With more than 29,000 restaurants, 800,000 employees and a new location opening every 3.5 hours. Kfc is one of the world's largest fast food chains. But while much of the brand's early success came from the US today, the majority of that growth is in China. In the city of Hangzhou, about an hour outside of Shanghai, KFC China recently celebrated the opening of its 10,000th store. By comparison, the US has a little over 4300 kfcs. The last four years is the highest speed of KFC development in our 36 year history. Because the the sheer scale of the economy provides us the opportunities to build more stores. Over 40% of our stores have been built in the last four years alone. China is a very important market, you know, for yum. It is the largest KFC market and Yum's second largest pizza market. Remarkably successful in a market, you know, full of restaurants. It's not like there aren't a lot of restaurants in China. They're everywhere. Known for more than just chicken. A typical menu in China can include items like rice congee, steamed dumplings and egg tart. Digital ordering and delivery are also a major component. And here. I can choose the the nearest restaurant and this one is a restaurant I'm right now. Kfc China claims it has over 4300 million members. It identifies members as someone using a member coupon, QR code or ordering through its app. A million of those customers visited at least 100 times in 2023, but the business has faced headwinds, including food safety scandals, lockdowns due to Covid, concerns about the health of the Chinese consumer, as well as questions about plans for future growth. Definitely has more US brands enter. Kfc might see itself facing more direct competition from the faces its used to seeing only in the US. Yum China, the operator of KFC China, generated revenue of $7.2 billion from its KFC segment in 2022. Over the coming three years, the company plans to return $3 billion to shareholders. So how did KFC overtake other fast food chains in China like McDonald's, Starbucks and Taco Bell? And can the business continue to grow? Cnbc traveled to Hangzhou, China to find out. The first KFC franchise opened in Salt Lake City in 1952, but the chain didn't get its start in China until 1987. A leg up on the competition and an infusion of Chinese characteristics into the menu were key to its early success. So 36 years ago, we only serve eight products in a restaurant, including original recipe chicken. Um, right now our menu is bigger, uh, 40 items on the menu. However, every year, including 2022, we introduce 180 different products to our customers in China. They more than any other Western food concept in China. Early on understood the need and necessity of not only introducing, uh, you know, flavors and menu items that would resonate with the Chinese palate, but adjusting their menu. At that time, it was still owned by PepsiCo. And so PepsiCo was more concerned with beating Coke and less concerned with what its restaurant brands were doing. So they kind of went full throttle in China. Pepsico spun off its fast food business, including KFC, Pizza Hut and Taco Bell in 1997. The business was later renamed yum! Brands. By 2000, China accounted for 12% of the sales in the international restaurants category at yum! Brands. Other fast food chains were capitalizing on China's economic transformation, too. Mcdonald's launched there in 1990. The reason that yum is larger, the reason that KFC is larger in China versus McDonald's is really twofold. The first is that yum owned the distribution business in China, so it just allowed them to access smaller cities first and get that first mover advantage. And the second piece is that chicken as a part of KFC is just naturally more appealing in China, where chicken is a larger protein than beef. They look at Colonel Sanders and there is a Chinese expression for them. For Colonel Sanders, they call him like old grandpa. And so he's kind of an iconic figure, just like Ronald McDonald, you know, a representation as an American cultural icon. But the brand was hit with a series of food safety scandals in 2012 and 2014 that weighed on its growth. Yum! Brands China division saw same store sales decline 5% in 2014, and an additional 4% the following year. It the brand was a bit tired at that time. Uh, the stores were a bit tired. Uh, the same store sales, uh, was on negative double digit. Uh, we start to ask the question, Will the Chinese people still like fried chicken? End of 2015? Yum. China was having some challenges that the same store sales recovery was non-linear and was underwhelming. Investor expectations. At the time. There was activist pressure at the time to separate the two businesses that the company adhered to. Yum brands spun off its China business in 2016 to create Yum China, an independent company incorporated in Delaware and listed on the New York and Hong Kong Stock Exchange. Joey Wat took over the role of CEO in 2018. Today, the company has over 14,000 restaurants in 1900 cities and is one of China's largest restaurant companies with exclusive rights to operate KFC, Pizza Hut and Taco Bell brands there. Unlike its US counterpart yum! Brands, with 98% of its stores franchised. Yum China owns and operates the vast majority of its restaurants. In Yum China. Over 90% of our stores are still owned by our company. They are not franchisees. I mean, the investment payback of our store is incredible. In China. That ownership model has helped to boost the company's store count. Yum China had revenue of $9.5 billion in 2022, compared with yum! Brands that had revenue of $6.8 billion that year. Yum brands has over 55,000 restaurants in 155 countries and territories. When we run our equity store in China, we can open our store very, very fast. We don't have to negotiate with franchisees. How many do we open the store in one province or the other one? We can execute in a very, very high speed. I think. Usually when you see this kind of behavior, it's usually indication that they they prefer to keep most of the profits to themselves rather than sharing those profits with individual owners. And so therefore, it's kind of an indication that on a unit level basis, the China stores are not only well operated, but they're profitable. It also benefits yum brands. Yum China pays a license fee to yum! Brands of 3% of net sales in the third quarter of 2023. China made up 25% of yum! Brands KFC system sales. For comparison, the US, its home market, only accounts for 15% of its system sales every quarter. Investments in automation and AI have also helped reshape the business. The first one is, uh, delivery to home, and the second one is dining or takeaway. And the third one is order a coffee. So we'll choose this one right now. In 2023, the company said it would invest an additional 3.5 to $5 billion over the next three years to improve its digital capabilities, boost its store count and bolster its supply chain. Instead of having my staff to order how many buns or how many burgers or how many chicken to the store, this is done by AI already. Our staff don't have to touch it going forward. How could I help our staff? The the next step from AI to AGC is the the new technology allow the the language to be spoken as a human. For example, our staff, our manager will already have a watch. The watch will tell them, oh, it's time to marinate another 50 chicken to prepare for the next batch of customer. It is also allowed it to trim staff. Yum China cut its workforce by 10,000 people over the past seven years, while at the same time almost doubling its store count from 7500 restaurants to over 14,000. Digital orders, including delivery, mobile orders and kiosk orders, accounted for 89% of Yum China's KFC sales in the third quarter of 2023. Yum! China's digital orders exceeded $8 billion in 2022. Chinese consumers are digital first in their behavior across the board. You cannot be retail anything in China without being on top of digital much more than in the US. So, you know, the fact that most of these companies Walmart, Alibaba, all of them, Zara, they're they're digital teams in China often end up being the innovation center for the rest of their operation. Globally. A trade war with the US and rising unemployment have caused strains not only for the Chinese economy but also for KFC. Economic growth in China is expected to slow, from 5.2% in 2023 to 4.2% in 2025. Yum China recently warned on its third quarter call that there's been a little bit of slowdown, and it's hard to tell if this is something that's seasonal, it might improve or if there's just a general pessimism in the Chinese economy. If you look at their profitability, it's starting to taper. And then we have to figure out, you know, to what extent is this related to the overall sort of slowdown in the Chinese economy, or is it or is it more related to the concept itself? There's also some concern that there might be a little bit of backlash or apathy towards Western brands in particular, which might not hit KFC to the same extent as, say, Starbucks. But it's still something to consider. The pandemic also impacted sales the number of Yum China stores temporarily closed, or that offered only takeout or delivery options, reached over 4300. In November 2022, total revenue at Yum China declined 3% in 2022 from a year earlier. Kfc's China's same store sales declined 7% during that same period. Covid pandemic really did put a hit on KFC. The only thing that kept them alive was the delivery business. Kfc China established its own delivery platform in 2010. By 2022, about 90% of KFC's in China offer delivery, contributing to 39% of sales. But can KFC continue to expand? Franchising might be one option for future growth. In 2019, Yum China announced its first KFC franchise at gas stations with China Petrochemical and China National Petroleum. Combined, the two companies operate more than 50,000 gas stations. Going forward, we're going to open up more to franchisee business because we have enough, um, our alumni, our employees who are, you know, going moving on to the next thing you know, you know, we might give them opportunity x Yum China employee to be our franchisee. And if they do foresee the opportunity franchise that actually potentially makes their stock more interesting because within those 10,000 locations, they could sell those locations off to individual families and recover a lot of capital, which would really boost their stock. Coffee is another market KFC is hoping to capture. Starbucks launched in China in 1999. Today, there are over 6500 stores. K coffee, KFC's in-house coffee brand, has about 300 locations, including inside trucks, kiosks and small formats. Nationwide, KFC China said it expects to sell 180 million cups of coffee in 2023. We're seeing a proliferation of of coffee concepts in China, given the fact that it's high ROI, with low barriers to entry, and the added benefit of the gross margin on coffee is far better than really any other product or restaurant can sell. Per capita consumption of coffee in China is about five cups a year versus the US, where it's closer to 400 cups annually. Total revenue for Yum China in the third quarter of 2023 increased 9% from a year earlier to $2.9 billion. But moving forward, KFC China's biggest challenge might come from closer to home as other Western fast food brands continue to expand there. Now, a lot of them are really leaning in, especially as the economy has opened up since Covid. So we've seen, for example, McDonald's is really doubling down on China. Starbucks has said multiple times, no matter what happens to their stores in China, that they are all in on China. Popeyes, obviously a close competitor of KFC in the US. So that sets up an interesting competition there in the future. Popeyes plans to open 1700 restaurants in China over the next decade, where they. Only serving one third of Chinese population. What happened to the other two thirds? One reason we are not solving the other two thirds is we just don't have enough stores yet to serve them. We are not even close to where do they live?