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Yum China's Second Listing in Hong Kong

On September 10, Yum China landed on the Hong Kong Exchange and achieved a second listing. However, the share price of the company was down by more than 5% from the issue price on the day of listing, closing at HK$395.4. This article is meant to help readers obtain a broad understanding of the Chinese catering market, from which you can also get a glimpse of the reasons for Yum China’s unfavorable share performance.

Enormous growth potential 

According to Frost & Sullivan, a market research firm, China’s catering industry has grown steadily over the past five years, from RMB2,892.6 billion in 2014 to RMB4,672.1 billion in 2019, with a CAGR of approximately 10%.  Bolstered by rising purchasing power, increasing urbanization rates, rapid growth in food delivery services, as well as digital platforms and technological development, China’s catering industry will continue to expand, and it is expected to reach RMB6,613.6 billion by 2024.

QSR and casual dining growing faster 

In terms of service type, China’s catering industry comprises quick-service restaurants (QSR), casual dining restaurants, formal restaurants, and others. Formal restaurants held the largest share, contributing about 58% of the overall retail sales value in 2019, and QSR and casual dining restaurants accounted for 23% and 11% respectively. 

Thanks to consumption upgrades, China’s catering industry is developing towards two directions: one is specialty restaurants to meet individualized, diversified, and social consumption needs; the other is chain restaurants to meet fast and convenient consumption demand. As a result, from 2014 to 2019, compared with formal restaurants, the average annual growth rates of QSR and casual dining restaurants were both above 10%, which was higher than the 9% of formal restaurants. 

Generation Z emerged as key catering spenders 

According to the "China Catering Report 2019" released by the China Hotel Association, in 2018, among all the catering consumers, the 90s (post-90s+95s) accounted for 51.4% (29.4%+22.0%), much higher than the 17% of the 90s in the total population. It is expected that the post-95 generation will emerge to be the largest catering consumer group in 2021. Compared to other age groups, Generation Z has more personalized needs and higher requirements for a dining experience, as well as greater needs for food delivery service.    

Yum China taking the lead 

China’s catering industry is highly fragmented, with the top five companies collectively holding less 5% of market share. A great variety of Chinese cuisines and significant disparity in regional tastes have given result in the long tail of the local catering industry. 

In 2019, Yum China took a merely 1.4% market share and boasts the largest company in the Chinese catering market. It generated a retail sales value of RMB67.6 billion, exceeding the combined sales of McDonald’s, Haidilao, and Starbucks, which held the 2-4 positions in the market share ranking. 

Yum China is the first international catering company to enter the Chinese market. As of 2019, the company has 9,200 restaurants in the local market, covering more than 1,400 cities. The company owns many well-known national brands, including KFC, Pizza Hut, Taco Bell, Little Sheep, Huang Jihuang, Coffii & Joy, East Dawning, and Lavazza. KFC is China's largest fast-food brand, and Pizza Hut is China's largest casual dining brand. 

Since 2017, although Yum China’s operating income has increased year by year, the growth rate has been declining. In 2019, it dropped to 4.29%, indicating that the company is facing the dilemma of weak growth. Also, the company's revenue skews to KFC, which contributes about 70% of the group’s overall sales, leaving a host of other brand sales being languished. 

New catering retailing accelerating  

China's catering industry has been plagued by the "three highs (rent, labor, and raw materials)", and the industry has witnessed losses suffered by many companies. In recent years, with the advancement of technology and the improvement of business philosophy, China's catering industry is undergoing unprecedented changes.  

The four technologies represented by data, mobile payment, instant delivery, and new supply chain systems have accelerated the digitalization of the local catering industry and significantly improved the operating efficiency of the entire industry and consumer experience.  

Major catering companies have taken the lead to beef up digital investment and improve omnichannel services. Especially owing to the Covid-19 epidemic, digital transformation has become the consensus of the industry. 

Chain and brand stores shaping the trends  

Leveraging on branding, economy of scale, and financial resources, chain restaurants can achieve rapid expansion in a short period of time. According to Frost & Sullivan, the Chinese self-operated chain restaurant market is expected to grow rapidly at a CAGR of 9.1% from 2019 to 2024, leading the industry by 2%. 

Compared with developed countries in Europe and America, the penetration rate of chain restaurants in China’s catering industry is still very low, with only 19.6% in China versus 73.8% in the US, indicating enormous room for growth for the former. 

Meanwhile, as consumers’ brand awareness continues to improve, catering companies have attached growing importance on branding. The industry incumbents with well-known brands are more likely to be favored by consumers, thus able to capture brand premium. Based on data from the "China Catering Report 2019", local catering companies pay the most attention to branding, accounting for 72.8%, followed by supply chain, green development, digitalization and lean management, which are all ranked above 45%. 

Implications for catering brands: 

1.Focus on consumer understanding of Generation Z, with products and services highlighting novelty and interesting

2. Catering companies that target mass consumption levels are more likely to succeed

3. Shore up digital investment and enhance omnichannel marketing strategies