| China

Yum China’s first quarter earnings impacted by Covid-19 lockdown

Tightened Covid-19 restrictions in China have significantly impacted Yum China’s food and beverage operations, with a predicted second quarter operating loss likely to follow

Yum China's first quarter operational performance was significantly impacted by Omicron in March | Photo credit: Yum China

Yum China, which operates major fast-food brands, including KFC and Pizza Hut, as well as branches of COFFii & JOY and Lavazza Café in the country, has reported a first quarter operating profit of $191m, in line with expectations indicated in the March business update.

However, tightened Covid-19 restrictions in China led to an operating loss in March, company said, with a second quarter operating loss likely. Yum China said it had already moved to reduce advertising and promotional activities, as well as temporarily postponing store remodels in response to trading pressures. 

For the first quarter, total revenues increased 4% year over year to $2.67bn from $2.56bn, whilst total system sales decreased 4% year over year. Same-store sales decreased 8% year over year.

Furthermore, operating profit decreased 44% year over year to $191m from $342m and net income decreased 57% to $100m from $230m in the prior year period.

Covid-19 cases have reached a record high in China, with infections in March 2022 surpassing figures for 2020 and 2021 combined. Cases in April further increased to nearly 600,000, which is approximately six times higher than that of March.

Economically important regions, such as Shanghai, Tianjin, Jilin, Suzhou, Shenzhen and Guangzhou, have been fully or partially locked down for months at a time.

During a peak in January 2022, over 500 Yum China outlets were temporarily closed or offered only takeaway and delivery services, but this rose to approximately 3,000 stores in April, of which approximately 50% of stores were temporarily closed.

"First quarter operational performance was significantly impacted by the surge of Omicron variant in March. The case counts, duration, coverage, and severity of restrictive measures are far more extensive than previous outbreaks. Our quick response to sustain operations in areas on lockdown, drive off-premise sales and proactively manage costs partially mitigated the impact,” said Andy Yeung, CFO of Yum China.

“While we generated operating profit in the first quarter, we experienced a loss for the month of March. Unless the COVID-19 situation improves significantly in May and June, we expect to incur an operating loss in the second quarter. During this enormously difficult time, our priority is to operate our restaurants safely in order to serve customers and communities in need," he added.

Fresh Covid-19 restrictions in China were also deemed the primary reason for Starbucks’ latest financial report, in which the Seattle-based chain saw comparable store sales decrease by 23% in its second largest market.

Yum China now operates 12,117 outlets in over 1,700 cities and towns across mainland China, with the first quarter results highlighting the opening of 329 net new stores.

Yum China became an independent publicly traded company in 2016 and operates the COFFii & JOY concept across the country. Having first been developed in 2018, there were 34 COFFii & JOY units in China as of the beginning of April 2022.

Yum China is currently partnered with Lavazza to develop the Lavazza Cafe brand in China and open 1,000 stores by 2025. The joint venture was first announced in May 2020, with Yum China also gaining exclusive rights to distribute Lavazza's retail products in mainland China, including coffee beans, ground coffee and coffee capsules.

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