Summary of YUMC China 10k 2023

These are some of the basic notes after reading YUMC (YUM Brands China) 10k 2023. This is not detailed analysis but basic info based on the public filing. This focused more on fundamental analysis.  

BASIC INFO:

• Delaware holding company, with all operations in China through subsidiaries. 
• Incorporate in April 1 2016. Separated from YUM in October 31 2016. 
• Secondary listing in Hong Kong in September 10 2020. 
• Exclusive right for  The KFC, Pizza Hut, and Taco Bell in China. Their own brands: Lavazza, Huang Ji Huang, Little Sheep. 
• Owns and operates ~86% of locations. 
• In 2023: $11 billion revenue, 14,644 locations, in over ~2,000 cities in China. 

Brands: 

• KFC: First one in China on 1987.  Operates 10,296 stores in over 2,000 cities. 
  • Largest: sales of 8,116 in 2023 (total company sales in 10,391), Operating Profit: 1,202
• Pizza Hut: First one in China on 1990. Operates 3,312 stores in over 700 cities. 
  • Second largest: Sales of 2,214 in 2023, Operating Profit: 142
• Taco Bell: First opened in China on Dec 2016. 120 locations. 
• Their Own Brands: 
  • All other brands except KFC and Pizza Hut are reported as others: Sales of 61 in 2023.  Operating Profit: -31
  • Lavazza: Joint venture with Italian Company, Luge Lavazza. First in April 2020. Operates 122 Lavazza locations. 
  • Huang Ji Huang: April 2020, acquisition controlling stake. Operates 631 locations. 
  • Little Sheep: Operates/Franchises 163 locations in both China and international market. 
  • Decided to close down: East Dawning (by March 2022), COFFii & JOY (in 2022). 

• Technology: 
  • Smart i-kitchen: Provides real-time order status for customer, all digitized through app in WeChat. 
  • Robotic Servers: Rolled out in half of Pizza Hut locations. 
  • Smart Delivery: Digital system that dynamically adjusts delivery coverage for each store by daypart. That allows to lower delivery time. 
  • Loyalty Programs: Over 155 million members for KFC and Pizza Hut. Uses data to increase customer loyalty and order frequency. 
  • Digital Ordering: 89% of total company sales. 
  • Three R&D sites Shanghai, Nanjing and Xi’an

• Management: 
  • Generally led by Restaurant General Manager (RGM) with one or more assistant. 
  • Started shared management model with help of AI-enabled digital tools. That allows one manger to manage multiple stores. 
  • Franchise Restaurant Management: 
    • ~14% of locations are franchised locations. 
    • Pays upfront franchise fee, on-going royalty and additional cost for supplies. 
  • Supply Chain Management: 
    • Long term bulk purchase agreement for key food ingredients. 
    • Fully utilized all the chicken parts. 
    • Over 800 independent suppliers, mostly China based. 
    • ~1,300 employees in supply chain management. 
    • Owns most of the 33 logistics center. 
    • Owns seasoning facility for Huang Ji Huang and Little Sheep. 

• Dining Experience:        
  • Menu Innovations:           
    • Dedicated food innovation team, focusing on development and innovation of new recipes and improvement of existing products. 
    • Operates 27,000 sq ft of innovation center in Shanghai. Designed to generate new menu ideas and ancients with new ingredients and cooking methods, which enables rapid rollout of new products to customer based on local taste. 
  • Ordering:           
    • Created Super Apps that allows to order from multiple brands in one app. 
    • Mini programs embedded in WeChat, that allows ordering. 
    • Certain commercial districts provide in-store kiosks with convenient and fast digital ordering options. 
    • Member exclusive perks, App-exclusives new product pre-sales and lucky draws to attract customers. 
    • 89% of total company sales are digital.     
  • Payment:          
    • Started partnership with Alipay in June 2015. WeChat pay in 2016. 
    • 99% of pay are digital pay. 
    • Digital and mobile payment: provides better customer service, reduces guest waiting time, reduces friction during payment, reduces staff need for cash management, reduces potential risk associated with cash management. 
    • Developed and lunched YUMCPay in partnership with UnionPay in 2019. 
  • Guest Loyalty and Interaction:        
    • Super Apps integrates multiples functions including messaging, e-commerce and payments in single app by embedding mini programs or providing in-App links to other App. 
    • Provides customer convenience, efficiency and additional functionality before, during and after dining. 
    • Monetize membership base by introducing privilege membership subscription programs that increase frequency and spending at brands. 
    • 67% of sales in KFC and Pizza Hut is member sales.  
  • Delivery:        
    • Ability to generate orders from own channels allows to be well positioned in commercial collaborations with O2O (Online 2 Offline like Uber Foods) aggregators and manager cost/commissions. 
    • Has team for managing delivery services. 
    • Primarily uses dedicated drivers, managed by third party company. 
    • 36% of sales are delivery. 

• Restaurant Format Innovation:          
  • ~75% of KFC and ~85% of Pizza Hut locations were remodeled or built in past five years. 
  • Add-on modules like TO-GO window, drive-thru on stores allows to meet guest needs. 
  • Combining flexible store models and lower upfront investment, allows to opens up more site. 

• Operational Efficiency:           
  • AI enabled tech to analyze and forecast transaction volume so we can improve labor schedule and inventory management. 
  • “Super Brain” end-to-end AI enabled system that integrates data from store operations, that aids store managers to make decision. 
  • Company designed “Smart-Watches” and “Smart-Glasses” to monitor for real time ordering and serving procedures of the restaurant and make timely staff adjustments.  

• Cash Management Policy:          
  • Certain treasury matters including: inter-company loans, bank borrowings, short-term investments, long-term investment, dividends are clearly defined with the level of approval required for each matter specifically identified. 

• Tax:          
  • So many taxes it has to deal with. I am not writing in detail but will just list some here.
  • Enterprise Income Tax, VAT/Local Surcharges, Repatriation of dividends from China Subsidiaries, Gains on Direct Disposal of Equity Interest in Chinese Subsidiaries, Gains on Indirect Disposal of Equity Interest in Chinese Subsidiaries, Tax Cuts and Jobs Act, Inflation Reduction Act, Hong Kong Profits Tax, Pillar Two Income Tax. 

• Intellectual Property:      
  • Master license agreement with Yum Brands for 50 years from October 31, 2016 for KFC and Pizza Hut, 50 years from April 15 2022 for Taco Bell. 
  • License fee of 3% net system sales. 

• Seasonality: Highest in Chinese festivals, holiday seasons and summer months. Low sales in second and fourth quarters. 

• Human Capital:           
  • As of Dec 31 2023,  ~430,000 employees (~155,000 full time employees, ~277,000 part time employees). Of full time employees 34,000 restaurant management team and 115,000 are restaurant crew members. 
  • Angel Restaurant: Started 2016. Modified equipment and operational process to assist employees with special needs so that they can perform full range of jobs. Currently employs 250 employees. 

• Training and Development:
  • Every employee is required to formulate specific development goal to improve their competencies. In 2023, total training to 10 million hours. 
  • Bench Planning: Enables internal promotions for most operations leaders. Two programs: KFC Business School and Pizza Hut Management Institute. 
    • New college graduate can advance to Restaurant General  Manager (RGM) in less than two years but participating in those programs. 
    • Digitization and automation streamlines operations which frees up RGM’s from amount of administrative task, allowing them to focus on operational tasks. 
    • YUMC Management Trainee programs for fresh graduate trainees in marketing and supply chain function. 
  • Digital Training Program: Employees can access digitally. 
  • Continuing Education Program: Company sponsors college education programs. ~5,000 employees were provided subsidies. 

• Other benefits: 
  • Provided RSU values $3k to all eligible RGM off Feb 2021. Turnover rate of RGM was around 9%. 
  • YUMC Care offers employees benefits tailed for their life stage.
    • RMB 1 million medical insurance coverage for each RGM
    • Family Care scheme for restaurant management teams
    • Critical illness insurance for service team leaders. 
    • For Office Staff: Family/medical insurance, medical examination, recreational activities. 
    • Company’s housing subsidy scheme. 
  • Has organizational forms like RGM Convention, Founder’s Day. Uses WeChat, Apps and intranet portals. 

• Environment:
  • Food Loss/Waste: Forecasting accuracy, increase cold chain transportation, avoid cooking excessive amounts. 
    • Provide surplus food for free to residents. 
    • Recycle used cooking oil, coffee grounds and packaging waste. 

• Execs: Quite younger than many US companies. Most are low 50’s (51, 52) and youngest is 38. 

• Properties: 
  • Of 12,648 company owned units, 12,589 leased and 59 owned properties. 
  • Lease corporate HQ in Shanghai and Dallas.
  • Own building or land rights in 14 properties including logistics centers, seasoning facilities and office building for Little Sheep and Huang Ji Huang. 
  • Sublease over 150 properties to franchise and other third party. 

• Liquidity:
  • As of Dec 31 2023, credit facilities of RMB 7,112 million (~1.002 billion), compromised credit facilities of RMB 5,550 million (~782 mil), Offshore of $220 mil. 
  • As of Dec 31 2023, outstanding short-term bank borrowing of ~$168 mil. 

• Franchise Fee
  • Total Franchise fee paid to YUM was $317 million in 2023, $277 million in 2022, $298 million in 2021. 
  • Franchise agreement is generally: 10yr  for KFC and Pizza Hut, 5 for Little Sheep, 3 to 10 for Huang Ji Huang. 

• Direct Marketing Cost: Cost incurred by company-owned restaurants were $374 million for 2023, direct marketing cost incurred for franchisees was $25 million for 2023. 

• Business Acquisitions and Equity Investment:  Looks like recently it went on acquisitions spree. 
  • Hangzhou KFC: $255 mil for 28% equity. Now controls 60% in company. This company also own catering company that owns four brands with 70 locations. 
  • Suzhou KFC: 25% for $149 million. Now controls 72%. 
  • Lavazza Joint Venture: Company owns 65%, 35% by Lavazza Group. 
  • Fuijan Sinner Development Co. : 5% for $261 million. This company is producer of white-feathered chicken. 
  • Meituan Dianping: $74 million for less than 1% (in 2018).