Yum China and Lavazza Put $200 Million Behind a 1,000-Store China Coffee Plan

This is an English adaptation of a FoodBud historical article originally published on September 23, 2021.

Yum China, which sold more than 100 million cups of coffee through KFC in the prior year, was increasing its commitment to coffee.

On September 23, 2021, Yum China and Italian coffee brand Lavazza announced plans to accelerate the expansion of Lavazza's cafe network in China through their joint venture. The target was to open 1,000 stores by 2025. The two parties planned to jointly inject $200 million into the joint venture to fund future development.

The joint venture would also become Lavazza's exclusive distributor in mainland China, bringing in more products from Lavazza's international portfolio.

Joint Venture Structure and Store Base

Yum China and the Lavazza Group, an Italian family-owned company, formed the joint venture in early 2020 to explore and develop the Lavazza cafe concept in China. Yum China held 65% of the venture, while Lavazza held 35%.

In April 2020, Lavazza opened its first flagship cafe outside Italy in Shanghai. By the time of the article, Lavazza cafes had expanded to more than 20 locations across Shanghai, Hangzhou, Beijing and Guangzhou. In the first half of 2021, about half of Lavazza's overall sales came from member sales.

As of August 31, 2021, Lavazza had 22 cafes. The company expected the store count to at least double by the end of 2021.

Expansion Model

For the next stage, Lavazza planned to expand in China through multiple store formats, continuing to build density in higher-tier cities and serve different consumption occasions.

The joint venture said it would continue strengthening capabilities in store operations, brand management and marketing efficiency.

In addition to cafes, the joint venture would handle distribution, sales and marketing in mainland China for Lavazza retail products, including coffee beans, freshly ground coffee and coffee capsules.

Yum China CEO Joey Wat said the partnership with Lavazza could capture what the company saw as a major opportunity in China's coffee market as store openings accelerated. She pointed to Yum China's supply chain, digital capabilities and consumer insights as tools to bring Lavazza's Italian coffee experience and products to more Chinese consumers.

Yum China's Coffee Portfolio

At the time, Yum China had built a coffee brand matrix that included KFC's K Coffee, COFFii&JOY and Lavazza.

Compared with emerging coffee chains such as Manner and Seesaw, which had recently been raising capital and opening stores rapidly, COFFii&JOY and Lavazza were expanding more slowly in China and remained concentrated mainly in first-tier and new first-tier cities.

Investor Day Growth Plans

At Yum China's investor day, Joey Wat also outlined broader company plans:

• Yum China aimed to accelerate store expansion and move steadily toward a milestone of 20,000 stores.
• Digital capabilities and supply chain were positioned as key growth drivers. The company said it would continue investing in both areas to widen its strategic moat and support long-term sustainable growth.
• KFC would continue expanding through store formats with different positioning, increasing density in existing cities and moving further into lower-tier cities.
• Pizza Hut would focus on four strategic pillars: strengthening leadership in pizza and steak while offering value-for-money products; driving sales through dine-in, delivery, takeaway and retail products; expanding its member base and improving the digital customer experience; and accelerating openings through smaller formats such as satellite stores. Yum China said the satellite model had been validated, with a payback period of about 2-3 years.
• Yum China's supply chain network, consisting of 33 logistics centers and consolidation centers, delivered to stores in more than 1,500 towns and supported further expansion. The company said it was using automation and smart technologies to improve traceability and productivity. It had allocated $1 billion over the following five years to expand the logistics network to 45-50 logistics and consolidation centers, and to support supply-chain digitalization and sustainability initiatives.
• Yum China expected to raise total capital expenditure over the following five years to about $5.0 billion-$6.5 billion to support organic growth. Most of that spending was planned for accelerating core-brand growth, store renovations, scaling emerging brands, and strengthening supply-chain and digital infrastructure.

Note: store targets, capex plans and other forward-looking figures are historical statements from September 2021.