al membership of KFC and Pizza Hut reached 485 million, while member sales accounted for approximately 65 per cent of KFC and Pizza Hut’s system sales in aggregate. Yum China returned approximately $745 million to shareholders in the first quarter through share repurchases and cash dividends, the highest quarterly return in the company’s history. A deep dive According to Joey Wat, CEO and executive director of Yum China Holdings, adjusted profit in the first quarter of last year was the highest in the 30 quarters since its company spin-off. The first quarter of this year was the second-highest in the company’s history. “We achieved these results in a challenging and competitive environment thanks to our resilient business model and our team’s agility and hard work,” she told Inside Retail during a recent earnings call to media and stakeholders. Wat said the company is continuing to invest to accelerate growth. It has reached and surpassed the milestone of 15,000 stores, and it aims to open 1500 to 1700 new stores in 2024 and to have 20,000 stores by 2026. “We remain bullish on China, we see the China market as offering us white space for years to come, we intend to fill in by expanding our store portfolio,” she added. Contrary to recent reports, Wat said China continues to develop rapidly with hundreds of new shopping complexes, residential complexes and commercial developments opening every year. “Urbanisation and long-term consumption upgrades in Tier-2 cities and below present a particularly attractive opportunity for us. Housing and living costs are more affordable there. Tremendous consumption potential has yet to be unleashed,” she noted. She expects roughly 30 per cent of Yum China’s new stores this year to be in new cities or strategic locations such as transportation and tourist locations. Flexibility and franchise partnerships Wat explained that Yum China’s flexible store models and franchise partnerships give the company the tools to capitalise on every opportunity. In the first quarter, around two-thirds of new store openings were in smaller store formats. On average, capital expenditure for new stores range from RMB 1.2 million to RMB 1.5 million, but the new small-town mini model stores for KFC for lower-tier cities can cost as low as RMB 0.5 million. These stores have simplified menus and optimised equipment. These compact models have more dining spaces and enable the company to add store density and enter smaller cities with more flexibility and profitability. “Transportation and tourist locations represent just single digits of our store mix right now, but they are key to capturing the spike in travel volume during holiday periods. Same-store sales at these locations grew around 20 per cent during Chinese New Year,” she said. Wat said the company will be opening more stores at highway service centres in over 20 provinces, capitalising on the opportunity presented by rising car ownership. Some of these stores will be opened through franchising. In fact, Wat said partnering with franchisees is key to unlocking opportunities in lower tiers, remote areas and other strategic locations. She estimates 15-20 per cent of Yum China’s net new stores in the next three years will come from franchising. In the first quarter, this mix reached 19 per cent at KFC. The brand strategy According to Wat, the company has devised robust strategies to meet the diverse demands of consumers in China. It’s all about “delicious innovative food to build an emotional bond with them,” she said. A combination of premium and affordable options is key to its success. The company recorded over 460 million transactions in the first quarter alone, a 15 per cent increase year-on-year. The strong growth reflects the strategy of spreading its price points into lower ticket orders. KFC’s beef burger and whole chicken sales grew by double digits, while the recent launch of a ‘super juicy pineapple beef burger’ was also a hit. The company’s signature ‘Crazy Thursdays’ continues to drive major traffic, even outperforming weekends. The delivery business also remains strong, and Wat said the company has identified smaller orders as an area of opportunity. KFC reduced its delivery fee and expanded one-person meal options. These strategies captured more traffic especially in lower-tier cities. In terms of new brands, K-Coffee continues to grow, with a 30 per cent increase in cups sold in the first quarter. These stores with a dining area and cafe ambiance are connected to KFC stores, so the company can share a kitchen to keep the investment and operating costs down. Pizza Hut on the other hand, has over 3400 stores and is ready for accelerated growth, in the past year, it has added over 400 stories and increased city coverage by 10 per cent to over 750 cities. Another brand under the Yum China banner is Lavazza, and its dual growth engines, namely coffee shops and retail, are making good progress in driving synergies. The company has further reduced the capital expenditure of its latest small store formats. The retail business has expanded into premium outlets such as five-star hotels and Michelin-starred restaurants. By growing these two businesses, Wat hopes to build the Lavazza brand in China. The future outlook Ka Wai Yeung, CFO of Yum China Holdings, provided a second-quarter outlook.  “Looking ahead to the second quarter of this year, we expect the tide to remain choppy. This will test our ability to adapt. We’ll continue to execute on our strategy to drive incremental traffic with great value for money offerings,” he told Inside Retail during a recent earnings call. He said that consumers are more rational with their spending in the new normal, but they are responding well to the brand’s offerings and campaigns. On the operational side, Ka said the company will continue to work hard to improve efficiency across the organisation and pass along the savings to customers. Yum China returned a record $745 million to shareholders in the first quarter, including a buyback of 16.6 million shares, which is equivalent to more than 4 per cent of its outstanding shares. At the end of the quarter, the company has $3.1 billion in net cash. Ka said the company is committed to return $1.5 billion to shareholders in 2024 and continue to drive its long-term sustainable growth. Further reading: Guzman y Gomez hits $1.725 billion valuation with new investors