Yum China turns to new concepts, diversified markets in accelerated growth roadmap

The operator of KFC and Pizza Hut restaurants in China aims to operate 30,000 stores by 2030, up more than 70% from current levels, it said at its recent investor day

Key Takeaways:

• Yum China plans to boost its store count by more than 40% over the next three years to 25,000 by the end of 2028
• The company aims to boost its restaurant margin to at least 16.7% by 2028 from 16.2% to 16.3% this year by using flexible store formats and other efficiency-boosting measures

By Doug Young

After years of building up a dominant position in China’s restaurant market, Yum China Holdings Inc. (YUMC.US; 9987.HK) is getting down to the nitty-gritty to fill in the many gaps it has yet to penetrate in the massive market. It’s also focusing on key technology and other upgrades to keep its operations lean, as it enters a new stage of using flexible store formats to enhance penetration in higher-tier cities and accelerate expansion in lower-tier cities.

Those were two of the key messages coming from the operator of KFC and Pizza Hut restaurants in China at its latest investor day on Nov. 17 in the southern boomtown of Shenzhen, where it laid out an ambitious goal of expanding its overall store count. The company said it aims to operate over 25,000 stores by 2028 and more than 30,000 by 2030, up from 17,514 at the end of September. By comparison, global rival McDonald’s (MCD.US) is a distant second in China’s fast-food space with about 6,800 stores at the end of last year.

An important part of the growth for Yum China, the country’s oldest fast-food operator whose history dates back to the opening of its first KFC in Beijing in 1987, will come from a new generation of KFC and Pizza Hut stores with lower cost formats suited to China’s lower-tier cities.

An example is the company’s Pizza Hut WOW store format, which has grown rapidly since its launch last year. Individual stores using the format typically cost just 650,000 yuan ($91,000) to 850,000 yuan each to open, far less than traditional stores costing up to 1.2 million yuan, Yum China told investors. That means franchisees – a key group that will help Yum China reach its rapid growth targets – should be able to recoup their investment in just two to three years.

“On the front end, we are innovating new modules and offerings to cater to a wide range of customer segments and occasions. On the back end, we are consolidating our resources to unlock synergies in and across stores, regions and even brands,” CEO Joey Wat told investors.

Yum China gave out the aggressive store targets as it detailed other steps it is taking to achieve such growth without sacrificing margins, and to keep boosting its overall profits. It said it is aiming for mid- to high-single digit compound annual system sales growth over the next three years, and high single-digit annual compound operating profit growth. At the same time, it is also aiming to boost its restaurant margins to at least 16.7% in 2028 from around 16.2% this year.

To reward existing shareholders for their loyalty and attract new ones, Yum China said it plans to return 100% of its free cash flow after dividend payments to non-controlling interests of its subsidiaries from 2027 onwards. That should translate into an average annual return of $900 million to over $1 billion in 2027 and 2028, and exceed $1 billion in 2028. 

Investors applaud

The bullish plans come as China’s economy slows after years of breakneck growth, making many consumers more cautious. That may actually be working to Yum China’s advantage, as a “consumption downgrade” leads many to choose more budget friendly restaurants that are Yum China’s specialty.

Yum China’s shares rose about 3% over the two trading sessions after the investor day, leaving them largely unchanged year-to-date. While that may not look inspiring, it’s better than many of its peers, whose shares have fallen as investors worry about growing consumer caution in China.

Among its top two brands, Yum China has the most aggressive expansion plan for Pizza Hut, which is represented in just 1,000 Chinese cities, less than half the more than 2,500 for KFC. Following an overhaul of the pizza chain to make it more efficient, and development of the Pizza Hut WOW format, Yum China plans to boost the brand by about a third to more than 6,000 stores over the next three years from 4,022 at the end of September. Pizza Hut’s operating profit is also expected to double from 2024 levels by 2029.

KFC is targeted for steadier growth, with plans to raise the chain to 17,000 stores by the end of 2028, up by about a third from 12,640 at the end of September. With the expansion, Yum China also aims to boost the chain’s operating profit to more than 10 billion yuan, or around $1.4 billion, becoming the first restaurant chain in China to cross that threshold.

To achieve this, KFC has promoted its “small town” model that requires less than half the capital expenditure needed for a standard store, aiming to accelerate franchise expansion in lower-tier cities.

Another important growth area associated with the chain will be two separate modules, KCOFFEE and KPRO, which are being built side-by-side with KFCs to share resources like kitchens and staff. KPRO restaurants offer items like energy bowls, superfood smoothies, salads and wraps, targeting a light food market expected to break 500 billion yuan by 2026.

The company plans to sharply expand KCOFFEE to more than 5,000 locations by 2029, nearly triple the roughly 1,800 at the end of September, and is experimenting with standalone stores separate from the side-by-side format.

Yum China is also placing KFC and Pizza Hut stores adjacent to each other in another side-by-side format to drive synergies between the brands, an approach called its “Gemini” model, developed primarily for lower-tier cities.

Yum China also operates the higher-end Lavazza coffee chain in China with the Italian company, and is aiming to boost that brand to 1,000 stores by 2029 from around 120 at the end of September, partly by using a new more cost-effective store format and enticing customers with locally developed products like its popular buffalo milk coffee.

Last but not least, Yum China outlined its ongoing campaigns to boost efficiency. It discussed efforts to manage its complex supply chains more efficiently to control prices and its use of a “mega RGM” initiative, whereby restaurant general managers oversee two to four stores with their teams of typically 60 to 90 staff, which also helps to keep cultivating new talent.

The company also detailed three new AI programs now being trialed, including an in-store management assistant called Q-Smart, a delivery operations assistant called D-Smart, and a customer service assistant called C-Smart.

The company detailed the three-year roadmap just days after reporting its latest financial results, which included a 4% year-on-year revenue rise to $3.2 billion in the third quarter. Its operating profit for the period rose 8% to $400 million.

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