Yum China posts record-breaking 2023 results driven by strong system sales and operating profit growth, outpacing industry peers

Yum China (NYSE: YUMC, HKEX: 9987), operator of KFC and Pizza Hut restaurants in China, reported a record-breaking $11 billion in revenue for the full year 2023 with a 21% rise in system sales year-over-year. The company’s robust system sales gains outperformed the double-digit growth experienced by China’s catering industry as a whole for 2023, as restaurants benefitted from the country’s post-pandemic reopening.

Further demonstrating its resilience in China’s competitive quick service and casual dining market, the company also reported an all-time high operating profit of $1.1 billion for the full year excluding special items. The company also grew its restaurant margin to 16.3% in 2023, a 270-basis point year-on-year improvement. Flexible store formats, cost structure rebasing and improved operating capabilities, key components of company’s “RGM 2.0” strategy announced this past September, enabled accelerated store growth while protecting store payback and margins.

In its quarterly earnings call on 7 February, Yum China CEO Joey Wat announced that the company will accelerate shareholder returns to $1.5b in 2024 through increased dividends and share repurchases, in line with its goal to return $3b to investors over the next three years. In 2023, the company distributed $833mn in dividends and buybacks.

“2023 was a pivotal year for Yum China. Not only did we demonstrate our resiliency and build strong capabilities during the pandemic, we also captured opportunities emerging from China’s reopening in 2023. For the year, we continued to outperform the industry and set new records for our top and bottom lines,” Wat said.

The company’s continued rapid store growth, together with robust same-store sales growth and transaction growth, were key drivers of system sales. The company opened a record 1,697 net new stores in 2023, expanding its total store count to 14,644 by year end. Both KFC and Pizza Hut reached major expansion milestones during the year, exceeding 10,000 stores and 3,000 stores in China respectively.

Same-store sales also grew 7% for the year, fueled by a 12% increase in transactions. Innovative menu items, strong value for money and effective digital channels helped the company capture over 1.7 billion transactions in 2023. The company grew its digital loyalty programs to over 470 million members, who contributed a record 65% of total sales.

K-COFFEE, KFC’s coffee category, saw 35% growth for the year, selling over 190 million cups nationwide. KFC also expanded its 20 RMB entry-price combos, enabling the brand to capture expanded sales from underserved customer segments. Successful KFC product categories, such as the Juicy Whole Chicken and new Beef Burgers, also helped to drive sales growth, contributing roughly 6% of the brand’s sales, more than its classic Original Recipe Chicken.

On the earnings call, Wat reassured investors that introducing more lower price points would not substantially affect restaurant ticket average over the long term. She explained that ticket average for KFC has remained stable over the past five years, and that premium-priced products, such as KFC’s Wagyu Beef Burger, are also being added to menus to satisfy consumers’ diverse tastes. “If we want to open more stores and become more mass-market, we need to have products and price points to cater for our incremental customers,” she said.

Currently serving just one-third of China’s population, the company has ambitious goals to open 20,000 stores and reach half of the country’s consumers by 2026. In 2023, over half of Yum China’s new store openings were in lower-tier cities, as the company aims to capture rising demand as customers in those markets upgrade their consumption behaviors.

Looking ahead to 2024, Wat emphasized the company remains very positive about China’s vast growth opportunities. The company anticipates opening 1,500 to 1,700 net new stores in 2024 while maintaining healthy store payback at 2 years for KFC and 3 years for Pizza Hut.

“Leveraging our distinctive strengths, including brands deeply ingrained in China, remarkable agility and robust operational execution, we are well-positioned to achieve our growth targets for 2024-2026 and deliver excellent returns to our shareholders through increased cash dividends and stepped-up share buybacks,” Wat said.

As the Chinese New Year peak season approaches, the company is preparing to drive holiday traffic with exciting menu items, toys and games. KFC is again featuring its wildly popular Golden Bucket with an auspicious and down-to-earth new year greeting, 快发财, a popular Chinese saying meaning “get rich soon.” Pizza Hut is launching 18 new menu items during the holiday season, including Wagyu Beef Pizza.

“Although consumers are more rational and price-sensitive in the current economy, there is a strong desire to indulge, especially during holidays,” Wat added. “Our enticing offers are designed to generate excitement and attract traffic. I eagerly anticipate this vibrant trading period.”