Sagaci Research’s KFC Index uses the price of KFC™ chicken buckets in different countries to estimate foreign exchange (FX) rates for 20 African currencies vis-à-vis the US dollar (USD). These “implied” rates are then compared to market FX rates in order to assess whether a given currency is overvalued or undervalued against the greenback.

Like The Economist’s Big Mac Index, the KFC index is based on the theory of purchasing power parity – the idea that, in the long run, FX rates will tend towards an equilibrium that equalises the prices of goods in different countries.

What is the KFC Index?

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

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

How is it calculated?

An “implied” FX rate for each currency is calculated by dividing the local price (in local currency units) 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.

To take the example of South Africa, the implied FX rate (ZAR price of a KFC chicken bucket/USD price) of 7.0 is significantly less than the actual ZAR-USD FX rate of 17.2. This implies that the South African rand is 59.1% undervalued vis-à-vis the USD.

Conversely, in Gabon the implied FX rate of 646 is greater than the actual FCFA-USD FX rate of 585, implying that the CFA franc is 10.4% overvalued vis-à-vis the greenback.

If a country’s currency is overvalued, this implies that it is cheaper to buy KFC chicken in the US than domestically. In this context, it is unsurprising that most African currencies are undervalued vis-à-vis the USD.

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.

 

The KFC Index is modeled on the Economist's Big Mac Index, which covers countries worldwide that have McDonald’s restaurants.

In Africa, McDonald's is only present in Morocco, Egypt and South Africa, while KFC has operations in more than 20 countries, making the latter a much more useful benchmark. The index provides insight into African currency valuations and consumer purchasing power, in addition to making exchange-rate theory more digestible.

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The KFC Index Report: Q2 2020 (Full report – Pdf)

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Key info

Research team

damian.shore@sagaciresearch.com

armando.ciccarelli@sagaciresearch.com