The COVID pandemic continued to impact Yum China’s operations and results in the third quarter. Despite the challenging environment, the company grew system sales in the quarter by 5% year-over-year and outpaced the 2% national restaurant industry average for the period. Along with sales recovery, the company also posted impressive margins. Yum China’s restaurant margin surged 6.6pp year-over-year to 18.8%, the highest since 2018. Positive margin drivers include higher productivity, sales leveraging and temporary relief.
One of the positive takeaways from the company’s third quarter earnings is the sequential recovery and relatively strong performance of Pizza Hut. Pizza Hut’s transformation in recent years was reflected in broad based improvements in the third quarter, with same-store sales growing 2% year-over-year and same-store traffic growing by 2%. Meanwhile, in the third quarter, Pizza Hut delivered solid restaurant margin of 13.4% and recorded $49 million operating profit, which is more than double of the same period last year.
Yum China has resumed its strong pace of store openings with 621 net new stores year-to-date. Pizza Hut also continued its fast pace of expansion in the third quarter. Pizza Hut’s 95 net new builds was the highest quarter since Pizza Hut’s revitalization plan commenced a few years ago, while Pizza Hut’s store payback of 3 years also offers reason for optimism. It is worth noting, that over 50% of Pizza Hut’s new store openings this year are either smaller or satellite stores, which are especially suitable for lower tier cities.
Pizza Hut has made significant progress in strengthening its business fundamentals and building a more resilient business model. For example, Pizza Hut’s off-premise business has become much stronger in recent years, now contributing 50% of sales, up from 30% before the pandemic. Additionally, leveraging Yum China’s digital capabilities to streamline restaurant efficiency, Pizza Hut’s table-side mobile ordering sales have grown exponentially from just 2% at its launch in 2018 to 45% in the third quarter. This is helping Pizza Hut mitigate rising wage inflation and frees up crew members to enhance customer service.
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.
Looking to the future, there are over 1,000 Chinese cities that Pizza Hut has not yet entered. The white space opportunity for Pizza Hut remains significant and expansion prospects look promising. This also bodes well for Yum China’s other emerging brands such as Taco Bell and Lavazza, that also have ambitious plans for the China market.
Yum China, the operator of popular fast-food chains KFC, Pizza Hut, and Taco Bell in China, has recently posted impressive margins, indicating a strong recovery from the pandemic-induced economic slowdown.
Despite the challenges posed by the pandemic, Yum China’s total revenue increased by 34% year-on-year in the first quarter of 2021, reaching $2.56 billion. The company’s net earnings also rose by 30% to $272 million during the same period.
One standout performer in Yum China’s portfolio is Pizza Hut, which has been experiencing a strong resurgence. Pizza Hut’s same-store sales surged by 19% in the first quarter of the year, highlighting the brand’s successful strategy of launching new menu items and promoting delivery services.
Notably, Pizza Hut’s delivery business in China has grown significantly during the pandemic, with the brand leveraging its strong digital capabilities to reach customers. The company’s mobile app and delivery platform have proven to be crucial assets in driving sales, especially in the current environment where more people are opting for delivery services.
Moreover, Pizza Hut has made efforts to cater to the evolving tastes of Chinese consumers by introducing new menu items that combine local flavors with the brand’s signature offerings. For instance, the brand recently launched a line of “mala” pizzas, which feature the popular Sichuan spice, and has also introduced a range of plant-based options to cater to the growing demand for meat-free products.
Overall, Yum China’s impressive margins and Pizza Hut’s strong performance indicate that the company is well-positioned to ride out the challenges posed by the pandemic and capitalize on the recovering economy in China. As the company continues to invest in digitalization and innovation, it is likely to maintain its competitive edge and drive growth in the coming years.
