Yum China Moves to Cooking Kits, Catering to Survive Virus

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(Bloomberg) -- KFC and Pizza Hut operator Yum China Holdings Inc. is trying out new business lines like catering and delivering raw food for home-cooking to boost revenue as Chinese customers shun eating out amid the coronavirus pandemic.

Last month, China’s biggest fast-food chain operator began customizing menus for its corporate clients which allow employees to order food through KFC’s mobile app tailored to their budget. Pizza Hut is now delivering raw steaks -- complete with a recipe that details the exact minutes of frying time -- to home cooks. Delivery is “contactless”: riders drop the food off and stand two meters away to watch people pick up their items.

“The traffic is recovering but it still takes some time,” Chief Executive Officer Joey Wat said in an interview Thursday in Shanghai. “Given the challenge and also the opportunity, we were able to give these a big push.”

Yum China Moves to Cooking Kits, Catering to Survive Virus

The Chinese restaurant economy has been at a near-standstill for two months as the coronavirus infected nearly 81,000 people locally and killed over 3,200 since it emerged from the central Chinese city of Wuhan in December. Even as China’s domestic infections dwindle to zero after harsh containment measures kept hundreds of millions of consumers at home, people remain fearful to go out as the pandemic widens globally. Cases worldwide now top 300,000 with more than 13,000 dead.

About 60% of listed restaurant operators in China are at risk of running out of cash within six months, according to data compiled by Bloomberg and company reports. Many medium and small-sized operators have already shut down. Food delivery, which contributed about a third of Yum China’s revenue pre-outbreak, has boomed.

Yum China shares have fallen 15% this year and earlier this month touched their lowest point since last May.

Read more on the outbreak’s impact on retail and restaurants

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Yum China, which operates 9,200 outlets nationwide according to its latest annual report, has more cash than most to survive even as dine-in demand fell to almost zero and more than 30% of stores were closed during the peak of the epidemic. The group said last month that it expects an operating loss in the March quarter. Wat said that the second quarter will still be “challenging”.

Opportunity for Innovation

Yum China’s “run of strong free-cash-flow generation in 2018-19 will end in 2020 as store closings, shorter operating hours and reduced customer traffic due to the coronavirus outbreak hurt results,” Bloomberg Intelligence analysts led by Michael Halen wrote in a March 4 note.

The virus outbreak added to challenges such as fierce competition and high material costs the fast-food giant was already facing. Pizza Hut’s same-store sales missed analysts’ consensus in the last two quarters prior to the epidemic.

Yum China Moves to Cooking Kits, Catering to Survive Virus

Still, Wat struck a note of optimism. Because Yum China directly manages almost all of its outlets -- unlike its former American parent company Yum Brands Inc. which works with franchisees -- it can move more quickly to innovate and tweak its business model.

Wat said that the company still hopes to open several hundred new outlets this year, and has no plans to lay off any workers. About 95% of its stores are now open although consumer sentiment is still weak.

“For the recovery of the business, we would have to be a little patient. The second quarter will still be a little challenging,” said Wat. The crisis “also gives us opportunities to become more open-minded for innovation,” she said.

©2020 Bloomberg L.P.

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