Yum China, the largest restaurant company in China, maintained its strong overall performance in 2023 as China’s economy grew 5.2% year-on-year and the restaurant industry saw good double-digit growth. The company saw both topline and bottom-line results exceed market expectations for the year, including generating record-breaking revenue of $11 billion and operating profit soaring to $1.1 billion, an all-time high excluding special items.
At the same time, Yum China continued to rapidly grow its store footprint, opening a record 1,697 net new stores during 2023, exceeding its full year net new store target. This meant that as of the end of 2023, Yum China has reached 14,644 stores, spanning more than 2,000 cities and towns across China. This impressive store growth momentum was a key driver behind Yum China achieving a system sales increase of 21% year-over-year, outperforming the industry.
Yum China still sees abundant untapped potential for further expansion, particularly in China’s lower-tier cities, where there is a significant consumption upgrade happening. According to Yum China, over half of its new stores in recent years are in lower-tier cities, with these stores performing well and benefitting from lower labor costs and rent. During the company’s latest earnings call, Joey Wat, Yum China’s CEO, explained that with lower living costs in lower-tier cities, customers there have significant purchasing power for the company’s products.
Elaborating on the company’s ambitious expansion goals, Wat stated, “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.”
Another key aspect of Yum China’s expansion strategy is the introduction of flexible store formats, including standard stores, future concept stores, mini-stores, and stores strategically located in lower-tier cities. These flexible models have opened up more site potential across city tiers. Meanwhile, strategic franchise partnerships are allowing Yum China to gain access to locations that were previously out of reach, such as highway service centers and university campuses. As introduced in the recent investor day, the franchise store will account for 10-15% of KFC’s new store in 2024.
Food innovation and a widening price range has also supported Yum China’s rapid growth in recent years. In 2023, Yum China rolled out more than 500 new or upgraded products. That means the company offered something new every week. Some notable examples include KFC’s Beef wrap with Spicy Duck Blood and Chicken Taco with Bullfrog, and Pizza Hut’s Black Thorn durian pizza. Underpinning Yum China’s food innovation efforts, the company’s superb in-house supply chain empowers it to innovate and offer fantastic value while protecting margins.
During the Q4 earnings call, Wat elaborated on Yum China’s strategy to appeal to consumer when they become more rational. “How do we respond to it? We are the market leader. Our focus in the last 30 some years and our ongoing focus is how to build a brand with a combination of good value, amazing product and opening up the price point.” Wat commented.
Aiming to maintain store growth momentum, in 2024, Yum China targets to open 1,500 to 1,700 net new stores. For context, Wat explained, “Our vision is to reach 20,000 stores by 2026. We will continue to protect our new store payback at 2 years for KFC and 3 years for Pizza Hut. Over the past years, we have been improving our fundamental capabilities to reach this target. This is a key reason we can expand at an accelerated speed.”
In conclusion, Yum China boasts a solid business model. From flexible store formats, food innovation at scale, to superb supply chain management and industry-leading AI applications, the company is well positioned to reach its ambitious expansion targets in the coming years.
