Yum China’s Q1 Retail Push Reached $40 Million as Taco Bell Expansion Targets 225 Stores

This is an English adaptation of a FoodBud historical article originally published on May 4, 2022.

On May 3, 2022, Yum China reported first-quarter results under heavy COVID-19 disruption. Total revenue reached $2.67 billion, about RMB17.6 billion, up 4% from $2.56 billion a year earlier.

System sales fell 4% year on year, with KFC down 4% and Pizza Hut down 1%. Same-store sales fell 8%, with KFC down 9% and Pizza Hut down 5%.

Yum China added a net 329 stores in the quarter. As of March 31, 2022, it operated 12,117 stores.

Adjusted operating profit was $193 million, about RMB1.28 billion, down 44% from $345 million a year earlier. Net income was $100 million, down 57% from $230 million, mainly due to lower operating profit and losses from the company’s mark-to-market equity investment in Meituan Dianping.

Taco Bell Expansion Plan

Other key operating points from the quarter included:

• KFC and Pizza Hut had more than 370 million loyalty members combined by the end of March. Member sales accounted for about 62% of system sales in Q1 2022.
• Delivery accounted for about 36% of KFC and Pizza Hut company-restaurant revenue in Q1 2022, up roughly 5 percentage points year on year as COVID-19 conditions worsened.
• Digital orders, including delivery, mobile orders and kiosk orders, represented about 88% of KFC and Pizza Hut company-restaurant revenue in Q1 2022.
• On April 19, Yum China announced that KFC general manager Johnson Huang would become chief customer officer, while chief development officer Wang Tao would become KFC general manager. Both appointments took effect on May 1, 2022.
• On April 15, Yum China and Yum! Brands amended the master franchise agreement for Taco Bell, revising development milestones for the Mexican-inspired quick-service brand.

Yum China committed to expanding Taco Bell’s China network to at least 100 stores by the end of 2022 and at least 225 stores by the end of 2025. Yum! Brands was expected to provide capital support for the expansion. If those milestones were reached, Yum China would hold 50-year exclusive operating and sublicensing rights for Taco Bell in China.

According to Yum! Brands’ 2021 annual report, Taco Bell had 7,791 stores globally at the end of 2021 and full-year system sales of $13.28 billion, about RMB87.76 billion.

New Retail Gains Momentum

One portfolio change in Yum China’s Q1 disclosure was the removal of East Dawning, after the company disclosed in its 2021 annual report that the brand had been permanently closed. A new retail brand, Shao Fan Er, was added.

Yum China’s new retail business stood out in Q1 under pandemic disruption. On the earnings call, the company said its 2021 new retail business scale was close to $80 million, about RMB530 million, doubling from 2020. In Q1 2022 alone, new retail sales surged to about $40 million, about RMB260 million, or roughly half of the prior full-year level.

The company said Q1 new retail sales more than doubled year on year. In April, new retail products represented more than 15% of sales in Shanghai.

COVID-19 Impact on Operations

Yum China’s exposure to eastern China was significant: the region accounted for 30%-40% of both store count and sales, and was hit hardest in this outbreak.

During Shanghai’s citywide static management period in April, Yum China generated 40%-50% of pre-lockdown revenue while operating only about 10%-15% of its Shanghai stores.

CFO Andy Yeung said on the earnings call that if the external environment did not improve in May and June, Yum China expected to record an operating loss in the second quarter.

Temporary closures and stores limited to takeaway and delivery increased sharply in March and April. In January and February, about 300 stores on average were temporarily closed or limited to takeaway and delivery, with the January peak above 500 stores.

In March, the average rose to about 1,700 stores, of which roughly 40% were temporarily closed. In April, the number surged to about 3,000 stores, half of which were temporarily closed. Same-store sales in April fell by more than 20%.

CEO Joey Wat said that, compared with 2020, the approvals required to keep stores open and employees working had become much more complex.

Note: forward-looking store targets and IPO/equity-related figures are historical as of the original May 4, 2022 article.