Yum China Holdings, which operates KFC and Pizza Hut in mainland China, surpassed analysts’ earnings forecasts due to its effective low-price strategy, boosting sales and market share in the second quarter.
The company reported a net profit of $212 million for the April to June period, a 7% increase from the previous year. This profit exceeded the median forecast of $190 million by Bloomberg analysts by 11.6%. Revenue also grew by 1% year on year, reaching $2.68 billion.
Yum China’s shares, listed in Hong Kong, surged by 10.6%, closing at HK$252.80.
“Our focus on value-for-money and innovative products drove strong same-store transaction growth,” CEO Joey Wat stated.
“We improved operational efficiency, stabilized restaurant margins, and expanded our operating margin year over year.”
Concerns about a slowing economy, job prospects, and wages have discouraged mainland consumers from dining out since China’s reopening post-COVID-19 in the first quarter of 2023. The economy grew by 4.7% in the second quarter compared to the previous year, which was lower than the 5.08% growth forecasted by Wind, a Chinese financial data provider, and the 5.3% growth in the first quarter. Retail sales in June grew by only 2% compared to the 3.7% growth in May, marking the slowest pace since China lifted its COVID-19 restrictions.
In response to the weak consumer market, Yum China led the charge among major restaurant chain operators to adjust pricing strategies in early 2024. This move resulted in a 13% year-on-year increase in transactions from April to June, though same-store sales fell by 4% during the same period.
“Consumers, especially middle- and low-income earners, are more cautious with spending. Leading brands like KFC and Pizza Hut need discounts and promotions to drive sales growth,” said Chen Xiao, CEO of Shanghai Yacheng Culture, a marketing and branding company. “Big-name chains offering attractive prices can lure budget-conscious customers away from smaller rivals, gaining market share but facing reduced profit margins.”
KFC’s restaurant margin fell by 0.6 percentage points year on year to 16.2% in the second quarter due to discounts and wage inflation, according to Yum China. Conversely, Pizza Hut saw its restaurant margin rise by 1.1 percentage points to 13.2%, thanks to improved operational efficiency despite increased value-for-money offerings and higher salaries.
Yum China’s total store count reached 15,423 by the end of June, with 401 new outlets added in the second quarter. The company had previously announced that 30% of its 1,500 to 1,700 new outlets for the year would be in lower-tier cities and strategic locations such as transport hubs and tourist destinations.