Yum China adds machines, not workers, as it expands store network

Yum China’s network of KFC and Pizza Hut outlets has kept growing right through the COVID pandemic, even as the size of its workforce has remained steady, the group’s chief executive said on Wednesday.

“We increased our stores, but without increasing the total number of staff,” said Joey Watt on a call with analysts and investors, highlighting Yum China’s investments in artificial intelligence and digital technologies to support operations and training.

Many stores now feature touch screen panels where customers place orders. In several Chinese cities, KFC robots serve up soft serve ice cream cones. Elsewhere, take-away orders can be picked up from digital lockers without contact with staff.

Watt noted that the company now has around 420,000 full- and part-time staff, roughly the same number it had in 2016 when it was spun off by U.S. parent Yum Brands.

Over that same period, the number of outlets climbed 56%, reaching 11,788 as of December with the addition of a net 1,282 outlets in 2021. Meanwhile, between 2016 and 2021, annual net profits nearly doubled to $990 million, though last year’s figure included a one-off gain from a joint venture in the city of Hangzhou.

In announcing its annual results, Yum China said it planned to open another net 1,000 to 1,200 stores this year across its brands, which include Taco Bell, local hot pot chains Little Sheep and Huang Ji Huang, and coffee shops COFFii & JOY and Lavazza.

Of its projected annual capital expenditures of $800 million to $1 billion, roughly half would be spent on new stores, but Watt emphasized they are individually less costly than before despite being higher tech. In 2016, she noted, the company opened 575 outlets on an overall capital budget of $436 million. Last year saw 1,806 openings on spending of $689 million.

“The key is efficiency,” she said, again highlighting the role of automation. In October, she announced the company would invest up to $200 million to open research and development centers in Shanghai, Xi’an and Nanjing to tap those cities’ technology talent pools.

While construction continued apace last year, COVID did take a toll on Yum’s sales. Revenues for stores open at least a year fell 11% in the October-December quarter from the same period a year before.

More than 500 outlets were closed for dine-in or completely last month amid omicron outbreaks. Chief Financial Officer Andy Yeung said that sales were lower during last week’s Lunar New Year holiday compared with 2021 and that the situation “remains volatile,” but did not disclose figures.

Watt added that Yum will be pulling the plug on East Dawning, a five-outlet group of Chinese-style fast food outlets focused on transport hubs where customer traffic has declined amid the pandemic.

Most new stores in the country are being opened by Yum China itself, but Watt said it would continue to look to franchisees in remote areas such as Tibet and for strategic channels like highway rest stops.

With franchise stores, there are a “lot of challenges in terms of quality of service that we care most about,” Watt said, before adding that improved automation and technology had given her “better comfort” in assuring the service quality of such partners. Franchise outlets now represent about 15% of Yum China’s store portfolio.

Despite the cap on staffing, Yum China’s labor costs have continued to rise, reaching $2.25 billion last year, up 31% from 2020. Payroll and benefits have also made up a growing proportion of total store operational expenses, hitting 29.2% last year, up from 25.5% in 2016.

Part of this is due to higher insurance expenses. The company last year raised medical coverage for some store managers to 1 million yuan ($157,182) while extending critical illness and other coverage for 100,000 front-line staff and family members.

With help from new outlets, Yum China’s revenues rose 19% last year to $9.85 billion.

Author: KENJI KAWASE, Nikkei Asia

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