TriconRestaurants International: Globalizationre-examined • By Francesca Filipet & Giulia Azzi
Agenda • Introduction • The FatsFoodIndustry • - Supply side • Demand side • Key FoodCategories and Competitors • Tricon Global Restaurants and Tricon • Restaurants International: whattheydid
TriconRestaurants International Name: Tricon Global Restaurants Headquarter: Kentucky Brands: Taco Bell, Pizza Hut and KFC Birth: 1997 spun off fromPepsiCo Organization: 4 divisions, 3 domesticonesbuiltaroundeachof the 3 brands + 1 tomanageinternationaloperations
… after the spin-off, therewas the needtochangeTricon’s culture, improveuniteconomics and refranchise some of the units the company owned. Other key objectiveswere: Reduce the $ 4.6 billiondebtresultingfrom the spin-off Consolidate and standardizeTricon’s operationsworldwide Focus on a few key markets
But first: The Fast FoodIndustry The revenuesof the fast foodindustrywere $ 160 billion in 1998. 27 of the top 30 fast foodchainswereheadquartered in the US and accountedfor 60% of global fast foodsales. The bigger part of the saleswascomingfrom US. However fast foodchainsstartedlooking more carefullyabroadbecauseof the low growth rate of US ( only 5% ascomparedto China and Mexico thatwereexpectedtoreach 20%).
The Supply Side • COMPARATIVE COST STRUCTURE • Fast foodchainstriedtooffer: • sameexperienceallover the world • uniformity in theirofferings, • standardizationof menu, • production processes, • rawmaterial quality, outleatappearenceetc… • RAW MATERIAL COSTS: 20% -40% (ofrev) • LABOR COSTS: 20% • RENT & UTILITIES: 25%- 30% • Big variationsbyfoodcategory: why? • -laborcosts • Storesbuiltfor on-premise or off-premise consumption • Location of the stores (on-premise neartrafficgenerators; off-premiseresidentialneighbourhood) • Franchising and company-ownedunits
… oneof the key pointwas the mix betweenfranchised and company-ownedunits. And all big fast foodchainsrelied on this mix whichwasalsoveryhelpfulsincetherewerehugecomplementaritiesbetweenfranchised and company-ownedunits and becauseofmutuallearning!
Demand side Consumer spending on fast foodwasincreasingeven more rapidlythan total expenditures on food. However in some developedcountriessuchas France and Italy, penetrationremainedlimited. While in lessdevelopedcountriessuchas China, people wentto the fast foodnottoeattypical American foodbutbetter “American style”. In allcountries some degreeoflocalcustomizationwasneeded (offerlamburgerstoHindus people insteadofhamburgers, don’t serve porktoMuslism, spicytasteswerepreferredto South Africansetc…). Butstandardization and consistencyformatslimitedthisadaptationattitude. Other marketing levers: bundlinghigh-marginsitems, spend a lot in advertising, promotions and expensivetie-inwith media icons.
Agenda Introduction The FatsFoodIndustry - Supply side - Demand side Key FoodCategories and Competitors Tricon Global Restaurants and Tricon Restaurants International: whattheydid
Key FoodCategories Fast foodindustrycouldbedividedinto 12 categories, howeverwefocus on the firts 4 thatconstitute the bulk of the market: burgers, pizza, chicken and Mexicanfood. FOCUS
Burgers! Biggest single category in fast foodindustry. The leader was McDonald’s Corporation with $ 36 billionsalesfrom 25,000 units spread across 115 countries. 80% of McDonald’s capital expendituresweredirectedoutside US, and itsinternationaloperationsaccountedfor 49% of company’s revenuesand 57% ofits profit saturationof the US market growthwasexpectedto come fromoutside!
McDonald’s Strategy Consistency in achieving key processes + Innovationtokeep market leadership + consistencyofexperience
PIZZA 15% of the fast food market Lessconcentratedthan the burger market Why? Lower capital requirements Leader: Pizza Hut (1958 Kansas) with 3,200 units, more than 100 outside US in 1977. 1998: 35% ofunits in US werecompany-ownedvs 26% overseas Severalchallenges: Domino’s (secondlargest competitor) innovation. Pizza Hutrespondedspendingmillionsofdollars on a qualityinitiative “totallynewpizzas” tomaintein the 15%-20% price premium. +challengesfromlocalcompetitorsabroadasTelepizzafromSpainwhoeneteredalso a numberofforeigncountriesbetween 1992 and 1998 (Poland, Portugal,Mexico, Germany, Brazil, France, Morocco). 1997: Telepizzahad 399 units in Spain and 68 overseas. Pizza Huthad 150 in Spain in 1995 and 123 in 1997!
Chicken Accountedfor 15% of the fast food market (as pizza). ButlessUS-dominated: more internationalized! Leader: KFC – 55% of US market Competitors: Popeye’s 8% Church’s 6% Overseas market wasgrowing more rapidly. KFC – Kentucky FriedChicken sold toPepsiCo in 1986 madePepsiCo the largest fast food competitor in the world in termsofunits and second-largest in termsof scale with 6,500 units and more than 1,500 unitsoutside US. 32% ofunits in US werecompany-owned vs 21% overseas. High profitability: itwas the inventorofthis fast foodcategoryand claimed a larger share ofit! Outside US, KFC accountedfor62% ofTricon’s sales, comparedto 36% for Pizza Hut and 2% forTaco Bell.
…. But…. • Chicken business seemedtovary more fromcountrytocountrythandid pizza or burger business. • Why? • Localtastesmore definedthantastesfor pizza or burgers • itaddresseddifferent social classes in differentcountries: in Australia middle class, in US bluecollars, in UK aneveningmealconcept ,while in France and Spainsaleswereduringlunchtime…income and daypart position difference • KFC announcedplanstoenter the chicken-sandwichindustry in directcompetitionwith McDonald and Burger King. Result? positive: 15% price premium to McDonald’s !
MexicanFood Mexicanquick-servicerestaurantindustryaccountedfor 5% of the worlwide fast food market, butwasconfinedto US. High market concentration. Leader: Taco Bell – 73% of market share. 2%-3% ofsystemwidesalesforTriconRestaurant International. 76 unitsamong Canada, Puerto Rico, Central & South America. 24% of US unitswerecompany-owned. Taco Bell expandedaccesspoints in the 1990s, and promoted a tiered menu strategyto continue tobe a mid-tier family food provider whilealsosellingcheaperfare focused on teens. 1998: advertising campaignwith Chihuahua Gidgetthatbecame a cultural icon in US (butwasnotuniversallyemployable, dogsweretaboo in some Asiancountries).
Agenda Introduction The FatsFoodIndustry - Supply side - Demand side Key FoodCategories and Competitors TriconGlobal Restaurants and Tricon Restaurants International: whattheydid
PepsiCo Restaurant International • 1980’s very aggressive Coca-Cola campaign cut down Pepsi-Cola’s sales • 1980’s PepsiCo also invested in the restaurant side: improving operational efficiency in restaurant refranchising company-owned restaurants • 1995 consolidation of KFC and Pizza Hut in PepsiCo Restaurant International Peter 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”
PepsiCo 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 food • 1998 Tricon had 29’000 units both operated or franchised in 102 countries, $20.6 billion of sale and $8.5 billion of revenues
New goals for the company (Pearson and Novak) • Pre-spinoff organizational structure • Run domastically • Achieve 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 Tricon • Relying on franchisees for the bulk of system expansion • Keep separate the three domestic operating companies • Combine into (TRI) Tricon Restaurants International all international operations
TRI 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
Tricon 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 Bassiin order to have one-system across various business units according 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
Sources of System Sales in International Restaurants Asia-Pacific 42% Europe, South Africa 24% Americas 21% Greater China 13%
Operations • CHAMPS= 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 globe • Gold standards for every core item and justification of variation through statistical testing
Marketing • Before the spin-off: lack of standardization and share of the best practices between brands or regionally between a brand • Need 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 level Bassi “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”
Human 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) • Recognition Pace “people are so appreciative of getting recognition, as long as it’s sincere, people just want to be told ‘thank you’” • Keep the restaurant location • Lowering turnover • Local management= cultural background (managerial mobility only for highest levels of management)
Finance Problem: 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 country • Standardization of financing functions across countries Difficoulties of internationalization: • Currency fluctations • Determination of country risk premia • Financial intermediaries for transactions • Taxation issues, very different across countries
Franchising Franchise 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)
Product 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 grow Limited product development outside U.S. (application resources to customize products for local health and safety standards, local suppliers, and customer sentiment)
U.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%
U.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%
U.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%
Repositioning in China? • Great success of KFC in China (first opening in Beijing 1987) leader in the market • Sam 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 experience • Investment in building up local product development capabilities