By David Kirton and Sophie Yu
SHENZHEN, China (Reuters) - Fast food giant Pizza Hut is adapting to China's sluggish economy by opening stores that offer smaller, cheaper versions of its favourites to attract cost-conscious diners, a strategy its parent Yum China is also using for other brands.
In the busy Bao An District of Shenzhen, a small lunchtime queue stood outside the recently opened Pizza Hut Wow store, which sells smaller pepperoni pizza servings for 29 yuan ($4), pastas for around 15 yuan, and a steak for 35 yuan, all priced significantly less than at traditional Pizza Hut restaurants.
"China’s catering industry is very competitive right now, but we’re trying to be innovative," a Pizza Hut Wow spokesperson said. "This kind of store is more for individuals, like a small plate of tapas. In the past, Pizza Hut has been set up for families sharing."
The first Pizza Hut Wow store opened in Guangzhou in May and there are now more than 100 around the country, with a target of 200 by the end of the year, Yum China said.
The company, which operates 10,931 KFC stores and 3,504 Pizza Hut stores, has also been experimenting with smaller store formats for KFC and rolling out more KCOFFEE kiosks to capitalise on a growing demand for cut-price coffee in China.
During a recent post-earnings call with analysts, Joey Wat, Yum China's CEO, said Pizza Hut Wow and KCOFFEE "showed great future potential."
According to independent food and beverage analyst Zhu Danpeng, large chains like Yum China-operated KFC and McDonald's (NYSE:MCD), which last year bought back a larger share of its China business, are among those best placed to win in the current low-cost environment.
"Pizza Hut is entering a price level that they didn't cover in the past, I think it's the right thing to do," he said.
"The winner will be highly cost-effective, with a good service system. Its supply chain must be very mature. If you are not a big company you won't be able to have these resources."
Restaurant owners across China cheered the end of draconian COVID restrictions in late 2022, hoping that would lead to a bounceback in business, but more than 18 months later, job uncertainty, a slowing economy and weak consumer sentiment have hit the sector hard.
According to the Beijing Statistics Bureau, profits in the city's catering business sector, which includes restaurants, dropped by 88% in the first half of 2024, compared to the same period last year. In Shanghai, revenue for the hospitality industry, which also groups restaurants, decreased by 2.6% year-on-year, with overall operating profit turning negative.
Last week, stalwart Taiwanese dumpling chain Din Tai Fung said it would close more than a dozen outlets in mainland China. According to catering industry news outlet Canguanju, those closures will add to more than a million food and beverage outlets shutting shop across the country in the first half of 2024.
($1 = 7.0823 Chinese yuan renminbi)