What the Kentucky Derby Owes to China

If it weren’t for KFC’s giant Asian consumer base, the annual classic would be a much poorer event.



As hundreds of thousands congregate in Louisville this weekend for a classic American ritual, the 140th running of the Kentucky Derby, they will find it hard not to notice of one of the most prominent local sponsors of the event, Yum! Brands, the parent company of KFC, known to the world as “Kentucky Fried Chicken.”

Yum and KFC are staples of Louisville and long-time sponsors of the Derby. Yet the American company was recently tempted to move away from Kentucky to Irvine, Calif. Why? Because its business is increasingly detached not just from the American heartland but from America in general. Yum and its brands KFC, Pizza Hut and Taco Bell (based in Irvine), are still powerful, but less because of continued success in the United States than because of stunning growth in China. 

Indeed, without tens of millions of Chinese buying fried food conjured up by a Kentucky colonel named Harlan Sanders, Louisville might no longer have one of its larger employers, and the Derby itself might be a smaller, sadder affair. Kentucky Fried Chicken is increasingly a Chinese fast-food restaurant chain that happens to be headquartered in Louisville. So raise a julep, and give a toast of thanks to the multitudes of Chinese who are making it all possible. (Recently the new CEO of the company, Greg Creed, announced that after some consideration, the company would keep its global headquarters in Louisville along with its more than 1,000 workers.)

The threat of China surpassing the United States as a manufacturing powerhouse has been a theme in American life and politics for more than a decade.

Less understood, however, is that this isn’t a one-way street. The story of KFC over the past twenty-five years shows that China has also seen American goods and brands become part and parcel of everyday life in the Middle Kingdom. As China makes its cumbersome uncertain shift away from an economy that rests on the production of low-cost exports, its billion plus consumers are increasingly consuming goods that if not technically made in America are still, at heart, American made.

KFC first set up shop in China in the late 1980s at a time when the company’s U.S. operations were starting to founder. Soon enough, with some helpful tweaks to the brand and skilled Taiwanese managers in Mainland China, KFC was outstripping McDonald’s in China and most domestic Chinese competitors, opening up hundreds of new locations a year and showing much greater profitability per store than comparable franchises in the United States. Fried chicken, especially fried chicken associated with capitalism and wealth, became not a cheap meal-on-the-go but an aspirational brand with a high price tag. Eating at KFC in America may have come to signal a need or craving for greasy calories; in China dining at KFC was a sign of making it in the making class.

By 2008, on the eve of the global financial crisis, less than 7 percent of KFC outlets were in China but those accounted for 20 percent of the entire global profits of Yum! Brands. Then troubles began, with tainted chicken supplies in China leading to a sharp drop in business. Meanwhile, though Taco Bell held up, Pizza Hut fell far behind Dominos, while Kentucky Fried Chicken in the United States lost even more luster, and saw ailing franchises and mediocre profits.

In the past couple of years, however, Yum has resumed its stellar growth in China. There are now 7,000 KFC and Pizza Huts spread across 1,000 cities in China. They account for nearly 35 percent of the company’s global business and that percentage is growing in both absolute and relative terms. Americans tend to focus on China when there is fear: fear of low-cost Chinese goods or fear of China’s regional ambitions in the Pacific. But for the vast Chinese middle class, American represents not just wealth for desirable–and trusted–brands. Even when those brands have safety issues, they are often more trusted to address them than comparable Chinese companies.

As the Chinese government works assiduously to build up its domestic market and reduce its dependence on exports and state-sponsored infrastructure products, it has become an ever-more robust and vital market for American companies that are selling goods and services to that emerging world. KFC, Nike, Ford, GM, Coach, Starbucks, Apple, all of those and hundreds more populate Chinese daily life, and shape it intimately.

The fact that KFC appeals to Chinese consumers says nothing about whether the food is healthy or whether such consumerism is ultimately a boon. But it does say that the story of us-vs-them, especially notable now during the acrimonious debates over expanded Pacific trade pacts, misses the larger fact that it is us and them, and that the health and future fate of some of the beacons of American capitalism depend on the willingness of Chinese consumers to buy their products.

Yum managed to save a flailing American business by plunging into China. So did countless other companies. We might think about that as we celebrate a proud American tradition this weekend.

Source: http://www.politico.com/magazine/story/201...