In this series, we explore Yum China Holdings (NYSE: YUMC, HKEX: 9987), the China-based spin-off of American fast food corporation Yum! Brands (NYSE: YUM). From its first KFC store in 1987, Yum China has grown from being a pioneer of Western food in the Chinese market to become the largest restaurant operator in mainland China. The company's portfolio comprises of not only Yum! Brands' traditional KFC, Pizza Hut, and Taco Bell restaurants, but also several Chinese food chains and, in more recent years, coffee shops.
In Part 1 of our Yum China series, we introduce the company's history and business portfolio, while a financial analysis of Yum China is in Part 2 and discussion of the company's future is in Part 3.
Yum China Series
Note: "China" in the context of Yum China refers specifically to mainland China and excludes Hong Kong, Macau, and Taiwan
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Corporate History
Yum China Holdings derives its history from Yum! Brands (NYSE: YUM), the American mother company of world-famous food chains KFC, Pizza Hut, and Taco Bell. Yum! Brands entered the Chinese market by opening China's first KFC store in 1987 and first Pizza Hut store in 1990, but has since expanded to become China's largest restaurant company in terms of system sales through the operations of Yum! Brands' traditional fast food chains as well as through the acquisition and launches of Chinese dining restaurants and coffee shops.
Note: "system sales" refer to the total sales of all outlets for a given brand, including sales from both directly operated stores and franchised stores
Yum! Brands spun off its China businesses in 2016 to create a new Yum China entity listed on the New York Stock Exchange (NYSE: YUMC) the same year, while a secondary listing was completed on the Hong Kong Stock Exchange (HKEX: 9987) in September 2020.
As of December 2021, Yum China has 11,788 restaurants covering 1,600 Chinese cities, with 85% of the restaurants being directly owned and operated by the company and the remainder franchised.
Note: Yum China's definition of what constitutes a "city" is different from the official definition. Officially speaking, China has 337 cities which are designated different tier levels (see our guide to Chinese city classifications here). However, we think Yum China mentions a much higher number of cities because the company counts administration zones within cities (called "xian", Chinese: 县) as separate cities themselves. It is noted that Chinese cities can be quite large in area including both metropolitan and rural parts, hence the need for many smaller administrative regions. As an example, Chongqing, China's largest city-level administrative region, spans an area of 82,400 squared kilometres, equivalent to nearly 2.5 times the size of the Greater New York Metropolitan Area and 52 times the size of Greater London.
Currently, Yum China has the exclusive right to operate and sub-license KFC and Pizza Hut in mainland China, and given that certain agreed-upon milestones are reached, also the Taco Bell brand.
Portfolio Overview
Yum China's business portfolio comprises of eight brands housed under three broad categories of restaurant concepts:
Traditional Yum! Brands restaurants
Chinese-style dining
Coffee shops
We go through each individual brand and restaurant concept below.
Traditional Yum! Brands Restaurants
Traditional Yum! Brands restaurants comprise of the original brands inherited from the American Yum! Brands corporation, namely KFC, Pizza Hut, and Taco Bell.
KFC
KFC is the largest quick-service restaurant (QSR) brand in China based on 2021 system sales. As of December 2021, there are more than 8,100 KFC restaurants across 1,600 Chinese cities generating store sales of US$6.8 billion. KFC has localized tremendously since it first penetrated the Chinese market, with an extensive fusion menu including rice dishes, congees, Asian-inspired burgers, wraps, desserts, and beverages, in addition to the classic original fried chicken. Most notably, Yum China extended the KFC brand to launch K-Coffee, a convenient and affordable coffee product line for customers which generated sales of 170 million cups in 2021.
An example of KFC's breakfast menu, which includes western classics such as croissants and breakfast sandwiches, as well as Chinese congee and fried dough sticks.
KFC recently introduced additional Chinese regional specialty dishes to cater to a wider audience of diners.
KFC's drink menu features western coffee as well as Asian milk and fruit teas.
K-Coffee's main selling point is freshly ground arabica coffee at an affordable price.
KFC's competitors in China include other western QSR brands such as McDonald's, Dicos (Chinese: 德克士, a slightly cheaper Chinese version of KFC), and Burger King. To compare, McDonald's has approximately 3,500 stores across 269 cities in China, while Burger King has 1,300 stores across 200 Chinese cities, and Dicos has about 3,000 stores with the number of cities undisclosed. The definition of what constitutes a city may differ from brand to brand, although KFC seems to be a clear leader in terms of market penetration based on the number of stores.
Pizza Hut
Pizza Hut is China's largest casual dining restaurant based on 2021 system sales and number of restaurants. As of December 2021, there are over 2,500 Pizza Hut stores across over 600 cities in China. Pizza Hut has an extensive classic western and fusion menu with a wide variety of pizzas, steaks, pastas, rice dishes, beverages, and desserts targeting different meal times (i.e. breakfast, lunch, afternoon tea, and dinner). Interestingly, the Chinese name for Pizza Hut is Bishengke (Chinese: 必胜客), which does not include the word "pizza", and reflects the company's strategy of marketing the restaurant as falling under the generic western dining category.
Examples of Pizza Hut's menus, which don't only include pizza but cover a wide range of western (plus a little bit of Chinese) food.
Example of what a Pizza Hut store looks like in China. The brand focuses greatly on promoting an enjoyable dine-in experience, in contrast to the original American Pizza Hut which places more emphasis on traditional fast food takeaway.
Taco Bell
Taco Bell is a Mexican-style food QSR with menu items including tacos, burritos, quesadillas, salads and nachos. Yum China opened its first Taco Bell store in China in December 2016. As of December 2021, there were 37 Taco Bell stores in China.
A Taco Bell fusion dish with durian (a tropical fruit popular in China) as a quesadilla filling.
Chinese Style Dining
In 2020, Yum China stated that the company plans to establish a Chinese dining business unit comprising of the three existing Chinese dining brands in its portfolio: Little Sheep, Huang Ji Huang, and East Dawning. However, at the end of 2021, management mentions in the year's annual report that the East Dawning brand will be discontinued.
Little Sheep (小肥羊)
Founded in 1999, Little Sheep Group is a restaurant chain that specializes in hot pot dine-in restaurants and selling pre-packaged hot pot condiments. The Group was listed on the Hong Kong Stock Exchange in 2008 before being acquired and subsequently privatized by Yum! Brands in 2011. Little Sheep was included as part of Yum China when the latter was spun off from Yum! Brands in 2016. At the peak of its popularity, Little Sheep had over 700 stores in China, as well as several overseas stores. Nevertheless, the brand's popularity has declined over the years with only 222 (predominantly franchised) stores as of March 2022. This is in contrast to competitor Haidilao (Chinese: 海底捞)(HKEX: 6862), a similar hot pot chain founded in 1994 that has gained significant traction in recent years due to its focus on providing premium service and ensuring greater meat quality and consistency.
Hot pot is a way of eating originally from Mongolia where different kinds of meat and vegetables are dipped and eaten with various kinds of soup broths. The hot pot culture has spread throughout China with each region having its own specialties, and has also become very popular in many East Asian and Southeast Asian countries.
Example of a Little Sheep hot pot soup base seasoning packet. Consumers can buy such seasoning packets and mix the soup base with water to make their own hot pot at home. Little Sheep also sells packaged dipping sauces for home use.
Huang Ji Huang (黄记煌)
Huang Ji Huang Group is a Chinese-style casual dining restaurant founded in 2004 that specializes in simmer pot dishes (Chinese: 三汁焖锅). In April 2020, Yum China acquired a controlling interest in Huang Ji Huang Group as part of an attempt to diversify the company's portfolio by expanding further into the area of Chinese style dining. Huang Ji Huang primarily operates under a franchise model with 650 stores across 200 Chinese cities and six international cities at the end of December 2021.
A simmer pot is a dish where different meat and vegetable ingredients are simmered together with different sauces based on the customer's choosing.
East Dawning (东方既白)
East Dawning was founded by Yum! Brands in 2005 as a Chinese style QSR (essentially a version of KFC that serves Chinese food) primarily located in transportation hubs. The brand was included as part of Yum China when the latter was spun-off from Yum! Brands. East Dawning never particularly gained traction over the years, and especially given the impact of the COVID-19 pandemic, management decided to wind down the brand's operations. There were five East Dawning stores at the end of 2021, all of which will be shut down in 2022
Coffee Shops
In addition to the K-Coffee extension of KFC, Yum China has also launched two coffee shop brands in recent years: COFFii & JOY, an in-house developed brand, and Lavazza, a joint venture with the Italian coffee maker of the same name.
Lavazza
In April 2020, Yum China entered a joint venture with famous Italian coffee manufacturer Luigi Lavazza S.p.A. (more commonly known as just Lavazza) to open relatively upscale Lavazza coffee shops in China. As of the end of 2021, there are 58 Lavazza shops covering all tier 1 cities and select tier 2 cities in China (see our China city classification guide here).
COFFii & JOY
Founded in 2018, COFFii & JOY is a coffee brand developed in-house by Yum China that features specialty hand-dripped coffee intended to deliver an exceptional taste experience to consumers. There are 34 COFFii & JOY stores in China as of March 2022.
COFFii & JOY shops come in different sizes to meet different needs and occasions.
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