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TRICON RESTAURANTS

INTERNATIONAL
GLOBALIZATION RE-EXAMINED
Tricon Global Restaurants
• Headquarter in Louisville
•World’s largest ensemble of fast food restaurants: KFC, Pizza Hut, and Taco
Bell
•Spun off from PepsiCo in 1977
The Fast Food Restaurant
•Revenues of Fast Food industry worldwide were estimated at $160 billion in
1998
•US was accounted for over 60% of global fast food sales
•Sales were increasing at about 5% only in US
•Level of local chains’ internationalization was quite limited
The Supply Side
•Uniformity in offerings at every outlet in the chain.
•On average, 20-40% of store revenues were accounted for raw materials, 20%
for labor, and 25-30% for rent and utilities.
•Rental costs varied considerably.
•Significant semi-variable and fixed costs made volume a key to profitability.
•Franchising was prominent in fast food.
•Largest fast food chains relied on a mix of franchised and company-owned
units for their operations.
The Demand Side
•Consumer spending on fast food was increasing rapidly.
•Customers were attracted towards American style and experience afforded by
US fast food chains.
•Customization of product lines was essential given variations in local tastes.
•Consistency and standardization limited ability of international chains.
•International chains focused on increasing average size of order by bundling
high-margin items.
Key Concepts & Competitors
Four categories are accounted for the bulk of market:
•Burgers
•Pizza
•Chicken
•Mexican food
Burgers
Burgers
•Burgers comprised more than one-third of total fast food industry.
•Leader in Burgers is McDonalds Corporation founded in 1955 by Ray Kroc.
•In 1998, it generated sales of $36 billion.
•80% of McDonalds total capital expenditures were earmarked outside of US
in 1998.
•McDonalds international operations accounted for 49% of company revenues
and 57% of its profits.
•McDonalds tried to achieve consistency of experience in key processes.
•A major milestone was a franchisee’s innovation of Big Mac in 1968.
Pizza
Pizza
•Pizzas comprised of about 15% of total fast food industry, second largest after burgers.
•Pizza market was much less concentrated than burger market.
•Capital requirements were low in pizza business.
•Almost $300,000 were required for a pizza parlor and $150,000-200,000 for delivery
business.
•The leader in pizza market is Pizza Hut, opened by Dan and Frank Carney in 1958 in
Wichita, Kansas.
•In 1998, Pizza Hut generated sales of $7.2 billion from 12,285 units.
•Innovations included deep-dish pan pizza, personal pizzas, and launch of delivery business.
•Biggest competitor is Domino’s .
Chicken
Chicken
•Chicken was less US-dominated and more internationalized.
•KFC accounted for 55% of market, followed by Pop-eye with 8%, and Church’s with
6%.
•Leader in quick service chicken, KFC, was opened in 1939 by Colonel Harland D.
Sandars in Corbin, Kentucky.
•KFC had more than 6500 units in 1969.
•In 1998, KFC generated sales of $8.3 billion from 10,432 units.
•KFC’s international activities were organized under Tricon Restaurants.
•KFC accounted for 62% of Tricon Restaurants.
•KFC’s direct competitor was Burger King and indirect competitor was Boston market.
Mexican Food
Mexican Food
•Mexican quick-service restaurant industry was estimated for 5% of fast food
market.
•Pioneer was Taco Bell, accounting 73% of market share.
•Taco Bell was started by Glen Bell in Downey, California in 1962.
•It went public in 1969 and opened first international restaurant in 1977.
•In 1998, Taco Bell generated sales of $5 billion from 7,055 units.
•Taco Bell recently entered the $20 billion after-five dinner category with
$9.99 12-item Grande Meal.
•In 1998, it also launched an advertising company, Gidget.
Tricon Global Restaurants &Tricon
Restaurants International
•Tricon operated or franchised more than any other fast food chain in the
world.
•29,000 total franchises
•500,000 people employed
•Operated in 102 countries
History
•PepsiCo’s restaurant businesses had not been successful.
•Customers switched to Coca-cola from Pepsi.
•There was minimal coordination in operations across different countires.
The Spin-off
•In January 1997, PepsiCo announced to spin off its restaurant as an
independent, publicly traded company - Tricon Global Restaurants, Inc.
•PepsiCo also announced to sell its food distribution company to focus more
on its core beverage and snack food businesses.
•In 1998, TRI’s system wide sales were $6.7 billion.
•Its operating profits amounted to $191 million.
•TRI was organized into 17 separate geographic business units.
•In 1998, TRI decided to concentrate its equity investments in countries that
either generated significant profits, or had the potential to do so.
Operations
•Operational improvement program: CHAMPS – Cleanliness, Hospitality,
Accuracy, Maintenance, Product quality, and Speed of service.
•Mystery shopping program began in 1996.
•CHAMPS also created a standard library for operating manuals which
consisted of four volume set: management, service, product, and equipment.
•Allowances had to be made for different tastes.
Marketing
•Before spin-off, there had been a lack of standardization and shared practices
between brands.
•Set standards and determined best practices.
•White paper
•Animated colonels with voice-overs
•Local budgets supported local marketing campaigns.
•Quarterly brand board meeting was attended by all marketing managers for
sharing best practices.
•In units that were 100% franchised, marketing manager played a consulting role.
Human Resources
•TRI adopted a restaurant-focused culture.
•Tricon emphasized ownership and recognition to a greater extent than McDonals by encouraging
its middle management to own company stock.
•Recruiting and turn-over in every country was focused.
•Developing countries had lower turn-over than US.
•TRI succeeded in filling its position within its ranks 80-90% of time.
•Emphasis on local management depth made it difficult to move talent across borders.
•There were only 110-120 expatriates within the organization.
•Compensation and quality of life challenges further compilcated cross-border mobility.
Finance
•Allocation of funds across myriad demands was the main focus.
•Each country unit was evaluated every two years.
•Some aspects of financing were standardized across countries, some varied by
country.
•Dealing with currency fluctuations and determining country risk premia were the
biggest challenges.
•Level of sophistication of financial intermediaries was improved.
•Taxation issues were not standard across countries.
•Capital was raised in US with domestic banks in different countries.
•Some franchisees were listed on domestic stock exchange.
Franchising
•TRI had opened franchise support centers in Dallas, London, and Singapore
which dealt with substantial international heterogeneity in franchising
arrangement.
•The support that the franchisor provided could be different from US.
•Asian franchisees had been more independent than the ones in US.
Product Development
•Product development had been bundled into R&D and Quality Assurance
department which reflected that it had failed to come up with new products.
•Tricon spent almost $20 million yearly on R&D.
•The resources that Tricon did not spend on PD were earmarked for US.
•Product Development outside the US was comparatively limited.
•TRI made some attempts to tap into franchisees’ ideas about product
innovation.
•TRI product development for KFC had been centralized in Asia.
Comparative Cost Structures for
Selected Fast Food Categories
Market Niches In Fast Food Industry
McDonalds Selected Financial Data ($
million)
McDonalds International Information
By Geographic Regions, 1998
Tricon Global Restaurants Selected
Financial Data ($ million)
Tricon Organizational Structure
Tricon’s Goals For The Future
•Become renowned for an ownership and recognition culture that derives the best
results in the industry.
•Drive superior same store growth through differentiated brand positioning and
innovation.
•Improve the unit level economics enough to drive shareholder value.
•Develop the most competitive, levergable above-the-cost structure in the
industry.
•Expand the system aggressively and profitably by becoming a superior franchise
company.
•Build a capital and asset structure that dramatically enhances shareholder value.

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