This is an English adaptation of a FoodBud historical article originally published on October 27, 2021.
Yum China reported third-quarter 2021 revenue of US$2.55 billion, up 9% from US$2.35 billion a year earlier, or up 2% excluding foreign currency translation. System sales rose 1% year over year, with both KFC and Pizza Hut up 1% on the same basis.
Same-store sales fell 7% year over year. KFC declined 8%, while Pizza Hut declined 5%, excluding foreign currency translation.
Yum China opened 524 new stores during the quarter, mainly driven by KFC and Pizza Hut. As of September 30, 2021, the company operated 11,415 stores, an increase of 1,265 from the prior year. It also remodeled 211 stores in the quarter.
Restaurant margin was 12.2%, compared with 18.6% a year earlier. The company attributed the decline mainly to lower same-store sales, heavier promotions, wage inflation, higher rider costs from delivery growth, and reduced temporary subsidies from landlords and government agencies. Lower commodity costs were partly offset by costs related to replacing some plastic packaging and other packaging upgrades.
Operating profit was US$178 million, down 68% year over year, or down 70% excluding foreign currency translation. Adjusted operating profit was US$168 million, down 48%, or down 52% excluding foreign currency translation.
Net income was US$104 million, down 76%, mainly due to lower operating profit and a mark-to-market loss on the company’s equity investment in Meituan. Adjusted net income was US$96 million, down 63% year over year.
KFC and Pizza Hut’s membership programs had more than 350 million members combined at quarter-end. In Q3 2021, member sales accounted for about 60% of system sales.
Delivery revenue represented about 34% of KFC and Pizza Hut company restaurant revenue, up about six percentage points year over year, as consumers remained cautious about dine-in occasions.
Digital orders, including delivery, mobile ordering, and kiosk ordering, accounted for about 87% of KFC and Pizza Hut company restaurant revenue in the quarter.
Yum China raised its new-store target from the original plan of 1,300 stores to more than 1,700 stores, mainly due to accelerated expansion at KFC and Pizza Hut.
The company maintained its expected capital expenditure target of about US$700 million to US$800 million, supported by ongoing efforts to reduce capital expenditure per new store.
In September 2021, Yum China signed an agreement to acquire a 28% equity interest in Hangzhou Catering Service Group for about US$250 million in cash. Hangzhou Catering Service Group held a 45% stake in the Hangzhou KFC joint venture.
Yum China already held 47% of Hangzhou KFC, which operated more than 700 KFC stores in Hangzhou and surrounding areas. After closing, expected in Q4 2021 subject to customary conditions and regulatory approval, Yum China would directly and indirectly own about 60% of Hangzhou KFC and consolidate it in its financial statements.
Hangzhou Catering Service Group also operated about 60 Chinese restaurants under four heritage brands, Zhiweiguan, Hangzhou Restaurant, Kuiyuan Guan, and Tianxianglou, as well as a fast-growing food processing business. Yum China said the deal would deepen cooperation in product innovation, retail-product collaboration, and multi-brand store expansion in Zhejiang province.
Also in September 2021, Yum China and Luigi Lavazza S.p.A. signed an agreement related to their previously established joint venture and announced plans to accelerate Lavazza coffee-store development in China, targeting 1,000 stores by 2025. The partners planned to inject an initial US$200 million into the joint venture. Yum China held 65% of the venture and consolidated it after the September 2021 agreement became effective.
Yum China said Q3 results were affected by Delta-variant outbreaks that began in late July 2021. The company described the outbreak as the broadest regional outbreak in China since Q1 2020, affecting important markets including Nanjing and Yangzhou in eastern China, as well as Zhengzhou and Wuhan. Smaller regional outbreaks also appeared in Fujian and Heilongjiang in mid-September.
Tighter prevention measures, including the closure of multiple tourist attractions, reduced social activity, travel, and summer trips. Government statistics showed China’s restaurant industry revenue in August 2021 slowed and was down about 10% from August 2019. In September 2021, sector revenue recovered modestly and was about 2% above September 2019, the slowest growth rate since March 2021.
Entering Q4 2021, strict prevention measures remained in place nationally. During the seven-day National Day holiday beginning October 1, government statistics showed tourist numbers down 2% from the prior year and down 30% from 2019; tourism spending was down 5% from 2020 and down 40% from 2019.
Yum China said same-store sales recovery would take time, with dine-in traffic and transportation-hub footfall still materially affected. The company said it would use membership systems and digital channels to drive sales, introduce products suited to both dine-in and at-home occasions, and strengthen its hybrid delivery model.
McDonald’s also reported Q3 2021 results on October 27. Revenue was US$6.201 billion, up 14% year over year, and net income was US$2.150 billion, up 22%.
McDonald’s international developmental licensed markets segment posted comparable sales growth of 16.7% in the quarter. Performance was strong in many markets including Japan and Latin America, while China declined.
Note: forward-looking store targets, transaction expectations, capital expenditure guidance, and investment figures are historical as reported in October 2021.