Innovation Strengthens Yum China’s Business Fundamentals, Unlocking Long-Term Growth Potential
Despite the impact of the COVID-19 on the Company’s operations, Yum China delivered a strong third quarter result, reporting growth across key financials. System sales recovered with 5% year-over-year growth while operating profit surged 77% year-over-year to $316 million, surpassing pre-pandemic levels.
The Company attributes the robust performance to its resilient business model and agility, while learning, adapting, and strengthening business fundamentals through innovation across every aspect of its operations has been vital to operating successfully in a challenging environment.
Notably, by introducing innovative smaller store formats, Yum China has benefited from lower upfront investment and better store economics. The lower capital expenditures have allowed the Company to stay agile and capture more unit growth opportunities, staying on track to meet its full-year net new store target of 1,000 to 1,200. Yum China expects about half of 2022 new stores across KFC and Pizza Hut to be in the smaller format, which is especially suitable for lower tier cities. Meanwhile, new store payback remains very healthy at 2 years for KFC and 3 years for Pizza Hut.
Product innovation has been another driver of growth. To satisfy customer cravings, Yum China has been able to quickly establish a strong presence in new categories such as beef burger, whole chicken and durian pizza. For example, KFC’s extra juicy beef burger has rapidly captured market share since the product was added to the permanent menu in May 2021, selling over 100 million burgers to date. For the full year, Yum China expects to generate close to RMB 2 billion in sales from beef burgers. KFC’s juicy whole chicken was another success story. Year to date, KFC has sold over 18 million whole chickens, a versatile product good for both dine-in and take-home consumption. At Pizza Hut, durian pizza has become a customer favourite – during a promotion in the third quarter, every fourth pizza sold at Pizza Hut was a durian pizza.
The Company’s ability to innovate amazing new products and launch at scale with great speed is powered by its in-house and tailor-made supply chain management system. Yum China’s supply chain team provides a core strength, helping secure supply at scale, streamlining production and optimizing costs, which has been key to partially mitigating the impacts of high commodity prices.
On the margin side, the Company has continued to identify cost-saving opportunities, drive labor productivity and rebase its cost structure. For example, the cost of sales in the third quarter was 30.7%, 150 basis points lower than last year, which was achieved by focusing on the most effective campaigns to drive traffic. That has enabled the Company to be more cost-efficient while ensuring great value for money. As noted by Morgan Stanley in an analyst report following Yum China’s third quarter earnings, “YUMC has developed a disciplined approach to deliver better-than-peers’ cost controls through continuing improving efficiencies, digitalization efforts and supply-chain management.”
Meanwhile, cost of labor was 23.5% in the third quarter, 210 basis points lower than last year. This was mainly due to an improvement in labor productivity and relief recognized in the third quarter of $17 million. Three key measures helped improve labor productivity: optimizing staff scheduling and hiring; sharing restaurant management teams across stores; and leveraging digital tools to automate processes, such as digital ordering and inventory management.
Yum China remains confident in its business fundamentals and ability to capture growth opportunities, even during challenging times. Despite the headwinds, in the third quarter Yum China resumed the pace of store openings and opened 621 net new stores year-to-date, bringing Yum China’s total store count to 12,409 as of September 30, 2022.
