On April 11, Yum China (09987. HK) has issued an annual letter to shareholders.
According to the shareholder letter, in 2023, Yum China returned a total of US$833 million to shareholders through dividends and share repurchases, a record high, accounting for 75% of the company's operating profit, which also brought the company's total return to shareholders since the spin-off in late 2016 to US$3 billion. The company plans to accelerate its pace and return at least $3 billion to shareholders over the next three years, including $1.5 billion in 2024.
Yum China noted that more than half of the company's new stores in recent years have been located in lower-tier cities. In these cities, not only are labor and rental costs lower, but the average order value is similar to that of high-tier cities, while the flexible store model helps the company reduce upfront investment costs, and its strong in-house supply chain management capabilities and logistics network help the company reach remote areas, all of which give the company a strong competitive advantage.
Despite the growth of Yum China's full-year performance in 2023, the company's operating performance in the first three quarters of last year was not ideal, with revenue and net profit falling short of market expectations.
According to the company's 2023 third quarter report, as of the end of September last year, Yum China's revenue and net profit were US$2.91 billion and US$244 million, respectively, and the restaurant profit margin was 17%, down 1.8 percentage points from 18.8% in the same period last year. As a result, the company's share price fell sharply at that time, falling by nearly 15% in two days (November 1-2, 2023), and the market value loss exceeded HK $22 billion.
As of the close of Hong Kong stocks on April 12, Yum China's share price closed at HK$299.8, down 1.64%, and the company's total market value is about HK$117.886 billion.
Vigorously deploy in lower-tier cities
In a letter to shareholders, Yum China said 2023 was a "milestone year and one of the best performers" for the company.
According to the financial report, in 2023, Yum China achieved total revenue of about US$10.98 billion, a year-on-year increase of 15%, the company's operating profit increased by 76% to US$1.1 billion, core operating profit increased by 79%, and net profit was US$827 million, a year-on-year increase of 87%. Diluted earnings per share were $1.97.
In constant currency terms, Yum China's system sales increased 21% year-over-year in 2023, and core operating profit increased 79% year-over-year, excluding non-comparable factors. During the reporting period, Yum China's restaurant margin reached 16.3%, an increase of 270 basis points from the same period in 2022 and has recovered and exceeded the same period in 2019.
At the same time, Yum China also set a record for net new stores in 2023, with a net new store of 1,697 stores in the year. Among them, KFC had 1,202 net new stores, and Pizza Hut had 409 net new stores, both of which reached a record high. By the end of 2023, the number of KFC and Pizza Hut stores reached 10,296 and 3,312, respectively.
Regarding the outstanding performance in 2023, Yum China said that it is inseparable from the recovery of the consumption environment. Yum China revealed in its financial report that 2023 will be a year for China's economy to pick up after the change in epidemic prevention policies. Yum China is seizing the opportunity of the recovery and continuing to expand, effectively driving demand through flexible innovation and further accelerating expansion.
It is worth noting that in September 2023, Yum China proposed the RGM2.0 strategy, that is, to stabilize the business and continue to expand stores while sending tentacles to the lower-tier markets, and more than half of Yum China's new stores are currently located in lower-tier cities. By the end of 2023, Yum China had a total of 14,644 stores, covering more than 2,000 cities and about one-third of the country's population. According to the company's goal, it is expected to reach 20,000 stores by 2026, covering a population of about 700 million.
Jiang Han, a senior researcher at Pangu Think Tank, believes that Yum China's strategy of laying out the sinking market is a way for the company to cope with market competition. The sinking market has huge potential and room for growth, and Yum China can achieve sustainable development by expanding its market share. However, consumer needs and consumption habits in lower-tier markets may be different from those in first-tier cities, and Yum China needs to adapt and innovate appropriately according to local conditions.
Chen Xiaolong, an investor in the food and beverage and catering industry, said that he is very optimistic about Yum China's layout in the sinking market, and the market of Western-style fast food in the sinking market has been formed, and there have been many brands to cultivate, forming a relatively large customer group, the consumption level of young people in small towns in the sinking market has come up, many people work in big cities, and have a considerable understanding of Yum China's KFC, Pizza Hut and other brands, and this part of the consumer will become the first batch of cornerstone consumers in the sinking market, which will affect the new consumer group.
"Of course, Yum China to achieve development in the sinking market, is not without difficulty, to the most popular fried chicken burger in the sinking market, KFC currently has an average customer unit price of 34.5 yuan, mainly concentrated in the city's shopping mall stores, in the sinking market township store mainly competitors Wallace, Palo burger, shell burger their customer unit price is less than 19 yuan, Yum China to achieve success in the sinking market, but also have to carefully layout. Chen Xiaolong added.
Weak entry into the field of Chinese food
According to Yum China's official website, Yum China operates a number of leading F&B brands in China, including KFC, Pizza Hut and emerging brands Taco Bell, Little Sheep, Huang Ji Huang and Roast Faner. The company has also partnered with Lavazza to explore and develop the Lavazza coffee concept in China.
Although there are many brands, the development of each business is extremely uneven, and the company's revenue and profit contribution mainly comes from KFC and Pizza Hut, which entered the Chinese market in 1987 and 1990 respectively, and have been loved by consumers for many years.
It is worth noting that as a foreign restaurant, Yum China has always wanted to make its own Chinese food brand. However, more than 36 years after entering China, Yum China still seems to have learned how to cook Chinese food.
As early as 2005, Yum China announced its entry into the Chinese food field and launched the KFC Brothers brand "Dongfang Jibai". At that time, Yum China's expectation for Dongfang Jibai was to become a "global brand of Chinese fast food", and the product design covered all meal periods in the morning, noon and evening, as well as special foods such as dim sum and frozen pastry.
In 2011, Yum China expanded its Chinese restaurant layout again, spending HK$4.6 billion to complete the privatization of Little Sheep, realizing control of the hot pot chain.
In April 2020, Yum China announced that it has completed the acquisition of a controlling stake in Huang Jihuang. Immediately after the acquisition, Yum China established the Chinese Food Division, which included three core Chinese food brands: Little Sheep, Oriental Jibai and Huang Ji Huang.
The good times did not last long, and due to the lack of brand effect and scale effect, Yum China's incubation of Chinese food eventually ended in failure. In 2021, Yum China's other segments, including Little Sheep, Huang Jihuang and Dongfang Jibai, generated revenues of only US$474 million, with a restaurant operating margin of -20.8% and an operating loss of US$29 million, a significant increase from -US$9 million in the same period last year.
In 2022, Yum China's only five remaining Chinese fast-food chains, Dongfang Jibai, closed permanently, marking the company's first incubated Chinese food brand, which failed after 17 years.
At present, Yum China's Chinese food brands, including the hot pot chain Little Sheep and the stewed pot brand Huang Jihuang, are still well-known in the industry, but the development is not as expected, and the benefits for the company are even smaller.
In terms of business, in 2023, the KFC segment will achieve revenue of US$8.24 billion, a year-on-year increase of 14.1%, accounting for more than 75% of revenue, while the revenue of the Pizza Hut segment will be US$2.246 billion, a year-on-year increase of 14.6%, accounting for less than 21% of revenue, accounting for more than 95% of Yum China's overall revenue, and the rest is other businesses including Little Sheep, Huang Jihuang, Taco Bell and other brands.
Not only that, Yum China is also largely dependent on KFC in terms of profits, which contributed $1.2 billion in operating profit to the company in 2023, while Pizza Hut only had $142 million, and other businesses even incurred losses.
In this regard, Jiang Han, a senior researcher at Pangu Think Tank, once pointed out that the development of Yum China's Chinese and Western food business is unbalanced, and the incubation of Chinese food business has not been successful, and the creation of the second growth curve in the future needs to start from many aspects. On the one hand, Yum China can strengthen the integration and synergy of Chinese and Western food businesses to enhance the market competitiveness of the entire brand, and on the other hand, Yum China can also explore new growth areas through innovation and investment, such as digitalization and food delivery. At the same time, Yum China also needs to strengthen the management and innovation of its Chinese food business to enhance its market competitiveness. (This article was first published on the Titanium Media APP, author: Chen Weina)