Ruling the Roost in China

The only people in the dingy New Wind Restaurant at lunchtime are the cooks, who are playing cards. Asked about the restaurant’s specialties, owner Ding Huang skips the sales pitch with a curt: “It’s Chinese food.”

Across the parking lot, smiling hostesses, “flowers,” as they are known, welcome a steady stream of customers to KFC. Cash registers ring up a sale every 90 seconds in the two-story air-conditioned restaurant. A group of boisterous children are gathered upstairs for the afternoon exercise class.

In 1998, Ding took his 5-year-old-daughter to the KFC’s grand opening to sample Colonel Sanders’ exotic fare and witness the hoopla. The Chinese restaurateur, a loyal Communist Party member, warned her that the popular fast-food chain is “owned by a foreign corporation that wants to take our Chinese people’s money.” His daughter listened but it made little difference. She declared the fried chicken delicious.

Ding said he won’t ever go back to the chicken store, but he has resigned himself to a reality that plays out every day just a stone’s throw from his livelihood: “I think KFC will spread all over the world,” he said, sighing.

Ding’s lament accurately captures a roaring story of capitalism in China, which is emerging as one of the world’s hottest fast-food battlegrounds. The smiling colonel of KFC, the market leader, is pitted against the golden arches of McDonald’s. The weapons include cutthroat promotions such as ice cream cones for a dime.

Since becoming the first foreign fast-food chain allowed to enter China in 1989, Dallas-based Tricon Global Restaurants Inc., KFC’s parent company, has built 490 stores in 120 cities, nearly all company-owned, and is still expanding. Just to meet its goals for the 100-plus stores on the drawing boards, Tricon will have to finish a store every three days. McDonald’s, which recently announced plans to begin franchising in China in 2002, lags behind by at least 100 stores.

KFC is hoping to reach 5,000 stores within two decades. The colonel’s statue still is found only in China’s most populated regions, leaving at least 400 major cities crispy chickenless. In Hunan Province, which has a population of 100 million, there are just three KFC stores.

This chicken blitzkrieg already has made KFC the most recognizable foreign brand of any kind in China, ahead of such staples as Coca-Cola, Mickey Mouse and Nestle, according to a survey last year by AC Nielsen. In the United States a basic KFC meal can be bought for less than an hour’s work, even at the minimum wage. In China, an Original Chicken meal costs nearly $3, the equivalent of six hours of work for the average person. Despite that bar, KFC’s China operations claim the highest per-store sales in the world, 20% above the U.S.

Shawn Gu, a 50-year-old California restaurateur who operates the KFC outlet in Li Yang, finds some irony in his success in China. Born and raised in Taiwan by parents who had fled the Communist takeover in 1949, Gu was force-fed terrifying stories about the poverty and tyranny of the land across the Taiwan Strait. He moved to the United States in 1979, settled in Riverside and made his fortune in a string of restaurants selling pizza, chicken and Chinese food.

He sold off most of his restaurants in 1987 after a serious car accident and went into semiretirement. But he grew tired of playing golf, and his wife, Jennifer, urged him to visit the mainland and look for opportunities.

In 1991, a reluctant Gu finally flew to China. Once he saw the long lines at KFC’s Beijing branch, his entrepreneurial juices began to flow again.

He couldn’t get his own outlet because Tricon had decided against franchising in China so it could control quality and protect its brand. Starting up even company-owned stores was a major headache: Chinese chickens were scrawny and the potatoes misshapen for French fries. Though the company is now able to source 95% of its supplies locally, it still imports mashed potato powder, French fries, corn on the cob and, of course, stockpiles of the secret recipe of 11 herbs and spices used to flavor its chicken.

Staying in the good graces of the Chinese government was difficult and time-consuming, because the laws were continually shifting and corruption widespread. It took KFC several years to get permission to hire part-ime workers, a new concept in a country accustomed to the iron rice bowl of lifetime employment. U.S. firms are forbidden from paying bribes overseas, but Chinese officials are masters of creative fund-raising. Just setting up a KFC franchise can require 100-plus obscure licenses and permits, all of which carry a fee.

“We needed to crack the code ourselves first” before offering franchising, said Joseph Ho, director of franchise relations for KFC in China.

While Tricon built its chicken empire, Gu bided his time. He invested in two Chinese restaurants, bought a home in Nanjing and commuted every three to four months to California, where Jennifer and son Joe remained. His wife manages their Chinese restaurant in Sun City, the Great Wall.

Company’s Franchise Limitations Stringent

In 1993, Tricon finally allowed a Taiwan entrepreneur to establish the first KFC franchise in Xian. Two years ago, the company decided it was time to get serious about franchising. It set the bar high: In addition to having at least $1 million to invest in the license, franchise operators had to have restaurant experience and a clear understanding of the risks of doing business in China. Tricon required its franchisees to purchase an operating restaurant--dubbed the “already cooked chicken franchise”--and run it at least a year before expanding. Franchisees--who pay a licensing fee of 6% of gross sales--were barred from operating in China’s biggest cities, where the company-owned restaurants dominated the turf.

Despite the costs, Gu was at the head of the line.

For six months, Gu was grilled about his history, business experience and motivation. Out of dozens of interested franchisees, he was one of just three who were approved.

Gu scouted more than 100 locations before deciding to sink his money into the Li Yang store. The economically depressed city of 200,000, about three hours by car from Shanghai, was not an obvious choice. Unemployment was high, thanks to layoffs at problem-plagued state-owned textile firms, and many men had left for construction jobs in other parts of China or abroad.

But Gu knew better than to trust the official numbers. He was confident that many of the absentee workers, traders and farmers had incomes that were not reported to the government. “In Shanghai, people look much richer but their house is small,” he said. “In these small towns, people look poor but they spend more money on food.”

Outside China’s largest cities, Western fast food was still an oddity. KFC cashiers were warned to be patient while customers dissected the menu and asked such questions as: What part of the chicken is a nugget? Can I touch a burger? Is the food the same size as it appears in the advertisement?

Gu made his KFC synonymous with the good life: birthdays, good grades, graduation. He targeted the parents and grandparents who spend lavishly on their “little emperors,” the offspring of China’s one-child policy. The restaurant offers children colorful plastic superheroes, free English and exercise classes and daily songfests touting the benefits of oral hygiene and traffic safety. Gu sponsors an educational radio spot and gives away gift certificates to outstanding students.

On International Children’s Day, June 5, the Li Yang restaurant had lines snaking out the door and served more than 2,000 customers, twice the usual number. Its classes are so popular that children are limited to two sessions a week. Parents even ask the young staff to help their children with homework.

Rui Zhenhua, a 33-year-old Li Yang city employee, brings his family to KFC every two or three weeks for dinner. He said he doesn’t like deep-fried food, pronouncing it “too greasy,” but his daughter loves the French fries and the dancing. And KFC is one of the few places in town that doesn’t allow smoking, which means diners can actually see their food.

“This is a place for special occasions,” Rui said, watching his daughter celebrate her 7th birthday with Ru Rongfong, 21, one of the restaurant’s five hostesses. Ru is so well-known that she is mobbed by children when she goes swimming or to other public places.

Being an American icon hasn’t eliminated every hurdle. Last year, fearful parents began restricting their daughters’ visits to KFC after a media report that the chicken contained hormones that accelerated puberty. KFC strongly denied that claim.

“There’s a downside to being an American symbol,” said Tony Chen, Tricon’s spokesman in Shanghai. “But in their hearts, the Chinese trust foreign products.”

When the NATO bombing of the Chinese Embassy in Belgrade, Yugoslavia, touched off violent anti-American protests in 1999, two KFC outlets were destroyed and 20 heavily damaged. The staff in Li Yang were terrified. But when the sun rose after the first day of rioting, the colonel was unscathed and the only people outside the glass doors were hungry farmers waiting for breakfast.

Manager Liu Weihui, a Tibetan-born Chinese who has worked for KFC for seven years, told his worried staff to keep serving up chicken with a smile. “We reminded them that the economy is separate from politics.”

It is foreigners such as Gu who are driving that idea home.

Instead of Communist slogans, the walls of the employee lunchroom are a call to arms for a China that welcomes capitalists into the party. One chart details the speed of each cashier’s transactions and the number of times the employee succeeded in cajoling a customer to “supersize”--order a bigger size. Another has a game in which teams of KFC employees compete for “thank-you notes” from colleagues. The team with the most notes at the end of the month wins 100 yuan, about $12.

Two hundred hopefuls apply for every job opening. The pay isn’t bad for China, though the jobs average just 24 hours a week. Trainees start at the government-mandated minimum wage of 37 cents an hour but get regular raises and bonuses. In a country where the annual per capita income hovers at $1,000, Gu pays his managers $500 a month plus a housing and food stipend and up to two months’ pay as a bonus.

Some of Gu’s staff left better-paying jobs to sell fried chicken. Zhang Tingting, 23, was working for a state-owned telecom firm at twice the salary when she applied at KFC three years ago. Her father, a middle school principal, objected to the move, fearful his daughter would lose face by washing tables and serving food.

Testimonials to Customer Service

But Zhang, who has been promoted to trainer, said KFC offers a much friendlier and more supportive atmosphere than her previous job. “In my former job, even if we were very busy the manager wouldn’t give us a hand,” she said. “If I need help, I can ask Mr. Gu. He will do anything. He can even package French fries.”

A company album titled the “Power of Love” is a must-read for all new KFC hires. It is a collection of testimonials from staffers describing what they have done to give their customers the “101%” KFC treatment. A customer who arrives on a bicycle laden with bags gets curbside service so he doesn’t have to leave his belongings. A highchair magically appears table-side for a mother balancing a baby and a toddler.

These courtesies might seem minor to someone raised in a Nordstrom’s consumer culture, but they’re unusual in China.

KFC has even won begrudging praise from its competitors. Zhu Jianzhou, 27, manager of the Yong He restaurant, has ventured down the street for a KFC meal several times, hoping to borrow some ideas.

His Taiwan-based fast-food chain offers up a drab imitation of its flashier Western neighbor. Two young women sit behind the counter dressed in bright yellow polo shirts and orange caps, but their smiles appear forced. It is lunchtime and the large restaurant is nearly deserted.

“From the management standpoint, we are just at the beginning,” Zhu admitted.

Even Ding, the restaurant owner who is boycotting KFC, has picked up a few tips. Gu, who occasionally drops by for Chinese food, has suggested that Ding ask his waitresses to smile at the customers so they would feel a little less like unwelcome intruders. “That made good sense,” Ding said, especially because it didn’t cost anything. But he spurned as “impractical” the idea that he paint the place and invest in some new furniture.

Gu soon will be taking his advice elsewhere. He already has scouted out his next location, a smaller city about half an hour’s drive away. Within 10 years, he hopes to have 15 stores in the countryside surrounding Nanjing.

Just a few months ago, he called his wife and warned her that he was going to have to delay his retirement plans.