The entry of a competitor hurts sales and profit, especially when both are operating close by and targeting similar customers.

KFC and McDonald’s are direct competitors. However, they have also benefited from each other’s presence in China’s emerging fast food industry.

We found that a rival’s presence drives a chain to expand, but for different reasons for McDonald’s and KFC.

KFC introduced concept of fast food for first time to China in 1987. It now dominates the Chinese fast-food market with more than 5,000 outlets in more than 1,100 Chinese cities.

KFC enters the capital city of a province first and then expands to nearby cities – Beijing, as the home of its first outlet and quickly spread to the east and south coast, which is economically more developed.

Whereas, McDonald opened its first outlet in 1990 in Shenzhen, a city in Guangdong next to Hong Kong. It accelerated its expansion from 1999, yet not as fast as KFC.  KFC has the first-mover advantage.

KFC and McDonald’s are likely to increase the number of outlets in a city where their rival has a larger presence. A rival’s presence appears to motivate them to expand there. Why? Market learning and demand expansion.

KFC and McDonald’s expanded into a rival’s territory for different reasons. The presence of KFC signals market potential and growth for McDonald’s to enter, whereas the prior presence of McDonald’s helps to cultivate tastes to prepare the market for foreign fast food, benefitting KFC when it enters.

KFC have a better understanding of local Chinese consumers, due to its leadership team made up of Chinese born in Taiwan. They have a better knowledge of Chinese culture and the market.

The Leader team in McDonald’s, is made up of non-locals. These insights serve KFC to know better which market has innately more potential with growing demand for fast food.

Due diligence on market potential is essential. McDonald’s learns from KFC that the market is worthwhile to enter.

When a chain is learning about local market and potential from its rival, it is more likely to expand into markets where the rival registers higher sales revenue since it signals that the rival understands the market.

But then, why would KFC not enter a market first?

• Such markets do not yield as much potential as those it chose to enter
• Market is not familiar with Western fast food.

Whereas, McDonald’s entry into such markets (prior to KFC), helps to build demand, which KFC will eventually find lucrative to enter.

Burgers are more symbolic of Western food than chicken. McDonald introduces and educates the locals to American fast food. It cultivated in them a gradual liking for Western fast food. KFC finds it attractive to enter when such cultivation expands demand for Western fast food.

Different motivations for entering a market where there is a rival’s presence.

One enters because it is riding on a rival’s knowledge of the market; while demand expansion suggests that one enters because the rival has helped build up demand for a smooth entry.

Competing firms can learn and benefit from each other in their expansion into a foreign market.

For some brands, they may compete close to their rivals because they rely on their due diligence that the market is profitable. For others they see their rivals smoothed the way for them. Regardless, competing close to rivals can bring the best out of a brand in addition to giving customers choice.

But what if the market is reaching saturation?

In that case, it is more likely to see the competition effect dominating the positive spillover effects of rivalry. A firm is likely to stay away from its rivals.

Suresh Shah, Pathfinders Enterprise