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cJanuary 18th, 2011

KFC Corporation (KFC), founded and also known as Kentucky Fried Chicken, is a chain of
fast food restaurants based in Louisville, Kentucky, in the United States. KFC has been a
brand and operating segment, termed a concept[2] of Yum! Brands since 1997 when that
company was spun off from PepsiCo as Tricon Global Restaurants Inc.

KFC primarily sells chicken pieces, wraps, salads and sandwiches. While its primary focus is
fried chicken, KFC also offers a line of grilled and roasted chicken products, side dishes and
desserts. Outside North America, KFC offers beef based products such as hamburgers or
kebabs, pork based products such as ribs and other regional fare.[citation needed]

The company was founded as Kentucky Fried Chicken by Colonel Harland Sanders in 1952,
though the idea of KFC's fried chicken actually goes back to 1930. The company adopted the
abbreviated form of its name in 1991.[3] Starting in April 2007, the company began using its
original name, Kentucky Fried Chicken, for its signage, packaging and advertisements in the
U.S. as part of a new corporate re-branding program;[4][5] newer and remodeled restaurants
will have the new logo and name while older stores will continue to use the 1980s signage.
Additionally, Yum! continues to use the abbreviated name freely in its advertising.

KFC Corporation is the largest fast-food chicken operator, developer, and franchiser in the
world. KFC, a wholly owned subsidiary of PepsiCo, Inc. until late 1997, operates over 5,000
units in the United States, approximately 60 percent of which are franchises. Internationally,
KFC has more than 3,700 units, of which two-thirds are also franchised. In addition to direct
franchising and wholly owned operations, the company participates in joint ventures, and
continues investigating alternative venues to gain market share in the increasingly
competitive fast-food market. In late 1997 the company expected to become a wholly owned
subsidiary of Tricon Global Restaurants, Inc., to be formed from the spin off of PepsiCo's
restaurant holdings.

The Early Life of Colonel Sanders

Kentucky Fried Chicken was founded by Harland Sanders in Corbin, Kentucky. Sanders was
born on a small farm in Henryville, Indiana, in 1890. Following the death of Sanders's father
in 1896, Sanders's mother worked two jobs to support the family. The young Sanders learned
to cook for his younger brother and sister by age six. When Mrs. Sanders remarried, her new
husband didn't tolerate Harland. Sanders left home and school when he was 12 years old to
work as a farm hand for four dollars a month. At age 15 he left that job to work at a variety of
jobs, including painter, railroad fireman, plowman, streetcar conductor, ferryboat operator,
insurance salesman, justice of the peace, and service-station operator.

In 1929 Sanders opened a gas station in Corbin, Kentucky, and cooked for his family and an
occasional customer in the back room. Sanders enjoyed cooking the food his mother had
taught him to make: pan-fried chicken, country ham, fresh vegetables, and homemade
biscuits. Demand for Sanders's cooking rose; eventually he moved across the street to a
facility with a 142-seat restaurant, a motel, and a gas station.

During the 1930s an image that would become known throughout the world began to
develop. First, Sanders was named an honorary Kentucky Colonel by the state's governor;
second, he developed a unique, quick method of spicing and pressure-frying chicken. Due to
his regional popularity, the Harland Sanders Court and Cafe received an endorsement by
Duncan Hines's Adventures in Good Eating in 1939.

Sanders Court and Cafe was Kentucky's first motel, but the Colonel was forced to close it
when gas rationing during World War II cut tourism. Reopening the motel after the war,
Sanders's hand was once again forced: in the early 1950s, planned Interstate 75 would bypass
Corbin entirely. Though Sanders Cafe was valued at $165,000, the owner could only get
$75,000 for it at auction, just enough to pay his debts.

Sanders' First Franchise in 1952

However, in 1952 the Colonel signed on his first franchise to Pete Harman, who owned a
hamburger restaurant in Salt Lake City, Utah. Throughout the next four years, he convinced
several other restaurant owners to add his Kentucky Fried Chicken to their menus.

Therefore, rather than struggle to live on his savings and Social Security, in 1955 Sanders
incorporated and the following year took his chicken recipe to the road, doing demonstrations
on-site to sell his method. Clad in a white suit, white shirt, and black string tie, sporting a
white mustache and goatee, and carrying a cane, Sanders dressed in a way that expressed his
energy and enthusiasm. In 1956 Sanders moved the business to Shelbyville, Kentucky, 30
miles east of Louisville, to more easily ship his spices, pressure cookers, carryout cartons,
and advertising material. And by 1963 Sanders's recipe was franchised to more than 600
outlets in the United States and Canada. Sanders had 17 employees and travelled more than
200,000 miles in one year promoting Kentucky Fried Chicken. He was clearing $300,000
before taxes, and the business was getting too large for Sanders to handle.

New Management for Kentucky Fried Chicken

In 1964 Sanders sold Kentucky Fried Chicken for $2 million and a per-year salary of $40,000
for public appearances; that salary later rose to $200,000. The offer came from an investor
group headed by John Y. Brown, Jr. a 29-year-old graduate of the University of Kentucky
law school, and Nashville financier John (Jack) Massey. A notable member of the investor
group was Pete Harman, who had been the first to purchase Sanders's recipe 12 years earlier.

Under the agreement, Brown and Massey owned national and international franchise rights,
excluding England, Florida, Utah, and Montana, which Sanders had already apportioned.
Sanders would also maintain ownership of the Canadian franchises. The company
subsequently acquired the rights to operations in England, Canada, and Florida. As chairman
and CEO, Massey trained Brown for the job; meanwhile, Harland Sanders enjoyed his less
hectic role as roving ambassador. In Business Week, Massey remarked: "He's the greatest PR
man I have ever known."

Within three years, Brown and Massey had transformed the "loosely knit, one-man show ...
into a smoothly run corporation with all the trappings of modern management," according to
Business Week. Retail outlets reached all 50 states, plus Puerto Rico, Mexico, Japan,
Jamaica, and the Bahamas. With 1,500 take-out stores and restaurants, Kentucky Fried
Chicken ranked sixth in volume among food-service companies; it trailed such giants as
Howard Johnson, but was ahead of McDonald's Corporation and International Dairy Queen.
In 1967, franchising remained the foundation of the business. For an initial $3,000 fee, a
franchisee went to "KFC University" to learn all the basics. While typical costs for a
complete Kentucky Fried Chicken start-up ran close to $65,000, some franchisees had
already become millionaires. Tying together a national image, the company began developing
pre-fabricated red-and-white striped buildings to appeal to tourists and residents in the United
States.

The revolutionary choice Massey and Brown made was to change the Colonel's concept of a
sit-down Kentucky Fried Chicken dinner to a stand-up, take-out store emphasizing fast
service and low labor costs. This idea created, by 1970, 130 millionaires, all from selling the
Colonel's famous pressure-cooked chicken. But such unprecedented growth came with its
cost, as Brown remarked in Business Week: "At one time, I had 21 millionaires reporting to
me at eight o'clock every morning. It could drive you crazy." Despite the number of vocal
franchisees, the corporation lacked management depth. Brown tried to use successful
franchisees as managers, but their commitment rarely lasted more than a year or two. There
was too much money to be made as entrepreneurs.

Stock Plummets in 1970

Several observations about franchise arrangements noted by stock market analysts and
accountants in the late 1960s became widespread news by 1970. First, Wall Street noticed
that profits for many successful franchisers came from company-owned stores, not from the
independent shops--though this was not the case with Kentucky Fried Chicken. This fact tied
in with a memorandum circulated at Peat, Marwick, Mitchell & Company, and an article
published by Archibald MacKay in the Journal of Accountancy stating that income labeled
"initial franchise fees" was added when a franchise agreement was signed, regardless of
whether the store ever opened or fees were collected. Such loose accounting practices caused
a Wall Street reaction: franchisers, enjoying the reputation as "glamour stocks" through the
1960s, were no longer so highly regarded. Kentucky Fried Chicken stock hit a high of $55.50
in 1969, then fell to as low as $10 per share within a year.

In early 1970, following a number of disagreements with Brown, Massey resigned. When
several other key leaders departed the company, Brown found the housecleaning he planned
already in progress. A number of food and finance specialists joined Kentucky Fried
Chicken, including R. C. Beeson as chief operational officer and Joseph Kesselman as chief
financial officer. Kesselman brought in new marketing, controlling, and computer experts; he
also obtained the company's first large-scale loan package ($30 million plus a $20 million
credit line). By August 1970 the shake-up was clear: Colonel Harland Sanders, his grandson
Harland Adams, and George Baker, who had run company operations, resigned from the
board of directors. Colonel Sanders, at 80, knew his limits. In a 1970 New York Times
article, Sanders stated, "[I] realized that I was someplace I had no place being.... Everything
that a board of a big corporation does is over my head and I'm confused by the talk and high
finance discussed at these meetings."

CEO Brown spent the rough year of 1970 shoring up his company's base of operations. By
September, Kentucky Fried Chicken operated a total of 3,400 fast-food outlets; the company
owned 823 of these units. The company, once too large for the Colonel to handle, grew too
mammoth for John Y. Brown as well. In July 1971 Kentucky Fried Chicken merged with
Connecticut-based Heublein Inc., a specialty food and alcoholic beverage corporation. Sales
for Kentucky Fried Chicken had reached $700 million, and Brown, at age 37, left the
company with a personal net worth of $35 million. Interviewed for the Wall Street Journal
regarding the company's 1970 financial overhaul, Brown commented, "You never saw a more
negative bunch.... If I'd have listened to them in the first place, we'd never have started
Kentucky Fried Chicken." Article author Frederick C. Klein included closing parenthetical
remarks in which observers close to the company noted that "in engineering Kentucky Fried
Chicken's explosive growth, Mr. Brown neglected to install needed financial controls and
food-research facilities, and had let relations with some franchise holders go sour."

Heublein Makes Changes in 1970s

Heublein planned to increase Kentucky Fried Chicken's volume with its marketing know-
how. Through the 1970s the company introduced some new products to compete with other
fast-food markets. The popularity of barbecued spare ribs, introduced in 1975, kept the
numbers for Kentucky Fried Chicken looking better than they really were. As management
concentrated on overall store sales, they failed to notice that the basic chicken business was
slacking off. Competitors' sales increased as Kentucky Fried Chicken's dropped.

For Heublein, acquisitions were doing more harm than good: Kentucky Fried Chicken was
stumbling just when the parent company had managed to get United Vintners, bought in
1969, on its feet. In 1977 the company appointed Michael Miles, who was formerly
responsible for the Kentucky Fried Chicken ad campaign at Leo Burnett and had joined
Heublein's marketing team in 1971, to chair the ailing Kentucky Fried Chicken. Richard
Mayer, vice-president of marketing and strategic planning for Heublein's grocery products,
took charge of the Kentucky Fried Chicken U.S. division.

Mayer found that the product mainstay, fried chicken, wasn't up to the high quality Colonel
Harland Sanders would expect. Miles and Mayer also faced the same problem John Y. Brown
had not managed to surmount: relations with franchisees were sour. In the mid-1970s, the
franchisees sold more per store than company-owned stores. Faring better without Heublein's
help, they resented paying royalty fees to the ineffective corporate parent. To top that off, the
stores were looking out of date.

Having unloaded well over 300 company-owned stores in the early 1970s, by the end of the
decade Heublein began to buy some back from the franchisees. Renovation of the original
red-and-white striped buildings began in earnest, with Heublein putting $35 million into the
project. On the outside, Kentucky Fried Chicken facades were updated, while on the inside,
cooking methods veered back to the Colonel's basics. Sticking to a limited menu kept
Kentucky Fried Chicken's costs down, allowing the company time to recoup. Timing was
fortunate on Kentucky Fried Chicken's turn-around; it happened just in time for Colonel
Sanders to witness. After fighting leukemia for seven months, Harland Sanders died on
December 16, 1980.

The 1980s: Profits and Expansion

Miles and Mayer's work culminated with the highly successful 1981 ad campaign, "We Do
Chicken Right." A year later, in step with the fast-paced 1980s, R.J. Reynolds Industries Inc.
acquired Heublein, giving Kentucky Fried Chicken another lift; the company had
expansionary vision, capital, and the international presence to tie it all together. Kentucky
Fried Chicken sales that year reached $2.4 billion. By 1983 the company had made
impressive progress. With 4,500 stores in the United States and 1,400 units in 54 foreign
countries, no other fast-food chain except McDonald's could compete. But while many
industry insiders were crediting the team with victory, Mayer wasn't so quick to join in. As he
noted in Nation's Restaurant News, "People keep talking about the turn-around at KFC. I'd
really rather not talk about it. The turn-around is only halfway over."

With the entrance of R. J. Reynolds came the exit of Michael Miles, who resigned to become
CEO of Kraft Foods; Mayer took over as chairman and CEO. Mayer continued on a cautious
line for the next several years, refusing to introduce new products as obsessively as its
competitors. "In the past two years," Mayer said in a KFC company profile in Nation's
Restaurant News, "people have gone absolutely schizoid.... A lot of chains have blurred their
image by adding so many new menu items." In further commentary, he added, "We don't roll
out a flavor-of-the-month."

PepsiCo Buys Company in 1986

Mayer's conservatism gained him the respect of Wall Street and his peers in the fast-food
industry. In 1986 soft-drink giant PepsiCo, Inc., bought Kentucky Fried Chicken for $840
million. Reasons cited were KFC's superior performance and its 1980--85 increase in
worldwide revenue and earnings. The successful operator of the Pizza Hut and Taco Bell
chains, PepsiCo did quite well introducing new products through those restaurants. It was just
a matter of time before Kentucky Fried Chicken would be expected to create new products.

To foster new product introduction, in 1986 Kentucky Fried Chicken opened the $23 million,
2,000,000-square-foot Colonel Sanders Technical Center. In addition, the company began
testing oven-roasted chicken through multiple-franchisee Collins Foods; further test-
marketing of home delivery was undertaken using PepsiCo's successful Pizza Hut delivery
system as an example. By late 1986 Donald E. Doyle, succeeding Mayer in the post of
Kentucky Fried Chicken's U.S. president, inherited the task of developing new menu items.

The overall market for fast food seemed glutted by the late 1980s. PepsiCo CEO D. Wayne
Calloway saw Kentucky Fried Chicken's national niche as secure for two reasons: first, with
competition spurred by the large number of fast-food suppliers, weaker chains would
inevitably leave the market; second, Kentucky Fried Chicken still had room to grow in the
Northeast and Mid-Atlantic regions. Internationally, the company planned 150 overseas
openings in 1987. Japan, a major market, had 520 stores, Great Britain had 300, and South
Africa had 160. KFC International, headed by Steven V. Fellingham, planned to concentrate
on opening units in a handful of countries where its presence was limited. The People's
Republic of China was the most notable new market secured in 1987; KFC was the first
American fast-food chain to open there.

Franchisee Problems with New Parent Company

Imperative to the success of Kentucky Fried Chicken was the establishment of successful
relations with the numerous franchisees. Most of them lauded parent PepsiCo's international
strength and food-service experience; KFC had its own inherent strength, however, according
to franchisees, which the parent company would do well to handle with care. That strength
was the sharing of decision-making.

In 1966, for instance, the Kentucky Fried Chicken Advertising Co-Op was established, giving
franchisees ten votes and the company three when determining advertising budgets and
campaigns. As a result of an antitrust suit with franchisees, in 1972 the corporation organized
a National Franchisee Advisory Council. By 1976, the company worked with franchisees to
improve upon contracts made when Brown and Massey took over. Some contracts even dated
back to when Colonel Sanders had sealed them with a handshake. The National Purchasing
Co-Op, formed in 1979, ensured franchisees a cut of intercompany equipment and supply
sales. All of these councils had created a democratic organization that not only served the
franchisees well, but helped keep operations running smoothly as Kentucky Fried Chicken
was shifted from one corporate parent to another. As time passed, however, PepsiCo's
corporate hand seemed to come down too heavily for franchisee comfort.

In July 1989, CEO and Chairman Richard Mayer resigned to return as president to General
Foods USA. Mayer, who together with Mike Miles was credited for bringing Kentucky Fried
Chicken out of the 1970s slump, departed as the company battled over contract rights with
franchisees. John M. Cranor, an executive who had joined PepsiCo 12 years earlier, took over
as CEO. Kyle Craig, formerly with Burger King, Steak & Ale, and Bennigan's, began in an
advisory role, later stepping up to become president of KFC-USA.

Within months Cranor was meeting with franchisee leaders in Louisville to defend parent
PepsiCo's contract renewal. Among the issues debated was PepsiCo's plan to revise the
franchisee-renewal policy, which guaranteed operators the right to sell the business, and an
automatic ten-year extension on existing contracts with reasonable upgrading required. It was
in KFC's long-term interest to settle the dispute without litigation, Cranor believed--and with
good reason. In August of 1989 franchisees had established a $3.6 million legal fund,
averaging $1,000 per unit, to fight the battle in court if necessary. Cranor remained
optimistic, relying on the history of positive relations with franchisees.

Despite contract battles and communication troubles, in the fall of 1990 Kentucky Fried
Chicken called a one-day truce to celebrate in honor of Colonel Sanders's 100th birthday.
Meanwhile, fast-food competitors with stricter organization were keeping up with changes in
consumer demand and introducing new products at a dizzying rate. KFC, in contrast, had
difficulty in creating new products linked to the cornerstone fried chicken concept, as well as
in getting them out quickly through franchisee stores. Hot Wings, brought out in 1990, were
KFC's only hit in a number of attempts, including broiled, oven-roasted, skinless, and
sandwich-style chicken.

In late September 1990, Kentucky Fried Chicken increased its holding of company-owned
stores by buying 209 U.S. units from Collins Foods International Inc.; Collins retained its
interest in the Australian KFC market. The acquisition boosted Kentucky Fried Chicken's
control of total operating units to 32 percent. The corporation also added Canada's Scott's
Hospitality franchises to its fold, an increase of 182 units.

To update its down-home image and respond to growing concerns about the health risks
associated with fried foods, in February 1991 Kentucky Fried Chicken changed its name to
KFC. New packaging still sported the classic red-and-white stripes, but this time wider and
on an angle, implying movement and rapid service. While the Colonel's image was retained,
packaging was in modern graphics and bolder colors. New menu introductions were
postponed, as KFC once again went back to the basics to tighten up store operations and
modernize units. A new $20 million computer system not only controlled fryer cooking
times, it linked front counters with the kitchen, drive-thru window, manager's office, and
company headquarters.
International Success in 1990s

Though KFC may have had problems competing in the domestic fast-food market, those
same problems did not seem to trouble them in their international markets. In 1992 pretax
profits were $92 million from international operations, as opposed to $86 million from the
U.S. units. Also, in the five-year span from 1988 through 1992, sales and profits for the
international business nearly doubled. In addition, franchise relations, always troublesome in
the domestic business, ran smoothly in KFC's international markets. To continue capitalizing
on their success abroad, KFC undertook an aggressive construction plan that called for an
average of one non-U.S. unit to be built per day, with the expectation that by 1995 the
number of international units would exceed those in the United States.

International sales, particularly in Asia, continued to bolster company profits. In 1993, sales
and profits of KFC outlets in Asia were growing at 30 percent a year. Average per store sales
in Asia were $1.2 million, significantly higher than in the United States, where per store sales
stood at $750,000. In addition, profit margins in Asia were double those in the United States.
KFC enjoyed many advantages in Asia: fast food's association with the West made it a status
symbol; the restaurants were generally more hygienic than vendor stalls; and chicken was a
familiar taste to Asian palates. The company saw great potential in the region and stepped up
construction of new outlets there. It planned to open 1,000 restaurants between 1993 and
1998.

Non-traditional service, often stemming from successful innovations instituted in the

company's international operations, was seen as a way for KFC to enter new markets.
Delivery, drive-thru, carry-out, and supermarket kiosks were up and running. Other outlets in
testing were mall and office-building snack shops, mobile trailer units, satellite units, and
self-contained kiosks designed for universities, stadiums, airports, and amusement parks. To
move toward the twenty-first century, executives believed KFC had to change its image. "We
want to be the chicken store," Cranor stressed in a 1991 Nation's Restaurant News. Cranor's
goal was total concept transformation, moving KFC to a more contemporary role.

New product introductions were part of the company's plan to keep up with competitors.
Having allowed Boston Market to grab a significant portion of the chicken market, KFC tried
to catch up with the introduction of Rotisserie Gold Chicken. The company's new CEO,
David Novak, also decided to test Colonel's Kitchen, a clear imitation of the Boston Market
format. To counter McDonald's and Burger King's "value meals," KFC brought out the
"Mega-Meal dinner": an entire rotisserie chicken, chicken nuggets, mashed potatoes,
macaroni, cole slaw, biscuits, and a chocolate chip cake for $14.99. In 1995, KFC expanded
the idea to "Mega-Meal-For-One," and decided to test chicken pot pie and chicken salad.

These moves gave a small boost to KFC's image, which had grown somewhat out-of-date,
and to its bottom line. However, problems with the franchisees continued, and PepsiCo was
not seeing the return on its assets that it saw with its beverage and snack food divisions.
PepsiCo was having similar problems with its other restaurant subsidiaries, Taco Bell and
Pizza Hut, and decided the drain of capital expenditure was not worth it.

In 1996 the company prepared to rid itself of its restaurant division by drawing together Pizza
Hut, Taco Bell, and KFC. All operations were now overseen by a single senior manager, and
most back office operations, including payroll, data processing, and accounts payable, were
combined. In January 1997 the company announced plans to spin off this restaurant division,
creating an independent publicly traded company called Tricon Global Restaurants, Inc. The
formal plan, approved by the PepsiCo board of directors in August 1997, stipulated that each
PepsiCo shareholder would receive one share of Tricon stock for every ten shares of PepsiCo
stock owned. The plan also required Tricon to pay a one-time distribution of $4.5 billion at
the time of the spinoff. If approved by the Securities and Exchange Commission, the spinoff
would take place on October 6, 1997.

PepsiCo CEO Roger Enrico explained the move: "Our goal in taking these steps is to
dramatically sharpen PepsiCo's focus. Our restaurant business has tremendous financial
strength and a very bright future. However, given the distinctly different dynamics of
restaurants and packaged goods, we believe all our businesses can better flourish with two
separate and distinct managements and corporate structures." KFC and its franchisees did
settle their contract disputes; according to a press release, "the crux of the agreement revolves
around KFC franchisees receiving permanent territorial protection. In turn, KFC Corporation
will have more direct influence over certain national advertising and public relations
activities." Still KFC faced the need to rennovate its restaurant buildings, and also faced stiff
competition from Boston Market, Burger King, and McDonald's, so it remained to be seen if
the new parent company would refresh KFC's image and profits.
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