Still Huge Growth Potential For KFC In China

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A key theme emerging from Yum China’s (NYSE:YUMC) recent Investor Day event, hosted in Xi’an, was the company’s confidence in the huge growth potential for its brands in China. Significantly, during the event, the company’s leadership announced an ambitious goal of reaching 20,000 stores by 2026. For reference, Yum China shared that it has 13,602 stores at the end of the first half of 2023.

While all Yum China’s brands will have an important role to play in making this goal a reality, a significant amount of this expansion will need to be contributed by KFC, which is already deeply embedded in China and a firm favourite among Chinese consumers, having opened its first China store in 1987. Today, KFC operates over 9,500 restaurants in more than 1,900 cities across China, handling more than 1 billion transactions annually. Meanwhile, KFC’s membership program – standing at 410 million registered members and counting – and various digital store formats, are important competitive advantages.

Despite KFC’s impressive existing footprint, Yum China still sees huge growth potential for KFC in China, disclosing that there are 1,100 more cities that are ripe for KFC expansion goals, and that KFC is in the process of identifying the right locations. KFC expects its annual net new stores in China to exceed 1,200 in the coming years, and the key factors that KFC looks at when considering possible new cities or towns include economic growth, new store formats, and restaurant unit economics.

Speaking at the Investor Day event, KFC’s General Manager, Warton Wang said, “Considering China’s population size and the large number of cities, we see huge growth potential. KFC’s market share in China’s quick service restaurant (QSR) market is around 5%, while the market share of the other top 10 brands combined is less than 10%.”

In the past five years, KFC has averaged 22% annual growth in net additions of new stores. This has been possible in part due to a variety of new store models, which allows KFC to cater to diverse customer preferences, adapt to location constraints, align with regional preferences, and improve operational efficiency.  Concurrently, KFC has continued to optimize its investment in new stores, with the new store opening payback period remaining consistent at around 2 years. Notably, first-year cash margins of KFC’s smaller store models are about 21%, higher than overall new store performance.

This type of flexible store models requires lower upfront investments than standard stores, therefore unleashing significant growth potential for KFC. KFC has also been achieving increased efficiency through new technology, such as in-store IoT, automatic cleaning devices, automatic order replenishment systems, and shared labor scheduling systems.

Another major driving force to accelerate KFC’s store openings is franchising including channel franchising and targeting of lower tier cities and remote areas. In a report following Yum China’s investor day, UBS noted, “The emphasis on franchise model was also mentioned for the first time as management now has stronger confidence in food safety control leveraging on digitalized full supply chain management capabilities.” There are also many exciting opportunities for KFC to expand its consumer base, such as targeting college students and small-town youth while also recognizing opportunities with value-conscious and elderly customers.

Warton Wang added during the Investor Day event, “There are several drivers propelling KFC sales growth. Our products are first and foremost, especially our main dishes. The KFC restaurant brand’s mainstay is meals. The variety of food we offer not only affects our consumer base but also impacts consumption frequency.” Some of the drivers being referred to by Warton include, continuing to add new food categories to attract more consumer groups, diversifying the price range of its food so that consumers can choose from a variety of price options, and continuing to research and develop innovative food choices tailored to consumers in China.

The KFC brand will soon open its 10,000th store in China. Looking ahead, the future looks bright for KFC, and it remains well placed to maintain its position as the largest and most powerful brand in the quick service restaurant industry in China.

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