Economic Issues of KFC - Essay Example

?Running Head: Economic Issues of KFC Economic Issues of KFC [Institute’s Economic Issues of KFC Introduction The recession that started with a real estate crisis, bursting of housing bubble, unrealistic credit conditions and liquidity crisis in the United States, spread like a wild fire to almost all the economies in the world, converting national financial crunch of the United States into a global financial recession. Experts believe that this recession is the worst economic recession since the great depression of 1930s (Davies, pp. 314-315, 2010). Within no time, the economy of United Kingdom also showed signs of slowdown and this is was the first time in the history of United Kingdom that the country was suffering from an economic meltdown, which was not caused by domestic factors. In United Kingdom alone, thousands of people have lost their jobs due to the current economic situation, millions had to change their lifestyles, and the entire population is still uncertain about their future (Kolb, pp. 170-172, 2010; Kluyver, pp. 280-286, 2010). Without any doubts, this recession had the worst possible impact on the businesses in UK, which suffered in form of slower sales growth, shrinking profit margins or worse, bankruptcy. Kentucky Fried Chicken (KFC) is one of those businesses, which has been impacted greatly due to the current recession. This paper is an attempt to explore the economic problems that KFC in UK is facing the aftermath of this recession. Discussion Important here to understand is that during any financial recession, people become risk averse and try to save more. Most of the people already face budget constraints due to either decreasing salaries or increasing inflation. The point here is that towards the end of the day, in a recession, people find themselves with less disposable income, they take rational decisions and become thoughtful about ways for spending it (Davies, pp. 314-315, 2010). Customers become more and more price conscious and look for low priced products, low priced substitutes or discounts and others (Arnold, pp. 52-57, 2010). This explains why despite of this brutal recession, low cost retailers like Wal-Mart, Target Corporation, Aldi and Asda have been able to actually pose strong sales growth over the past four years. As mentioned earlier, during recessions, people look for low cost providers since they want more value for their money. Therefore, rather than spending on premium versions of the product, people shift to lower prices thus boosting the businesses of low cost providers (Carpenter, Sanders, & Harling, pp. 49-51, 2011; Kluyver, pp. 280-286, 2010). Quite understandably, during recessions, people can cut down their purchases of luxury products or purchases, which can be delayed under normal circumstances such as alcohol, clothing, home equipment, automobiles, and others. However, food, grocery, medicine, and drinks do not come in this category. Despite the fact that KFC is serving food but when faced with financial constraints, consumers avoid dine-in at restaurants or cafes and prefer to cook food at home, which can save them money (Hemerijck, Knapen & Doorne, pp. 230-234, 2010). They throw parities at home rather than celebrating at fast food chains. This attitude of the consumers means that the business of food retailers is more likely to grow and statistics indicate that food and grocery retail business has showed steady growth, but at the same time, revenues of fast food chains like KFC and other restaurants decreases significantly. This pattern has pushed many small restaurant chains at the brink of insolvency (Wit & Meyer, pp. 390-394, 2010). A careful analysis may reveal that during a recession, some of the competitors do not only leave the marketplace due to bankruptcy or insolvency but these economic recessions also present a unique opportunity to upper middle class entrepreneurs who are willing to take the risk. The Bank of England has set the interest rate at 0.5 percent which the record low level in the history of UK (Arnold, pp. 52-57, 2010). In fact, there is no evidence in the entire world of such low interest rates. The prime reasons behind setting such low interest rate is that with the same, the Central Bank and the government expects that the economy would witness an increase in investment and people could be discouraged from keep their savings idle in banks (David, pp. 210-215, 2011; Hall & Lieberman, pp. 164-165, 2009). Investment is an important component of the aggregate demand function expressed by John Maynard Keynes. Proponents of Keynesian economics strongly believe that the way out from any economic recession is to stimulate the aggregate demand, of which investment is an important function (Wit & Meyer, pp. 390-394, 2010). Low interest rates serve the dual function of encouraging people to borrow money from the banks and discourage them to save money in the bank. When people borrow money from the banks, it is highly likely that it would be for the purposes of business. Furthermore, when people see that keeping their money in banks is earning them with such low return on investment, they look for investing their money in other sources (Hemerijck, Knapen & Doorne, pp. 230-234, 2010). Towards the end of day, there is less money sitting idle in the economy and more money is circulating in the economy to help the economy grow. The point here is that during the recession, several bold entrepreneurs would set up their businesses to capture the niche market. In fact, various success stories in the market place starts from a bold entrepreneur who is willing to take the risk even in the worst market conditions (Krugman, & Wells, pp. 462-467, 2009; Kluyver, pp. 280-286, 2010). Therefore, not only KFC’s revenues are going down because consumers are preferring eating at home but also at the same time because new, low cost and niche market targeting competitors will also emerge in these investment friendly environment (Crossan, Bansal, Killing, White & Zietsma, pp. 195-198, 2011; Hall & Lieberman, pp. 164-165, 2009). Recently, KFC UK announced that it plans to around 9000 jobs in the coming years with an expansion plan of 150 million British pounds aiming at opening (David, pp. 210-215, 2011). AS the recovery is underway, KFC has started attracting new customers and they have added much to the revenue stream of the company as well. KFC claims that it opened 44 stores in the year 2010 and plans to open 54 more stores this year as well. This is another economic issue, which the coming is facing and that is the fact that a recovery in the UK is underway. This means that very soon, maybe within a couple of years, UK economy would be on its way for an economic boom for which companies have to prepare from now. KFC is not alone in this but other companies like McDonalds, Taco Bell, Pizza Hut, Subway, and others are adding to their stores so that they are better prepared to capture the opportunity of capturing the market share, which will increase in the coming years (Carpenter, Sanders, & Harling, pp. 49-51, 2011). Another important issue, which KFC in UK is facing, would be of the devaluation of British Pound. As mentioned earlier that most of the economists are proponents of Keynesian School of thought, which believes that the key to navigate quickly from a successful business trough to a business cycle peak is by ensuring a boost in aggregate demand (FitzRoy, Hulbert & Ghobadian, pp. 349-352, 2011). Investment is just one component of aggregate demand out of four, the other three being net exports, consumption, government spending. The government did try to encourage consumer spending with the help of reducing VAT (Hemerijck, Knapen & Doorne, pp. 230-234, 2010). The bailout packages were the best manifestation of government spending. However, in order to increase the exports from the country, the authorities adopted a short-term solution of depreciating the British Pound against the US dollar, in order to achieve a competitive advantage of price over its competitors (Wit & Meyer, pp. 390-394, 2010). The government believes that all these efforts combined with help the economy to recover. Despite the fact that this may be a good step for stabilizing the economy, KFC’s top management will not appreciate it (Krugman, & Wells, pp. 462-467, 2009). Devaluation of British pound means that decrease in the wealth, which goes to the head office of the company, which deals in US dollars and not in Pounds. KFC’s management have appeared to have absorbed this shock but if the process of devaluation of British pound continues then it highly likely that either KFC will have to raise its prices to offset the losses or it will have to shrink its profit margins (Crossan, Bansal, Killing, White & Zietsma, pp. 195-198, 2011). Efficiency is the cornerstone of each business in the absence of which the business is at the mercy of the competitors. This is true for all business, operating in all industries. KFC has been able to survive for the past six decades and has been able to expand its operations to so many different countries of the world because of its efficiency and ability to make the most of its resources (David, pp. 210-215, 2011). There are hints that KFC may be losing its ability to some extent of being efficient. Over the past few weeks, inflation in UK has increased steadily and as of July 2011, it is peaking at 5 percent. More importantly, the recent increase in energy, fuel and electricity prices in the country are shocking for all businesses and they have played an important role in increasing the cost of doing business (Hemerijck, Knapen & Doorne, pp. 230-234, 2010). Nevertheless, in the recent past, energy prices have increased all over the world and especially, in European countries but a comparative analysis reveals that there is great disparity between these increases (Davies, pp. 314-315, 2010). Compared to the last year energy prices, the increase in prices in Sweden, Germany, France, Denmark, Norway and Finland is not more than 7 percent. However, this increase in Britain is more than 17 percent and that is an alarming figure. As mentioned earlier in the previous mentioned scenario, that KFC here has two options, either to increase its prices or accept shrinking profit margins (Carpenter, Sanders, & Harling, pp. 49-51, 2011). Nevertheless, the current condition of UK posses several problems for the Kentucky based fast food chain but at the same time, there is a bright side of the picture as well. Currently, unemployment rates in UK are significantly high. Despite the fact that a significant number of the previously unemployed people have been absorbed in the market, there are still many more of them, which are looking for them (Wit & Meyer, pp. 390-394, 2010). In light of the basic principles of economics, whenever the supply of labour is greater than the demand for labour, the wages would keep on decreasing to the point where the market reaches equilibrium by forcing out the excess supply of labour. Therefore, when applied in practical situation of UK employment market, it means that in the current situation, KFC can employ comparatively cheap labour for its blue-collar jobs. Furthermore, it is highly likely than even with that comparatively low wage, the company would be able to retain its employees, until and unless, the market witnesses a significant economic boom (Crossan, Bansal, Killing, White & Zietsma, pp. 195-198, 2011). Conclusion Therefore, towards the end, it understandable enough to conclude that KFC in UK is operating in a quickly changing economic environment, which asks for proactiveness and well, planned strategic management. Until this point in time, KFC has done well to cope with the economic issues faced by the company. However, there are a few issues, which are not in the control of the company. The best strategy for the company would be to focus on its core operations and its competitive advantage, which is its “secret recipe that produces finger lickin good chicken”. Its focus should be on harnessing this competitive advantage and making the most out of it (Hemerijck, Knapen & Doorne, pp. 230-234, 2010). References Arnold, Roger A. 2010. Macroeconomics. Cengage Learning. Carpenter, Mason A., Sanders, William Gerard., & Harling, Kenneth. 2011. Strategic Management: A Dynamic Perspective. Pearson Education Canada. Crossan, Mary M., Bansal, Pratima, Killing, J. Peter., White, Roderick E., & Zietsma, Charlene. 2011. Strategic Management: A Casebook. Prentice Hall. David, Fred R. 2011. Strategic Management: Concepts and Classes. Pearson Education, Limited. Davies, Howard. 2010. The Financial Crisis. Polity. FitzRoy, Peter, Hulbert, James, & Ghobadian, Abby. 2011. 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