The surge in food deliveries is significantly transforming KFC China, the country’s top restaurant brand, leading to increased sales but tighter profit margins.
Delivery sales for the brand witnessed a year-on-year growth of 33%, making up approximately 55% of total sales, a significant increase from 43% the previous year, according to parent company Yum China.
Adrian Ding, the CFO of Yum China, communicated to investors during the earnings call that they consider this a sustainable trend.
Despite Yum China’s same-store sales remaining constant, the launch of new outlets increased sales by 4%, and the operating profit rose 12% to US$447 million.
The food delivery sector in China has seen fierce competition in recent times. E-commerce powerhouses Alibaba and JD have been actively striving to dominate the market share by offering enticing deals and discounts on a variety of menu items, including ice cream, takeaway coffees, and KFC’s signature fried chicken.
A trend referred to as “instant retail,” which involves delivery of goods within an hour, has attracted the attention of Chinese regulators. They have consistently cautioned against extreme competitive practices among food delivery firms.
While the growth in deliveries has boosted sales, it has also put pressure on profit margins since Yum China subsidizes them in collaboration with tech companies. Ding indicated that margins would have contracted by 190 basis points due to the increased costs associated with delivery drivers. However, about half of this impact was offset by operational improvements in other areas of the business. The company anticipates a margin expansion throughout the entire year.
During the earnings call, company executives noted that subsidies for delivery apps have recently decreased, and these apps are now focusing more on larger food orders. “We appreciate this shift and believe it will positively impact our industry in the long run,” stated CEO Joey Wat. The executives also shared that delivery driver expenses account for approximately 30% of the company’s labour costs. Yum China also operates the Chinese divisions of Pizza Hut, Taco Bell, and other restaurants.
How much have delivery sales grown for KFC China?
Delivery sales for KFC China have grown by 33% year-on-year.
What is the impact of the growth in food deliveries on Yum China’s profit margins?
While the surge in food deliveries has led to increased sales, it is also exerting pressure on profit margins due to the company’s decision to subsidize them.
What percentage of labour costs at Yum China is attributed to delivery driver expenses?
Delivery driver expenses account for roughly 30% of the company’s labour costs.
