- KFC restaurants in China sold parts of chickens they've never used before in the first quarter of 2019.
- The restaurant chain introduced "a part of the chicken that we somehow have not used in the last 30-some years," said CEO Joey Wat on Yum China's first-quarter earnings call.
- Yum China, which runs KFC and Pizza Hut in China and was spun off from Yum Brands in 2016, made the move in response to rising costs.
- Chinese poultry costs have risen as an outbreak of African Swine Fever has hit pork production, and the trade war with the US has reduced chicken imports.
- KFC's operating margin shrunk from 20.6% to 18.7% due to the higher costs.
- Watch Yum China and Yum! Brands trade live.
KFC was forced to get creative when Chinese poultry prices rose in the first three months of 2019. The restaurant chain rushed to protect its profit margins by introducing a cut of chicken it had never used before.
Yum China, a New York Stock Exchange-listed spin-off from Yum Brands that runs KFC and Pizza Hut restaurants in China, turned to "a part of the chicken that we somehow have not used in the last 30-some years," said CEO Joey Wat on the company's first-quarter earnings call. The name of the piece was said in Mandarin and not translated in the transcript.
"This is the piece of chicken between the chicken wing and the chicken breast," he elaborated.
Poultry prices in China have risen this year due to a widespread outbreak of African Swine Fever that has hampered domestic pork production, as well as restrictions on poultry imports due to the US-China trade war, according to an industry report from Rabobank.
As a result, KFC — which has more than 6,000 restaurants in China — faced commodity inflation of 5% in the first quarter, the company said its earnings call.
The fried-chicken chain's same-store sales rose 5% excluding currency impacts, but its food and paper costs rose by 12%, according to its earnings report. Coupled with higher labor costs, that reduced the brand's operating profit by about 3% to $288 million.
"We expect poultry inflation to weigh on margins for the rest of the year," said Jacky Lo, CFO of Yum China, in the earnings report.
Wat downplayed the impact of higher poultry prices, arguing KFC could negotiate lower prices from suppliers and draw from chicken inventories. Moreover, the chain continues to explore whether new technology can provide "another way to cut out chicken," he said. It's also on the lookout for "some sort of ingredient that probably has not been used before."
For example, KFC plans to introduce shrimp and crayfish into its wraps as the prices of these typically "pretty expensive" proteins now look attractive relative to chicken, Wat added.
Excluding currency impacts, Yum China's same-store sales rose 4% in the first quarter, pushing adjusted operating profits up 9%.
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