I just read this on Snopes:
It was about money. … In 1990, the Commonwealth of Kentucky, mired in debt, took the unusual step of trademarking their name. Henceforth, anyone using the word “Kentucky” for business reasons — inside or outside of the state — would have to obtain permission and pay licensing fees to the Commonwealth of Kentucky.
It was an unusual and brilliant scheme to alleviate government debt, but it was also one that alienated one of the most famous companies ever associated with Kentucky.
The venerable Kentucky Fried Chicken chain, a mainstay of American culture since its first franchise opened in Salt Lake City in 1952, refused as a matter of principle to pay royalties on a name they had been using for four decades.
After a year of fruitless negotiations with the Kentucky state government, Kentucky Fried Chicken — unwilling to submit to “such a terrible injustice” — threw in the towel and changed their name instead, timing the announcement to coincide with the introduction of new packaging and products to obscure the real reasons behind the altering of their corporate name.