2Agenda Introduction The Fats Food Industry - Supply side Demand side Key Food Categories and CompetitorsTricon Global Restaurants and TriconRestaurants International: what they did
3Tricon Restaurants International Name: Tricon Global RestaurantsHeadquarter: KentuckyBrands: Taco Bell, Pizza Hut and KFCBirth: 1997 spun off from PepsiCoOrganization: 4 divisions, 3 domestic ones built around each of the 3 brands + 1 to manage international operations
4… after the spin-off, there was the need to change Tricon’s culture, improve unit economics and refranchise some of the units the company owned.Other key objectives were:Reduce the $ 4.6 billion debt resulting from the spin-offConsolidate and standardize Tricon’s operations worldwideFocus on a few key markets
5But first: The Fast Food Industry The revenues of the fast food industry were $ 160 billion in 1998.27 of the top 30 fast food chains were headquartered in the US and accounted for 60% of global fast food sales.The bigger part of the sales was coming from US.However fast food chains started looking more carefully abroad because of the low growth rate of US ( only 5% as compared to China and Mexico that were expected to reach 20%).
6The Supply Side COMPARATIVE COST STRUCTURE Fast food chains tried to offer:same experience all over the worlduniformity in their offerings,standardization of menu,production processes,raw material quality, outleat appearence etc…RAW MATERIAL COSTS: 20% -40% (of rev)LABOR COSTS: 20%RENT & UTILITIES: 25%- 30%Big variations by food category: why?-labor costsStores built for on-premise or off-premise consumptionLocation of the stores (on-premise near traffic generators; off-premiseresidential neighbourhood)Franchising and company-owned units
8… one of the key point was the mix between franchised and company-owned units. And all big fast food chains relied on this mix which was also very helpful since there were huge complementarities between franchised and company-owned units and because of mutual learning!
9Demand sideConsumer spending on fast food was increasing even more rapidly than total expenditures on food.However in some developed countries such as France and Italy, penetration remained limited. While in less developed countries such as China, people went to the fast food not to eat typical American food but better “American style”.In all countries some degree of local customization was needed (offer lamburgers to Hindus people instead of hamburgers, don’t serve pork to Muslism, spicy tastes were preferred to South Africans etc…).But standardization and consistency formats limited this adaptation attitude.Other marketing levers: bundling high-margins items, spend a lot in advertising, promotions and expensive tie-in with media icons.
10 Key Food Categories and Competitors AgendaIntroductionThe Fats Food Industry- Supply side- Demand side Key Food Categories and CompetitorsTricon Global Restaurants and TriconRestaurants International: what they did
11Key Food CategoriesFast food industry could be divided into 12 categories, however we focus on the firts 4 that constitute the bulk of the market: burgers, pizza, chicken and Mexican food.FOCUS
12Burgers! Biggest single category in fast food industry. The leader was McDonald’s Corporation with $ 36 billion sales from 25,000 units spread across 115 countries.80% of McDonald’s capital expenditures were directed outside US, and its international operations accounted for 49% of company’s revenues and 57% of its profit saturation of the US market growth was expected to come from outside!
13McDonald’s StrategyConsistency in achieving key processes + Innovation to keep market leadership + consistency of experience
14PIZZA 15% of the fast food market Less concentrated than the burger marketWhy? Lower capital requirementsLeader: Pizza Hut (1958 Kansas) with 3,200 units, more than 100 outside US in 1977.1998: 35% of units in US were company-owned vs 26% overseasSeveral challenges: Domino’s (second largest competitor) innovation. Pizza Hut responded spending millions of dollars on a quality initiative “totally new pizzas” to maintein the 15%-20% price premium.+ challenges from local competitors abroad as Telepizza from Spain who enetered also a number of foreign countries between 1992 and 1998 (Poland, Portugal,Mexico, Germany, Brazil, France, Morocco).1997: Telepizza had 399 units in Spain and 68 overseas. Pizza Hut had 150 in Spain in 1995 and 123 in 1997!
15ChickenAccounted for 15% of the fast food market (as pizza).But less US-dominated: more internationalized!Leader: KFC – 55% of US marketCompetitors: Popeye’s 8%Church’s 6%Overseas market was growing more rapidly.KFC – Kentucky Fried Chicken sold to PepsiCo in 1986 made PepsiCo the largest fast food competitor in the world in terms of units and second-largest in terms of scale with 6,500 units and more than 1,500 units outside US.32% of units in US were company-owned vs 21% overseas.High profitability: it was the inventor of this fast food category and claimed a larger share of it!Outside US, KFC accounted for 62% of Tricon’s sales, compared to 36% for Pizza Hut and 2% for Taco Bell.
16…. But….Chicken business seemed to vary more from country to country than did pizza or burger business.Why?Local tastes more defined than tastes for pizza or burgersit addressed different social classes in different countries: in Australia middle class, in US blue collars, in UK an evening meal concept ,while in France and Spain sales were during lunchtime… income and daypart position differenceKFC announced plans to enter the chicken-sandwich industry in direct competition with McDonald and Burger King. Result? positive: 15% price premium to McDonald’s !
17Mexican FoodMexican quick-service restaurant industry accounted for 5% of the worlwide fast food market, but was confined to US.High market concentration.Leader: Taco Bell – 73% of market share.2%-3% of systemwide sales for Tricon Restaurant International.76 units among Canada, Puerto Rico, Central & South America.24% of US units were company-owned.Taco Bell expanded access points in the 1990s, and promoted a tiered menu strategy to continue to be a mid-tier family food provider while also selling cheaper fare focused on teens.1998: advertising campaign with Chihuahua Gidget that became a cultural icon in US (but was not universally employable, dogs were taboo in some Asian countries).
18Agenda Introduction The Fats Food Industry - Supply side - Demand side Key Food Categories and CompetitorsTricon Global Restaurants and TriconRestaurants International: what they did
19PepsiCo Restaurant International 1980’s very aggressive Coca-Cola campaign cut down Pepsi-Cola’s sales1980’s PepsiCo also invested in the restaurant side:improving operational efficiency in restaurantrefranchising company-owned restaurants1995 consolidation of KFC and Pizza Hut in PepsiCo Restaurant InternationalPeter Hearl, executive vice president of Tricon Restaurant International, criticize the way KFC and Pizza Hut were run by PepsiCo (minimal coordination across different countries)“U.S. domestic company doing business overseas, rather than a multinational”
20PepsiCo spin off to Tricon 1997 PepsiCo spun off KFC, Pizza Hut and Taco Bell into Tricon Global Restaurant in order to focus its activity on selling soda and snack food1998 Tricon had 29’000 units both operated or franchised in 102 countries, $20.6 billion of sale and $8.5 billion of revenues
21New goals for the company (Pearson and Novak) Pre-spinoff organizational structureRun domasticallyAchieve economies across the three brands(combo units, launching multibrands promotions, unified food service purchasing cooperative, leveraging general and administrative expenses across them)Reduce company ownership of TriconRelying on franchisees for the bulk of system expansionKeep separate the three domestic operating companiesCombine into (TRI) Tricon Restaurants International all international operations
22TRI successes in 1998 $6.7 billion of sales (32% of Tricon’s total) $2 billion revenues (24% of Tricon’s total)$191 million operating profits (21% of the total)TRI aimed to grow at 20% per year and go global
23Tricon Internationally 17 separete geographic business units working together(functional area heads reported to both the general manager of the business unit and the senior vice-president)1998 decision to concentrate equity investments in countries which generated significant profit or which has high potential to do so(the objective was to have a smaller number of core markets reporting directly to Tricon’s president Bassi in order to have one-system across various business unitsaccording to the proportion 80:20, in which 80 is what headquarters would drive and 20 is the local option)Remaining markets would be operated by franchisees
24Sources of System Sales in International Restaurants Asia-Pacific 42%Europe, South Africa 24%Americas 21%Greater China 13%
25OperationsCHAMPS= main operational improvement and standard for a common operating platform among all franchisees(Cleanliness, Hospitality, Accuracy, Maintenance, Product Quality, Speed of Service)Definition and measurement of excellence, training and support for employees, recognition and reward for whose achieving excellence(mystery guest who simulated a customer visiting a restaurant and evaluating the service)Four volumes of operating standards in every unit all over the globeGold standards for every core item and justification of variation through statistical testing
26MarketingBefore the spin-off: lack of standardization and share of the best practices between brands or regionally between a brandNeed to communicate the same message all over the world throughout TRI’s global operations(share of standards and best practices as quick service, delivery/take-avey and kids’ playgrounds)Difficoulties in coordinating marketing and advertising campaign at international levelBassi “even il you can globalize a product, it is very difficoult to globalize an experience”Senior vice-president “Franchisees improve things, we don’t generally have the first fights with them”
27Human Resources Restaurant-focused culture Movement around of manager (refusal of historical baggage and development of new programs)Emphasis of ownership(encouragement managers to own company stock)RecognitionPace “people are so appreciative of getting recognition, as long as it’s sincere, people just want to be told ‘thank you’”Keep the restaurant locationLowering turnoverLocal management= cultural background(managerial mobility only for highest levels of management)
28FinanceProblem: how to allocate funds across demands coming from all around the world?Risk-reward profile, historical background, competition in the market and human resources for each countryStandardization of financing functions across countriesDifficoulties of internationalization:Currency fluctationsDetermination of country risk premiaFinancial intermediaries for transactionsTaxation issues, very different across countries
29FranchisingFranchise was increasingly important: more and more sections of the globe were served through the franchise business model Franchise support centers in three core cities (Dallas, London, Singapore) that provided services internationally Standardization of franchise contract around the world (imposition of franchisees discipline)
30Product Development R&D and Quality Assurance department at TRI almost $20 million per year spent on R&D(product and process development to expand into new dayparts and new channels)Resources spent on product development were mostly for the U.S., where Tricon thought to have enough room to growLimited product development outside U.S.(application resources to customize products for local health and safety standards, local suppliers, and customer sentiment)
31U.S. Sales by Daypart (% of Sales) Dinner 63%Lunch 26%Snacks/Breakfast 11%U.S. Sales by Distribution Channel (% of Sales)Dine Out 71%Dine In 29%
32U.S. Sales by Daypart (% of Sales) Dinner 55%Lunch 34%Snacks/Breakfast 11%U.S. Sales by Distribution Channel (% of Sales)Dine Out 82%Dine In 18%
33U.S. Sales by Daypart (% of Sales) Dinner 39%Lunch 48%Snacks/Breakfast 13%U.S. Sales by Distribution Channel (% of Sales)Dine Out 71%Dine In 29%
34Repositioning in China? Great success of KFC in China (first opening in Beijing 1987) leader in the marketSam Su (leader of the management team): “Possibility of increase KFC success by repositioning it to offer fuller dining experiences”DIFFICULTIES:Operational and marketing changes in expanding to fuller dining experienceInvestment in building up local product development capabilities