Yum China's Q3 2025 Earnings Call: Key Contradictions in Delivery Subsidies, K-Pro Expansion, and Operating Leverage

Date of Call: None provided

Financials Results

• EPS: $0.76 diluted EPS, down 1% YOY (up 11% YOY excluding Meituan investment)
• Gross Margin: Restaurant margin 17.3%, up 30 bps YOY
• Operating Margin: Operating profit margin 12.5%, up 40 bps YOY; operating profit $400M, up 8% YOY

Guidance:

• Q4 on track for mid-single-digit system sales growth; Q4 same-store sales goal similar to Q3
• Full-year target: mid-single-digit system sales growth and moderately improved margins
• 2025 net new stores expected 1,600–1,800 (YTD 1,119)
• 2025 capex target $600–$700M; per-store capex declining (KFC RMB1.3–1.4M; Pizza Hut RMB1.0–1.1M)
• Franchise mix guidance: KFC 40–50%; Pizza Hut 20–30%

Business Commentary:

* Strong Financial Performance: - Yum China reported system sales growth of 4% year-over-year in Q3, outpacing the China restaurant industry. - The growth was driven by the company's resilient LGM strategy, strong execution by its team, and the sustained growth of core brands like KFC and Pizza Hut.

• Store Expansion and Market Penetration:
• Yum China achieved a 536 net new store opening in Q3, with a total store count exceeding 17,500, keeping them on track to reach 20,000 stores by the end of 2026.

• The expansion is supported by the company's flexible store formats and a focus on entering new cities and enhancing convenience in existing ones.

• Menu Innovation and Consumer Engagement:

• KFC's new hero product, the Crackling Golden Chicken Wings, and Pizza Hut's Suzhou Baodie Pizza showed significant sales growth and contributed to same-store transaction growth of 17% for Pizza Hut.

• The success of these products is attributed to effective limited-time offers and new growth drivers, enhancing consumer engagement and driving repeat purchases.

• Operational Efficiency and Margin Expansion:

• Yum China's restaurant margin expanded to 17.3%, with an operating profit increase of 8% to $400 million.
• The margin expansion was due to favorable commodity prices, supply chain optimizations, and a balanced approach to maintaining sales growth while protecting margins amid delivery platform subsidy campaigns.

Sentiment Analysis:

Overall Tone: Positive

• Management: "achieved another solid quarter... System sales grew 4% year-over-year... Restaurant margin expanded to 17.3%... operating profit to $400 million, an 8% year-over-year increase" and called it a record for adjusted operating profit.

Q&A:

• Question from Michelle Cheng (Goldman Sachs): Can you share observations on delivery platform subsidies' near-term and long-term impact and pricing trends/competitive landscape? Also, any impact from Yum! Brands' review of Pizza Hut on Yum China?
  Response: Subsidies have eased in some categories and overall impact on Yum China is limited; company will remain disciplined—focus on innovation, quality and protecting price perception; Yum! Brands' strategic review does not change Yum China’s Pizza Hut operations or growth outlook.

• Question from Brian Bittner (Oppenheimer & Co.): What are you seeing on the macro/consumer backdrop in China and can you confirm Q4 same-store sales should look similar to Q3?
  Response: Traffic has improved, aided by travel and stronger lower‑tier city performance; consumers remain value‑cautious; management expects Q4 same‑store sales to be broadly similar to Q3.

• Question from Chen Luo (Bank of America): Can the ~40% ratio of system‑sales growth to store expansion be maintained with shift to smaller formats? Any progress improving franchise economics?
  Response: The 40% ratio won’t necessarily hold—smaller/new stores open at lower initial sales and timing of openings affects weeks; franchise economics are improving (franchise margins near equity levels before G&A) and management expects mid/long‑term parity and ROIC benefits, with no near‑term margin dilution.

• Question from Lilian Luo (Morgan Stanley): Are aggregators driving more orders given subsidies, causing membership contribution to drop; what initiatives to pull customers back to owned channels and reduce rider costs?
  Response: The membership drop is largely mechanical due to aggregator mix; adjusted member contribution is stable; rider cost per ticket is falling but higher delivery mix increases total delivery costs—company is improving delivery efficiency and offsetting via operational and supply‑chain measures.

• Question from Suchie Lin (CICC): What is the strategic approach to rolling out new formats (K‑Coffee, K‑Pro, Wow, Fried Chicken Brothers)? Do you focus on a few categories or test many?
  Response: Approach is focused testing of promising modules that leverage front‑end segmentation and back‑end synergies (shared space, membership, kitchens); some trials will fail but scalable concepts (K‑Coffee, K‑Pro, Wow) are prioritized; more detail at investor day.

• Question from Xiaobo Wei (CT): Given delivery-driven sales mix, should we expect limited positive operating leverage for KFC and how will you expand KFC OP margin going forward?
  Response: KFC’s restaurant margin is targeted to remain broadly stable at a healthy level (~17%); higher delivery mix is a headwind to cost of labor but improvements in cost of sales and occupancy offset much of it—management plans to maintain margins while sharing gains with partners.

• Question from Christine Peng (UBS): How sustainable is KFC's 2% same‑store sales and how much came from delivery subsidies vs new formats; can you share K‑Pro economics?
  Response: 2% SSS exceeded expectations but sustainability is uncertain; management focuses on sustaining transaction growth and expects Q4 similar to Q3; K‑Pro is a side‑by‑side module leveraging KFC assets that delivers incremental sales and profit but remains early stage.

• Question from Linda Huang (McQuarrie): Can Yum China accelerate to high‑single‑digit growth and would that be macro‑driven or company‑specific?
  Response: Company is well positioned with multiple growth initiatives and modular expansion to capture upside; management believes faster growth is achievable but will present the specific three‑year growth algorithm at the upcoming investor day.

Contradiction Point 1

Delivery Subsidies and Margin Impact

It involves the impact of delivery subsidies on margins, which is crucial for understanding Yum China's financial health and strategic positioning.

Can you elaborate on the impact of delivery platform subsidies and pricing trends? What is Yum China's stance on Yum! Brands' strategic review of Pizza Hut? - Michelle Cheng (Goldman Sachs)

2025Q3: We observed a decrease in subsidies from delivery platforms. The impact is limited, and we maintain a balanced approach to sales growth and margin protection. - Joey Wat(CEO)

Do platforms bear the majority of delivery subsidies, and how do they affect margins? - Chen Luo (Bank of America)

2025Q2: The subsidy split between platforms and merchants varies, with larger brands like Yum China enjoying more favorable arrangements. For the second half, KFC restaurant margin is expected to be stable, and Pizza Hut's is expected to slightly improve. - Adrian Ding(CFO)

Contradiction Point 2

K-Pro and Fried Chicken Brothers Expansion Strategy

It relates to Yum China's expansion strategy and its focus on new growth initiatives, which could impact future sales and market positioning.

How does Yum China identify and develop new store formats and categories, such as K-Pro and Fried Chicken Brothers? - Suchie Lin (CICC)

2025Q3: We focus on growth initiatives like K-Pro and K-Coffee. New models like Fried Chicken Brothers are early trials. Promising categories like fried chicken and alternatives are explored for customer choice and market needs. - Joey Wat(CEO)

How is Yum China tackling delivery subsidies, and is the competitive landscape worsening? - Yushen Wang (CLSA Limited)

2025Q2: We believe that there is great opportunities in our delivery business and we are also testing a new store format called K-Pro to leverage our KFC brand to expand into the delivery-only market. - Joey Wat(CEO)

Contradiction Point 3

Subsidy Impact and Pricing Trend

It reflects differing perspectives on the impact of subsidies from delivery platforms on sales growth and margin protection, which are crucial for the company's financial health and strategic positioning.

What is the impact of delivery platform subsidies on pricing trends? How does Yum China view Yum! Brands' strategic review of Pizza Hut? - Michelle Cheng (Goldman Sachs)

2025Q3: We observed a decrease in subsidies from delivery platforms. The impact is limited, and we maintain a balanced approach to sales growth and margin protection. - Joey Wat(CEO)

好的，我现在需要处理用户提供的这个任务。用户希望我作为专业的金融文章作者，总结并精简来自美股上市公司财报电话会议中的问答环节的问题。用户特别强调要简洁、精准，不改变原意，并且符合美式英语习惯，同时只输出简化后的问题，保留问号结尾。首先，我需要仔细阅读用户提供的原始问题：“Can you update us on business trends after the first quarter? We've seen consumption slowdown post-Chinese New Year, and JD is pushing delivery with subsidies. How is this affecting your business?”用户的要求是简化这个问句。原始问题有两个部分：第一个部分是请求更新业务趋势，第二个部分是询问中国春节后消费放缓和京东补贴配送对业务的影响。我需要将这两部分合并成一个简洁的问题，同时保留所有关键信息。首先，第一个问题“Can you update us on business trends after the first quarter?”可以简化为“Can you update us on Q1 business trends?”因为“first quarter”通常缩写为“Q1”，这样更符合美式英语的财务术语习惯。接下来，第二个部分：“We've seen consumption slowdown post-Chinese New Year, and JD is pushing delivery with subsidies. How is this affecting your business?”需要合并到第一个问题中。用户提到消费放缓和京东的补贴策略，这两个因素对业务的影响是核心。因此，可以将这两个因素作为影响因素整合到问题中。可能的简化方式是：“How are the post-Chinese New Year consumption slowdown and JD's subsidized delivery initiatives impacting your business?” 这里，“post-Chinese New Year”保留了时间因素，“consumption slowdown”和“JD's subsidized delivery initiatives”是两个关键因素，用“impacting your business”来询问影响。检查是否符合要求：是否保留了原意？是的，原始问题询问了消费放缓和京东补贴的影响。是否简洁？是的，去除了冗余的表达，如“update us on business trends after the first quarter”合并到Q1中。是否符合美式英语？是的，使用Q1和正确的术语。结尾是否有问号？是的。有没有更好的表达方式？比如，“post-Chinese New Year consumption slowdown”是否可以更简洁？可能不需要进一步缩短，因为这是关键信息。另外，“subsidized delivery initiatives”是否准确？原始问题中是“pushing delivery with subsidies”，所以“subsidized delivery initiatives”是合适的翻译。最终，合并后的问题应该是一个完整的问句，涵盖Q1业务趋势和两个影响因素。因此，最终的简化问题应该是：“Can you update us on Q1 business trends, particularly the impact of the post-Chinese New Year consumption slowdown and JD's subsidized delivery initiatives on your business?”但用户要求的是仅输出简化后的问题，可能不需要合并两个问题。原问题有两个独立的问题，但用户可能希望将它们合并成一个。不过原始问题有两个问句，所以可能需要将它们合并成一个。但用户提供的例子可能是一个问题，所以需要确认是否应该合并。例如，原始问题中的两个问句可能被用户视为一个整体的问题，所以需要合并。因此，最终的简化问题可能是一个问题，涵盖Q1趋势以及影响因素。但根据用户提供的例子，他们可能希望将两个问题合并成一个。例如，原问题有两个部分，但用户可能希望将它们合并为一个更简洁的问题。因此，正确的简化可能是：“How are the post-Chinese New Year consumption slowdown and JD's subsidized delivery initiatives impacting your Q1 business trends?”这样既包含了Q1的趋势，又询问了影响因素。或者，可能更简洁的是：“How are post-Chinese New Year consumption trends and JD's delivery subsidies affecting your Q1 performance?”但需要确保不改变原意。原始问题中的“consumption slowdown”和“JD pushing delivery with subsidies”是两个因素，所以应该明确提到这两个因素。因此，最终的简化问题可能是：“How are the post-Chinese New Year consumption slowdown and JD's subsidized delivery initiatives impacting your Q1 business?”或者更简洁：“How are post-Chinese New Year consumption trends and JD's delivery subsidies affecting your Q1 business?”但需要确保“consumption slowdown”被保留，因为这是关键点。因此，正确的版本应该是：“How are the post-Chinese New Year consumption slowdown and JD's subsidized delivery initiatives impacting your Q1 business?”或者，如果用户允许将“update us on business trends after the first quarter”简化为“Q1 business trends”，那么可以合并为：“Can you update us on Q1 business trends, particularly the impact of the post-Chinese New Year consumption slowdown and JD's subsidized delivery initiatives?”但用户可能希望更简洁，所以可能直接问影响因素，而不是更新趋势。因此，最终的简化问题可能是：“How are the post-Chinese New Year consumption slowdown and JD's subsidized delivery initiatives impacting your business in Q1?”这样既简洁又准确， - Lillian Liu (Morgan Stanley)

2025Q1: So far, we're in line with expectations and no significant negative impact from the competition. We remain watchful. Consumer sentiment in China is rational, pragmatic, and supportive. - Joey Wat(CEO)

Contradiction Point 4

Impact of Subsidies and Delivery Platforms on Sales Growth

It highlights differing perspectives on the impact of subsidies from delivery platforms on sales growth and profit margins, which are critical for strategic decision-making and investor expectations.

Could you clarify the impact of delivery platform subsidies and the pricing trend? - Michelle Cheng (Goldman Sachs)

2025Q3: We observed a decrease in subsidies from delivery platforms. The impact is limited, and we maintain a balanced approach to sales growth and margin protection. Long-term, subsidies will normalize, and our focus on innovation and food quality is crucial for our competitiveness. - Joey Wat(CEO)

Why will labor cost per delivery increase in 2025 despite improved delivery efficiency? - Yushen Wang (CLSA)

2024Q4: We face a high starting base for delivery sales mix, which adds a headwind to labor cost per delivery and core OP margin. We will continue to optimize our delivery operations and non-delivery operations to offset these impacts. - Adrian Ding(Acting CFO)

Contradiction Point 5

Operating Leverage and Cost Management

It involves differing explanations for the lack of operating leverage and the strategies to improve margins, which are crucial for financial performance and investor confidence.

Why didn’t KFC show operating leverage despite strong system sales growth? How will operating margins improve? - Xiaobo Wei (CT)

2025Q3: KFC's restaurant margin is stable at a high level. Despite increased delivery mix causing COL headwinds, we offset this with COS and O&O efficiencies. Mid to long-term, we expect stable KFC margins. - Adrian Ding(CFO)

What are the potential cost savings and margin improvement areas for 2025? - Lillian Lou (Morgan Stanley)

2024Q4: We expect to keep core OP margin stable or slightly improve. Cost of goods sold (COS) is expected to improve due to favorable commodity prices and operational efficiency. Labor cost (COL) faces headwinds but will be managed through efficiency improvements. Occupancy and other costs are expected to remain stable. - Adrian Ding(Acting CFO)