Image Source: Yum China

As China’s economy began to rebound in 2023, following the challenges of recent years, Yum China accelerated its expansion and delivered impressive financial results for the year. The company’s robust business model and adaptability have continued to underpin its strong performance. 

Yum China concluded the 2023 fiscal year with a record-breaking revenue of $11 billion, while operating profit soared to $1.1 billion (an increase of 76%), an all-time high, excluding special items. Meanwhile, system sales were up 21% for the full year and core operating profit grew 112%.  More broadly, it is worth noting that since spinning off from Yum! Brands several years ago, Yum China have returned $3bn to shareholders. Yum China accelerated returns to shareholders in 2023, returning a record $833mn in cash dividends and share repurchases.  The company has also stated that it plans to return another $3 billion to shareholders in the next 3 year, including plans to further accelerate returns to shareholders in 2024 to around $1.5bn. 

Yum China CEO Joey Wat partly attributes the company's success to its aggressive expansion strategy. In 2023, Yum China opened a record 1,697 net new stores (exceeding the full-year net new store target), to reach 14,644 total stores by the end of the year. This expansion extended into many untapped lower-tier cities across China, capturing the growing demand brought about by increased urbanization and consumption upgrades.

Wat emphasized in the company’s recent earnings call the importance of this strategy, saying, "We see a long runway of growth for our brands. KFC still only serves one-third of the China population. Our next ambitious target is to extend our reach to half the population by 2026. How? By being closer to our customers. This means adding store density in existing cities and entering new cities. KFC currently operates across 2,000 cities in China and is tracking an additional 1,000 cities. For Pizza Hut and our emerging brands, the white space is even larger."

Additionally, Yum China’s relentless focus on innovation – such as menu innovation, new store formats, and digitalization - has helped it adapt to the changing business and consumer environments. For example, in 2023 the company introduced over 500 new or upgraded menu items across its various brands. This constant innovation, combined with the company's commitment to affordability and availability, has helped Yum China to attract a broader customer base. At KFC, apart from its long-lasting Crazy Thursday value platform, it has identified entry price combos as huge underserved market segments. For example, last year, KFC expanded the choices of its 20 RMB combo (~3 USD), including its Chinese Burgers which have been well received by customers. For pizza, the under 50 RMB (~7 USD) segment represents a significant portion of the market but is still underserved at Pizza Hut. On the delivery side of things, the company is adjusting its delivery pricing structure to be more aligned with market norms. This will help it capture incremental traffic, especially in the smaller ticket segment and from more price sensitive customers. 

During the analyst Q&A, Wat explained Yum China's strategy of introducing more entry-level menu items while safeguarding average ticket (TA) and maintaining relative stability over the past 5 years. “The introduction of the entry price product also comes with the introduction of the high price product. RMB50 for beef burger and RMB20 combo is a good balance. What also help is when we do promotion like even for Chinese New Year, we always try to help customer to trade up to a higher ticket average by having very attractive discount. So it's a combination of the marketing campaign that we have been doing to protect the ticket average.”

Another key traffic driver is Yum China’s effective use of its own and third party online channels. In 2023, digital sales exceeded $9.2 billion, with one third contributed by the company’s own SuperApps, which grew rapidly in 2023. Meanwhile, Yum China’s loyalty programs exceeded 470 million members as of the end of 2023, with these members contributing a record 65% of sales during the year. 

As Yum China moves forward, it is well-positioned to continue its growth trajectory. With its commitment to expansion, innovation, and exceptional value, the company is poised to capture further opportunities in the years ahead. As Wat added, "Our business model is rock solid. From flexible store formats, food innovation at scale, to superb supply chain management and industry-leading AI applications. Our team has world-class execution capabilities and agility. We have demonstrated expertise to navigate different business cycles and generate long-term, sustainable value for our shareholders." 

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