This is an English adaptation of a FoodBud historical article originally published on April 18, 2022.
By 2021 system sales, Yum China had become China’s largest restaurant company. As of December 31, 2021, it operated 11,788 stores across more than 1,600 cities in China.
For full-year 2021, Yum China reported revenue of US$9.85 billion, or RMB62.7 billion, and net profit of US$990 million, or RMB6.3 billion. For context, several other China restaurant chains reported materially smaller 2021 revenue bases: Haidilao at RMB41.1 billion, Starbucks China at roughly RMB23.0 billion, Xiabuxiabu Group at RMB6.15 billion, and Jiumaojiu Group at RMB4.18 billion.
A key operating point: Yum China was not primarily franchised. As of December 31, 2021, about 85% of its stores were company-owned and operated. It had 10,051 self-operated stores, including 9,999 leased sites and 52 owned properties. Only about 15% of stores were franchised.
Yum China’s performance was still anchored by KFC and Pizza Hut. In 2021, KFC generated US$7.0 billion in revenue and Pizza Hut generated US$2.1 billion. Other brands were much smaller contributors, although the company was expanding in coffee and new retail. Its new retail business exceeded RMB500 million in 2021.
In coffee, Yum China sold K Coffee through KFC, incubated COFFii & JOY, and formed a joint venture with Lavazza. The stated goal was to open 1,000 Lavazza stores by 2025; by the end of 2021, there were 58 Lavazza stores in China.
Yum China’s next milestone target was to move steadily toward 20,000 stores, driven by both core brands and emerging brands such as Lavazza. In April 2020, it acquired a controlling interest in Huang Ji Huang and used that as the basis for a Chinese cuisine business unit.
KFC was founded in 1939 by Colonel Harland D. Sanders in Corbin, Kentucky, and opened its first China restaurant in Beijing in 1987. As of December 31, 2021, KFC had more than 8,100 restaurants across more than 1,600 Chinese cities. It mainly competed with Western-style quick-service brands such as McDonald’s, Dicos, and Burger King. By store count, KFC was about twice the size of its nearest China competitor, McDonald’s China.
KFC’s loyalty program had more than 330 million members by the end of 2021 and contributed 62% of system sales. Delivery accounted for about 31% of KFC’s store revenue in 2021.
Pizza Hut opened its first China restaurant in Beijing in 1990. By the end of 2021, it had more than 2,500 restaurants in over 600 Chinese cities. Its restaurant count was about six times that of its closest Western casual-dining competitor in China. Pizza Hut’s loyalty program had about 110 million members and contributed roughly 55% of system sales. Delivery accounted for about 36% of annual sales.
For KFC and Pizza Hut, average capital expenditure per new restaurant in 2021 was about RMB1.5 million to RMB2.5 million. About one-third of KFC delivery sales and about 20% of Pizza Hut delivery sales came through Yum China’s own channels.
Little Sheep originated in Inner Mongolia and specializes in hot pot. As of December 31, 2021, it had more than 240 stores in China and international markets, including 220 franchised stores.
Huang Ji Huang was founded in 2004. Yum China completed its acquisition of a controlling interest in April 2020. As of December 31, 2021, Huang Ji Huang had more than 650 stores in China and overseas markets.
Lavazza became part of Yum China’s portfolio through an April 2020 joint venture with the Italian family-owned coffee company Luigi S.p.A., known as Lavazza Group. In September 2021, Yum China and Lavazza Group entered into an agreement to accelerate Lavazza coffee shop expansion in China. As of December 31, 2021, China had 58 Lavazza stores, with a target of 1,000 stores by 2025.
COFFii & JOY was developed by Yum China in 2018 as a specialty coffee brand. As of December 31, 2021, it had 36 stores in China.
Taco Bell, a Western quick-service brand focused on Mexican-style food such as tacos, burritos, quesadillas, salads, and nachos, opened its first China restaurant in Shanghai in December 2016. As of December 31, 2021, it had 37 stores in China.
East Dawning was a Chinese quick-service brand mainly located in transport hubs. It was heavily affected by COVID-19, and Yum China decided to discontinue the brand. As of December 31, 2021, China had five East Dawning stores, all planned for permanent closure in 2022.
Yum China held a 50-year exclusive franchise right from Yum! Brands for mainland China, excluding Hong Kong, Macau, and Taiwan. KFC, Pizza Hut, and Taco Bell were Yum! Brands concepts, and Yum China also had priority rights to introduce new Yum! Brands concepts in China. Little Sheep and Huang Ji Huang were acquired externally. East Dawning, an internally incubated Chinese quick-service brand, was not successful and was being closed.
In coffee, Yum China was building a tiered brand portfolio: mass-market K Coffee within KFC, specialty-oriented COFFii & JOY, and higher-end Lavazza.
Restaurant operations are labor-intensive. According to Yum China’s 2021 annual report, the company had about 450,000 employees at year-end 2021, including 147,000 full-time employees and 303,000 part-time employees. The full-time workforce included 38,000 restaurant management team members and 102,000 restaurant service team members.
The company’s incentive structure can be viewed across three levels: senior executives, store managers, and new-business equity incentives such as those used for the Lavazza joint venture.
Yum China’s named executives included the CEO, CFO, chief legal officer, KFC general manager, chief people officer, and chief supply chain officer.
The executive compensation system was built around base salary, short-term annual performance cash bonuses, and long-term equity awards. For the CEO, performance-based compensation accounted for 87% of total compensation. For other named executives, the average was 72%.
The annual performance bonus depended heavily on both team and individual performance factors. The team performance factor was weighted toward adjusted operating profit growth, which accounted for 40%. New-store openings accounted for 20%. Same-store sales growth and delivery growth together accounted for 30%. Member-contributed revenue accounted for 10%.
The calculated team result was 112%, but the compensation committee adjusted the team performance factor to 105%.
For CEO Joey Wat, individual performance goals covered five areas: sales and profit growth, environmental, social and governance work, accelerating leading brands, developing new business plans, and people, culture, and organizational development. The compensation committee set her individual performance factor at 130%. Combined with the team factor, this produced a short-term incentive payout equal to 137% of target.
Yum China’s 2021 named-executive compensation was as follows:
Under North American listed-company disclosure rules, Yum China also disclosed its CEO pay ratio. In 2021, the median employee’s annual total compensation was US$6,738, or RMB42,900. The ratio of CEO annual total compensation to median employee annual total compensation was 2,457:1.
For comparison, Starbucks CEO Kevin Johnson received US$20.425 million, or about RMB130 million, in fiscal 2021 compensation. Newly appointed CFO Rachel Ruggeri received US$3.329 million, or about RMB21.179 million. COO John Culver received US$9.367 million, or about RMB59.586 million.
Since 2016, Yum China had granted eligible restaurant managers restricted stock worth US$2,000. By the end of 2021, this plan had made 10,700 restaurant managers shareholders of Yum China.
Starting in February 2021, Yum China also began granting restricted stock worth US$3,000 to eligible restaurant managers, covering 3,500 managers.
Lavazza was a new business area built through a joint venture with Lavazza Group. For this type of business, Yum China’s compensation committee emphasized founder mentality and linked equity incentives to long-term strategic targets.
The Yum China-Lavazza joint venture created an equity incentive plan with a pool equal to 15% of the joint venture’s equity. Lavazza joint venture participants and other eligible participants could receive up to 80% of that pool, equal to as much as 12% of the Lavazza joint venture’s equity.
The remaining shares in the joint venture equity incentive plan were to be allocated according to Yum China’s and Lavazza Group’s respective ownership in the joint venture, with up to 2% of the Lavazza joint venture’s equity granted to Yum China employees and up to 1% granted to Lavazza Group employees.
The broader structure showed Yum China linking incentives to the level of responsibility: senior management compensation tied to key business indicators, restaurant manager equity intended to align unit-level execution, and new-business equity pools designed to bind teams to the success of emerging ventures.
Note: store targets, 2025 Lavazza guidance, acquisition and equity-incentive figures, and executive compensation figures are historical and reflect disclosures available around the 2021 reporting period.