U.S. Route 25: From Corbin to Tokyo, via Gardiner Lane

In 1939, Winston Churchill claimed Russia to be “…a riddle, wrapped in a mystery, inside an enigma; but perhaps there is a key. That key is Russian national interest.”  That was 25 years before Col. Harlan Sanders sold his budding chicken empire to John Y. Brown, Jr. and friends, creating the incarnation of the company we know today as KFC.  If Sir Churchill were alive today, he might describe KFC as an oxymoron, wrapped in a contradiction, inside a paradox.

A company made famous by its once-eponymous fried chicken shuns the word fried.  A company that tries to hide the origin of its most popular product and then tried to claim that it could be part of a healthy diet.  A company that dominates in the largest emerging market in the world, but struggles in the largest developed one.

While KFC’s domestic sales continue to stall and the company moves from one lawsuit to the next with its U.S. franchisees, its global business is booming.  The company’s entry into Ghana last fall was national news, it outperforms McDonald’s in China with double the number of restaurants (>3700 vs. <1500) and it continues to stay relevant in the most developed market in Asia, Japan.

So how can a company be the darling of the global business community, yet be so market deaf domestically?  There is a key.  That key is shareholder value.  When CEO David Novak took over KFC-parent Yum! Brands in January 2000, KFC was in terrible condition; its share price fell to $6.06 by that July.  It closed at $64.99 on Friday.  Yep, that’s right, a more than tenfold increase.

How did Yum! Brands do it?  Basically, it ignored the home market and double-downed on global markets, with KFC leading the way.  And in doing so, has become a poster child for world-class global management (Yum! Brands’ two other holdings, Pizza Hut and Taco Bell, have not fared as well globally as KFC; Yum! Brands sold two other holdings, A&W Restaurants and Long John Silver’s, to concentrate on its three remaining brands).  Whatever one might think about the ethical nature of the fast food industry and the factory farming that supports it, from a purely global management perspective, KFC is a superstar.  There is even a Harvard Business Review Case Study on KFC’s foray into China to enable aspiring global managers figure out how KFC figured out the Chinese market.  There’s been a book written about it, too.  Novak himself has penned two management books in the past three years.  Again, both KFC and Novak are global superstars–and compensated like superstars given Yum! Brands’ share price and Novak’s $20.4 million salary in 2011.

Exploiting virgin markets is a whole lot easier than trying fix things in established ones, as we can see by the rundown look and worn image of KFC in the U.S.  This brings us to Japan, the antithesis of a growing market—flat growth and a graying population.  Yet, here too, KFC is listening to its local folks and reacting to market changes effectively, which is at complete odds to the constant complaints from U.S.-based franchisees that KFC management simply doesn’t listen.

Overseas, KFC has an incredible ability to listen and implement ideas at the host country level without micromanaging every detail from the home country.  From a global management point of view, they get it–the local differences, the idiosyncrasies and the cultural sensitivities.

Walk into any KFC in Japan, and the first thing you will notice are the ubiquitous high school students doing homework in the afternoons.  Japanese school children spend hours at KFC doing homework.  The dilemma for KFC?  How to keep these kids coming back after they graduate from high school and go off to college and enter adulthood because, with Japan’s shrinking population, the sustainable supply of teenaged schoolchildren is declining noticeably.  As such, these customers are becoming harder and harder to replace.  The solution?  Combine KFC with a bar–a bar that serves cheap drinks, which is exactly what they’ve done with their new KFC Route 25 concept (named for the highway that runs in front of Colonel’s Sanders first restaurant in Corbin, Kentucky) in the Tokyo suburb a Shimokitazawa, an area popular with college students and twenty-somethings.

The KFC Route 25 opens at 5:00pm and serves food til midniight, drinks til 4:00am.

The concept was born from brainstorming meetings amongst Japanese KFC managers and was eventually approved by KFC Headquarters on Gardiner Lane in Louisville.  This is a classic example of KFC not succumbing to a command-and-control superstructure form of management and relying on local managers to deliver local solutions to local problems based on local knowledge, glocalization at its finest.  In this case, KFC Japan is trying to stretch the age profile of their largest consumer segment and extend their brand into the bar business, while treading a fine line between brand equity and brand elasticity.  Textbook management practice here.

The Route 25 restaurant serves the same food as a normal KFC outlet plus a few extra menu items, from appetizers such as mixed nuts, nachos and a bean-and-grain salad to entrees like pasta and pizza (a six-cheese with maple syrup offering).  On the cocktail side, they serve standard well/call drinks, draught beer and an array of ‘southern cocktails’, which are primarily Jack Daniel’s-, Early Times- and Southern Comfort-based cocktails.

A bar on the left, table service on the right and a television showing sports on the back wall.

The Route 25 bar is on the third floor atop a traditional two-story KFC outlet.  It has its own entrance without direct customer access to the KFC below, although both establishments share the same first-floor kitchen and charge the same prices for food.  The KFC below opens at 7:00 a.m. but the Route 25 doesn’t open until 5:00 p.m. and then serves food until midnight and drinks until 4:00 a.m.  The décor is a combination of farmhouse and industrial, but heavily accented with Kentucky motifs such as faux julep cups to hold silverware and hand wipes and an homage wall to Colonel Sanders.  All food is served on proper plates and cocktails come in glassware.  This is definitely not the Colonel’s KFC.  It’s a 26-seat sit-down restaurant with printed menus, table service and 10-stool full-service bar that serves fast food.

Three pieces of Original Recipe fried chicken and a bourbon and soda with a lemon slice.

As odd as this might sound, it works.  Since its opening on April 25, the store manager says it has become a popular dating spot for college couples.  Sales have been almost evenly split between food and alcohol, with food having a slight edge due to being more expensive (one piece of Original Recipe chicken at KFC in Japan runs ¥240/$3.05); all alcoholic drinks on the menu ranged from ¥480-¥580/$6.10-$7.37 per drink, which makes KFC Route 25 a very cheap place to drink for price-conscious young people in Japan.  It will interesting to watch if this concept has legs and expands elsewhere in Japan and eventually to China.  Or could it be reverse imported into the U.S.?

Once again, KFC has proven its global management chops.  Another lesson taught in the art of glocalization.  Perhaps KFC could learn a thing or two from its global operations and spend time listening to its domestic franchisees with equal attention to try and close the contradictory gaps between its domestic and global businesses.  If not, one has to wonder how long will KFC continue to be an American company if it continues to lose money at home and earn its profits abroad.  At what point will shareholders grow tired of the battles and losses in the U.S. and pressure the company to focus solely on foreign sales?  There is a key.  That key is shareholder value.  And that could bring the ultimate irony:  a KFC–a slice of Americana–that exists only outside the U.S.

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