By John Sexton

One of the many mysteries of modern marketing is how KFC, a once rather lack-luster American fast food brand, outperformed all competitors and in particular arch rival and world market leader McDonald's, to become the biggest restaurant chain in China.

Whether measured by number of restaurants, revenue, or market share, KFC is far and away the number one restaurant brand in China. Even more striking is its dominance over McDonald's, a position that is reversed in nearly every other country. McDonald's has 800 branches in China, compared to KFC's 2200 and, with KFC opening 300 new branches per year, the gap is widening.

Two KFC staff clap hands to cheer each other outside a KFC restaurant in Shanghai. [Xinhua]

KFC China is not just outperforming the competition. In 2007 it contributed more than 20 percent of global revenue of parent company Yum!, whose brand portfolio includes Taco Bell and Pizza Hut. It is a proportion that is likely to grow up to and beyond 50 percent, according to Taiwan-born Warren Liu, a former member of the company's Greater China executive committee.

Liu, who was with Yum! for three years from 1997, and is in Beijing to promote a book about his experience with the company, is very clear about the reasons for this remarkable success story. KFC China, he says, quite simply went native.

The first important move was to recruit a local senior management team; not so simple in 1987 when KFC opened its first restaurant not far from Chairman Mao's Mausoleum in downtown Beijing. Back then nobody in Chinese mainland had experience of running a fast food chain, so KFC did the next best thing. They recruited what Liu affectionately refers to as "the Taiwan gang."

Liu says it was crucial for firms trying to enter the market back then to have an understanding of China and the Chinese cultural context "so deep that it is intuitive," to understand the Chinese people's "mixed feelings, of love and hate about the West, to understand Chinese history, language, the influence of Confucianism, Buddhism and Taoism, this is especially important if you are in the consumer goods industry."

KFC looked at recruiting from Hong Kong, then still a British colony, Singapore, and other areas in Asia but in the end found its core team in Taiwan. "Why particularly Taiwan?" said Liu. "The education system in Taiwan at the time was very Sino-centric. We learnt Chinese history, Chinese geography; we studied the Tang dynasty poets Du Fu and Li Bai. The Taiwan gang was the best available substitute for a local team."

The second factor underpinning KFC's success, according to Liu is product localization. Liu said the company has constantly sought to adapt its offerings to the local palate. For some years customers have been able to order congee (rice porridge) with thousand year old eggs. But six months ago, Liu said, he had a kind of epiphany. "I woke up and turned on the early morning news and realized KFC was selling youtiao [a kind of Chinese doughnut]. I realized KFC has entered a new plateau. Youtiao are the quintessential Chinese breakfast. I was speechless. That's localization as extreme as it can be."

Asked if KFC might prove vulnerable to the kind of economic nationalism seen around Coca Cola's proposed takeover of China's Huiyuan juice company, Liu replied, "KFC is still seen as a foreign brand but it's a foreign brand with local characteristics." Not everyone may agree. In 2007 the All China Federation of Trade Unions accused KFC and Pizza Hut of paying their employees in Guangdong Province less than the minimum wage. The ACFTU has recently stepped up a recruitment campaign targeting foreign companies that have resisted unionization.

Liu said his primary motivation for writing the book was not to help multinationals conquer the China market, but to help Chinese firms who have ambitions to go abroad. "For the last decade the Chinese government has been urging the most capable of Chinese enterprises to step out. So far the results have not been impressive. That's an understatement. So I hope people here can learn from the KFC experience in China"

KFC, Secret Recipe for Success by Warren Liu is published by Wiley. It can be bought from Amazon.com at http://www.amazon.com/KFC-China-Secret-Recipe-Success/dp/0470823844.

(China.org.cn, September 22, 2008)