Customer Relationship Management of KFC - January 18th, 2011

KFC Corporation (KFC), founded and also known as Kentucky Fried Chicken,
is a chain of fast food restaurants based in Louisville, Kentucky, in the
United States. KFC has been a brand and operating segment, termed a
concept[2] of Yum! Brands since 1997 when that company was spun off
from PepsiCo as Tricon Global Restaurants Inc.

KFC primarily sells chicken pieces, wraps, salads and sandwiches. While its
primary focus is fried chicken, KFC also offers a line of grilled and roasted
chicken products, side dishes and desserts. Outside North America, KFC
offers beef based products such as hamburgers or kebabs, pork based
products such as ribs and other regional fare.[citation needed]

The company was founded as Kentucky Fried Chicken by Colonel Harland

Sanders in 1952, though the idea of KFC's fried chicken actually goes back
to 1930. The company adopted the abbreviated form of its name in
1991.[3] Starting in April 2007, the company began using its original name,
Kentucky Fried Chicken, for its signage, packaging and advertisements in
the U.S. as part of a new corporate re-branding program;[4][5] newer and
remodeled restaurants will have the new logo and name while older stores
will continue to use the 1980s signage. Additionally, Yum! continues to use
the abbreviated name freely in its advertising.
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 PepsiCo's 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 Sanders's father in 1896, Sanders's 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 didn't 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
Sanders's 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 state's 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 Hines's Adventures in Good Eating in 1939.

Sanders Court and Cafe was Kentucky's 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, Sanders's 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 Sanders's
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 Sanders's 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:
"He's 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 McDonald's 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
Colonel's 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 Colonel's 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 o'clock 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 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 company's 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 I'm confused by the talk and high finance discussed at these meetings."

CEO Brown spent the rough year of 1970 shoring up his company's 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 company's
1970 financial overhaul, Brown commented, "You never saw a more
negative bunch.... If I'd have listened to them in the first place, we'd 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 Makes Changes in 1970s

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

Mayer found that the product mainstay, fried chicken, wasn't 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
Heublein's 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 Colonel's basics. Sticking to a limited
menu kept Kentucky Fried Chicken's costs down, allowing the company
time to recoup. Timing was fortunate on Kentucky Fried Chicken's 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 Mayer's 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 McDonald's could
compete. But while many industry insiders were crediting the team with
victory, Mayer wasn't so quick to join in. As he noted in Nation's Restaurant
News, "People keep talking about the turn-around at KFC. I'd 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 Nation's 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 don't roll out a flavor-of-the-month."

PepsiCo Buys Company in 1986

Mayer's 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 KFC's 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 PepsiCo's successful Pizza Hut delivery system as an
example. By late 1986 Donald E. Doyle, succeeding Mayer in the post of
Kentucky Fried Chicken's 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 Chicken's 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 People's 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 PepsiCo's 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, PepsiCo's 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
Bennigan's, 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 PepsiCo's contract renewal. Among the issues debated was
PepsiCo's 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 KFC's long-term interest to settle the dispute without litigation, Cranor
believed--and 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 Sanders's 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 KFC's 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 Chicken's control of total operating
units to 32 percent. The corporation also added Canada's Scott's 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 Colonel's 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, manager's 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 KFC's
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 food's 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 company's 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 Nation's Restaurant News. Cranor's goal was total concept
transformation, moving KFC to a more contemporary role.

New product introductions were part of the company's 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 company's new CEO, David Novak, also
decided to test Colonel's Kitchen, a clear imitation of the Boston Market
format. To counter McDonald's and Burger King's "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 KFC's 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 PepsiCo's 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 McDonald's, so it
remained to be seen if the new parent company would refresh KFC's image
and profits.