Yum China, the operator of KFC and Pizza Hut restaurants in China, grew 21 percent in revenue last year, driven by rapid store expansion and belt expansion
Yum China's revenue grew 21% in both the fourth quarter and full year of 2023, with a record number of new stores opening nearly 1,700 last year.
The KFC and Pizza Hut master franchisee in China, which had 14,644 stores at the end of last year, plans to increase the number to 20,000 by 2026.
This article was written by Yang Ge.
Yum China Holdings***(yumc.us；9987.HK) has found the future of China's fast-food industry in thousands of small cities – big-name fast-food restaurants can be found everywhere in Beijing, Shanghai, Guangzhou and Shenzhen, but they are often blank in the sinking market.
The Chinese master franchisee of KFC and Pizza Hut opened nearly 1,700 new stores last year, more than half of which were in lower-tier markets, according to fourth-quarter earnings released on Tuesday. This figure set a record for the number of new stores opened in Yum China for the year, exceeding the previous target of 1,400 to 1,600 stores. The company had a total of 14,644 stores at the end of 2023 and said it aims to achieve double-digit growth this year, continuing to move towards its goal of reaching a total of 20,000 stores by 2026.
In lower-tier markets, KFC is often a high-end dining option, and the company is launching more and more localised products to attract customers — most notably bestsellers such as Whole Chicken with Secret Sauce, as well as Maoxuewang-flavored tender beef Wufang and Bullfrog tacos, which are unimaginable anywhere else in the world.
From a macro point of view, Yum China still has a first-mover advantage in China, having a history of more than 30 years since it first entered China in 1987. In addition to localizing its products, the company has also gradually outsourced more of its business, which was managed in-house in the early years when Western-style fast food was still a novelty in China.
This allows Yum China to accelerate its embrace of the franchise model, which is the mainstream model for Western fast food operators. At the same time, partnerships with e-commerce and social platforms help companies reach more consumers beyond physical stores. In addition, the company has also cooperated more closely with third-party food delivery platforms such as Meituan and Ele.me to meet consumers' pursuit of convenience.
We are about to enter the next phase of rapid growth, KFC currently serves only one-third of Chinese consumers, and we expect to reach more than half of Chinese consumers by 2026," said Yum China CEO Wat Cuirong.
As China's economy slows after years of rapid growth, Yum China and many of its peers are turning to expansion for growth. Last year, China's GDP grew by just 52%, the slowest growth rate in more than 30 years except during the epidemic. According to data from the National Bureau of Statistics, the national catering revenue in 2023 will be 52 trillion yuan, a year-on-year increase of 204%, which is faster than the recovery rate of other industries.
After the results were announced, the company's U.S. stock was on Tuesday 42%, and its Hong Kong stocks** were as high as 28% on Wednesday. Of course, the market's worries about China's economy have also taken a toll on the company's share price, which is already about 12% in 2024. At the latest** level, the stock is currently trading at a lower price-to-earnings (PE) ratio than the world's major fast food operators, including its original parent companyyum brands(yum.us)，McDonald's(mcd.US) and Burger Kingrestaurant brands international(qsr.us)。
Yum China's latest earnings report was generally very positive, although much of its strong growth was due to rapid expansion. In the fourth quarter of last year, the company's revenue increased by 19% to 24US$900 million, an increase of 21% excluding foreign exchange rates. This brought its full-year revenue to approximately $11 billion, a 21% increase in currency-adjusted revenue.
But same-store sales in the fourth quarter were only slightly higher than the same period last year, with an increase of 4, and for the full year, same-store sales were up 7, and full-year transactions were up 12.
In order to gain incremental footfall and acquire new customers, Yum China has been expanding its overall product offering with a focus on attracting customers who are more sensitive to the lower end of the market. In 2023, digital order revenue increased by more than 35% last year, exceeding 9.2 billion yuan, of which brand-owned apps contributed one-third.
The company also continues to promote the recruitment of new members. By the end of last year, KFC and Pizza Hut had a combined number of registered members of 4700 million, an increase of 14% over the same period last year, and member sales contributed two-thirds of total sales.
In order to expand its appeal in the lower end of the market, Yum China has also begun to pilot a plan to reduce delivery fees. The company said that strengthening its cooperation with the aforementioned food delivery service provider in addition to its own delivery team will not affect its overall profit margin.
At the same time, the company is working to improve operational efficiency by increasing digitalization and automation, more flexible store formats, and expanding the model of multiple stores managed by a single restaurant manager.
As a result of lower costs and improved operational efficiency, the company improved its restaurant margin to 10 percent in the fourth quarter7%, deducting the ** subsidy during the epidemic, an increase of 1 over the same period last year7 percentage points. Restaurant margins also improved by 2 percent for the full year7 percentage points to 163%, which is even higher than the pre-pandemic level in 2019.
Yum China's net income increased 81% in the fourth quarter and 87% for the full year to $97 million and $8., respectively$2.7 billion. Operating profit increased by 170%, while core operating profit increased fourfold. Since the 2016 spin-off, the company has returned $3 billion to shareholders through buybacks and dividends, and it also said it will accelerate returns, planning to return another $3 billion over the next three years.
Finally, let's take a look at some of the company's smaller brands, especially the two local Chinese chains that made a major breakthrough last year. Since acquiring Huang Kee Huang in 2020, the chain has been doing well, adding 40 new stores last year and tripling profits. At the same time, the Little Sheep chain hot pot also turned losses into profits last year. Both brands plan to expand both domestically and overseas this year.