Burger King China (9987.HK), with a network of 15,000 stores, is quietly extending its business &#34;frontline&#34; by entering the intense competition in the coffee market.
According to the financial report released by Burger King China for the first quarter of 2024, the company achieved a revenue of USD 2.958 billion, a year-on-year increase of 1.41%; and a net profit of USD 287 million, a year-on-year decrease of 0.7%.
This marks the first time since the fourth quarter of 2022 that Burger King China has recorded a year-on-year decline in net profit.
The decrease in average spending per customer due to offering more &#34;cost-effective&#34; products may be the main reason for the pressure on Burger King China's profit performance in the first quarter. In the first quarter, Burger King China reduced the delivery fee for KFC and introduced more Pizza Hut products priced below 50 yuan.
Ultimately, the average spending per customer for the two major brands, KFC and Pizza Hut, which contribute over 90% of the revenue, decreased by 6% and 12% respectively year-on-year, while the restaurant profit margins decreased by 2.9 and 1.7 percentage points respectively year-on-year.
On the day of the financial report release, the secondary market reacted strongly, with Burger King China falling by 6.24% to HKD 294.4 per share.
In addition to competing with local &#34;Western fast food&#34; chains, Burger King China is aggressively entering the already saturated coffee market. Its Kenjoy Coffee, launched last year, has opened 100 stores and is participating in the &#34;9.9 competition&#34; with Luckin Coffee and Coffee Box.
When asked about the opening target for Kenjoy Coffee in 2024, a Burger King China representative told TradeWind that there is currently no clear opening guidance.
Unable to break free from the low-price competition of &#34;Western fast food,&#34; Burger King China will be involved in the next price war, posing a greater challenge to the already pressured profit levels.
<h2>Successive Price Adjustments</h2>
Burger King China, known for creating the phenomenon marketing campaign &#34;Crazy Thursday,&#34; is trying to make consumers feel like every day is &#34;Thursday.&#34; In the first quarter of 2024, Burger King China made different degrees of price adjustments to its two major brands, KFC and Pizza Hut.
In the first quarter of 2024, the flagship brand KFC contributed USD 2.23 billion in revenue to Burger King China, a slight increase of 1.5% year-on-year.
Since the fourth quarter of 2023, Burger King China has introduced a new product for KFC called &#34;Pie Burger,&#34; which looks similar to Chinese-style hamburgers like Tasdin, priced at the lowest tier of KFC hamburger products at 19 yuan, achieving a de facto price reduction by expanding the product range.
In the first quarter of this year, Burger King China further adjusted the delivery fee for KFC from 9 yuan to 6 yuan, in order to attract more consumers placing small orders for &#34;one-person meals.&#34; Delivery revenue for KFC in the first quarter increased by 14% year-on-year, accounting for nearly 40%.
To control delivery costs, Burger King China introduced third-party delivery riders for KFC starting from the fourth quarter of last year.
The management of Burger King China stated during the performance briefing that due to higher costs in self-delivery, KFC will continue to cooperate with third-party platforms for delivery while ensuring delivery quality in the future
Under the strategy adjustment of price reduction and lowering delivery thresholds, KFC's average customer spending decreased by 6% year-on-year to 42 yuan.
Compared to KFC, Yum China made more adjustments to another major brand, Pizza Hut.
In the first quarter of this year, Pizza Hut contributed revenue of 596 million US dollars, a year-on-year decrease of 0.3%.
During the reporting period, Yum China made more aggressive price adjustments to Pizza Hut products, increasing the supply of pizza products with an &#34;entry-level price&#34;.
Yum China's management stated that in the first quarter, sales of pizzas priced below 50 yuan at Pizza Hut grew by double digits, with the 39 yuan pizza quickly becoming one of the top five best-selling pizzas. &#34;We are learning from other pizza competitors, focusing on low-priced pizzas. This is our way of competing in this market, and we will continue to stay agile.&#34;
Management stated that Pizza Hut's average customer spending has decreased from 132 yuan in 2017 to 90 yuan now, and Yum China will continue to lower Pizza Hut's average customer spending in the future.
Compared to peers, Pizza Hut does have a larger room for price reduction. According to research report data from Guojin Securities analyst Ye Sijia, the average customer spending of peers Zunbao Pizza and Dashen Stock is less than 60 yuan.
However, the erosion of profitability due to price reduction strategies is also evident.
Due to the existence of three rigid expenditures in the catering industry: labor, rent, and utilities, after some operations, KFC's restaurant profit margin decreased by 2.9 percentage points year-on-year to 19.3%, while Pizza Hut decreased by 1.7 percentage points year-on-year to 12.5%. Yum China recorded its first year-on-year decline in net profit since the fourth quarter of 2022.
<h2>&#34;Roll&#34; into the next round of low-price competition</h2>
While enduring the damage of lowering average customer spending, Yum China has set its sights on the &#34;fierce battle&#34; in the coffee market.
Yum China CEO Qiu Cuirong revealed the store data of Coffee Box at the performance briefing. So far, Coffee Box has opened 100 stores in more than 80 cities.
Xin Feng (ID: TradeWind01) inquired about Yum China's guidance for opening Coffee Box stores this year, but as of the time of publication, no response has been received.
It is worth mentioning that while opening the 100th Coffee Box store, Yum China eagerly launched a 9.9 yuan promotion, joining the price war in the coffee industry.
Yum China's confidence in participating in the 9.9 price war may come from its existing over ten thousand KFC stores. As of the first quarter, KFC added a net of 307 stores to reach 10,600 stores.
The large number of stores and multiple sales points are advantages of KFC. A private equity person in the South China region who has been tracking the coffee industry for a long time told Xin Feng (ID: TradeWind01) that, according to their research, in a situation where overall differences are not significant, the convenience and accessibility of store locations when consumers choose coffee will be the primary driving factor, followed by product quality, with price being the least important factor.
Xin Feng (ID: TradeWind01) learned from relevant personnel at Yum China that Coffee Box adopts a &#34;shoulder-to-shoulder&#34; model, meaning it is located next to KFC stores, sharing the back kitchen with KFC, but having independent storefronts, dining areas, and menus
In other words, Yum China expands its Costa Coffee business by dividing existing KFC stores into independent stores that share the kitchen with KFC stores.
As of the end of the first quarter of 2024, approximately 89.47% of KFC stores are company-owned, totaling 9,486 stores.
Yum China officials cited above mentioned that sharing kitchens and equipment with KFC allows Yum China to open Costa Coffee stores at a lower cost.
This may mean that, similar to KFC, Costa Coffee will mainly expand through company-owned stores, resulting in a corresponding reduction in capital expenditure for opening new stores.
Trudy Dai expressed at the performance briefing that opening 100 stores in over 80 cities will inspire the active promotion of Costa Coffee's store opening model by the company.
She also mentioned that under Costa Coffee's single-store model, &#34;even at a price of 9.9 RMB, our cost structure is still okay, without worrying about the impact on profit margins.&#34;
The current coffee market is already a fiercely competitive red ocean market, and this price war shows no signs of stopping for now.
After Luckin slightly reduced the intensity of its 9.9 promotion, Qudi announced the start of &#34;Good Coffee, All 9.9 Unlimited&#34; promotion. Even Starbucks, which claimed not to participate in industry price wars, launched online group buying, discounts, and other promotional activities to attract customers.
Qudi Coffee's management even bluntly stated that low prices are the main means of future market education and expansion.
The outcome of the industry price war is &#34;fierce&#34;.
In the first quarter of this year, Starbucks, which was &#34;complacent&#34;, saw a 11% year-on-year decline in store sales in the Chinese market; actively participating Luckin suffered its first operating loss since the fourth quarter of 2021.
TradeWind01 inquired with Luckin Coffee officials whether Luckin would adjust its product pricing strategy due to its first-quarter performance, to which they responded, &#34;We have not heard of it yet.&#34;
If we consider the scale of over 10,000 stores currently held by KFC, the coffee industry may see the emergence of a second brand with over 10,000 stores besides Luckin. The coffee price war may be far from over, posing a greater challenge to Yum China's profitability

09987

YUMC

"Foreign fast food" faces intensified price competition, Yum China's net profit in the first quarter decreased year-on-year