What is in this article?:
- Analysts weigh China survival strategies for Yum, McDonald's
- Focusing on margins
Industry watchers say the restaurant brands can’t count on the country’s slow economic growth to meaningfully improve same-store sales.
Focusing on margins
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In a review of the unit-level economics for KFC and Pizza Hut Casual Dining in China, West noted that average unit volumes for both brands had been increasing in new and existing markets, but cash margins had been declining. On average, Yum spent about $560,000 per KFC unit opening in 2012 and about $570,000 per Pizza Hut opening. Both brands generated an average unit volume between $1.4 million and $1.5 million.
While those annualized sales were better than the average unit volumes around $1.2 million in 2011, restaurant-level margins did not keep pace. According to Deutsche Bank, KFC China’s cash margins fell to a range of 20 percent to 22 percent in 2012, decreasing from 25 percent and 27 percent in 2011 and 2010, respectively. Pizza Hut’s margins went to a range between 23 percent and 26 percent in 2012, compared with 25 percent in 2011 and 23 percent in 2010.
For 2013, Yum has guided investors toward “mid-teens” cash margins because of difficulties stemming from the avian-flu outbreak and the poultry supply controversy.
Among the nuances of Yum’s results in China, West added, was that new units opened in smaller markets were producing cash margins that were 3 percent to 6 percent better than locations opened in Tier 1 or Tier 2 coastal cities like Shangai and Beijing. The investment costs and average unit volumes are identical in small and large markets, but rents and labor costs are much higher in China’s major cities.
“Not surprisingly, Yum is shifting more of its growth to these smaller markets,” West wrote. “Pizza Hut Casual Dining new-unit returns have also improved relative to KFC in recent years, leading Yum to ramp up growth at that concept. Overall, given that KFC continues to generate the lion’s share, or about 80 percent, of Yum China profits, we would like to better understand the dynamics of the slowing new-unit returns at that brand.”
In a research note filed after the first day of meetings with Yum in China, David Tarantino of Robert W. Baird & Co. said KFC China’s long-term efforts to grow margins via new value platforms, breakfast, 24-hour service and delivery “appear largely intact.”
He added that the outlook for Pizza Hut was more bullish, as “ongoing tactics of strengthening menu variety, including the expansion of breakfast, and affordability appear to be working for the dine-in business.”
West of Deutsche Bank wrote that McDonald’s does not release details about its unit-level profitability in China, but the investment firm estimates average unit volumes there to be about $1.3 million, with investment costs between $600,000 and $800,000 and margins “in the mid-teens.”
McDonald’s is forecasting 300 unit openings in China in 2013, which would ensure it achieves its projected goal of 2,000 units in China by the end of the year.
Yum operates or franchises more than 39,000 restaurants worldwide, and McDonald’s has more than 34,500 locations around the world.
Contact Mark Brandau at email@example.com.
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