Investor Day 2023: Yum China unveils »RGM 2.0«

Shanghai / CN. (yb) Yum China Holdings Inc. hosted its 2023 Investor Day in Xi’an, China. At the event, Yum China’s CEO Joey Wat, CFO Andy Yeung and members of the management team formally launched the Company’s refreshed »RGM 2.0« strategy to an in-person audience in Xi’an and to an online audience via webcast. Presentations highlighted the Company’s strategic initiatives to accelerate network expansion, drive sales growth and boost profits. Yum China is striving to reach 20,000 stores by 2026 and to achieve high-single-to-double-digit CAGR for system sales and operating profit as well as double-digit EPS CAGR from 2024 to 2026, compared to base year 2023 and in constant currency. The Company targets to return approximately USD 3 billion to shareholders through quarterly dividends and share repurchases over the same three-year period, doubling the shareholder return of the past three years.

Joey Wat, CEO of Yum China, commented, «We are excited about the significant opportunities China presents. In 2021, we implemented our »RGM« strategy, which stands for «Resilience, Growth and Moat.» Thanks to the tireless efforts of our team and their exceptional execution, we expanded our footprint, achieved robust performance and remained profitable throughout the past three years. Further, we have transformed our business, emerging even stronger and better positioned for growth. Moreover, we have strengthened emotional connections with customers. Going forward, we are transitioning our RGM strategy to place greater emphasis on growth. By leveraging flexible store formats and strategically partnering with franchisees, we are expanding into more locations. Through our delicious and innovative food offerings, combined with amazing value for money, we are winning over more customers and giving them compelling reasons to choose us. As we continue to expand, we believe our improved cost structure and proactive cost management will enable us to sustain and potentially improve our profitability over time. Our ambitious financial growth targets for 2024 to 2026 reflect our unwavering commitment to delivering value to our shareholders, affirming our confidence in our prospects, expanding our reach, and driving robust growth.»

Additional highlights from the 2023 Investor Day presentations are included below.

KFC: Most powerful quick-service restaurant brand in China

This year, KFC will celebrate its 10,000th store in China. Even with a presence in over 1,900 cities, KFC continues to expand its addressable market. There are over 1,100 unpenetrated cities and significant untapped opportunities in strategic locations such as highway service centers, hospitals and college campuses. The brand plans to accelerate its annual net new store openings to over 1,200 in the next three years, 15 percent to 20 percent of which are projected to be franchise stores. To achieve this, KFC has a variety of new store models and modules that enable customization to suit different trade zones and city tiers. Concurrently, KFC continues to drive sales growth with a wide array of food and drink offerings, signature campaigns, and popular toys and games. The brand plans to further improve its flexibility and productivity through various cost structure rebasing initiatives such as store management sharing, securing favorable lease terms with variable rent components, enhancing automation in operations and centralizing store processes.

Pizza Hut: Leading casual dining restaurant brand in China

Having passed the 3,000-restaurant mark this year, Pizza Hut is on track to achieve record-high net new stores in 2023, and plans to further increase the pace to 400-500 net new stores annually in the next three years. The brand intends to drive footprint growth with flexible store formats such as its proven satellite store format. At the same time, Pizza Hut is expanding its mass market appeal by creating affordable occasions, driving off-premise sales and streamlining services. The brand continues to reinforce its leadership position in the pizza category and is also expanding into more categories such as burgers and coffee. Pizza Hut also aims to further grow existing occasions such as breakfast and individual meals. Additionally, the brand will continue to transform its cost structures for more resilience and flexibility.

Lavazza: Iconic coffee brand underway with encouraging progress

Yum China’s joint venture with world-renowned Italian coffee brand Lavazza has made encouraging progress in the past two years, now operating over 100 coffee shops in 11 cities along with a growing retail business. With an ambition to reach 1,000 stores in the next three to five years, it is deploying a four-pillar strategy focused on investing in brand building, refining its menu with a mix of authentic Italian and locally-inspired beverage and food items, expanding its digital presence and enhancing delivery capabilities, as well as upgrading store design and experience. In addition, the JV plans to further expand its retail business through collaborations with premium partners such as hotels, fine dining establishments and retailers, leveraging Lavazza’s coffee beans.

Embracing AI to build future-ready digital capabilities

Yum China’s rapid expansion is supported by a dynamic AI-empowered digital infrastructure. Through digitalized operational tools and automated technology solutions, the Company has streamlined workflows, empowered store management and increased flexibility. This has allowed 80 percent store growth since 2016 with a relatively flat headcount. In addition, to support the growth of franchise stores, Yum China has been building an integrated digital solution for franchise management. Going forward, the Company is broadening its use of AI technologies to further improve customer experience, store operations and people management. Strong in-house digital capabilities and the development of a company-wide knowledge base will drive innovation in future AI-enabled applications.

World-class supply chain supports long-term growth

Over the years, Yum China has built a formidable, agile and highly efficient supply chain to support its growth. With upstream supplier collaborations and innovative solutions such as full utilization of raw materials, the Company has been able to maintain competitive raw material costs. Going forward, the Company is building more company-owned logistics centers to enhance digitalized operations and create flexibility. The Company’s ongoing efforts to optimize its intelligent network planning and multimodal delivery are expected to help it improve coverage and manage costs. Yum China is also making progress on its sustainability goal to transition its stores and support facilities to use renewable energy. Recently, its logistics center in Nanning, Guangxi, became the industry’s first cold chain logistics center in China to be 100 percent green-powered.

Building an industry-leading sustainable workforce

Yum China’s people strategy centers on building a sustainable and engaged workforce to support the Company’s fast growth. The Company has a robust talent development strategy with structured training and career paths in place to cultivate top operational talents. Additionally, the Company offers one of the leading employee care programs in China, an equity incentive plan for its eligible Restaurant General Managers, and rewarding experience from active engagement in community services. Yum China continues to uphold a people-first philosophy, with «Fair, Care and Pride» as its guiding principles.

Balanced and systematic capital allocation

In accordance with the previously disclosed 5-year capital expenditure plan of approximately USD 5 billion to USD 6.5 billion announced during the 2021 Investor Day, Yum China is earmarking a total capital expenditure of USD 3.5 billion to USD 5 billion over the next three years. These investments are aimed at growing and refining its store network, enhancing its supply chain infrastructure and further advancing digital capabilities. Moreover, the Company will continue its disciplined approach to strategic investment, focusing on targets that strengthen core capabilities and improve market positioning. Yum China is committed to returning surplus cash to shareholders, with a target to return approximately USD 3 billion from 2024 to 2026. This includes a significant increase in share repurchases and a planned double-digit increase in dividends.

2023 outlook

The recovery trajectory remains stable despite the near-term economic headwinds. The Company expects same-store sales to continue recovering steadily throughout the full year 2023, maintaining a pace of approximately 90 percent compared to the 2019 level. The Company increased its net new stores target for 2023 to 1,400-1,600, compared with its previous target of 1,100-1,300. Footprint growth is supported by the flexible store formats, healthy new store payback periods and a strong store pipeline. Management will continue to implement a disciplined and systematic approach in new store openings. The Company maintained its capital expenditures target of approximately USD 700 million to USD 900 million for 2023.