A KFC restaurant in Wuhan, China.
Source: Yum China
While economists and investors worry about low consumer confidence and slow growth in China, Yum China CEO Joey Wat says that the Chinese consumer is becoming increasingly rational – and that has been the case for years.
Fueled by investor concerns about the broader Chinese economy, Yum China shares have fallen 27% in the past year, dropping its market value to $17.51 billion. For comparison: Licensor Yum brandswhich spun off its Chinese arm in 2016 and has a global footprint, has seen its own shares rise 8%, reaching a market value of $38.87 billion.
Despite the concerns on Wall Street, Yum China's turnover is growing. In the fourth quarter, the company's revenue rose 19% to $2.49 billion, fueled by new store openings. Same-store sales rose 4% during the period, exceeding StreetAccount estimates of 3.3%. Which pointed to the restaurant industry's strong recovery from the Covid-19 pandemic, but also recognized a larger consumer shift.
“I think Chinese consumers have become more rational in recent years,” she told CNBC.
Housing costs in top cities like Shanghai and Beijing have become even more expensive in recent years, putting pressure on consumers' disposable incomes, Wat said. But in lower-tier cities such as Chengdu, Yum China is seeing stronger sales growth as housing is cheaper and consumers have more money to spend.
Cities in China are often classified into tiers based on factors such as population and gross domestic product, although there is no official classification system.
“We have a very good business model, not just in a top-tier city, but all the way up to the fifth and sixth cities,” Wat said.
Joey Wat, CEO of Yum China Holdings Inc., during a Bloomberg Television interview in Xi'an, China, on September 15, 2023.
Qilai Shen | Bloomberg | Getty Images
The vast majority of Yum China's current footprint consists of KFC locations, but the company also operates Pizza Hut restaurants and Lavazza coffee shops. China is KFC's largest market and Pizza Hut's second largest.
While some diners in China have cut back, others are increasing their spending, switching from instant coffee to KFC's sparkling coffee, for example.
“There is a consumption upgrade happening over the long term and in a subtle way,” Wat said.
At KFC, Yum China has used a barbell strategy to attract diners looking for deals and those looking for higher quality dishes. For example, the company sells a chicken breast sandwich for less than $2, as well as a Wagyu beef burger.
Yum China uses a similar strategy at Pizza Hut. Only about 30% of Pizza Hut's sales in China come from actual pizza. The chain is introducing cheaper pizza options to appeal to the bargain hunter and build market share within the pizza category.
One of Pizza Hut China's other popular entrees is steak, which sets it apart from the competition.
“In a top city you can choose from different steakhouses,” says Wat. “Go to level two, level three, level four city, and Pizza Hut may be the only choice.”
Yum China has built about half of its new stores in lower-tier cities in recent years, hoping to attract consumers with higher disposable incomes. The company has a footprint of more than 14,600 restaurants, making it the largest restaurant company in China. The company wants to have more than 20,000 locations by 2026.
The World Bank and the International Monetary Fund both predict that China's economic growth will slow in 2024, citing weakness in the country's real estate sector and weaker global demand. Beijing will unveil its annual GDP target at a parliamentary meeting starting Tuesday.
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