Yum China (YUMC) wants to expand to the coffee business to attract younger customers to its stores, according to an announcement made during its virtual meeting this week.
The company’s announcement follows a period of successful experimentation with the idea in partnership with Lavazza.
“Rapid same-store sales growth at COFFii & JOY and the early success of Lavazza reaffirm the Company’s belief in the potential of the coffee market in China,” says the announcement. “COFFii & JOY is positioned to attract younger consumers with its artisanal coffee and small store format. Lavazza offers a premium and authentic Italian coffee experience.
“Yum China and the Lavazza Group, the world-renowned family-owned Italian coffee company, will accelerate the expansion of the store network in China through their joint venture, targeting to open 1,000 Lavazza stores by 2025. The joint venture is also expected to be Lavazza’s exclusive distributor in mainland China to introduce more products from Lavazza’s portfolio.”
Coffee is a high-margin business, and therefore, could boost the Yum’s overall margins. It could also attract younger people, helping fuel buzz for the company’s brand.
Aggressive Expansion Strategy
Yum China’s expansion into the coffee business comes when the company continues to open new stores at a feverish pace, shaking off the risks arising from the pandemic.
“As we manage risks in the short term, we see plenty of opportunities to grow quickly,” said CEO Joey Wat. “We are accelerating our store network expansion to reach our 20,000 store milestone.”
Wall Street’s Take
Wall Street has been skeptical of Yum’s expansion plans. Its shares have lost 1.1% of their value year-to-date, as the S&P 500 gained 20.2%.
Yum’s numbers should be interpreted with caution however, as Yum’s performance has been affected by the pandemic, and China’s crackdown on businesses.
Only five analysts have followed its shares in the last 12 months, rating them a Moderate Buy. The average YUMC price target of $71 implies upside potential of 25.8%. Price targets range from a low of $52.90 to $78.10.
Yum China seems to do whatever it takes to expand the size and the scope of its businesses, a strategy that could reward long-term investors.
Disclosure: At the time of publication, Panos Mourdoukoutas had a position in Yum China.
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