Yum China Renews Emphasis on Growth with RGM 2.0 Strategy

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Yum China Renews Emphasis on Growth with RGM 2.0 Strategy

Yum China Renews Emphasis on Growth with RGM 2.0 Strategy

Yum China recently hosted its 2023 Investor Day in Xian, an important cultural and commercial hub in China's Shaanxi Province. The company's leadership team provided updates on its progress, highlighted the opportunities ahead, and outlined its strategies for seizing them. The company also unveiled ambitious targets for the next three years, most notably the goal of reaching 20,000 stores by 2026, up from 13,602 stores at the end of the first half of 2023. Additionally, the company shared that it is targeting to return about $3 billion to shareholders through dividends and share repurchases from 2024 to 2026, and achieve high single-digit to double-digit CAGR in system sales, and operating profit, and double-digit CAGR in EPS in the next three years.

Commenting on these targets at the recent Investor Day event, Yum China CEO, Joey Wat, stated, "These targets reflect our commitment to delivering value to our shareholders, our confidence in our prospects, expanding our reach and driving robust growth. And very importantly, our vision remains unchanged, which is to be the most innovative pioneer in our industry globally."

Reflecting this optimistic outlook, in a report following Yum China's investor day, Morgan Stanley noted, "Management remains confident in driving growth despite slowing GDP growth in China." Meanwhile, Nomura commented that, "We think this goal is achievable by leveraging flexible store formats and untapped franchise opportunities, and it should be encouraging for the market."

Underpinning Yum China's impressive performance in recent years has been the company's RGM strategy, which stands for resilience, growth, and moat. First introduced in 2021, the company initially placed a stronger emphasis on resilience, which was essential as the industry weathered the challenges of Covid-19. At the same time, Yum China never backed off from its commitments to growth and investing to deepen its competitive moat. The RGM strategy has served Yum China well, and over the past three and a half years the company has opened more than 4,400 net new stores and remained profitable every quarter.

However, the landscape has evolved greatly since the RGM strategy was first introduced in 2021, at a time when the industry was dealing with the challenges of the pandemic. Recognizing these changes, and looking towards the future, Yum China's leadership used its latest investor day to announce that it is shifting the emphasis of its RGM strategy from resilience to growth. The company calls this updated strategy RGM 2.0, and it centers on three primary areas for growth: expanding its store footprint, increasing sales, and boosting profits.

In terms of store footprint, as already mentioned, Yum China aims to reach 20,000 stores by 2026 (that means adding about 1,800 net new stores annually for the next three years). It intends to achieve this with a focus on flexible new store models, franchising, and emerging brands. At the same time, the company will continue to drive sales growth by building out from the fundamentals and by incubating disruptive innovations, and continuing to engage customers with delightful toys and captivating campaigns. Meanwhile, Yum China will continue to strengthen its leading position in core menu items like burgers and pizza, while expanding offerings across dayparts and occasions, like breakfast at KFC, individual meals at Pizza Hut and new late night snack menu.

To boost profits, Yum China aims to build on its strong performance so far this year- including record high operating profits in the first half of 2023 - by continuing to drive efficiencies and further restructuring its costs base. For example, in recent years, the company has streamlined restaurant operations and greatly improved labor productivity by investing in systems and automation and empowered its Restaurant General Managers and crew members with various digital and automation tools.

In many respects, Yum China has come out of the pandemic years in an even stronger competitive position, poised for continued growth. The company has transformed its operations, and its digital capabilities and its dedicated delivery network has allowed it to meet consumer needs as they evolved. At the same time, the scale of Yum China's membership base (445 million and counting) continues to amaze observers, and the untapped potential here remains considerable.

Buoyed by impressive recent performance - and confident it its refreshed RGM 2.0 strategy - Yum China's leadership are excited about the company's future prospects and the significant opportunities China presents. Nomura seemed to echo this sentiment in its report, noting, "Overall, we maintain our positive view on the long-term growth prospects of YUMC. The company's accelerated network expansion, coupled with operational efficiency improvements driven by digitalization and technological advancement, contributes to our optimism." Goldman Sachs added, "We like Yum China for its nimble business model, mass market position, and strong execution which could lead to more steady operating results."

 

 

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