By Waylon Cunningham
April 30 (Reuters) – An explosion of food deliveries is reshaping KFC China, the country’s largest restaurant brand, boosting sales but squeezing margins.
Delivery sales at the brand grew 33% year-on-year and contributed roughly 55% of total sales, up from 43% last year, parent company Yum China reported Wednesday.
“We believe it’s a long-term trend,” chief financial officer Adrian Ding told investors on the earnings call.
Yum China’s total same-store sales were flat, although new restaurants pushed sales up 4%, and its operating profit grew 12% to $447 million.
Food delivery in China has become intensely competitive over the last year, with e-commerce giants Alibaba and JD.com aggressively pursuing market share by offering coupons and discounts on products across menus, from ice cream and takeaway coffees to KFC’s fried chicken.
So-called “instant retail” – goods delivered within the hour – has drawn scrutiny from Chinese regulators who have repeatedly warned against race-to-the-bottom competition among food delivery firms.
Even as the deliveries drum up sales, they eat into margins because Yum China subsidizes them in an arrangement with the tech companies. Ding said margins would have shrunk by 190 basis points because of higher costs paid to delivery drivers, but about half of the margin impact was mitigated through improvements to store operations elsewhere. The company expects margins to expand over the full year.
Executives on the earnings call said delivery app subsidies had recently eased, and that apps were focusing on larger food orders. “We welcome the development and believe that it will benefit our industry over time,” CEO Joey Wat said on the earnings call. Executives said costs for delivery drivers account for roughly 30% of labor costs at the company, which also owns the China divisions of Pizza Hut and Taco Bell among other restaurants.
(Reporting by Waylon Cunningham;Editing by Elaine Hardcastle)
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