The KFC Index created by Sagaci Research uses the prices of KFC™ chicken buckets in different countries to estimate FX rates for 20 African currencies versus the U.S. dollar. These “implied” rates are then compared to actual market FX rates in order to assess whether a given currency is overvalued or undervalued against the greenback. The KFC index is based on the theory of purchasing-power parity – the idea that, in the long run, FX rates will move towards an equilibrium that equalises the prices of goods in different countries.

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What is the KFC Index?

The KFC Index estimates whether African currencies are overvalued or undervalued against the US dollar by comparing the local currency price of a bucket of KFC chicken to its price in the US.

KFC was chosen as a point of comparison because it is by far the largest fast food chain in Africa, with a presence in more than 20 countries.

Like The Economist’s Big Mac Index, the KFC Index is based on the theory of purchasing power parity, which predicts that foreign exchange (FX) rates will adjust in the long run to an equilibrium level where the prices of goods are equalised in different currencies.

How is it calculated?

An “implied” FX rate for each currency is created by dividing the local price (in the local currency unit) by the US price in USD.

If this implied rate is less than the actual (market) FX rate, then the local currency can be said to be undervalued against the USD. Conversely, if the implied rate is greater than the actual rate, then the local currency can be said to be overvalued against the USD.

For example, the implied FX rate of the Kenyan shilling vis-à-vis the US dollar in January 2020 was 99.4. This was less than the actual rate of 101.2. From this, we infer that the Kenyan shilling was undervalued (by 1.7%) against the USD at that time.

Meanwhile, the implied rate of the West African CFA Franc vis-à-vis the US dollar in January 2020 was 627.5, which was greater than the actual rate (590). This implies that the West African CFA Franc was overvalued (by 6.0%) vis-à-vis the greenback.

What are its limitations?

There are a host of factors that determine the pricing of KFC chicken in different markets beyond FX rates. These include the purchasing power of local consumers, price elasticity of demand (the responsiveness of demand to changes in price), taxation, and input costs – most notably the cost of chicken, which is sourced locally.

As a result, the KFC Index’s estimates of the overvaluation or undervaluation of various currencies are strictly notional.

 

Inspiration

The index takes its name from the international fast food chain, Kentucky Fried Chicken™ (KFC™) and is modeled on the Economist´s “Big Mac Index”, which covers countries with McDonald’s™ presence (about 60 countries). In Africa, the McDonald´s™ chain is only present in Morocco, Egypt and South Africa. KFC™ on the other hand has operations in more than 20 countries, the highest of any international fast food chain, making it a more applicable benchmark. The index is not intended as a precise gauge of currency misalignment but merely as a tool to make exchange-rate theory more digestible.


Impact

By analyzing the prices of KFC´s™ buckets and covering countries in all major regions of Africa, Sagaci Research's KFC Index provides high-level insight into African currency valuations and consumer purchasing power relative to the US.

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The KFC Index Report (Full report – Pdf)

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Key info

Research team

damian.shore@sagaciresearch.com

armando.ciccarelli@sagaciresearch.com