While economists and investors express concerns about China’s low consumer confidence and sluggish economic growth, Yum China’s CEO, Joey Wat, believes that the Chinese consumer has been growing more rational over the years.
Yum China, facing investor worries about the broader Chinese economy, has seen a 27% decline in its shares over the past year, bringing its market value down to $17.51 billion.
In contrast, Yum Brands, which spun off the Chinese unit in 2016 and has a global presence, witnessed an 8% increase in its stock, resulting in a market value of $38.87 billion.
Despite these challenges, Yum China has reported growing sales. In the fourth quarter, the company’s revenue increased by 19% to $2.49 billion, driven by the opening of new stores.
CEO of Yum China (Credits: Fortune)
Same-store sales for the period rose by 4%, exceeding estimates. While Wat acknowledged the restaurant industry’s recovery from the COVID-19 pandemic, she also highlighted a more significant shift in consumer behavior.
Wat stated that the Chinese consumer has become more rational, particularly in top-tier cities like Shanghai and Beijing, where rising housing costs have impacted disposable income.
However, in lower-tier cities such as Chengdu, Yum China is experiencing stronger sales growth due to more affordable housing and increased consumer spending power. Yum China’s business model is successful not only in top-tier cities but also in tier five and tier six cities, Wat emphasized.
The majority of Yum China’s current footprint consists of KFC locations, with the company also operating Pizza Hut restaurants and Lavazza coffee shops. While some consumers are cutting back, others are upgrading their spending habits, making subtle shifts in their choices.
Yum China employs a barbell strategy at KFC, offering both value deals and higher-quality fare to attract a diverse range of diners. For example, the company sells a budget-friendly chicken breast sandwich alongside a more premium Wagyu beef burger.
A similar strategy is implemented at Pizza Hut, where only about 30% of sales come from pizza. The chain introduces cheaper pizza options to attract deal-seeking customers while building market share in the pizza category.
Additionally, popular non-pizza options like steak distinguish Pizza Hut from competitors, especially in lower-tier cities where dining choices may be limited.
Yum China has been strategically expanding in lower-tier cities, aiming to capture consumers with higher disposable incomes. With a footprint of over 14,600 restaurants, it is currently the largest restaurant company in China, with plans to exceed 20,000 locations by 2026.
Concerns about China’s economic growth persist, with both the World Bank and the International Monetary Fund forecasting a slowdown in 2024.
Weakness in China’s real estate sector and softer global demand are cited as contributing factors. Beijing is expected to announce its annual GDP target at an upcoming parliamentary meeting.
