Individual Assignment KFC

KFC is the second largest fast food chain in the world with over 18000 outlets. The headquarter is located at Louisville Kentucky. KFC was the one of first fast food chain to expand internationally. It founded by Harland Sanders. He started his career by selling fried chicken at roadside restaurant. He finalized his own secret recipe 11 herbs &spices after the first commercial of pressure cooker on July 1949. The first franchisee opened at Utah in 1952 by his potential of restaurant franchising concept. At 1987, KFC become the first western fast food chain that opened in China. Now, China is the KFC 's most highest profitable market which earned about $250 million annually since the end of 1999. Now, the company is owned by Tricon Global Restaurant (YUM!Brands).At 2011, they decided to drop their tagline ‘finger lickin good’ and replace with ‘So good’.KFC's main product is fried chicken. As it keeps on expanding, more dishes are added on the menu such as coleslaw, burgers, french fries and dessert due to consumer demand.

Law of demand states the quantity of a good demanded per period of time will fall as price rises and will rise as price falls, others will be equal.(Sloman J. 2013 ) Hence demand curve is negative curve. Price wasn’t only determinant that affect the demand but also change in taste of public, the number and price of substitution good(McDonald) and number and price of complementary good.

Law of Supply defines that other factors remaining constant, price and quantity supplied of a good are directly related to each other. The other factors that affect the supply curve is change in input prices , change in technology , government policy and the number of supplier.

 

In 2011 , KFC’s price increases ranging from 0.5 yuan to 2 yuan ($0.08-$0.3) for various items such as chicken products and drinks, was its third price adjustment in China this year due to the to the rising cost of ingredients . A price rise of several yuan would have more effect on price-sensitive customers in lower-tier cities and curb their demand," said Yan. The demand of KFC will definitely drops in China hence the company expects its full-year restaurant margins will shrink further to 20 percent.(People Daily News 2011). KFC force to set their cost higher because the input price is now higher. From the graph below the supply curve shift to left , the price set is increasing. So, quantity demanded drops.

 In 2004, the world wide avian flu was spreading over the world. The customers did not dare to consume any poultry at that moment. Hence, the demand decreased by as much as 40% .KFC forced to offer the new product named 'Snackers'.The price is cheaper to gain back profit. To decrease customer's fear due to bird flu, KFC official cited a World Health Organization report that said the disease cannot be contracted by eating cooked chicken.(CNN money 2005). Morever, KFC cut down their supply that have potential risk, improve the screening process of suppliers and step up self-inspections to address food safety concern. From the graph below, the demand curve shifts to left caused the price drops. So, KFC need to decrease its on price to minimize their lost.

Price elasticity of demand is the responsive of quantity demanded to change a price. It affected by the number of closeness of substitution goods and proportion of income spent on the goods. In Malaysia, KFC offers promotion meals on weekdays normally. In limited period of time, certain meal is discount up to 10% to attract more customers. While 6am to 9am, they provide a simply breakfast set which costs only rm5.While lunch and dinner period, it offers several types of meals such as chicken burger set, fried chicken set and chicken rice set. It only takes up to at most RM 20.Besides, the other reasons that they have to provide economical meal because they need to compete with their competitors such as Burger king, Mcdonald, Wendy and Carls junior. Their competitors will offer approximately same price for a meal. If KFC’s price is higher, they will lose customers because customers tend to buy cheaper but same quality product. So they definitely will switch to other fast food restaurant so it will cause KFC’s sales drop. According to CTV News' website essentially states that Priszm (the parent company of Taco Bell, Pizza Hut, and Kentucky Fried Chicken in Canada) has lost some of its market share due to its failure to adopt healthier food choices like Subway Tim Hortons with its soup and sandwiches, and even McDonald's with its recent change in salads in 2009 .The demand of KFC drops. Besides, if the income of consumer is higher, demand will be higher because customers afford to buy for it.  

Government imposed the tax on KFC depends on their sales. So, they force to charge 6%government tax on the customer to gain back their profit. For elastic demand, both buyer and seller actually share the tax together. But ,larger portion of the tax is paid by the buyer. If they share the burden equally, the price set will be higher. So they will definitely losing their customer and demand of KFC drops.

KFC is a normal good, so the value is greater than 1 due to their product can easily get substitute. If price increases, then there will be such a large fall in consumer demand that less will be spent than before as shown in graph below. But, KFC will be a luxury good for who live in the outskirt of the town.

KFC undergoes long run theory of production which means all factor of production are variable. If a firm is getting increasing returns to scale from its factor of production, the cost of production will become cheaper and cheaper. ‘The training is designed and facilitated by accredited professionals (internal and external) to ensure all Shift Supervisors/Managers gain the skills, knowledge and experience to operate our successful restaurants’(KFC 2013). When workers are highly specialized, their work performance are highly efficient. KFC’s worker must go for training before they start to work. 

In early year , KFC was using stove top covered cooking pot to cook its chicken until 1960s the officially model called ‘KFC 20- Head Cooker’ is launched. It is a large device that costs $16,000 but this device had no oil filtration system. Hence workers need to filter the oil manually and usually exploded. So, it is unsafe. On 1969,Winston Shelton invented a pressure fryer which could self-filter the oil called Collectramatic 519. Vice president KFC, claimed that the invention helped fuel the company's rapid expansion and success: "There’s no way it could have grown like it did without the Collectramatic. The Collectramatic then became the official pressure fryer for KFC from 1972. From the aspect of long run, KFC have to choose a better machine to increase the output of the company. A better performance machine may be more efficient in sense that more output can be gained for a given amount of input (Sloman J. 2013) .That’s why the cost production will be cheaper. Therefore, decrease in cost of production leads total revenue increases .The company earned $700,000 extra sales when the Collectramatic is introduced

Long run average cost curve(LRAC)is derived from the combination envelope of short run average cost curve (SRAC). If there are economic of scale , the additional output will add less to cost than average .On the other of hand, diseconomic of scale occurs when the additional unit of output cost more than average cost. Through the long run average cost curve, KFC can find out their lowest cost of production. KFC  undergoes economic of scale because it keep on expanding its franchises and they have a strong reputation in fast food industry.

KFC is adapted to monopolistic competition which involves a lot of firms competing such as Mcdonald, Wendy’s and Popeye and there is no barrier for new firms to exit or entry the fast food industry. However KFC promote their dishes in some way different with others rival by using product differentiation. They are independence because they do not care how their rivals react. Non-price competition, competition in term of product promotion or product development which affect the demand of KFC. Their packaging depends on three criteria: heat retention, moisture removal, and grease absorption and mostly made of recycle paper (Wishnu S 2013).They using the slogan ‘So good’ to create awareness of public and build healthier image. KFC with its secret blend 11 herb & spice fried chicken differentiate from others fast food restaurant to maintain the customer loyalty. Morever KFC using non-hydrogenated palm oil that contains insignificant amount of trans fat and it is 100% cholesterol free (KFC 2013).In Malaysia KFC spend about RM12 million in advertising, marketing and promotions and expected to drive sales up by 10-15 percent. The smiling colonel Sanders reminds the public about KFC instantly. However, If KFC keep increasing its price, they will losing their customer but not all of them due to customer loyalty.

  (1502words)

Reference list

Sloman J. , Wride A., Garratt D. 2012 Economic 8th ed. Rotolito Lombarda, Italy :Pearson pp 41 - 150

KFC (2013) Colonel History http://www.kfc.com.my/about-quality.php [Accessed on 19^th October 2013]

People Daily Online(2011) KFC raises prices again http://english.peopledaily.com.cn/90778/7631179.html [ Accessed on 21^st October 2013]

Economic Times (2001) KFC earns $250m from China a year http://articles.economictimes.indiatimes.com/2001-11-29/news/27469500_1_kfc-tricon-china [Accessed on 21st October 2013]

Wishnu S. (2013) Kentucky Fried Chicken Market Strategy  http://www.storaenso.com/products/packaging/Documents/paperboard_guide.pdf [Accessed on 23rd October 2013]

Econ100-powers.wikispaces.com.2013. ECON100-Powers - Monopolistic Competition 1. [online] http://econ100-powers.wikispaces.com/Monopolistic+Competition+1 [Accessed on 23^rd  Oct 2013].