create more operational efficiency through innovative technologies, such as robotics and generative AI. In the current evolving market environment, we remain steadfast in achieving our full year targets, including 1600-1800 net new stores, while creating sustainable, long-term value for our shareholders.” Yet beneath the surface of these steady results lies a more complex narrative, one that reveals how the operator of KFC and Pizza Hut is delicately navigating an increasingly value-driven Chinese consumer landscape. Earnings per share clocked in at $0.77, narrowly missing analyst expectations by a penny. That shortfall may seem minor, but it reflects the thin margins of an operating environment where affordability has become king. In a post-pandemic economy marked by weak consumer confidence and slower income growth, Yum China’s strategy has pivoted sharply toward aggressive promotions and lower-priced offerings.  The company is betting big on a “dual focus” strategy: balancing innovation with operational efficiency.  Growth in scale, not spend  In a challenging macro environment, Yum China’s playbook increasingly relies on scale, speed and digital savvy. More than 93 per cent of company sales were made digitally in Q1, and membership across KFC and Pizza Hut now exceeds 540 million, up 12 per cent year-over-year. The company’s investment in AI, automation and new retail formats appears to be yielding results. KFC, accounting for more than 75 per cent of sales, brought in $2.25 billion in revenue this quarter, up just 1 per cent from the prior year. Operating profit rose 4 per cent to $386 million. These modest gains came not from pricing power, but from cost control – lower commodity prices, leaner kitchen operations, and scale efficiencies. But those savings are already being eaten into by rising labor costs and a growing reliance on delivery, which now represents 43 per cent of KFC’s company sales. Yum China’s compact coffee business embedded inside KFC stores, KCoffee, counts more than 1000 locations and offers a low-cost way to tap into China’s fast-growing coffee culture using existing store space, infrastructure and loyalty programs.  Pizza Hut, historically the laggard, is showing signs of a turnaround. Sales held flat at $595 million, but operating profit surged 27 per cent to $60 million. Drive volume by broadening access Menu innovation, such as offering Pizza Hut’s Super Supreme flavor not just on pizza but also in burgers and pasta, has helped attract younger, budget-conscious diners. The expansion of “Wow” store formats at Pizza Hut has enabled the company to open leaner, more tech-forward outlets tailored to lower-tier cities with half the capital expenditure of traditional locations. In total, the company opened 247 net new stores during the quarter, bringing its footprint to 16,642 restaurants. Of those, 25 per cent were opened by franchisees, a number that is expected to grow. Yum China is clearly betting on asset-light expansion to maintain growth while preserving capital in a fragile economy. Meanwhile, consumer sentiment in China remains tepid. Household spending has been slow to rebound post-Covid, particularly among younger consumers facing a soft job market and real estate anxiety. Value-for-money is more than a slogan, it’s a survival tactic. In this environment, discounting may help protect short-term traffic, but it also risks training customers to expect more for less. Still, investors are watching the bottom line. The company’s operating profit margin improved to 13.4 per cent, but it’s clear that further margin expansion will be hard-won. Yum China faces macroeconomic headwinds, including a cautious consumer, food cost volatility and geopolitical friction between the US and China, all of which could cloud its ambitious plan to open up to 1800 new stores this year. Further reading: Yum China’s winning formula: Lower-tier cities as key markets