Yum China: about the impact of the Delta Variant Outbreak

Shanghai / CN. (yb) Yum China Holdings Inc. updated stakeholders on the impact of recent Covid-19 developments as follows:

Impact of the Delta Variant Outbreak

In our second quarter 2021 earnings release, we mentioned that the latest Covid-19 outbreak of the Delta variant, which started in late July in Nanjing, was evolving quickly. Since then, this outbreak has become the most widely spread regional outbreak since the national outbreak in 2020, impacting 16 provinces. A large number of areas were identified by the government as medium to high risk. As a preventative health measure, several major cities were locked down. For example, Nanjing and Yangzhou, key cities in eastern China, the most vibrant economic region and the most important market for us, were the most affected. Zhengzhou and Wuhan, the capital cities of Henan and Hubei provinces respectively, were also significantly affected. Strict public health measures were implemented across the country, including closures of many tourist locations. These actions led to substantially lower travel volume, cancelled summer holiday trips and fewer social activities, which significantly impacted the restaurant industry.

At the peak of the outbreak in August 2021, more than 500 of our stores in 17 provinces were closed or offered only takeaway and delivery services. Same-store sales in August 2021 declined by mid-teens percentage year over year, or close to an approximately 20 percent decline compared to August 2019. This was mainly due to a same-store dine-in sales decline in that month of approximately 20 percent to 30 percent, and a sharp drop in sales at our transportation and tourist locations of approximately 40 percent to 50 percent year over year, also on a same-store basis.

While the outbreak has subsided in recent days and restaurant traffic is gradually recovering, our operations continue to be heavily impacted. As we have previously noted, our business recovery remains to be uneven and non-linear, as regional outbreaks occur and corresponding public health measures are implemented. The Company expects a recovery of same-store sales to take time.

As a result of the Delta variant outbreak, the Company has experienced significant operating deleveraging, and based on the current trend, our adjusted operating profit, which excludes special items, may be reduced by approximately 50 percent to 60 percent for the third quarter of 2021, compared to the same period last year. This is primarily due to the significant sales deleverage impact from sharply reduced sales, which is especially pronounced in the third quarter, a seasonally strong quarter for sales and margins. Moreover, as we have previously discussed, our restaurant margins are further pressured by the diminishing favourable impact of commodity prices, by wage inflation of mid to high single digits, and as we step up value promotions to drive traffic.

Resiliency Helps Mitigate Short Term Challenges

Since the onset of the pandemic, the well-being of our employees and customers has been our utmost priority. The Company has demonstrated its resiliency and agility in responding to the past outbreaks. We will continue to focus on the elements of the business that we do best to drive sales and build on the strengths of execution and innovation, including to:

  1. Leverage our over 330 million member base, privilege programs, Super Apps and other digital channels to drive repeat purchases.
  2. Capture off-premise occasions with our delivery and takeaway friendly menu, as well as to leverage our store network and dedicated riders to ensure availability and coverage to drive our off-premise sales.
  3. Address the rising trend of single dining and at-home consumption with our ready-to-cook, ready-to-heat and ready-to-eat retail products, such as steak, pasta and fried rice. These products are available in store as well as through online omni-channels.
  4. Excite customers with innovative new products and great value, for example, the upgraded hand-tossed pizza at Pizza Hut, which is especially suitable for delivery.
  5. Proactively manage costs to alleviate cost pressures and continue to improve labour productivity and operating efficiency using technology and automation.

Confidence in Long-Term Growth

The Covid-19 pandemic may pose volatility in the near-term, but the fundamentals of our business remain strong. We are confident in the long-term growth potential of China. We will continue to act to ensure the Company remains well-positioned to capture future opportunities. The Company will accelerate its store network expansion, expecting to open 1,300 gross new stores in 2021, strengthen offerings for dine-in, delivery, takeaway and retail, and invest in digital and technology.