HONG KONG — China’s economy has largely recovered from the pandemic-led turmoil just a year ago, and with it the restaurant business as underscored by Yum China Holdings’ strong first quarter results on Wednesday.
But its earnings reflect a new reality as COVID-19 subsides in the world’s biggest economy: China’s largest fast-food chain growth has been driven mainly by delivery services.
The operator of KFC, Pizza Hut, Taco Bell and other dining chains in China said revenue jumped 46% in the first three months from a year earlier to $2.55 billion, while net profit nearly quadrupled to $230 million. That surpassed the pre-coronavirus period: First quarter revenue and operating profit for 2021 was up 11% and 13%, respectively, from the same period in 2019 — a year before COVID struck.
“Our first quarter results demonstrate the resilience of Yum China,” CEO Joey Wat said during an online earnings call for analysts on Wednesday. However, its results show a shifting pattern, as same-store sales grew 10% from the first quarter of 2020, but are still 6% below the first quarter of 2019.
The company’s upturn was led mainly by two factors: first, the resumption of expanding the number of new stores. There were 315 new-store openings in the first quarter, and the total store count at the end of March stood at 10,725 — with 7,373 for KFC and 2,382 for Pizza Hut.
Second, and the most important factor in driving sales, was food delivery services, which Yum China operates with its own drivers. About 29% of sales at KFC and Pizza Hut came from food delivery, compared with 19% in the first quarter of 2019, while dine-in customer traffic was 13% lower from the same three months in 2019.
Yum has been investing in digitalization in recent years. Digital orders, on mobile apps and other online methods, is now 84% of total sales for KFC and Pizza Hut.
© AP
“Our delivery business is doing fantastically well,” said Chief Financial Officer Andy Yeung. He said that in addition to transitioning toward more ecologically sound food containers, the company is investing in special packaging that will better fit the needs of delivery and take-away. It has become an “increasingly important part of our business,” Yeung said.
Yum has been investing in digitalization in recent years, which has paid off with the shift to delivery. Digital orders, on mobile apps and other online methods, is now 84% of total sales for KFC and Pizza Hut.
New technology, including artificial intelligence, has been introduced to enhance the efficiency of drivers. During the Lunar New Year peak season in February, the company started a driver-sharing arrangement between KFC and Pizza Hut platforms to make better use of its resources.
Consulting firm AlixPartners said on Wednesday that 49% of Chinese consumers have permanently altered their restaurant habits after the pandemic, according to a survey it conducted in January.
“We are seeing a shift in consumers’ concerns and behaviors, with increasing divergence based on culture and locale,” said Li Jian, managing director at the consulting firm. “Although Chinese consumers demonstrate a high level of vaccine optimism following efficient pandemic control and successful vaccine rollout in the country, our report suggested a strong shift to digital channels across the board.”
The consultant polled more than 7,000 consumers across nine countries, including China, mainly on pandemic-related anxieties.
For Yum China, the flip side of its strategy is cost. Paying drivers, maintaining its digital platforms and other investment expenses — including new packaging — all add up. And the company will face other additional cost pressures in the coming quarters.
Given the labor shortage in China, hiring additional restaurant staff — and drivers — is getting more expensive. Meanwhile, various COVID relief measures from the government and landlords — which totaled $6 million in the first quarter — is set to further fade out. Last year, the company received $100 million in government aid.
As China’s economy warms up, prices for commodities — including poultry — are rising, putting potential “inflationary pressure later this year,” Yeung said.
Delivery costs, however, can be alleviated with a more holistic approach. Wat said that by increasing store density in various cities — that is, more restaurants in a smaller geographical area — “then we reduce the average circle of delivery distance.” In order words, the average delivery distance for drivers becomes shorter and thereby lower costs.
Wat also noted the potential impact of total store rental costs if the current pattern persists. “If a store is relying too heavily on dine-in business, the location cannot be compromised too much,” she said. “It has to be a very, very good location. Otherwise, you don’t get the business.”
She said that as the company relies more on delivery and builds more delivery-friendly stores, “we actually open up more opportunities for locations that are at a slightly lower rent, and that’s not a small deal.”
It was not clear whether any of the recent new-store openings fell under that consideration, but food-delivery services clearly have become a crucial source of revenue — accelerated by the pandemic.
Still, dine-in traffic remains Yum China’s core business. While authorities in Beijing praise the government’s control of the pandemic, there are sporadic resurgences in various parts of the country that have an impact on the dining population.
“Consumer behavior still remains cautious,” Yeung said. “We need to continue to expect the recovery… to be nonlinear and uneven.”
He cautioned that the market should not be carried away by the robust first quarter results. “We encourage analysts and investors to do the same,” Yeung said. “That’s why we say the full recovery of our same-store sales will take some time.”
Yum China’s shares in Hong Kong rose 5.4% on Wednesday to close at HK$486.
