YUM! Brand (KFC) in China

Solution Preview

YUM BRANDS - KFC IN CHINA

INTRODUCTION

The Chinese market commands center stage in foreign investment forums around the world. With 1.3 billion people, a majority between 15-64 years old, combined with Gross Domestic Product (GDP) growth rates averaging 9.5% since 2008, the lure of the Chinese market is obvious, (CIA, 2011). The equation results in lots of people with ever increasing amounts of disposable income. Foreign investment in China-especially direct foreign investment-represents a great risk-reward opportunity for growing enterprises.

One such enterprise is YUM! Brands' component Kentucky Fried Chicken (KFC). Since the opening of its first storefront in Beijing in 1987, KFC has grown to over 2000 locations across China, (YUM, 2011). KFC represents a successful mitigation strategy of the risks of direct foreign investment... but may not represent a model to be duplicated.

DIRECT VERSUS INDIRECT INVESTMENT

Even the most casual of investors is exposed to offers promoting foreign investment. These types of investment are not the KFC model. The difference between the KFC success story, and the ever increasing numbers of Chinese focused mutual and index funds is the nature of the investment. KFC successfully grew their business into China through direct foreign investment. Direct investment is comprised of physical capital bought or built in one country, by an enterprise from another country. In other words, "direct investment in buildings, machinery and equipment is in contrast with making a portfolio investment, which is considered an indirect investment," (Graham, J & Spaulding, R., 2004).

Indirect investment-while certainly not without its risks-represents a far more liquid investment than direct investment. This liquidity provides a degree of risk mitigation in and of itself. KFC did not invest in liquid Chinese assets. They purchased or leased property, hired employees, opened physical storefronts in China. This sort of permanency elevates the risk level of any investment-much more so when the intricacies of foreign investment are included.

RISK OF INITIAL INVESTMENT

The reward of a forty percent (and growing) market share of Chinese fast food restaurants didn't come without assuming some risk, (Mellor, 2011). The KFC success story is, in fact, its second attempt in the Chinese market. In 1973, KFC opened 11 restaurants within the year-just two years later, all were closed (YUM, 2011). That failure certainly came with a financial cost. This initial probe into the Chinese market came at a time of overextension of the KFC company, and its subsequent failure added to the franchise-wide struggles of the ...