The COVID pandemic continued to impact Yum China’s operations and results in the third quarter. Meanwhile, downward pressure on the economy and cautious consumer spending created significant challenges for the company.
However, despite the complex environment, Yum China demonstrated resilient performance in the third quarter. The company’s operating profit increased 77% year-over-year to $316 million from $178 million and system sales grew by 5% year-over-year, outpacing the 2% national restaurant industry average for the same period.
Morgan Stanley said in an analyst note following Yum China’s third quarter earnings that, “The company has the ability to leverage product innovation, effective marketing campaigns and strength in delivery services to drive the sales recovery with several waves regional Covid resurgence.”
Yum China’s Innovation
Yum China has achieved this by constantly adapting and innovating. Steps to strengthen the company’s business fundamentals and efforts to improve its cost structure make the company more nimble and efficient. This enables Yum China to offer great value to customers without sacrificing profitability.
Product innovation is an area where Yum China is particularly strong, and the company is constantly launching new products to satisfy customer cravings. Yum China’s in-house and tailor-made supply chain management system empowers the company to innovate impressive new products and launch at scale with great speed.
Yum China’s supply chain team provides a core strength, helping secure supply at scale, streamlining production and optimizing costs, which has been key to partially mitigating the impacts of high commodity prices.
In the past two years, the company has established strong presence in new categories such as beef burger, whole chicken and durian pizza, capturing meaningful market share in the process.
The Third Quarter Promotion Period
Among the company’s recent product innovation success stories are KFC’s extra juicy beef burgers, with over 100 million burgers sold since being added to the permanent menu in May 2021, and KFC’s entry-priced golden SPA chicken breast burger – its first successful chicken breast burger.
UBS commented on KFC’s extra juicy burger in an analyst note following Yum China’s third quarter earnings saying that, “Innovation and scalable capabilities have been revealed by the success of beef burger. R&D initiated since 2019, beef burger (launched in May 2021) now contributes to 3-4% of KFC’s sales as an essential menu component.”
KFC’s juicy whole chicken has also gained popularity since its launch in late 2021, with whole chicken proving to be versatile product, good for both dine-in and take-home consumption. To optimize costs, KFC also uses a different breed of smaller chicken that is more cost effective and the perfect size for an individual meal.
Meanwhile, enabled by Yum China’s powerful supply chain, Pizza Hut have been innovating new products to satisfy customer savings. For example, durian pizza has become a customer favorite. In fact, during Pizza Hut’s third quarter promotion, one in every four pizzas sold was a durian pizza.
Pizza Hut has also taken steps to keep its brand appealing to youthful customers. In September, select Pizza Hut stores were transformed into social hubs for gamers, partnering with the popular RPG game, Genshin Impact.
Pizza Hut decorated stores, outfitted restaurant crews and offered exclusive gifts. The campaign generated extraordinary social buzz. In just 3 minutes, Pizza Hut sold over 300,000 themed combo meals, and Pizza Hut’s Super APP recorded its highest activity ever.
As consumers become more value conscious, Yum China’s strategy is to drive traffic with attractive value. KFC’s Crazy Thursday campaign – launched in 2018 – continues to be popular and generate a significant boost to sales every Thursday. In addition, KFC’s recently launched Sunday Buy More Save More campaign is helping to attract weekend family traffic.
Yum China remains confident in its business fundamentals and ability to capture growth opportunities, even during challenging times.
