Food deliveries are reshaping KFC China, lifting revenue while putting pressure on profitability, Yum China said on Wednesday. The company reported that deliveries grew 33% year-on-year and now represent roughly 55% of its total sales, up from 43% a year earlier.
On the company’s earnings call, chief financial officer Adrian Ding characterized the shift toward deliveries as structural. "We believe it’s a long-term trend," he told investors.
Despite the surge in delivery sales, Yum China reported flat total same-store sales for the period. Growth from new restaurant openings contributed a 4% increase to overall sales, and the company’s operating profit rose 12% to $447 million.
Executives said intense competition in China’s food delivery market has been a key factor shaping these dynamics. E-commerce giants Alibaba and JD.com have been aggressively chasing market share by offering coupons and discounts across menus, covering items from ice cream and takeaway coffees to fried chicken from KFC. Regulators have taken notice of fast-paced promotions in so-called "instant retail" - goods delivered within the hour - and have repeatedly warned against a race-to-the-bottom among delivery platforms.
While deliveries bolster top-line figures, they impose additional costs. Yum China subsidizes delivery orders through arrangements with the tech platforms, and Ding said margins would have contracted by 190 basis points because of higher costs paid to delivery drivers. The company offset about half of that margin impact through improvements in store operations elsewhere.
Yum China expects margins to expand over the full year. Management noted that delivery app subsidies have recently eased and that the platforms are focusing on larger food orders, developments executives view positively. "We welcome the development and believe that it will benefit our industry over time," CEO Joey Wat said on the earnings call.
On a cost breakdown, executives said expenses for delivery drivers account for roughly 30% of the company’s labor costs. Yum China’s portfolio includes the China operations of Pizza Hut and Taco Bell in addition to KFC.
These results highlight contrasting forces: the delivery channel is driving a larger share of sales while generating margin headwinds that management is attempting to manage with operational efficiencies and by responding to changing subsidy behavior from delivery platforms.