Yum China confident to continue rapid store expansion following record 2023 system sales growth and operating profit


Mohit Kamboj

Yum China (NYSE: YUMC, HKEX:9987), operator of KFC and Pizza Hut in China, reported record-breaking full year 2023 results including $11 billion in revenues, 21% year-on-year system sales growth and $1.1 billion in operating profit excluding special items.

Robust system sales were attributed to a record 1,697 net new stores opened in 2023, along with 7% same-store sales growth, which was fueled in part by a 12% increase in transactions. Yum China’s system sales gains outperformed the catering industry’s overall growth rate in 2023, which rose by double digit figures as restaurants rebounded following the country’s post-pandemic reopening.

Based on its continued strong performance and resilience in the market, Yum China announced it is planning to open 1,500 to 1,700 net new stores in 2024, on track with its previously announced plan to achieve 20,000 stores across China by 2026. As of the end of 2023, the company operated 14,644 stores including 10,296 KFC stores and 3,312 Pizza Hut stores.

In addition to new store openings, the company has set ambitious targets to grow system sales and operating profit by high single-digit to double-digit CAGR, and EPS by double-digit CAGR from 2024 to 2026 using 2023 as the base year in constant currency.

Speaking to investors on the company’s quarterly earnings call on 7 February, Yum China CEO Joey Wat emphasized that the way forward to deliver on its growth targets is to reach underserved populations in China’s lower-tier cities, who now have higher disposable incomes.

“China is vast, with significant regional and city-tier differences. In lower-tier cities, urbanization and consumption upgrade are presenting attractive opportunities for us. With lower living costs, consumers in these cities have significant purchasing power for our products,” Wat explained.

Currently, KFC only serves around one-third of China’s population, operating in 2,000 cities across China. Yum China is tracking an additional 1,000 cities for KFC to extend its reach to half of the country’s population by 2026, with even larger white space seen for Pizza Hut.

“Over half of our new stores in recent years are in lower-tier cities. These stores have performed well, benefitting from lower labor costs and rent. And, the ticket average is as good as in higher-tier cities,” Wat added.

On the earnings call, Wat pointed to strong 2023 growth in new shopping malls across China as further evidence that a significant number of consumers are upgrading – rather than downgrading – their consumption. “In 2023 alone, there were around 400 new shopping malls opened – not a small number – and two-thirds of them opened during Q3 and Q4,” she said. We’re happy to report that our shopping mall location stores are trading better than the rest, apart from tourist and transportation locations.”

As the company looks to further expand into new markets in every province and region across China, strong capabilities developed over the past several years will help it achieve its mission. Firstly, flexible store formats with lower upfront investment open up more site potential across city tiers. Secondly, cost structure rebasing, with a majority of leases based on flexible rents, has lowered the company’s rent ratio to the lowest level in the past 10 years. Thirdly, AI-enabled digital tools allow the company’s restaurant managers to oversee multiple stores without compromising quality. Lastly, strategic franchise partnerships allow Yum China to gain access to locations that were beyond its reach before, such as highway service centers.

“Our achievements [in 2023] were made possible by the transformations we implemented in our fundamental capabilities, ranging from flexible store formats and food innovation at scale, to superb supply chain management and industry-leading AI applications,” Wat said. “We have showcased our expertise and agility to navigate diverse market conditions. Acknowledging the high expectations our shareholders hold for us, we in turn set equally high standards for ourselves. We are fully committed to our 3-year growth targets and generating long-term, sustainable value for our shareholders.”