View From America

01 May 2005
View From America

Beleaguered brands are realising that survival is all about product innovation, says David Farkas, senior editor of Chain Leader USA

KFC's same-store sales - an important measure for investors - have been negative almost every quarter for more than two years. The 5,450-unit US operation ended 2004, for instance, two points down and now accounts for merely 9% of parent Yum! Brands' worldwide profits. By contrast, KFC China contributes five points more with many fewer units, reports Piper Jeffrey analyst Peter Oakes.

The problem: KFC has failed to create new-product excitement in a segment that thrives on new menu items. The company had one a few years ago - the wildly successful Popcorn Chicken - which led to double-digit sales gains.

Since then, KFC's sister concepts, Taco Bell and Pizza Hut, have been the stars in Yum's firmament, wisely promoting new products and keeping comparable sales positive. KFC product development has lagged.

The Snacker isn't just a new product, by the way; it's a new "value" (read: inexpensive) product. These not only drive sales but boost customer visits. Executives at KFC have finally realised this - along with the fact that consumers like chicken sandwiches - and now may be willing to sacrifice food cost (estimated at 54%) in the hope of gaining on volume and add-ons. The product can also be bundled with drink and side-dish, presumably creating a better margin.

That's the trick, as the burger giants know. Lure the punters in with a $1 product and then get them to dig a wee bit deeper for an extra item or two. But this isn't as easy to pull off as it seems. Today, products, no matter how cheaply sold, must taste good. The portion size may be small (customers understand this) but in no way should the product look or taste like scraps. Indeed, in the best of circumstances, its flavour will be "cravable".

The word doesn't appear in the Concise Oxford English Dictionary but it's regularly employed by fast-food operators over on this side of the Atlantic to describe the kind of menu item that induces people to patronise their restaurants exclusively. Burger King's Whopper, McDonald's Double Cheeseburger and Wendy's Baked Potato are now-famous examples of the genre.

The Snacker might one day be added to this illustrious list. It's really quite good and, apparently, already popular. The KFC Manager at the unit I visited boasted the store sold 180 Snackers in a five-hour stretch the day before. He added that the price will soon be hiked to $1.19 to re-coup the food cost. It's still a pretty good deal at that price.

Speaking of cravings, Golden Corral Corp is feasting on them. Officials at the all-you-can-eat concept boast the 32-year-old chain broke all sales and profits record in 2004. There is no independent way to verify the claim; the company, unlike Yum! Brands, is private. But it's clear from industry scuttlebutt and the track record of rivals that Golden Corral is gobbling up market share faster than a 300-pounder at the buffet bar.

Now, the 470-unit chain intends to reinvent itself by replacing food bars with kiosks in the manner of Movenpick's Marche concept. Officials are keeping mum about specific details but in a recent interview with company chief executive Ted Fowler it became clear that customers discern a sameness among buffet chains. "It's time for a bold new stroke," he declared.

KFC officials must have been thinking the same thing.

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