. PepsiCo's strategy of diversifying into three distinct but related markets created one of the world's largest food companies.

In the early 1990s, PepsiCo's sales grew at an annual rate of more than 10 percent. Its rapid growth, however, masked troubles in its fast-food businesses. Operating margins at Pepsi-Cola and PepsiCo's Frito-Lay division averaged 12 and 17 percent, respectively. Margins at KFC, Pizza Hut, and Taco Bell, however, fell from an average of 8 percent in 1990 to 4 percent in 1996. Declining margins reflected increasing maturity in the U.S. fast-food industry, intense competition, and the aging of KFC and Pizza Hut restaurants. PepsiCo's restaurant chains absorbed nearly one-half of PepsiCo's annual capital spending but generated less than one-third of its cash flows. Cash had to be diverted from PepsiCo's soft drink and snack food businesses to its restaurant businesses. This reduced PepsiCo's corporate return on assets, made it more difficult to compete effectively with Coca-Cola, and hurt its stock price. In 1997 PepsiCo decided to spin off its restaurant businesses into a new company called Tricon Global Restaurants, Inc.

Yum! Brands, Inc.

The spin-off created a new, independent, publicly traded company that managed the KFC, Pizza Hut, and Taco Bell franchises. David Novak became Tricon's new CEO. He moved quickly to create a new culture within the company. One of his primary objectives was to reverse the long-standing friction between management and franchisees that was created under PepsiCo ownership. Novak announced that PepsiCo's top-down management system would be replaced by a new management emphasis on providing support to the firm's franchise base. Franchises would have greater independence, resources, and technical support. Novak symbolically changed the name on the corporate headquarters building in Louisville to "KFC Support Center" to drive home his new philosophy.

The firm's new emphasis on franchise support had an immediate effect on morale. In 1997, the year of the divestiture, the company recorded a loss of $111 million in net income. In 2003 it recorded net income of $617 million on sales of $7.4 billion, a return on sales of 8.3 percent. In 2002 Tricon acquired Long John Silver's and A&W All-American Food Restaurants. The acquisitions increased Tricon's worldwide system to almost 33,000 units. One week later, shareholders approved a corporate name change to Yum! Brands, Inc. The acquisitions signaled a shift in the company's strategy from a focus on individual to multibranded units. Multibranding combined two brands in a single restaurant such as KFC and Taco Bell, KFC and A&W Pizza Hut and Taco Bell, and Pizza Hut and Long John Silver's. Multibranded units attracted a larger consumer base by offering them a broader menu selection in one location. By 2004 the company was operating more than 2,400 multibrand restaurants in the United States.

Fast-Food Industry

The National Restaurant Association (NRA) estimated that U.S. food service sales increased by 3.3 percent to $422 billion in 2003. More than 858,000 restaurants made up the U.S. restaurant industry and employed 12 million people. Sales were highest in the full-service, sit-down sector, which grew 3.3 percent to $151 billion. Fast-food sales rose at a slower rate, 2.7 percent to $119 billion. The fast-food sector was increasingly viewed as a mature market. As U.S. incomes rose during the late 1990s and early 2000s, more consumers frequented sit-down restaurants that offered better service and a more

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comfortable dining experience. Together, the full-service and fast food segments made up about 64 percent of all U.S. food service sales.

Major Fast-Food Segments

Eight major segments made up the fast-food segment of the restaurant industry: sandwich chains, pizza chains, family restaurants, grill buffet chains, dinner houses, chicken chains, non-dinner concepts, and other chains. Most striking is the dominance of McDonald's, which had sales of more than $22 billion in 2003. McDonald's accounted for 14 percent of the sales of the top 100 chains. To put McDonald's dominance in perspective, the second largest chain-Burger King-held less than a 5 percent share of the market.

Sandwich chains made up the largest segment of the fast-food market. McDonald's controlled 35 percent of this segment, while Burger King ran a distant second with a 12 percent share. Sandwich chains struggled through early 2003 as the U.S. recession lowered demand and the war in Iraq increased consumer uncertainty. U.S. consumers were also trending away from the traditional hamburger, fries, and soft drink combinations and demanding more healthy food items and better service. Many chains attempted to attract new customers through price discounting. Instead of drawing in new customers, however, discounting merely lowered profit margins. By mid-2003 most chains had abandoned price discounting and began to focus on improved service and product quality. McDonald's, Taco Bell, and Hardee's were particularly successful. They slowed new restaurant development, improved drive-through service, and introduced a variety of new menu items. McDonald's and Hardee's, for example, introduced larger, higher-priced hamburgers to increase value perceptions and ticket prices. The shift from price discounting to new product introductions increased average ticket sales and helped sandwich chains improve profitability in 2004.

Dinner houses made up the second-largest and fastest-growing fast-food segment. Segment sales increased by almost 9.0 percent in 2003, surpassing the average in crease of 5.5 percent in the other segments. Much of the growth in dinner houses came from new unit construction in suburban areas and small towns. Applebee's, Chili's, Outback Steakhouse, Red Lobster, and Olive Garden dominated the segment. Each chain generated sales of more than $2 billion in 2003. The fastest-growing dinner houses, however, were newer chains generating less than $700 million in sales, such as P F. Chang's China Bistro, the Cheesecake Factory, Carrabba's Italian Grill, and LongHorn Steakhouse. Each chain was increasing sales at a 20 percent annual rate. Dinner houses continued to benefit from rising household incomes in the United States. As incomes rose, families were able to move up from quick-service restaurants to more upscale, higher-priced dinner houses. In addition, higher incomes enabled many professionals to purchase more expensive homes in new suburban developments, thereby providing additional opportunities for dinner houses to build new restaurants in unsaturated areas.

Increased growth among dinner houses came at the expense of sandwich chains, pizza and chicken chains, grill buffet chains, and family restaurants. "Too many restaurants chasing the same customers" was responsible for much of the slower growth in these other fast-food categories. Sales growth within each segment, however, differed from one chain to another. In the family segment, for example, Denny's (the segment leader in sales), Shoney's, Perkins, and Big Boy shut down poorly performing restaurants. At the same time, IHOP, Bob Evans, and Cracker Barrel expanded their bases. The hardest-hit segment was grill buffet chains. Declining sales caused both Sizzlin' and Western Sizzlin' to drop out of the list of Top 100 chains, leaving only three chains in the Top 100 (Golden Corral, Ryan's, and Ponderosa). Each of these three chains shut down restaurants in 2003. Dinner houses, because of their more upscale atmosphere and higher-ticket items, were better positioned to take advantage of the aging and wealthier U.S. population.

Yum! Brands: Brand Leadership

Yum! Brands generated U.S. sales of $16.3 billion across its five brands. It operated close to 21,000 U.S. and 12,000 non-U.S. restaurants, or more than 33,000 restaurants worldwide. Four of its brands—Pizza Hut (pizza), KFC (chicken), Taco Bell (Mexican), and Long John Silver's (seafood)—were the market leaders in their segments. Taco Bell was the third most profitable restaurant concept behind McDonald's and Starbucks. Profitability at McDonald's was primarily driven by volume; each

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McDonald's restaurant generated an annual average of $1.6 million in sales compared to an industry wide average of $1.0 million. Starbucks, in contrast, generated less revenue per store-about $660 million each year but premium pricing for its specialty coffee drinks drove high profit margins. Taco Bell was able to generate greater overall profits because of its lower operating costs. Products such as tacos, burritos, gorditas, and chalupas used similar ingredients. In addition, cooking machinery was simpler, less costly, and required less space than pizza ovens or chicken broilers.

Pizza Hut controlled the pizza segment with a 41 percent share, followed by Domino's (25 percent) and Papa John's (14 percent). As the pizza segment became increasingly mature, the traditional pizza chains were forced to close old or underperforming restaurants. Only relatively new pizza chain concepts such as CiCi's Pizza, which offered an inexpensive all-you-can-eat salad and pizza buffet, and Chuck E. Cheese's, which focused on family entertainment, were able to significantly grow their restaurant bases during 2003. Most chains could no longer rely on new restaurant construction to drive sales. Another problem was the proliferation of new diets. Many Americans were eating pizza less often as they pursued the Atkins Diet (low carbohydrates), "The Zone" (balanced meals containing equal parts of carbohydrates, protein, and unsaturated fat), or a traditional low-fat diet. Each diet discouraged users from eating pizza, which was high in both fat and carbohydrates.

Operating costs were also rising because of higher cheese and gasoline prices. Pizza chains were forced to develop unique strategies that attracted more customers but protected profit margins. Some chains raised pizza prices to offset higher-priced ingredients or raised home delivery charges to offset higher gasoline costs. Most chains, however, responded with new product introductions. Pizza Hut introduced a low-fat "Fit 'n Delicious" pizza that used one-half the cheese of normal pizzas and toppings with lower fat content. It also introduced a "4forAll" pizza that contained four individually topped six-inch square pizzas in the same box. Domino's introduced a Philly cheese steak pizza, its first new product introduction since 2000. Papa John's introduced a new barbeque chicken and bacon pizza. In addition, it began a campaign that allowed customers to choose one of three free DVDs with the purchase of a large pizza. By matching pizza and movies, Papa John's hoped to encourage customers to eat pizza more often. Pizza Hut quickly responded with its own offer for a free DVD with the purchase of any pizza at the regular price.

KFC continued to dominate the chicken segment with sales of $4.9 billion in 2003, more than 50 percent of sales in the chicken segment. Its nearest competitor, Chick-fil-A, ran a distant second with sales of $1.5 billion. KFC's leadership in the U.S. market was so extensive that it had fewer opportunities to expand its U.S. restaurant base. Despite its dominance, KFC was slowly losing market share as other chicken chains increased sales at a faster rate. Sales data indicated that KFC's share of the chicken segment fell from a high of 64 percent in 1993, a 10-year drop of 14 percent. During the same period, Chick-fil-A and Boston Market increased their combined share by 11 percent. On the surface, it appeared that these market share gains came by taking customers away from KFC. The growth in sales at KFC restaurants, however, had generally remained steady during the last two decades. In reality, the three chains competed for different market groups. Boston Market, for example, appealed to professionals with higher incomes and health-conscious consumers who didn't regularly frequent KFC. It expanded the chicken segment by offering healthy, "home-style" alternatives to non-fried chicken in a setting resembling an upscale deli. Chick-fil-A concentrated on chicken sandwiches rather than fried chicken and most of its restaurants were still located in shopping mall food courts.

The maturity of the U.S. fast-food industry intensified competition within the chicken segment. As in the pizza segment, chicken chains could not rely on new restaurant construction to build new sales. In addition, chicken costs, which represented about one-half of total food costs, increased dramatically in 2004. A boneless chicken breast, which cost $1.20 per pound in early 2001, cost $2.50 per pound in 2004, an increase of more than 100 percent. Profit margins were being squeezed from both the revenue and cost sides. All chains focused on very different strategies. KFC added new menu boards and introduced new products such as oven-roasted strips and roasted twister sandwich wraps. Boston Market experimented with home delivery and began to sell through supermarkets. Chick-fil-A continued to build freestanding restaurants to expand beyond shopping malls. Church's focused on adding drive-through service. The intensity of competition led chicken chains to implement very different strategies for differentiating their product and brand.

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Trends in the Restaurant Industry

A number of demographic and societal trends influenced the demand for food eaten outside the home. Rising income, greater affluence among a larger percentage of American households, higher divorce rates, and the marriage of people later in life contributed to the rising number of single households and the demand for fast food. More than 50 percent of women worked outside the home, a dramatic increase since 1970. This number was expected to rise to 65 percent by 2010. Double-income households contributed to rising household incomes and increased the number of times families ate out. Less time to prepare meals inside the home added to this trend. Countering these trends, however, was the slower growth rate of the U.S. population and a proliferation of fast-food chains that increased consumer alternatives and intensified competition.

Baby boomers (ages 35 to 50) constituted the largest consumer group for fast-food restaurants. Generation Xers (ages 25 to 34) and the "mature" category (ages 51 to 64) made up the second and third largest groups, respectively. As consumers aged, they became less enamoured of fast food and were more likely to trade up to more expensive restaurants such as dinner houses and full service restaurants. Sales for many Mexican restaurants, which were extremely popular during the 1980s, began to slow as Japanese, Indian, and Vietnamese restaurants became more fashionable. Ethnic foods were rising in popularity as U.S. immigrants, who constituted 13 percent of the U.S. population in 2004, looked for establishments that sold their native foods.

Labour was the top operational challenge of U.S. restaurant chains. Restaurants relied heavily on teenagers and college-age workers. Twenty percent of all employed teenagers worked in food service, compared to only 4 percent of all employed men over the age of 18 and 6 percent of all employed women over age 18. As the U.S. population aged, fewer young workers were available to fill food service jobs. The short supply of high school and college students meant they had greater work opportunities outside food service. Turnover rates were notoriously high. The National Restaurant Association estimated that about 96 percent of all fast-food workers quit within a year, compared to about 84 percent of employees in full-service restaurants.

Labour costs made up about 30 percent of a fast-food chain's total costs, second only to food and beverage costs. To deal with the decreased supply of employees in the age 16 to 24 category, many restaurants were forced to hire less reliable workers. This affected service and restaurant cleanliness. To improve quality and service, restaurants hired elderly employees who wanted to return to the workforce. To attract more workers, especially the elderly, restaurants offered health insurance, noncontributory pension plans, and profit-sharing benefits. To combat high turnover rates, restaurants turned to training programs and mentoring systems that paired new employees with experienced ones. Mentoring systems were particularly helpful in increasing the learning curve of new workers and providing better camaraderie among employees.

The Global Fast-Food Industry

As the U.S. market matured, more restaurants turned to international markets to expand sales. Foreign markets were attractive because of their large customer bases and comparatively little competition. McDonald's, for example, operated 48 restaurants for every one million U.S. residents. Outside the United States, it operated only one restaurant for every five million residents. McDonald's, Pizza Hut, KFC, and Burger King were the earliest and most aggressive chains to expand abroad beginning in the 1960s. This made them formidable competitors for chains investing abroad for the first time. Subway, TCBY, and Domino's were more recent global competitors. By 2004 each was operating in more than 65 countries. Exhibit 1 lists the world's 35 largest restaurant chains.

The global fast-food industry had a distinctly American flavour. Twenty-eight chains (80 percent of the total) were headquartered in the United States. U.S. chains had the advantage of a large domestic market and ready acceptance by the American consumer. European firms had less success developing the fast-food concept because Europeans were more inclined to frequent mid-scale restau-rants where they spent several hours enjoying multi-course meals in a formal setting. KFC had trouble breaking into the German market during the 1970s and 1980s because Germans were not accustomed to buying takeout or ordering food over the counter. McDonald's had greater success in Germany

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because it made changes to its menu and operating procedures to appeal to German tastes. German beer, for example, was served in all of McDonald's restaurants in Germany. In France, McDonald's used a different sauce that appealed to the French palate on its Big Mac sandwich. KFC had more success in Asia and Latin America where chicken was a traditional dish.

Yum! Brands operated more than 12,000 restaurants outside the United States (see Exhibit 2). The early international experience of KFC and Pizza Hut put them in a strong position to exploit the globalization trend in the industry. A separate subsidiary in Dallas—Yum! Restaurants International (YRI)—managed the international activities of all five brands under Graham D. Allan’s leadership. As a result, the firm had significant international experience concentrated in one location and a well--established worldwide distribution network. KFC and Pizza Hut accounted for almost all of the firm's international restaurants. Yum! Brands planned to open 1,000 new KFC and Pizza Hut restaurants outside the United States each year, well into the future. This came at a time when both KFC and Pizza Hut were closing units in the mature U.S. market.

Of the KFC and Pizza Hut restaurants located outside the United States, 77 percent were owned by local franchisees or joint venture partners who had a deep under standing of local language, culture, customs, law, financial markets, and marketing characteristics. Franchising allowed firms to expand more quickly, minimize capital expenditures, and maximize return on invested capital. It was also a good strategy for establishing a presence in smaller markets like Grenada, Bermuda, and Suriname where the small number of consumers only allowed for a single restaurant. The costs of operating company-owned restaurants were prohibitively high in these markets. In larger markets such as China, Canada, Australia, and Mexico, there was a stronger emphasis on building company owned restaurants. Fixed costs could be spread over a larger number of units and the company could coordinate purchasing, recruiting, training, financing, and advertising. This reduced per unit costs. Company-owned restaurants also allowed the company to maintain tighter control over product quality and customer service.

Country Evaluation and Risk Assessment

International Business Risk

Worldwide demand for fast food was expected to grow rapidly during the next two decades as rising per capita income made eating out more affordable for greater numbers of consumers. International business, however, carried a variety of risks not present in the domestic market. Long distances between headquarters and foreign franchises made it more difficult to control the quality of individual restaurants. Large distances also caused servicing and support problems, and transportation and other resource costs were higher. In addition, time, cultural, and language differences increased communication problems and made it more difficult to get timely and accurate information.

During the 1970s and 1980s, KFC and Pizza Hut attempted to expand their restaurant bases into as many countries as possible-the greater the number of countries, the greater the indicator of success (see Exhibit 4 for Latin American restaurant count as of 1999-2000). By the early years of the 21st century, however, it became apparent that serving a large number of markets with a small number of restaurants was a costly business. If a large number of restaurants could be established in a single market or region, then significant economies of scale could be achieved by spreading fixed costs of purchasing, advertising, and distribution across a larger restaurant base. Higher market share, as a result, was typically associated with greater cash flow and higher profitability.

Country analysis was an important part of the strategic decision-making process. Few companies had sufficient resources to invest everywhere simultaneously. Choices had to be made about when and where to invest scarce capital. Country selection models typically assessed countries on the basis of market size, growth rates, the number and type of competitors, government regulations, and economic and political stability. In an industry such as fast food, however, an analysis of economic and political variables was insufficient. As mentioned earlier, KFC had trouble establishing a presence in Germany because many consumers there didn't accept the fast-food concept. An analysis of Germany's large, stable economy would otherwise have indicated a potentially profitable market.

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An important challenge for multinational firms was to accurately assess the risks of doing business in different countries and regions in order to make good choices about where to invest. A useful framework for analyzing international business risk was to separate risk into factors of country, industry, and firm. Country factors, for example, included risks associated with changes in a country's political and economic environment. These included political risk (e.g., war, revolution, changes in government, price controls, tariffs, and government regulations), economic risk (e.g., inflation, high interest rates, foreign exchange rate volatility, balance of trade movements, social unrest, riots, and terrorism), and natural risk (e.g., rainfall, hurricanes, earthquakes, and volcanic activity).

Industry factors addressed changes in industry structure that inhibited a firm's ability to compete successfully in its industry. These included supplier risk (e.g., changes in supplier quality and supplier power), product market risk (e.g., consumer tastes and the availability of substitute products), and competitive risk (e.g., rivalry among competitors, new market entrants, and new product innovations).

Last, firm factors examined a firm's ability to control its internal operations. They included labour risk (e.g., labour unrest, absenteeism, employee turnover, and labour strikes), supplier risk (e.g., raw material shortages and unpredictable price changes), trade secret risk (e.g., protection of trade secrets and intangible assets), credit risk (e.g., problems in collecting receivables), and behavioural risk (e.g., control over franchise operations, product quality and consistency, service quality, and restaurant cleanliness). Each of these factors-country, industry, and firm-had to be analyzed simultaneously to fully understand the costs and benefits of international investment.

Country Risk Assessment in Latin America

Latin America is comprised of some 50 countries, island nations, and principalities that were settled by the Spanish, Portuguese, French, Dutch, and British during the 1500s and 1600s. Spanish is spoken in most countries, the most notable exception being Brazil where the official language is Portuguese. Despite commonalities in language, religion, and history, however, political and economic policies differ significantly from one country to another.

Mexico

Many U.S. companies considered Mexico to be one of the most attractive investment locations in Latin America in the 1990s. Its population of 105 million was more than one-third as large as the United States, and three times larger than Canada's population of 32 million. Prior to 1994, Mexico levied high tariffs on many goods imported from the United States. As a result, many U.S. consumers purchased less expensive products from Asia or Europe. In 1994 the North American Free Trade Agreement (NAFTA) was signed. NAFTA eliminated tariffs on goods traded between the United States, Canada, and Mexico. It created a trading bloc with a larger population and gross domestic product than the European Union. The elimination of tariffs led to an immediate increase in trade between Mexico and the United States. By 2004, 85 percent of Mexico's exports were purchased by U.S. consumers. In turn, 68 percent of Mexico's total imports came from the United States.

Most Mexicans (70 percent) lived in urban areas such as Mexico City, Guadalajara, and Monterrey. Mexico City's population of 18 million made it one of the most populated areas in Latin America. Many U.S. firms had operations in or around Mexico City. The fast-food industry was well developed in Mexico's cities. The leading U.S. fast-food chains already had significant restaurant bases in Mexico, most importantly KFC (274 restaurants), McDonald's (261), Pizza Hut (174), Burger King (154), and Subway (71). Mexican consumers readily accepted the fast-food concept. Chicken was also a staple product in Mexico and helped explain KFC's wide popularity. Mexico's large population and ready acceptance of fast food represented a significant opportunity for fast-food chains. Competition, however, was intense.

Brazil

Brazil, with a population of 182 million, was the largest country in Latin America and the fifth largest country in the world. Its land base was almost as large as the United States and bordered 10 countries. It was the world's largest coffee producer and largest exporter of sugar and tobacco. In addition to its

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abundant natural resources and strong export position in agriculture, Brazil was a strong industrial power. Its major exports were airplanes, automobiles, and chemicals. Its gross domestic product of $1.3 trillion was larger than Mexico's and the largest in Latin America (see Exhibit 3). Some firms viewed Brazil as one of the most important emerging markets, along with China and India.

The fast-food industry in Brazil was less developed than in Mexico or the Caribbean. This was partly the result of the structure of the fast-food industry that was dominated by U.S. restaurant chains. U.S. chains expanded further away from their home base as they gained experience operating in Latin America. As firms gained a foothold in Mexico and Central America, it was a natural progression to move into South America. McDonald's understood the importance of Brazil. It opened its first res-taurant in 1979 and by 2004 was operating 1,200 restaurants, ice-cream kiosks, and McCafes there. Many restaurant chains such as Burger King, Pizza Hut, and KFC built restaurants in Brazil in the early- to mid-1990s but eventually closed them because of poor sales. Like Germany, many Brazilians were not quick to accept the fast-food concept.

One problem facing U.S. fast-food chains was eating customs. Brazilians ate their big meal in the early afternoon. In the evening, it was customary to have a light meal such as soup or a small plate of pasta. Brazilians rarely ate food with their hands, preferring to eat with a knife and fork. This included food like pizza, which Americans typically ate with their hands. They also were not accustomed to eating sandwiches; if they did eat sandwiches, they wrapped the sandwich in a napkin. U.S. fast food chains catered to a different kind of customer who wanted more than soup but less than a full sit-down meal. U.S. fast-food chains were more popular in larger cities such as Sao Paulo and Rio de Janeiro where business people were in a hurry. Food courts were well developed in Brazil's shopping malls but included sit-down as well as fast-food restaurants. U.S. restaurant chains were, therefore, faced with the challenge of changing the eating habits of Brazilians or convincing Brazilians of the attractiveness of fast food, American style.

Risks and Opportunities

Yum! Brands faced difficult decisions surrounding the design and implementation of an effective international strategy over the next 20 years. Its top seven markets generated more than 70 percent of its international profits. As a result, it planned to continue its aggressive investments in its primary markets. It was also important, however, to improve brand equity in other regions of the world where consumer acceptance of fast food was still weak and the company had limited operational capabilities. Latin America as a region was of particular interest because of its geographic proximity to the United States, cultural similarities, and NAFTA. The company needed to sustain its leadership position in Mexico and the Caribbean but also looked to strengthen its position in other countries in the region. Limited resources and cash flow limited Yum! Brands’ ability to aggressively expand in all countries simultaneously. Country evaluation and risk assessment would be an important tool for developing and implementing an effective international strategy.

EXHIBITS

Exhibit 1: The World’s 35 Largest Fast-Food Chains in 2004

Exhibit 2: Yum! Brands Inc. – Largest International Markets, 2004

Exhibit 3: Latin America – Selected Economic and Demographic Data

Exhibit 4: Latin American Restaurant Count – McDonald’s, Burger King, KFC, and Wendy’s

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Exhibit 1: The World’s 35 Largest Fast-Food Chains in 2004

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Exhibit 2: Yum! Brands Inc. – Largest International Markets, 2004

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Exhibit 3: Latin America – Selected Economic and Demographic Data

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Exhibit 4: Latin American Restaurant Count – McDonald’s, Burger King, KFC, and Wendy’s

Sources:

Krug, JA, “Yum! Brands, Pizza Hut, and KFC” in Dess, GG, Lumpkin, GT, & Eisner, AB (2004) Strategic Management: Text and Cases. 2nd

ed. McGraw-Hill Irvine (pp. 907-918)

Krug, JA, “Kentucky Fried Chicken and the Global Fast-Food Industry” in De Wit, B & Meyer, R (2004) Strategy: Process, Content, Context: An International Perspective. 3rd ed. Thomson (pp. 909-927)

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End of Case Study

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