On April 30, Yum China (09987) announced its 2024 first quarter results report, which revealed several key signals worth paying attention to.

According to financial reports, in the first quarter of 2024, excluding the impact of foreign currency conversion, the company achieved total revenue of US$2.96 billion, an increase of 7% over the previous year; quarterly system sales increased 6%, with KFC and Pizza Hut increasing by 7% and 4% respectively. The increase was mainly due to the net contribution of 8% of new stores.

At the same time, Yum China's core operating profit also achieved steady growth under last year's high base — during the reporting period, the company achieved operating profit of 374 million US dollars, an increase of 22 million US dollars over the same period last year; achieved core operating profit of 396 million US dollars, an increase of 1% year-on-year under last year's high base; and diluted earnings per share increased 10% to 0.71 US dollars.

As a well-known restaurant brand that has been deeply involved in the Chinese market for over 36 years, stability has always been an unmatched advantage of Yum China. The ability to continue to set growth records in stability also clearly shows Yum China's forward-looking development layout in the first quarter and the efficiency of strategy execution.

More specifically, let's take a look at the strategic layout of Yum China:

First, innovation has enabled scale expansion, causing the company to have both a “Matthew effect” and a “compound interest effect.”

In September 2023, Yum China proposed the RGM 2.0 strategy, which focuses on growth while balancing resilience and moats. Currently, more than half of Yum China's new stores are located in low-tier cities. The meaning of the company's strategy is already very clear, that is, it points to a sinking market.

Focusing on the food and beverage consumer market, it can be seen that in recent years, in the context of consumption upgrades, the consumption level of young people in sinking market towns has already risen, and this group of people clearly has a lot of room for growth for catering companies. In view of this, Yum China is also speeding up store expansion in second-tier and lower-tier cities in China. In the first quarter of 2024, the company added a net of 378 stores, achieving the milestone of 15,000 stores, and plans to add another 5,000 stores by 2026.

Moreover, while laying out a sinking market, Yum China also continued to innovate its store model to adapt to the low-tier market environment in the first quarter. Two-thirds of the company's new stores adopted a smaller store model. For example, KFC's newly launched small-town mini store model reduces the capital expenditure of each store to less than RMB 500,000 through simplified menus and optimized equipment, providing it with an advantage in opening up a “county market.” Pizza Hut, on the other hand, is entering lower-tier cities more flexibly through a “focus” store model that places more emphasis on dine-in business.

Accelerated store opening+ under the “flexible store model” also contributed to a good return on investment in Yum's new stores in China. Among them, KFC maintained a return on investment cycle of 2 years and Pizza Hut's return on investment cycle of 2 to 3 years. As a result, it can be predicted that in the future, with the steady and orderly expansion of the company's stores and the continuous release of investment benefits in new stores, Yum China may exert strong “compound interest effects” and “Matthew effects”, leading to a further increase in performance.

Second, deeply enrich the business layout and open up a wider space for growth.

If the number of stores that continue to expand or the business growth of the same stores leverages more profit space for Yum China, then a diversified business layout is an important cornerstone for Yum China to achieve steady growth. Yum China is obviously well aware of this, and in the first quarter of 2024, it took a number of steps in terms of business layout.

On the one hand, the company is diversifying its product supply and broadening its incremental user base. On the side of KFC, entry-level beef burgers were added to the weekday value package, providing both great value options and high-quality options to meet the needs of different consumers. High customer unit price products sold well during the period, and sales of beef steak and whole chicken recorded double-digit growth. On the side of Pizza Hut, a wide range of entry-priced pizza products led to double-digit growth in sales of pizza under 50 yuan in the first quarter. Also, in terms of Chinese food, Little Fat Sheep's innovative rotary pot model for single customers has been tested well in Shanghai, and will open up a number of franchise stores to further open up new incremental space.

On the other hand, through independent KCOFFEE stores, KFC may use this to further explore the growth space of the coffee market. According to reports, in addition to providing consumers with a better coffee experience, Kenyue Coffee, which works side by side with KFC, will also use shared equipment with KFC to gain an advantage in product innovation, store expansion, and cost management. This efficiently opens up a wider space for growth for KFC and even Yum China. Currently, Kenyue Coffee has 100 stores in more than 80 cities and has achieved initial success.

It can be seen from this that under a diversified business landscape, Yum China will have sufficient momentum to exert a flywheel effect. Its major businesses are interconnected, like gears are interconnected, and this in turn creates strong growth momentum, thereby providing a steady stream of growth vitality for the company's performance.

As the so-called “numbers are the best litmus test,” Yum China, as a leading restaurant brand, continued growth in core financial indicators has clearly revealed to the outside world a leading undertone of both stability and growth. From the company's clear and effective strategic layout, we can also clearly see that the certainty of its performance will become stronger and stronger in the future, which is worthy of investors' long-term attention.