Via The Financial Times, a look at KFC’s efforts to enter the Mongolian market:

Mongolia is following the footsteps of its largest trading partner, China, whose first western food chain in 1987 was Yum! Brands’ KFC. Now Mongolia’s Tavan Bogd Group has attained franchise rights to the restaurant chain, though the success of fast food in this fast-developing frontier market has so far been mixed.

Tavan Bogd, one of Mongolia’s largest holding companies, plans to open the first KFC restaurant by the middle of 2013, followed by three more in the second half of the year.

“All four will be flagship stores located in Ulaanbaatar city,” Ts Baatarsaikhan, chief executive and president of Tavan Bogd Group, said in a statement last month. “Additionally we are conducting a market survey together with a global research company to determine the market potential and identify eating habits of Mongolians, which will outline our development roadmap.”

Tavan Bogd hopes to tap into Mongolia’s new middle class that is rising on the back of its mining industry. The remote north Central Asian country opened one of the world’s largest coal mines in 2011 and is developing of one its largest copper mines. The latter, the Oyu Tolgoi copper-gold project, is due to begin operating in June and its output is expected to comprise a third of Mongolia’s entire economy.

Oyu Tolgoi in particular has driven up Mongolian wages, boosting spending on food, clothing and housing. According to the World Bank, the country’s per capita GDP grew by nearly two thirds from $2,250 in 2010 to $3,623 in October 2012.

“Bullet points would be the large youth population – youth are generally more knowledgeable and disposed towards imported goods like clothing and western foods. And there’s the high growth rate and all the wealth that comes from the mining sector,” says Matt Jones, an associate at Mongolian Investment Capital Corporation a local investment bank.

Tavan Bogd and Yum! are betting this will deliver a performance similar to that in China, where the company saw 15 per cent growth in sales between 2007 and 2011.

Jones said MICC had looked to partner with franchises such as pizza chains Papa Johns and Dominoes to tap into that prized demographic but so far without success – one indication that Mongolia presents its own set of problems for this kind of business.

US franchises have opened in Mongolia before but with varying degrees of success. Though bd’s Mongolian Grill still caters heavily to the tourist crowd during summer months, Kenny Roger’s Roasters’ – which would have been KFC’s main competitor – long since closed its Mongolian operation. The fact that KFC is willing to come in now is testament to the rapid transformation taking place in the country, say analysts.

The crux for franchises in Mongolia has been the challenge of delivering – in what is after all a distant and isolated location – the consistency and quality control customers demand. Relying on a single railway line from China and the absence of other transport infrastructure raises the cost of essential ingredients and drives prices beyond levels familiar to western consumers.

Though Mongolia has 14 head of cattle per person, meat producer Just Agro is the only one with facilities that meet export standards. Russia banned imports of Mongolian meat following outbreaks of diseases such as foot and mouth. The ban was lifted in November 2011 and the Mongolian government has since been looking at ways of selling its meat as a high-quality, speciality product.

“I’m very sceptical that chain restaurants will be able to provide the same low-cost service they can in the US in these developing markets due to ingredient scarcity,” says Jones, who has yet to find a franchise interested in coming to Mongolia. “To obtain high-quality and consistent products, you have to pay a higher price relative to the rest of the market.”

Jones says MICC’s biggest challenge is finding the right partner, willing to take the plunge and invest in a country that is still unproven. The risk for KFC is that it will follow its predecessors and be packing its bags before long. Or it could be about to grab “first mover” status in a transformed market, with the chance to dominate it for some time.