Yum China's Low-Price Strategy Thrives Amid Economic Pressures in China

By John Lopez

Mar 01, 2024 01:00 PM EST

Yum China, the operator of popular chains like KFC and Pizza Hut, is successfully navigating economic challenges with its low-price strategy.

Speaking with CNBC, Yum China CEO Joey Wat notes that Chinese consumers are becoming increasingly rational, particularly as rising housing costs in top-tier cities like Shanghai and Beijing eat into disposable incomes.

However, Yum China's barbell strategy, catering to both deal-seekers and those seeking higher-quality fare, has proven effective in maintaining sales growth.

(Photo : PETER PARKS/AFP via Getty Images)
A customer eats Kentucky Fried Chicken (KFC) in an outlet in Shanghai on January 9, 2013. Chinese customers of KFC, the biggest fast food chain in the country, said they would still patronise it despite a government food safety investigation which has hit sales. US-based Yum! Brands Inc., whose portfolio includes KFC and Pizza Hut, said this week that sales in its key China market were forecast to fall more than expected in the fourth quarter in the wake of the probe into excess antibiotic levels in chickens. AFP PHOTO/Peter PARKS

Yum China's Succesful Strategy

Yum China's financial performance reflects the success of its strategy. In the fourth quarter, the company reported a 19% increase in revenue to $2.49 billion, with net profit jumping 81% to $97 million.

This growth trend persisted throughout the year, with annual revenue reaching $10.39 billion and net profit hitting $827 million, marking increases of 14% and 87%, respectively.

Key to Yum China's strategy is offering value for money. The introduction of entry price point products, such as KFC's K-coffee, priced at 9.9 yuan, has resonated well with consumers, leading to a 35% increase in beverage sales in 2023.

Additionally, the company has rolled out new combo products priced around 20 yuan ($2.80) at KFC and meals under 50 yuan at Pizza Hut, targeting slightly higher-end consumers.

Expansion Plans

Yum China's expansion plans focus heavily on lower-tier cities with greater growth potential. Currently, the company operates 14,644 stores, with its leading brands, KFC and Pizza Hut, accounting for the majority.

However, the company plans to accelerate its store openings, aiming to add 1,500 to 1,700 net new stores in 2024 alone. By 2026, Yum China aims to have over 20,000 locations, with half of the growth coming from lower-tier cities.

The company's commitment to enhancing shareholder returns is evident in its plan to allocate a minimum of $3 billion in quarterly dividends and share repurchases over three years. Despite a recent dip in Hong Kong-listed shares, Yum China's positive financial results have buoyed investor confidence, with a 14.8% increase in share price following the latest earnings report.

In addition to its in-house supply chain efficiency, Yum China is also focusing on food delivery as a key growth avenue. Even after the COVID-19 pandemic, food delivery contributed significantly to sales, accounting for 38% of KFC's fourth quarter and 36% last year. The company has adjusted its pricing structure to capture incremental traffic, especially from price-sensitive customers.

While concerns about China's economic slowdown persist, Yum China remains optimistic about the future. CEO Joey Wat highlights the country's ongoing urbanization as a growth driver, emphasizing the opportunities presented by lower-tier cities.

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