March 12, 2019
By Brenda Goh
SHANGHAI (Reuters) – Yum China Holdings is partnering with China’s two biggest state oil giants to open franchise fast-food outlets at gas stations in the country, in a bid to tap new growth areas as the domestic economy slows.
More than 100 outlets, likely KFC restaurants, will be opened at gas stations owned by Sinopec Corp and China National Petroleum Corporation (CNPC) over the next three years, Yum China said on Tuesday, without giving any financial details. The two Chinese oil firms collectively operate over 50,000 gas stations in the country.
“It’s something quite new for both of us, we’re going to open some stores and figure out the economics, once we figure out the economics then we can be more specific on the financials,” Yum China’ Chief Executive Joey Wat told Reuters in an interview after an investor day it held in Shanghai.
“We only have a very modest goal in the coming three years,”
The New York-listed firm, spun off from Yum Brands Inc in 2016, owns Pizza Hut, KFC and Taco Bell in China and is the largest fast-food operator there with more than 8,400 outlets, which it intends to expand to 10,000 by 2021.
Wat said the company was adapting to changes in China’s economy, whose growth has slowed to a 28-year-low. For example, the company was rolling out more value promotions to meet demand from customers who were seeking more value-for-money deals.
These promotions and other factors could put pressure on KFC’s restaurant margin in the first half, Yum China said, though it added that it had the capacity to return $1.5 billion to shareholders over the next three years. The company had flagged both the margin pressure and how much it could return to shareholders last month with its quarterly results.
TOUGH SHIP TO TURN
While sales at its KFC chain have largely stabilized after a period of weakness, thanks to upgraded stores and a big push on delivery, Yum China has been trying to revive performance at Pizza Hut, which has posted just three quarters of positive same store sales growth in China since the start of 2014.
In February, Yum China, reported a 6 percent year-on-year rise in total system sales for the fourth quarter, led by KFC, but sales at Pizza Hut dipped 2 percent during that period.
Wat said in 2017 that a turnaround could take up to two years to bear fruit. Towards that goal, the firm has so far rolled out a new store design and a series of promotions. It will introduce a new menu with 15 percent fewer items next week.
She said on Tuesday that while same store sales had yet to recover, the business had hit a milestone in the fourth quarter when traffic growth turned positive.
“When we are turning the ship, when we work hard to get the momentum to turn, it’s not easy, there are many forces at work, but we certainly feel like we are on the right track and doing all the right initiatives,” she said.
“At the time we set out a very aggressive time frame…but management does not have a crystal ball either,” she added. “We still have a little bit of time.”
(Reporting by Brenda Goh; Editing by Himani Sarkar and Muralikumar Anantharaman)