Yum China (YUMC)'s strong second quarter earnings highlighted its ability to drive sales growth in both dine-in and delivery while raising store operational efficiency to consistently improve margins.
The company achieved record high Q2 revenues of $2.65 billion, representing 25% year-over-year (y-o-y) growth, despite a period of soft sales in May amid a wave of COVID infections across China.
System sales across the company's more-than-13,000 restaurant portfolio rose 32% y-o-y. Same-store sales growth contributed to the solid performance, rising 15% and 13% for Yum China's largest chains, KFC and Pizza Hut, respectively.
Savvy promotions and robust operational and supply chain resilience, combined with innovative new food items, allowed the company to successfully capture sales in the quarter. KFC collaborated with Sanrio, maker of Hello Kitty, to feature toy collectibles in kids meal sets during Children's Day holiday on June 1st, breaking sales records with nearly 3 million sets sold. In April, Pizza Hut ran a 2-million-set-selling limited time offer promotion with gaming company Genshin Impact.
In addition, KFC's popular Crazy Thursdays promotion continued to be a tremendous draw, driving 50% more sales than other weekdays. Pizza Hut's Scream Wednesdays, offering pizza, steak, appetizers, and other meal choices at bargain prices of US$3 to $5, also significantly boosted sales and traffic. Offering prepaid discount vouchers through third-party platforms, such as Douyin (China's version of TikTok) and food-ordering app Meituan also helped to fuel sales traffic.
Loyalty programs also remained a key revenue growth engine. The company boasts one of the world's largest loyalty member bases, with over 445 million registered members, nearly one-in-three people in China. Member orders make up a staggering 66% of overall sales. Improved digital experience through KFC and Pizza Hut's online apps and exclusive member-only deals were factors in achieving this high member-order ratio.
At the same time, Yum China has continued to strengthen its bottom line. Operating profit for Q2 tripled that of the prior year to hit $257 million, also a record for the second quarter. Restaurant margin reached 16.1%, a 400 basis-point gain y-o-y. Occupancy and other expenses improved significantly, primarily due to sales leveraging and ongoing benefits of cost structure rebasing efforts. In the past few years, the company has been adapting more flexible and lower investment store models, with a higher proportion of restaurants with variable rents. The company's rent ratio was at 9% in the half of 2023, the lowest in a decade.
On the operations side, technology investments have enabled an increasing number of KFC and Pizza Hut restaurant general managers (RGMs) to effectively manage multiple stores, improving efficiency. AI-enabled store management systems help relieve RGMs of repetitive administrative tasks, allowing them to oversee a numbers of stores while maintaining high operating standards. Further systems integration has also enhanced the overall visibility of store operations and cross-store data analytics.
"Our results are a testament to our resilient and anti-fragile business, which allows us to capture upside in good times and protect downside in bad times," Yum China CEO Joey Wat said. "Robust end-to-end digital capabilities and agile supply chain enabled us to flexibly handle surges in customer traffic through holiday periods and special marketing campaigns, while maintaining consistent quality and customer service."
