United Airlines, KFC and Why Winning Big in China Creates New Challenges

Earlier this year, United Airlines got massive criticism in China. The video of David Dao being dragged down an airplane aisle went viral in China, much to United’s surprise. KFC had a somewhat similar surprise last year when their China outlets suddenly got protests, a response to a ruling at the Hague. Both events highlight a quirk of China business. That when you win in China and become known, you can often face significant new challenges and risks. One day you’re making fried chicken and the next you’re an issue in global geopolitics.

KFC’s protests are a good example of this. KFC has won big in China. No question about it. They have over +7,500 outlets (including Pizza Hut). Chinese consumers love their chicken. And their former CEO Samuel Su is rightfully regarded as the best restaurant manager in the PRC.

But then one day, they got protested as a foreign symbol. It doesn’t make a whole lot of sense (by revenue and corporate structure Yum China is really not American company anymore). And it is a strange logic chain that gets you from tribunal rulings in Europe to fried chicken in Shanghai. But it happened.

In addition to becoming foreign symbols, big winners in China can also become favorite targets for media exposes and social media frenzies. McDonalds, Wal-Mart, Starbucks and many other highly successful China businesses (both foreign and local) have all been the subject of exposes by CCTV and other media outlets.

And while such media scrutiny is common globally, what is different in China is that social media can greatly amplify it. An issue or event can take off really quickly. And government action can then follow surprisingly quickly.

For example, in 2014 a documentary about McDonalds’ supplier Shanghai Husi Food Co said they were using expired meat. The expose ran on a Sunday. Five members of management (including the company head) were detained by the police by Wednesday and the factory was closed that same week. So OSI Group launched their China business (Shanghai Husi) in the 1980’s, spent +20 years and hundreds of millions of USD building it, and then almost lost almost everything in about 6 days. These things are serious in China and can happen very fast.

A related “winning in China” problem is competitor attacks. I have a suspicious mind and assume competitors are sometimes involved in such media + social media attacks. And the more successful a company is the more its big profits will attract competitors and attacks.

Really the problem is that when you win big in China, whether as a foreign or local company, there is an increasing amount of self-interest in going after you. Media and social media attacks can result in big attention and viewership. Competitor attacks can be very profitable. You can see this phenomenon in lots of markets. China is just a faster version of it.

I think there are really two management responses to all this.

First, build up your customer loyalty as much as possible.

Ultimately, your customers are your best defense. If customers love / like your products, these attacks usually bounce off. Case in point is the mentioned McDonalds expose, which took down supplier Husi in days. But McDonalds itself continues to do quite well. Regardless of the media attention, their customers keep coming and their outlets have rebounded. It turns out B2B is a lot more exposed than B2C.

My favorite example is the Starbucks pricing expose of 2013. CCTV ran a segment claiming Starbucks charges more in China than in the USA. There was a lot of media indignation but the response from customers was “we don’t really care. We like Starbucks”. The outlets remained packed and the report disappeared almost immediately. Customer loyalty is your best defense.

Second, management needs to play smart offense and fast defense.

If you are highly successful in China, you are going to get attacked or at least publicly challenged at some point. Sometimes it’s predictable, like in food scandals. If you’re in food in China you’re going to have a quality issue at some point. Other times, it’s totally unexpected, like the KFC protests. But it’s probably only a matter of time. And you can tell a lot about management by how prepared they are.

I think management needs to be playing “smart offense” all the time, especially on social media. You can’t wait for someone to raise an issue and then respond. You need to be pushing your facts and story all the time. McDonalds widely publicizes the quality of its ingredients on its webpage. And they are known for giving tours of their kitchens to show how clean they are. That’s smart offense.

And when an issue does happen (or is fabricated or charged), you need to play “fast defense”. Social media can whip accusations into a frenzy within hours. When McDonalds was the subject of an earlier food quality expose (not the 2014 one), they responded on their Weibo account within 1 hour of the report. And they closed the outlet in question within 24 hours. That’s fast defense. And the speed of their response actually reinforced their reputation for caring about customers and food quality.

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A final comment. A friend once told me about a sign next to a Florida river that said the following:

“Danger crocodiles. No swimming. Survivors will be prosecuted.”

I often think about this when these types of stories erupt. The markets in Asia and China are always difficult. The competition can be brutal. And most companies don’t survive, let alone win. And if you do manage to succeed, you then encounter a whole new set of problems, like the ones I just mentioned. Survivors will be prosecuted. I find this to be a useful mindset.

Anyways, I don’t want this to come across as too cynical. I’m exceptionally bullish on most China industries, especially food. But I also think to win, whether local and foreign, you want to be pretty paranoid and overly prepared. It’s a good approach.

Thanks for reading. -jeff

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I write and speak about “how rising Chinese consumers are disrupting global markets – with a special focus on digital China”.

  • Photo by Steve Webel, Creative Commons license with link here.

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