Fried Chicken Wars: The Fall of KFC in America transcript

Fried chicken. To some, it’s a comfort food that evokes precious childhood memories and to others, it’s a timeless representation of American culture. As I’ve gotten older, I’ve given up many junk foods, but fried chicken is one guilty pleasure I just can’t let go. There’s something magical about it - the contrasting textures, the combination of juicy chicken with crispy breading along with spice, salt, and fat makes for it such a satisfying meal any time of the year.

Fried chicken is loved around the world and these days there are more varieties than ever before. There’s classic Southern bone-in buttermilk fried chicken, pub-style buffalo wings fried slathered in hot sauce, diner chicken-and-waffles drenched in maple syrup, boneless Japanese karaage coated in potato starch , citrus marinated fried chicken from Latin America, Nashville hot chicken served with pickles, Taiwanese popcorn chicken doused in five spice, and my personal favorite - the sticky, sweet, ultra-crunchy Korean fried chicken.

Beyond flavors and textures, fried chicken comes in many forms like tenders, nuggets, bone-in, wings, wraps, and sandwiches. Kentucky Fried Chicken was once widely considered to be the golden standard, the best fried chicken one could get. While I grew up on KFC and its family buckets and biscuits, KFC these days is far from the golden standard that it once was. KFC these days is nothing like the KFC from my childhood.

The mashed potatoes taste like glue, the chicken is greasy and dry, it’s expensive, and even at its best, it doesn’t come close to the quality of other establishments like Popeyes, Chick-fil-A, Jollibee, Raising Cane’s and more. There are a variety of places nowadays to get your fix and KFC is an afterthought. As fried chicken has evolved, consumer tastes have also changed. Nowadays, I prefer to pay more for less - for product that’s fresher, smaller in quantity but higher in quality, and unique like soy garlic or honey glazed Korean fried chicken.

KFC has dominated fried chicken around the world with legacy and scale, but its relevance and popularity in America has been declining for years. As the Colonel has weakened, longtime rivals in Popeyes and Chick Fil A have all laid claims to the chicken throne. Even the world’s second largest investment bank, Goldman Sachs, sees this rare opportunity to upset the established order and take a piece of a booming multi-billion dollar food category that’s growing faster than burger and fries.

In 2020, Goldman Sachs acquired Zaxby’s for 2 billion dollars with the ambitions of taking the Southern chain nationwide and international. And on the other side of the world, the eastern siege has begun. Jollibee and Kyochon, who have dominated East Asia for decades, have shifted focus to the West, eager to carve out a slice of the Colonel’s market share. The popular narrative amongst Americans is that KFC’s drop in quality over the years is the result of ruthless cost cutting measures from out-of-touch executives looking to juice EPS and who wouldn’t know good fried chicken if it hit them in the face.

When you look at KFC in America, it’s an outdated and run-down, cheap, uncreative brand with a boring menu. But when you look at the KFC around the world, in South America, Europe, Asia, Africa, and the Middle East, KFC is a star brand known for its quality chicken, great service, and unique offerings. How is it that the same company can be so great internationally and so poor in its own home country? In this episode, we’ll cover the fried chicken wars, the strategy and missteps that have brought KFC in America to where it is today, and how legacy and brand power can be just as much a curse as it is a blessing in the world of business.

[break] Chicken is the world’s most popular protein. As chicken consumption per capita continues to break records and fresh off the chicken sandwich mania, companies and investors believe that there is room for growth. Two decades ago, people would have said that a Quarter Pounder and a Whopper would be the best burgers one can get. Fast forward today, you have Five Guys and Shake Shack who have elevated the lowly burger from a cheap bite into a high-end premium with each brand grossing nearly a billion dollars in sales every year.

While Shake Shack and Five Guys are not at the scale of the Golden Arches, having two new thriving billion dollar businesses is still a significant milestone in a mature market that many historically believed with no room for competition. The evolution of burgers and success of new entrants is a parallel that feeds the ambitions of restaurateurs and fast food companies who believe the same developments will play out with fried chicken.

Restaurants are a notoriously hard business. In a typical full-service restaurant, the food costs are roughly 30-35% of sales, labor costs are 30-40%, and overhead, which is rent and advertising clocks in about 20-30%. With such heavy cost structures, it’s no surprise that the average restaurant profit margin hovers at 3-5%. Like all restaurants, fried chicken shops face the universal challenges of saturation and acquisition.

But modern fried chicken shops have some natural operational advantages compared to most restaurants with lower labor costs, food costs, and overhead. Fried chicken is a takeout business. Consumers are looking to grab-and-go with no expectations of ambience. As a result, fried chicken shops have gotten smaller and more barebones over the years with floor plans that have little to no dine-in areas for consumers. In contrast, dining space is critical for almost every other type of restaurant as their business is a function of how many customers they can seat and how fast they can turnover tables.

Modern fried chicken shops can get away with a few tables or sometimes nothing at all, just a counter to order, pick up, and leave. As a place for people to stop at but not stay at, fried chicken businesses save on overhead, can fit into smaller spaces for cheaper rent, and are less dependent on location and foot traffic for business. Food costs are a function of ingredients and menu diversity. The bigger the menu, the greater the variety of dishes to choose from, the wider range of price points a restaurant can offer, and the better chance a customer will find something they like.

But on the flip side, the more items on a menu, the more ingredients that must be sourced and the higher the food costs. Fried chicken shops in comparison generally have very simple, concise, easy-to-understand, predictable one page menus. Beyond the chicken itself, fried chicken shops will typically offer low-cost, high margin fried sides like fries or premade sides like mac-and-cheese to round out the menu. They’ll sometimes have a few salad and dessert options for balance.

Modern fried chicken shops lean on sauces or marinades for differentiation. The core ingredients that make up 90% of the menu for fried chicken shops around the world - chicken, flour, potatoes, oil - are all cheap, widely available, and stable in supply. While fried chicken shops can use about every part of a chicken with little waste, restaurants who serve beef or pork generally only use ground forms or premium cuts like ribs, chops, or ribeye.

Since the customer interaction is limited, fried chicken shops don’t need a proper front of house in wait staff and servers. Some shops are so operationally lean that the person frying the chicken can be the same person who takes the order. For the back of the house, most shops fry in batches in advance of customer orders. And since nearly everything on the menu is fried, cooks just need to be trained on how to fry something.

When it comes to cooking, fried chicken shops just need fryers, ovens, and warmers. In contrast, restaurants need ranges, flat tops, fryers, ovens, warmers, microwaves, steamers, salamanders, and boilers along with space to operate such equipment. While the modern fried chicken shop has evolved to become smaller and operationally leaner while offering better quality over the years, KFC has struggled to adapt. To set the stage, KFC is owned by Yum Brands who also owns Pizza Hut, Taco Bell, and Habit Burger Grill in its portfolio.

In portfolio companies, investment is never evenly distributed across all brands. Just like in a family with multiple kids - in every portfolio, there’s always a golden child, a brand that executives have the most hope for and consequently get the most attention, prioritization, and investment. On the flip side, there are neglected brands who chug along with minimal investment and attention. KFC for decades has been that golden child.

In the past 10 years, KFC has made over double the amount of sales than Taco Bell and Pizza Hut combined. KFC made over 30 billion dollars in 2021 and single-handedly contributes over 50% of Yum Brands annual revenue. In calls and presentations, KFC is always featured or mentioned first. Knowing this, it would be unfair to attribute KFC’s regression over the years as the result of underinvestment or lack of care. On paper, KFC looks like a solid business.

When we look at all the traditional metrics that a fast food chain is evaluated by, KFC is by definition successful. System sales, which are the dollar value of food and beverages sold by all KFCs in the United States and around the world with the exception of China, has increased year over year. KFC global system sales has grown 36% in 9 years, from 23M billion dollars in 2013 to 31 billion dollars in 2022. Just like McDonald’s and other large fast food corporations, KFC has moved away from being an operator and franchisor to becoming a pure franchisor.

By operating fewer stores, KFC gives up any sales upside in exchange for franchise fees, which are a lower but more stable form of recurring revenue. Franchise fees are made of two components, the first being one-time fixed upfront payments that franchisees pay upfront for the right to operate a store and whenever they renew or transfer those rights to someone else. These fees range from thousands to tens of thousands of dollars.

The second and more lucrative fee is the royalty. Every month, franchisees have to pay 4-6% of their gross sales or a fixed minimum, whichever is greater. Under this pure franchisor strategy, KFC reduces its own overhead and places all the operating risks on its franchisees. In 2013, 9 out of every 10 KFC stores were franchised. As of 2022, 99% of all KFC stores around the world are franchised. When nearly 10 out of every 10 customers are being served by a local operator, this means that customer experience and food quality of the KFC brand is entirely in the hands of franchisees.

If we put ourselves in the Colonel’s shoes as the franchisor, while we can sit back and count our cash safely every month in our ivory tower, we have to maintain our relationships with our franchisees and consumer demand to keep the royalties flowing. The more stores, the more franchisees, and the more fees to collect. The franchisor strategy is a volume play that works at scale - and it certainly helps that KFC is the second largest restaurant chain in the world and the global fried chicken leader with over 25,000 restaurants in 145 countries.

While KFC provides guidelines, sets the menu, runs the ads, and supplies everything from the equipment, food, packaging down to the furniture, cleaning supplies, utensils, and napkins - it’s ultimately up to the franchisee on how they want to operate and execute. Franchisees can set their own prices, staff as many people or as few as they want, and establish their own hours of operations for each location. The relationship between a franchisor and its franchisees is always a testy one of power and control.

Both sides need trust and support from each other to thrive. But when they don't get along, things can get nasty. And when 99% of stores are franchised like they are with KFC, the power dynamics naturally shift away from corporate and in favor of the franchisees. When we break down KFC’s revenue over the years, we can see the powerful results from its franchisor strategy. Back in 2013, franchise fees accounted for 28% of revenue while sales from locations that KFC corporate directly operated accounted for 72% of revenue.

By 2022, these two revenue streams have flipped with franchise fees representing 56% of revenue and self-operated store sales accounting 21%. This same inflection point can be seen when graphed by dollar value where KFC franchise fees have grown from $800M to $1.5 billion and self-operated sales have decreased from $2 billion down to $600M over the same timeframe. In the same timeframe, KFC’s annual operating margin with less overhead has improved significantly, almost doubling from 23% to 42%.

As KFC has opened and franchised more locations worldwide, food and beverage sales at franchised stores have also grown over the years. System sales at franchised KFCs has grown from $20 billion dollars in 2013 to $30 billion dollars in 2022. At the same time, KFC has successfully demanded a higher cut over the years from franchisees. In 2013, a KFC franchise paid out on average 4% royalty. Fast forward 9 years, and the average KFC franchise now pays out a little over 5% - which is a sign of brand and franchisor strength.

Along the way, KFC has doubled its stores worldwide going from 13,000 locations in 2013 to over 26,000 locations in 2022. Same store sales, which is a measure of if and how many customers are coming back to the same restaurants year over year, has also remained steady averaging at 2% every year both before and during COVID. Cannibalization, saturation, and retention don’t seem to be non-issues for the world’s largest fried chicken shop.

The fundamental issue with most business analysis is that it’s always historical, meaning only after something has obviously happened do all the numbers, graphs, rationale, commentary, and case studies get made. Despite KFC’s aforementioned success, there are signs if we dig deep enough that this is a company that is playing its last cards. Instead of addressing the declining consumer popularity, loyalty, and sentiment in America, KFC these days looks overseas to replace the churn at home.

The company focuses on international expansion while doing just the bare minimum domestically to stay relevant. The only viable strategy that KFC has is to leverage its brand equity in the areas of the world where it’s still worth something - those places are overseas markets that its competitors haven’t reached and where the Colonel’s legacy remains intact. While KFC is happy to invest in localization, build beautiful international stores that have massive, comfortable, dining areas designed to encourage consumers to stay as long as possible, and compete on quality by constantly releasing new creative menu items, the company makes no effort to do the same in the United States.

For KFC stores in America are old, run-down buildings, inferior dine-in spaces that look cheap and feel uncomfortable, the menu is just as stale as ever, and the food is getting worse. KFC is a tale of two businesses - a star chain with great food and service around the world and an inconsistent, unpopular, dying brand in America. While KFC languishes in America but thrives overseas, its executives don’t seem to realize that reality is that success from first-mover advantage, legacy, and capital is typically short-lived - especially in a high-growth food category like fried chicken where it’s no longer the brand that dictates quality.

In the years leading up to 2015, KFC in America had hit rock bottom. Fried foods had become public enemy number two behind soda. The company had just resolved a high-profile dispute with its franchisees over the brand’s healthy repositioning and grilled chicken offerings. Customers became confused, grilled chicken failed to sell, sales plummeted, and franchisees rallied together to stop what they saw as an act of self-sabotage and to raise the heat on an out-of-touch executive team.

Like many other fast food brands in the early and mid 2010’s, KFC was caught in an external identity crisis and internal strife, attempting to keep the peace at home with its franchisees. As a result, revenue, system sales, and operating profit stagnated between 2013 and 2015. While the future looked uncertain at home, KFC continually told shareholders the company had two strategies - one was to transition to franchise-led growth and two was to become the fried chicken leader in emerging international markets.

Between 2013 to 2015, KFC in the US launched dud after dud like the Colonel’s Original Sandwich, which was just a boneless tender placed on a Hawaiian bun, the Original Recipe and Hot Shot Bites, which were just a cross between a nugget and a tender, KFC Go-Cups to make it easier for people to eat in their cars, lil Bucket Kids Meal, which was just a repackaging of the kids meal, and the Loaded Potato Bowl which just added a different sauce and green onions on an existing menu item.

Unsurprisingly, these items failed to inspire and KFC had no highlights to celebrate about its domestic operations during this three year stretch. Instead, executives focused on KFC’s international success for 3 straight years, talking up its achievements like 40% sales growth year over year in Russia and double digit growth in Africa and Thailand. The thing is though by 2015, 92% of KFCs in the world were already franchised.

Americans only accounted for 24% of KFC’s sales. 70% of all KFC stores at the time were already outside of the United States. International expansion and franchise-led growth were not new goals for KFC - these were initiatives that the company had already been doing for decades. To continuously restate the potential of overseas growth year over year shows just how little was going right for KFC in America. In 2016, KFC unveiled a grand turnaround plan that it called the “Re-Colonelization” to win back customers at home in the US.

The company unveiled this plan at a major media event as part of “public recommitment to the standards set forth by founder Colonel Harland Sanders.” Coming off a continuous string of viral, embarrassing incidents that had the American public openly questioning the sanitation and standards of KFC like mutant chickens and a deep-fried rat, the company decided enough was enough. In the eyes of corporate, American franchisees had failed to live up to their end of the bargain with years of neglect and sloppiness.

Perhaps it was corporate complacency, too much focus on international expansion over the domestic business, or laziness from franchisees, or all three - but whatever the case was, it was obvious to all that KFC in America was and had been operating at below acceptable standards for years - and that had to change. KFC cracked the whip on its operators, using this public demonstration as a way to restore food quality, operator discipline, and consumer confidence.

KFC wanted to get back to competing on quality and make up for the ground it had lost to its national rivals in Chick Fil A, Popeyes, Raising Canes and regional challengers in Bojangles, Zaxby’s, and Church’s. KFC temporarily shuttered franchise stores nationwide, created a mandatory “Chicken Mastery” certification program for all its franchisees, and retrained all 20,000 of its operators on how to cook “the way the Colonel intended” - showing just how far and how wide the standards had fallen.

These were highly publicized and aggressive steps that placed the blame of KFC’s downfall on its operators but KFC was just as much to blame for letting franchisees operate so poorly for so long. Yet KFC had its hands tied - there was only so much they could push before the franchisees would revolt just like in 2011. To enforce this new focus on quality, KFC looked to the public to hold franchisees accountable with the “Colonel Quality Taste Guarantee”.

This new policy stated that anytime a customer was unsatisfied with their meal, that KFC store and by extension, that franchisee, would have to remake that portion out of their own pocket. KFC also committed to renovating its stores into “American Showrooms” - sleek, modern, eye-catching, bright red-and-white striped exteriors with vintage interiors. When it came to marketing, the company went back to its tried-and-trusted roots, relying once again on legacy, bringing back the Colonel along with the Always Original and Finger Lickin’ Good campaigns.

The reintroduction of the $5 Fill Up boxes and $20 buckets were commercial successes, reinforcing value in the minds of consumers. KFC is not better than Chick-Fil-A or Popeyes, but it’s a lot cheaper and more bang for your buck. The wins continued for KFC throughout 2016 with the launch of Nashville Hot and Georgia Gold chicken. These menu items were not only significant in not only breathing life into the brand, but also in their design - these new flavors were a major departure from the iconic 11-herbs-and-spices that KFC had conservatively clung onto throughout its existence.

This newfound momentum in the United States and the continued international success in emerging markets propelled the company to new records in 2016. Same-store-sales grew to 3% in 2016 and the US KFC business surged back to $5.5 billion dollars in gross sales. But this would turn out to be no more than one year wonder. Hidden behind these top-line successes is that in the United States, KFC had been closing over 100 stores every year for nearly a decade.

While the new offerings and stronger marketing improved the overall brand, there was not enough to go around. KFC stores were shuttering and that local demand for fried chicken was swiftly replaced with Chick Fil-A, Popeyes, and independent shops. Yet in 2017, KFC had reason to be optimistic about its US business based on 2016. The company believed that it had cleaned up its act and could now compete on quality with its rivals as a trend-setter.

With high hopes, KFC launched their original hand-breaded Zinger sandwich with the ambition of conquering the chicken sandwich category. The company spared no expense in its marketing, literally launching the sandwich into space and auctioning off a 400-year old meteorite for virality. While the Zinger was an international hit, it failed to catch on with Americans. Company execs were probably crushed two years later when Popeyes came out with its own chicken sandwich in 2019 and turned into the mainstream hit that KFC had hoped the Zinger would be.

At the same time, KFC’s international business continued to overperform in emerging markets like Brazil, where KFC grew an astounding 18% in same store sales. In Russia, where KFC opened 1000 new stores in a single year with 33% sales growth. At this point in 2017, KFC’s international business accounted for nearly 90% of the company’s profits and the US business was well on its way to becoming an afterthought. KFC’s US business continued to underperform, dropping from $5.5 billion dollars in 2017 to as low as $4.7 billion dollars in 2020.

The United States, which historically contributed the most and nearly a quarter of KFC’s overall sales up to 2016, had devalued over time, dropping to 18% in 2017 and as low as 16% by 2019. Sales from KFCs in the U.S have steadily declined from $5.6 billion dollars in 2014 to as low as $4.4 billion dollars by 2018 - long before COVID. The problems of KFC’s US business are continually masked and overshadowed by KFC’s international success which skews not just the company’s top-line, but also the bottom line and traditional metrics that we covered earlier.

Yet KFC’s leaders to this day proudly proclaim mission accomplished and that the KFC turnaround in the US has been a complete success. Predictably, the executives who hatched the “Re-Colonelization” plan 2016 have used its stated success to leapfrog up the corporate ladder - one is now the CEO of Chili’s and the other became the CEO of Carl’s Jr before moving into tech. Sometime between 2017 and 2019, KFC executives must have gone over these numbers and arrived at an obvious decision to cut losses and deprioritize the U.S business.

While KFC continued to try its hand at menu innovation for Americans with the Pickle Fried Chicken, theCrispy Colonel sandwich, Smoky Mountain BBQ, Chicken & Waffles, Mac & Cheese bowls, Cinnabon Biscuits - none of these gimmicky items have brought lasting success beyond a few quarterly sparks. This tactic feels similar to Taco Bell’s playbook, who releases limited time offerings aggressively as a way to juice demand and energize sales on a regular basis.

In contrast, the products that KFC introduces for international customers are regularly celebrated for their commercial success - in Japan, it’s the Peri Peri chicken, the Popcorn Chicken Slab in Australia, or the Crunch Double Down and Wrapstar Lunchbox in Africa. When KFC executives talk about their US business these days, there’s only one strategy - value. Quality is not mentioned anywhere. Adding more options in the $5 fill-up and $20 family meal offerings.

Introducing an Ala Carte menu where consumers can mix and match 2 sides for $6. Throwing in an add-on where you can get 12 tenders for just $10 more on a $20 family bucket meal. Blasting advertisements constantly reminding Americans about how cheap KFC is. [insert clips] Releasing gimmicky marketing stunts, each more outlandish than the last, for virality and clicks but have nothing to do with the product or brand. [clips] The goal for KFC in the United States nowadays is to offer consumers in the words of their CEO, a “truly incredible value with enough food to feed a family for multiple meals in some cases”.

KFC is a powerful demonstration of how legacy and brand power is a double edged sword that is as much a curse as it is a blessing in the world of business. It’s KFC’s legacy that has fueled the company’s international success and appeal in emerging markets where the Colonel is the first taste of American fried chicken that consumers get. With its first mover advantage and warchest, KFC is able to reach customers and markets that its competitors cannot and win these customers through first impression - even if KFC’s rivals have a much better product.

When Popeyes or Chick Fil-A eventually scale to those markets one day, those consumers may have grown too accustomed to KFC to prefer someone else’s - and that’s the bet that KFC is riding on these days with its unrelenting international focus. KFC knows that its legacy and brand power in America is on its last legs and any attempts to wrestle back domestic market share from its rivals would be futile especially when customers know KFC cannot compete on quality.

The pure franchisor play that fueled so much of KFC’s expansion, profits, and dominance in prior decades is now a hindrance to the Colonel’s evolution. Rather than downsizing the stores to be more efficient like modern fried chicken shops, KFC is stuck with its franchisees and can only remodel its existing properties in-place to make them grander, not leaner. Its new modern concepts only apply to new construction and not existing stores.

Rather than experimenting with sauces, marinades, and batters to match the changing consumer tastes, KFC is forced to constrain its creativity and preserve its legacy by keeping to the iconic “11 herbs and spices” as its core flavor - which Americans these days have simply become tired of. In business, one expects companies to dominate their backyard first, relentlessly defend it from new entrants, and then chip away at international markets over time.

It’s rare to find a company like KFC who relies so heavily on international expansion to replenish its shrinking domestic market share. There is great irony that the United States, which has the greatest fried chicken consumption and served as the birthplace of Kentucky fried chicken, is now KFC’s weakest market with the most competition and lowest ceiling. As an American who grew up pigging out on buckets of KFC, it’s sad to see the Colonel regress to a discount volume brand.

Businesses, like humans, must adapt or die. For KFC in America, adaptation came too little, too late.