While economists and investors express concerns over China’s subdued consumer confidence and sluggish economic growth, Yum China CEO Joey Wat argues that the Chinese consumer has been becoming increasingly rational over the years.
Despite Yum China’s shares plummeting by 27% in the past year due to apprehensions about China’s broader economic landscape, the company’s market value has reached $17.51 billion. In contrast, its parent company, Yum Brands, which spun off the Chinese unit in 2016 and operates globally, has witnessed an 8% rise in its stock, commanding a market value of $38.87 billion.
Despite the apprehensions on Wall Street, Yum China continues to experience growth in sales. In the fourth quarter, the company reported a 19% increase in revenue to $2.49 billion, fueled by the opening of new stores. Its same-store sales surged by 4%, surpassing StreetAccount estimates of 3.3%.
What attributed this growth not only to the restaurant industry’s robust recovery from the COVID-19 pandemic but also to a significant shift in consumer behavior? “I think the Chinese consumer has become more rational over the last few years,” Wat told CNBC.
According to Wat, the escalating housing costs in major cities like Shanghai and Beijing have squeezed consumers’ disposable income. However, in lower-tier cities such as Chengdu, Yum China is witnessing robust sales growth due to more affordable housing and increased spending power among consumers.
Cities in China are typically categorized into tiers based on various factors, although there is no official ranking system. “We have a really good business model, not only in a top-tier city but to the tier five, tier six city,” Wat emphasized.
The majority of Yum China’s current establishments are KFC outlets, although the company also operates Pizza Hut restaurants and Lavazza coffee shops. China constitutes KFC’s largest market and Pizza Hut’s second largest.
While some Chinese consumers are tightening their belts, others are upgrading their spending habits, transitioning from instant coffee to KFC’s sparkling coffee, for instance. “There’s a consumption upgrade happening in the long term and in a subtle way,” Wat observed.
At KFC, Yum China employs a barbell strategy to attract both budget-conscious diners and those seeking premium offerings. For instance, the company offers a chicken breast sandwich for less than $2, alongside a Wagyu beef burger.
A similar strategy is employed at Pizza Hut, where only about 30% of sales come from pizza. The chain is introducing cheaper pizza options to cater to value-seeking consumers and increase its market share within the pizza segment.
One of Pizza Hut China’s popular dishes is steak, distinguishing it from competitors. “In a top-tier city, you can have some choices of steakhouses,” Wat noted. “Go to tier two, tier three, tier four city, and Pizza Hut might be the only choice.”
In recent years, Yum China has focused on expanding its footprint in lower-tier cities to tap into consumers with higher disposable incomes. With a presence of over 14,600 restaurants, it stands as the largest restaurant company in China. By 2026, the company aims to surpass 20,000 locations.
Both the World Bank and the International Monetary Fund predict a slowdown in China’s economic growth in 2024, citing weaknesses in the country’s real estate sector and softer global demand. Beijing is expected to disclose its annual GDP target at a parliamentary meeting commencing Tuesday.
