Facing the emergence of local challengers in the sinking market, Yum China Holdings, the parent company of KFC (9987.HK), has decided to further lower its product prices to confront the competition.
On the evening of November 12th, KFC officially announced the launch of a new product called &#34;Bing Burger&#34; on its official video platform. Its appearance is no different from other Chinese-style burgers such as Tasting, and it has only a few differences compared to KFC's classic fried chicken burger. The biggest difference lies in the use of &#34;freshly baked pancake&#34; instead of bread.
KFC's new product comes in two flavors: Sichuan Pepper and Old Beijing. The retail price is 19 yuan, the lowest among KFC's burger products. The combo price, which includes fries and a cola, is only 20.9 yuan, slightly higher than its &#34;value burger combo&#34;.
Prior to the launch of the new product, Yum China had just experienced a less-than-ideal third quarter. Although its performance continued to grow positively and more stores were opened, key operating indicators such as average customer spending and restaurant profit margins for KFC and Pizza Hut, both under Yum China, declined.
The release of the financial results triggered strong concerns in the secondary market. On November 3rd, Yum China's stock price fell more than 20%, marking the largest decline since September 2018. The daily decline reached 11.27%, closing at HKD 368.6 per share.
KFC, the &#34;teacher&#34; of Chinese fast food, is indeed feeling a bit &#34;anxious&#34;.
On one hand, its store expansion speed is accelerating. In just the third quarter, it added 355 new stores. It's worth noting that KFC only added 468 new stores in the first half of this year. On the other hand, with the introduction of more low-priced SKUs such as &#34;Chinese-style burgers&#34;, the profitability of its stores may face further pressure.
TradeWind01, an online platform, sent a letter to Yum China inquiring about how they plan to balance performance growth with average customer spending, but as of the time of writing, no response has been received.
Clearly, Yum China does not want KFC to become the next Starbucks. Although the latter has almost single-handedly cultivated the Chinese coffee market, it is still losing market share to new entrants like Luckin Coffee, which have lower average customer spending.
Now KFC is facing a similar situation. Brands like Hua Lai Shi and Tasting have already gained a significant presence, and KFC has to actively respond to the competitive pressure from the sinking market.
On November 13th, the day of the new product launch, Yum China's stock price closed at HKD 352.8 per share, with a daily increase of 4.01%.
<h2>Breaking the Ice with &#34;Chinese-style Burgers&#34;?</h2>
In the current trend of Chinese-style burger chains like Tasting, KFC couldn't resist trying out what's so special about &#34;Chinese-style burgers&#34;.
As early as the third quarter earnings conference, Yum China's management stated that they had already conducted product tests in second-tier cities in provinces such as Jiangxi and Fujian. Jiangxi is the birthplace of Tasting.
During the conference, the management stated, &#34;The product prices are very competitive and affordable, which is also one of our strategies. For lower-tier cities, the company's product pricing will be more flexible while maintaining business profit margins.&#34;
However, when compared horizontally with Tasting's products, KFC's &#34;Bing Burger&#34; is still priced 1-2 yuan higher.
In addition, in the corner of the promotional poster for KFC's new product, there is a small note stating that the Sichuan Pepper and Old Beijing flavors of the &#34;Bing Burger&#34; are limited to 12 million and 8.5 million respectively. This indicates that Yum China is expanding the scope of testing to all its stores nationwide.
TradeWind01 (ID: TradeWind01) wrote to Yum China to inquire about the sales performance on the first day of new product launches, but as of the time of writing, no response has been received.
In fact, compared to most of its competitors, KFC has made quite a few innovations in the Chinese market. Whether it's adding Beijing-style chicken rolls to the menu, or incorporating crayfish into hamburgers, selling Qingtuan during the Qingming Festival, or selling Zongzi during the Dragon Boat Festival, KFC has been trying its best to cater to the discerning taste of Chinese consumers and maintain the popularity of a Western fast food chain.
On the other hand, a typical negative example is the old American hamburger brand Carl's Jr., which entered China in 2009 and insisted on positioning itself as &#34;authentic American hamburgers.&#34; It eventually withdrew from the Chinese market in 2022.
However, in the current market, the rise of Chinese-style hamburger chains like Tasting Burger is clearly not just about changing the two buns of a hamburger. &#34;Large portions and affordable prices&#34; is the key.
<h2>Dealing with low-price competition</h2>
It seems that the battle for limited consumer spending power has now spread to the Western fast food sector, and Yum China also plans to respond with low prices.
In the first three quarters of this year, KFC, which accounted for over 70% of Yum China's revenue, contributed $2.186 billion in revenue, an 8% YoY increase. Pizza Hut contributed $599 million, a 7% YoY increase. However, both brands experienced a decline in average transaction value, with KFC's average transaction value down 5% YoY and Pizza Hut's down 9% YoY.
During an earnings conference, Yum China's management attributed the decline in KFC's average transaction value to promotions, a decrease in delivery orders, and a higher proportion of breakfast sales. As for Pizza Hut, which experienced a larger decline, Yum China is further expanding its price range and targeting a price range below 50 yuan, while increasing the proportion of lower-priced delivery orders. This means that there is still room for further decline in Pizza Hut's average transaction value.
Since the beginning of this year, the average transaction value of catering companies has been decreasing in order to capture limited consumer spending power. In the first half of the year, the average transaction value of the Suancai Fish brand Tai'er, owned by Jiumaojiu (9922.HK), decreased from 78 yuan to 72 yuan, and the average transaction value of Suanhuoguo decreased from 130 yuan to 121 yuan. Xiabu Xiabu (0520.HK) also saw a decrease from 63.1 yuan to 58.2 yuan.
The head of a chain restaurant in East China told TradeWind01 that not only chain restaurants, but the entire catering industry has seen a trend of &#34;trading price for volume&#34; this year. By offering coupons, discounted packages, and other promotions through platforms such as Meituan, Dianping, and livestreaming, they attract customers and naturally lower the average transaction value. Fast food brands are no exception.
Even during the pandemic, Yum China faced low-price competition from local brands. In the past three years, Tasting Burger, which only raised 150 million yuan in Series A funding, rapidly expanded by opening 2-3 stores per day, and grew from 500 to nearly 5,000 stores through a franchise model.
However, it wasn't until 2022 that Yum China realized the opportunities and challenges of KFC in the lower-tier market. In that year, KFC introduced the &#34;small town model&#34; and entered the lower-tier market with a &#34;selected store&#34; model that reduced store size and SKU to adapt to the spending power of the lower-tier market.
Northeast Securities analyst Li Hui pointed out in the research report that the barriers to entry for Western-style fast food products are not high, and the production process is simple, providing an opportunity for the development of localized Western-style fast food brands. Hua Lai Shi, Pie Le Burger, and Baker Burger focus on differentiated competition in the sinking market and have already formed certain advantages by taking the low-price route of 15-20 yuan per capita.
Li Hui believes that consumers nowadays tend to choose fast food brands with high cost performance.
This trend can be verified in another local brand, Hua Lai Shi. Compared with KFC's average customer price of over 35 yuan, Hua Lai Shi's price is less than 19 yuan, highlighting its &#34;large quantity and fullness&#34; nature. The extreme cost performance is also the biggest reliance for Hua Lai Shi to open 20,000 stores. According to Narrow Gate Restaurant Eye, Hua Lai Shi accounts for a high proportion of the third-tier and below cities, reaching the scale of tens of thousands of stores in the low-tier market.
At the performance briefing in the third quarter, Yum China's management stated that Crazy Thursday is no longer just a marketing activity, but has become a cultural phenomenon. In the third quarter, the sales on Crazy Thursday were consistently about 40% higher than other working days.
However, Yum China's CFO, Yang Jiawei, also stated, &#34;The economic recovery process after the epidemic has shown a wave-like and non-linear characteristics.&#34; He noted that consumer demand began to weaken at the end of September and continued into October, considering seasonal factors, sales and profits in the fourth quarter are usually lower. &#34;Therefore, even a slight fluctuation in sales may have a significant impact on profitability.&#34;
A slightly embarrassing fact is that according to Euromonitor International data, from 2013 to 2022, KFC's market share in the Chinese fast food industry has shown a significant downward trend, from 19.5% in 2013 to 11.8% in 2022. Pizza Hut's market share is also declining.
In the current situation where profits and scale can only choose one, Yum China has clearly chosen scale. After the third quarter report, it raised its store opening guidance from 1,100-1,300 to 1,400-1,600. Only on the basis of scale can products like &#34;pie burgers&#34; be sold to more people and compete with peers in the segmented market.

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