KFC China’s Tea Spin-Off Tests a Missing Category for Yum China

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

On June 30, 2022, KFC’s new-style tea sub-brand, Grandpa Comfy Tea, opened its first store in China in Suzhou. The store sells tea drinks, snacks and ice cream.

The store’s positioning is clearly youthful. Its menu lists small tea drinks at RMB13-19 and large drinks at RMB16-23. Food items include egg tarts, Swiss rolls, oat-based light ice cream and a Chinese-style fresh pork pastry.

Signage at the store describes Grandpa Comfy Tea as a “first national store” and an “innovative brand under KFC.” Posters inside the store use the same language. The brand also overlaps with KFC on some products: both sell a three-citrus tea drink.

KFC, one of Yum China’s core growth engines, had already been testing tea drinks for several years. In July 2019, selected KFC dessert stations across China launched 10 new tea drinks across four series: original oolong tea, Kowloon Golden Jade “dirty” tea, Kowloon Golden Jade milk tea and Kowloon Golden Jade yogurt cheese-foam tea.

This time, KFC has taken tea products out of the broader KFC system and incubated them as a standalone brand. The question is whether that is the best route for Yum China.

Filling a gap in Yum China’s brand portfolio

Yum China’s portfolio includes imported Western foodservice brands KFC, Pizza Hut and Taco Bell. Its Chinese chain brands Little Sheep and Huang Ji Huang were both acquired. In coffee, Yum China incubated COFFii & JOY and introduced Italy’s Lavazza. Its new retail brand, Shaofaner, was also self-incubated.

In principle, China’s tea-drink market is larger than the coffee market. But Yum China had long lacked a dedicated tea-drink brand.

From the current move, Grandpa Comfy Tea looks like a test built from KFC’s existing tea-drink product system rather than a full-scale category commitment.

Yum China’s core operating DNA has historically been introducing strong international brands and localizing them for China. Its self-incubated brands have had mixed results: East Dawning has permanently ceased operations.

Would acquisition be faster after testing the market?

China’s freshly made tea-drink market is already highly competitive. Across value, mid-market and premium price tiers, national and regional leaders are already well established.

Entering the category at this stage through a newly incubated tea brand may be late. Compared with leading tea chains, Yum China does not necessarily have a strong category-native advantage in such a fast-changing and competitive market.

Its stronger advantage is capital. As a listed company, Yum China can access public-market funding and use M&A to consolidate quickly.

For Western foodservice and coffee, Yum China can bring international brands with strong brand equity into China. Tea drinks are different: the strongest brands are local, so Yum China’s realistic options are either self-incubation or external acquisition.

Yum China’s coffee portfolio shows the trade-off. COFFii & JOY was incubated in 2018 and had only 36 stores by the end of 2021. Lavazza, introduced from Italy through a 2020 joint venture with Yum China, had 58 stores in China by the end of 2021, with a target of 1,000 stores by 2025.

KFC’s embedded K-COFFEE business performed better at scale. In 2021, it sold 170 million cups of coffee, up 22% year on year. KFC had 8,100 stores at the end of 2021. For comparison, Luckin Coffee sold 100 million cups of a single product, its coconut latte, over the past year, despite having fewer stores than KFC.

Yum China’s coffee matrix has become more developed, but its self-incubated coffee brand remains small and Lavazza still needs time to mature. In tea drinks, building a portfolio through acquisition may be faster than relying only on an internally incubated brand.

Performance pressure creates a need for new growth engines

Yum China’s first-quarter 2022 results were under pressure from COVID-19 disruptions. 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 CFO Andy Yeung said on the first-quarter 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.

Yum China’s core growth has long depended on KFC and Pizza Hut. Its backup growth businesses, including Chinese dining chains, coffee and new retail, have not yet become major growth engines.

In April 2022, Yum China also announced an amendment to its master franchise agreement with Yum! Brands, revising development milestones for Taco Bell in China. 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, with capital support from Yum! Brands. If those milestones were met, Yum China would receive 50 years of exclusive operating and sub-franchising rights for Taco Bell in China.

Mexican food remains a niche category in the China market.

For a listed group such as Yum China, the stronger strategic move may be to capture mature assets in a large, more certain category. Repeated COVID-19 disruptions in 2022 put heavy pressure on many restaurant chains, while capital markets became more cautious. That created opportunities for industry groups like Yum China as consumer-sector valuations fell. Rather than spend four or five years incubating a brand with uncertain results, M&A could allow Yum China to acquire a capable team and reach meaningful scale faster.

Note: Forward-looking store targets, operating-loss expectations and capital-market references are historical figures from the 2022 source article.