Tag: China

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Price Paradox

It is important to price your products and services correctly. Getting the price wrong can turn away many potential customers. When a business finds itself in trouble, many will suggest cutting prices to improve sales. They say that if you drop prices, you will be more competitive and so more customers will come to than to your competitors. However, cutting prices is often the absolutely wrong thing to do and it could very well be the last nail in the coffin for your business.

Kentucky Fried Chicken has been having some problems recently. In particular, the Chinese branch of KFC has not made the profit it used to.

It may surprise you, but Yum, the group that own KFC and other restaurants such as Pizza Hut and Tacho Bell, do 36% (2010) of there business in China. Since KFC’s introduction in 1987, they have expanded steadily throughout China and KFC now have over 4200 stores there as of the beginning of 2013. It is in stark contrast with KFC in the USA which has seen a contraction due to competition, in China KFC just keeps on growing and there is still room to expand with new stores opening every week. The year 2011 saw sales in China grow by 21%.

That said, 2012/13 has not been a good year for KFC in China. Two big health scares have shaken public confidence in finger licking good sector.

The first came in December 2013 when Chinese inspectors announced that samples of Chicken from suppliers of KFC based in Shandong Province had given their chickens excessive amounts of antibiotics, including amantadine and ribavirin. The farmers had been trying to accelerate the growth rate of the chickens. The Shanghai Food and Drug Administration said that tests conducted by a third-party agency between 2010 and 2011 had found that eight batches of chicken meat supplied to the company by Liuhe Group Co., contained excessive levels of antibiotics.

China has had quite a number of similar scares about food additives in recent years. The biggest of which was the tainting of milk supplies with melamine which caused several babies to die and many more to become seriously ill. The scare around KFC, a popular treat for kids, caused many parents to stop taking their children there.

The second scare was at the end of March 2013 near Shanghai. An outbreak of H7N9 bird flu caused several people to die and many others became ill. Although bird flu cannot be caught by eating chicken, a nervous public stopped eating chicken produce throughout China.

Sales in KFC fell sharply throughout the first two quarters of 2013. Sales, which had fallen noticeably in the first quarter due to the supply scandal, saw a further 29% decline for the month of April 2013. May had an estimated 19% fall and June continues the trend albeit with a slowing fall of 10%.

The response to this problem was in my oppinnion the wrong one. KFC cut it prices.

KFC has always been an expensive choice in China. This has played to its advantage where Chinese people saw KFC as a high quality brand. The idea of American, foreign food that is high quality, tasty and convenient is what made KCF a Chinese success. A typical meal of hamburger, medium fries and cola would cost about 28 RMB. In a country where the average income is just 1500 RMB per month, that is a substantial cost for most people. However, the boom of the economy over the last decade meant that the new middle class could afford to regularly eat this luxury product.

So in April, ignoring the nonsensical flu scare, I went to KFC for lunch. I had in hand a set of coupons that had been posted through my door two weeks before. KFC posts such coupons every three months and I usually make use of them to save a little money. However, after giving my order to the counter staff, she handed me back the coupons. KFC had changed its prices, not just by a little bit, they had slashed them nearly in half. The burger, fries and coke had dropped from 28 RMB to just 15 RMB.

By reducing the price, KFC thought it could stem the fall in sales. It didn’t work. Sales fell non the less because price is not the key factor in the KFC purchase. Other aspects such as quality, convenience, foreignness and taste are what bring customers in. Dropping the price would not influence the customer choice as they would still see the issues of additives and flu as dominant.

KFC is not without competition in China. While other American brands such as McDonalds and Burger King do have a Chinese presence, they are no where near as compressive in coverage of the land. McDonalds has 1300 stores and Burger King, just 64 stores, in China at the beginning of 2013. Rather the competition comes from home grown Chinese and other Asian brands such as Discos, who have a very close copy of KFC’s menu.

Discos was affected by the bird flu just the same as KFC was. They matched KFC’s price cut to the penny.

So the situation was this: KFC were selling fewer chicken meals than before for less money than before. Is it any wonder that they posted a loss of 239 million RMB, or $39 million for the second quarter of 2013.

Things are improving. KFC in China will recover. It won’t be because of the price cut. Rather, as media reporting on the avian flu reduces and the additives scandal becomes just a distant memory, sales will go back to what they were before.

The lesson to be learned here is that reducing prices is not always the best way to increase sales. KFC could probably have kept its price level throughout 2013 and though sales would have fallen they would have made less of a monetary loss.