Yum! China's multiple indicators hit new historical highs in the second quarter.
On August 6, KFC and Pizzahut China chain store operator Yum! China (9987.HK, NYSE: YUMC) released their financial reports for the second quarter and the first half of 2024. According to the financial report, Yum! China's total revenue, operating profit, and amortized profit per share in the second quarter all reached a historic high in the second quarter.
Among them, the second quarter achieved a revenue of 2.679 billion US dollars, a year-on-year increase of 1%, and a total revenue increase of 4% excluding the impact of foreign currency; Net profit of 212 million US dollars, a year-on-year increase of 8%; The operating profit increased by 4% to 266 million US dollars. In the first half of 2024, Yum! China achieved a revenue of 5.637 billion US dollars, a year-on-year increase of 1%; Operating profit decreased by 5% year-on-year to 640 million US dollars; Achieved a profit of 499 million US dollars, a year-on-year increase of 3%.
Yum China Financial Data
Qu Cuirong, CEO of Yum China, stated in the financial report that in 2024, Yum China achieved its highest profit in the second quarter since its split listing. Despite facing a challenging industry environment, Yum China's core operating profit still increased by 12%. The company focuses on providing cost-effective and innovative products, and has achieved good results, driving strong growth in same store transaction volume. Positive measures have also been taken to improve operational efficiency, stabilize the restaurant's profit margin, and achieve an increase in operating profit margin.
On August 6th, Yum! China Hong Kong Stock (9987. HK) rose more than 11% during trading and closed up 10.59%; Yum China's US stock market (NYSE: YUMC) rose over 2% after trading.
Yum China: 9.9 yuan discount for more competitive coffee
Yum! China's food delivery sales revenue has maintained double-digit growth over the past decade. According to the financial report, the takeaway revenue in the second quarter increased by 11% year on year, accounting for 38% of the revenue of KFC and Pizzahut restaurants.
At the same time, the digital transformation has also brought about changes in the income structure. The financial report shows that in the second quarter of 2024, digital order revenue reached 2.2 billion US dollars, accounting for about 90% of restaurant revenue. In addition, Yum! Brands' user stickiness and influence in China have further improved. The total number of members of KFC and Pizzahut has exceeded 495 million, accounting for more than 65% of the sales of members.
In the complex market environment, Yum! China will continue to promote long-term sustainable development through store expansion, product innovation, market expansion, and model innovation, "Qu Cuirong said during the conference call.
KCOFFEE, which is more in line with the younger consumer group, has achieved new expansion in market share. It is reported that in the first half of 2024, KCOFFEE sold nearly 120 million cups, a year-on-year increase of 36%, and sales exceeded 1 billion yuan, a year-on-year increase of 26%. Qu Cuirong mentioned during the earnings call that KCOFFEE has adopted a different business model from before, and the 9.9 yuan discount coffee has helped Yum! Brands become more competitive in the market.
KFC's "Kenyue Coffee" and Pizzahut WOW stores have also broken through the original business model. During the conference call, Qu Cuirong stated that Kenyue Coffee and WOW stores have brought incremental profits and demonstrated enormous future potential. The breakthrough in business model has enabled Yum China to expand its target market and expand into more consumer scenarios.
It is reported that KCOFFEE is sold in all KFC stores, and Kenyue Coffee, which stands shoulder to shoulder with KFC restaurants, has increased from just over a hundred stores in March to nearly 300 stores in July this year, about tripling in number. It is expected that by the end of this year, the number of Kenyue Coffee stores will expand to 500 to 600, in order to occupy more coffee market share.
Pizzahut WOW stores, which focus on "food for one person" and pay attention to cost performance, have also seen significant growth in sales. Since the opening of the pilot stores in May this year, by the end of July, Pizzahut had transformed more than 100 existing stores into WOW store mode, and the first batch of new stores saw significant growth in same store sales. Pizzahut is accelerating the promotion of the WOW store model. It is expected that the number of WOW stores will more than double by the end of this year.
Market competition intensifies: "high cost-effectiveness" and store sinking have become mainstream
According to the financial report, Yum! China's same store sales in the second quarter reached 96% of the same period last year's level, and the same store transaction volume increased by 4% year-on-year.
However, in the first half of this year, the profit margins of KFC and Pizzahut's restaurants declined year-on-year. Among them, KFC's profit margin has decreased from 19.9% in 2023 to 17.8%. Pizzahut's restaurant profit margin will be reduced from 13.3% in 2023 to 12.8%.
KFC Financial Data
Pizzahut Financial Data
Excluding items that affect comparability at the restaurant level in the second quarter, KFC's restaurant profit margin was 16.2%, a decrease of 60 basis points compared to the high base restaurant profit margin in the same period last year. This was mainly due to the addition of cost-effective products to drive foot traffic growth and wage cost increases, partially offset by favorable raw material prices and operational efficiency improvements. The profit margin of Pizzahut's restaurant in the second quarter was 13.2%, a year-on-year increase of 110 basis points. The increase in operating efficiency offset the impact of the increase in cost-effective products and wage costs, thus improving the profit margin.
Whether it is KFC, Pizzahut, McDonald's, Burger King, western fast food chains are competing to launch low price promotions, and "cost performance" has become the key word of industry development in recent two years.
During the earnings call, the CFO of Yum! Brands China stated that the company's initiatives to "drive sustainable growth" and "protect profits" launched in the fourth quarter of last year have begun to show results. Although the current market conditions have affected same store sales, the company's stable profit growth is driven by healthy traffic. Yum China attracts new customers and gains more opportunities from existing customers by expanding its price range and offering delicious food at affordable prices.
Qu Cuirong also pointed out in the financial report that KFC has successfully increased its market share on the food delivery platform by expanding its price range and reducing delivery costs.
From the perspective of other companies in the industry, due to fierce market competition, McDonald's' same store sales in the Chinese market have declined in the second quarter. Burger King also launched a series of low price promotions in the first half of this year, benchmarking KFC and McDonald's. In addition to pursuing cost-effectiveness, expanding into lower tier stores has also become one of the main measures for Western style fast food chains to seize the market.
According to Yum China's financial report, as of June 30, 2024, Yum China's total number of stores reached 15423, including 10931 KFC stores and 3504 Pizzahut stores.
Specifically, in the second quarter, Yum! Brands China added a net of 401 new stores, with an average of over 4 new stores added per day, of which 25% were franchise stores. Among them, KFC added 328 stores in the second quarter, accounting for 23% of the total, and Pizzahut added 79 stores.
"At present, the new store continues to maintain a good return on investment. KFC's payback period will be stable at two years, and Pizzahut's payback period will be shortened to two to three years." Qu Cuirong pointed out on the conference call that the Mini store model of KFC town is helping KFC further unlock low-end cities. Currently, more than half of Yum China's new stores are located in lower tier cities. The flexible new store model enables effective penetration at different city levels and strategic locations, which will be the main strategy for current store expansion.
In its financial report, Yum! China's annual performance guidance remains unchanged, with a projected net addition of 1500 to 1700 stores in 2024, capital expenditures of approximately $700 million to $850 million, and a record breaking $1.5 billion in quarterly cash dividends and stock buybacks to shareholders.