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Yum China CEO says consumers are becoming more “rational” as rising costs squeeze restaurant budgets.

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A KFC restaurant in Wuhan, China.

Source: Yum China

As economists and investors worry about weak Chinese consumer confidence and sluggish growth, Yum China CEO Joey Wat says the Chinese consumer is increasingly rational – and has been for years.

Weighed down by investor concerns about China’s economy as a whole, Yum China shares have fallen 27% over the past year, dropping their market value to $17.51 ​​billion. For comparison, the licensor Yum Brandswhich spun off from the Chinese unit in 2016 and has a global presence, saw its own stock rise 8%, giving it a market value of $38.87 billion.

Despite Wall Street’s concerns, Yum China’s sales are growing. In the fourth quarter, the company’s revenue climbed 19% to $2.49 billion, fueled by new store openings. Its same-store sales rose 4% in the period, beating StreetAccount’s estimates of 3.3%. Wat highlighted the restaurant industry’s strong recovery from the Covid-19 pandemic, but also recognized a larger shift from consumers.

“I think the Chinese consumer has become more rational in recent years,” she told CNBC.

Housing costs in top cities such as Shanghai and Beijing have become even more expensive in recent years, putting pressure on consumers’ disposable income, according to Wat. But in lower-tier cities, like Chengdu, Yum China is seeing stronger sales growth because housing is cheaper and consumers have more money to spend.

Chinese cities are often classified into tiers based on factors such as population and gross domestic product, although there is no official ranking system.

“We have a very good business model, not only in a tier-one city, but up to tier five and six cities,” Wat said.

Joey Wat, CEO of Yum China Holdings Inc., during an interview with Bloomberg Television in Xi’an, China, September 15, 2023.

Qilai Shen | Bloomberg | Getty Images

The overwhelming majority of Yum China’s current footprint is KFC locations, but the company also runs Pizza Hut restaurants and Lavazza cafes. China is KFC’s largest market and Pizza Hut’s second largest.

While some Chinese diners are cutting back, others are increasing their spending, switching from instant coffee to KFC’s fizzy coffee, for example.

“There is an increase in consumption in the long term and in a subtle way,” Wat said.

At KFC, Yum China used a dumbbell strategy to attract bargain-seeking customers and those seeking higher quality dishes. For example, the company sells a chicken breast sandwich for less than $2, as well as a Wagyu beef burger.

Yum China uses a similar strategy at Pizza Hut. Only about 30% of Pizza Hut’s sales in China come from real pizza. The chain is introducing cheaper pizza options to attract bargain-seeking customers and increase its market share in the pizza category.

One of Pizza Hut China’s other popular dishes is steak, which makes it stand out from the competition.

“In a top-tier city, you can have several choices of steakhouses,” Wat said. “Go to a tier two, tier three, tier four city, and Pizza Hut might be the only choice.”

Yum China has built about half of its new stores in lower-tier cities in recent years, hoping to attract consumers with more disposable income. The company has more than 14,600 restaurants, making it the largest restaurant company in China. By 2026, the company wants to have more than 20,000 sites.

The World Bank and the International Monetary Fund both forecast a slowdown in Chinese economic growth in 2024, citing weakness in the country’s real estate sector and slowing global demand. Beijing is expected to reveal its annual GDP target at a parliamentary meeting starting on Tuesday.

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