Yum China Sets a High Bar in the World's Most Populous Country
Yum China (NYSE: YUMC) recently released its full-year results from 2017, showing continued improvement in same-store sales and new location openings. The chain has had a great run since spinning off from Yum! Brands (NYSE: YUM) back in late 2016. It's not just momentum from China's economy that's benefiting Yum China right now -- the restaurant chain's strategy is a winner and provides a road map to growth for years to come.
First, 2017 in review
Metric | 2017 | 2016 | Year-Over-Year Change |
|---|---|---|---|
Revenue | $7.14 billion | $6.75 billion | 6% |
Operating Profit | $785 million | $640 million | 23% |
Earnings (Loss) per Share | $1.01 | $1.36 | (26%) |
Same-Store Sales Growth | 4% | 0% | N/A |
Chart by author. Data source: Yum China quarterly earnings.
Growth accelerated in the last quarter, with revenue and operating profit increasing 13% and 23%, respectively. The big boost is twofold: new location openings and increasing foot traffic at existing ones. Over the course of 2017, Yum China opened nearly 700 new KFCs, Pizza Huts, and other local brands native to the Chinese market. Total store count at year end was 7,983. Two new Taco Bells were also opened, the brand's first foray back into China in many years.
The only negative in the report was a year-over-year decrease in the bottom line. The culprit was U.S. tax reform, which caused Yum China to take a one-time charge of $164 million in the fourth quarter to repatriate cash, decreasing earnings per share by $0.42. Excluding one-time items, earnings would have notched an 11% increase.
The path forward is pointing up
Since gaining independence in late 2016, Yum China has focused on bringing its KFC and Pizza Hut restaurants into closer alignment with the Chinese consumer. The former Chinese segment of Yum! Brands struggled, with blame being laid on the chain's inability to customize its experience to the unique culture of its market. In a very short time, Yum China has been able to turn that around, and the numbers prove it.
The Oriental Pearl Tower in Shanghai last year celebrating KFC's 30th anniversary in China. Image source: Yum China.
The menu at KFC was an easy fix, as fried chicken is already a favorite in the country. Pizza Hut, on the other hand, has been a different story as pizza doesn't carry the same favored status as it does in the U.S. The stores are also advertised as an upscale dining experience, adding a challenge to the mix. The company is continuing to tweak the menu and improve the quality of the food to lure diners back. Those efforts are just beginning to yield results, though, as same-store sales at the pizza chain notched only a 1% improvement in 2017 after a 7% decrease in 2016.
Digital ordering, delivery, and catering also are very important parts of people's lives in China's bustling cities. As a result, use of ordering and payment apps is much more common than it is here in the U.S. Therefore, it's also part of Yum China's growth strategy. Mobile payments made up 53% of total sales in the fourth quarter, and delivery accounted for 14%.
While pushing those initiatives has been key, management thinks it can do better. To that end, promoting its rewards programs for KFC and Pizza Hut has been one area of focus. At year end, KFC had 110 million members and Pizza Hut 35 million. Those are big numbers -- and still growing -- but the fact that China's population is 1.4 billion provides some perspective. Yum China has a lot of room to run.
To mark a new chapter in its history, current CEO Micky Pant will be passing the baton to current COO Joey Wat on Mar. 1. The company thinks that Wat's experience on the operations side will go a long way toward helping business expand with digital integrations and the strong pipeline of new store openings.
The Chinese restaurant industry poses unique challenges not found in the U.S. However, Yum China is showing companies a way forward. Its early initiatives are proving successful, and it's growing its lead over other restaurant chains in the country. With so much of the market still untapped, Yum China has bright prospects.
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Nicholas Rossolillo owns shares of Yum China Holdings, Inc. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
