Good day, thank you for standing by. Welcome to the Yum China third quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question- and- answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to our speaker today, Michelle Shen. Thank you, please go ahead.
Thank you, Lyndon. Hello, everyone, and thank you for joining Yum China's third quarter 2021 earnings conference call. Joining us on today's call are our CEO, Ms. Joey Wat, and our CFO, Ms. Andy Yeung. Before we get started, I'd like to remind you that our earnings call and investor presentations contain forward-looking statements, which are subject to future events and uncertainties. Our actual results may differ materially from these forward-looking statements. All forward-looking statements should be considered in conjunction with the cautionary statement in our earnings release and the risk factors included in our filings with SEC. This call also includes certain non-GAAP financial measures. You should carefully consider the comparable GAAP measures. Reconciliation of non-GAAP and GAAP measures is included in our earnings release. Today's call includes three sections. Joey will provide an update regarding recent developments and our third quarter 2021 results.
Andy will then cover the financial performance in greater detail. Finally, we will open the call to questions. You can find a webcast of this call in a PowerPoint presentation, which contains operational and financial information for the quarter on our IR website. Now, I would like to turn the call over to Ms. Joey Wat, CEO of Yum China. Joey?
Thank you, Michelle. Hello, everyone, and thank you for joining us today. As we shared in mid-September, we navigate a very challenging situation in the third quarter. The Delta variant outbreak that started in late July spread to 16 provinces, became the most widely spread regional outbreak since the first quarter of 2020. Strict public health measures were implemented across the country. Trading was significantly impacted during the peak summer season, which is traditionally a very strong quarter for our business. Same-store sales declined by 7% in the quarter as demand fell for dine-in, although this was partially offset by growth in delivery. I want to take a minute to thank our 440,000 employees for working diligently and rapidly finding solutions in this fluid situation.
In response to the sharp decline in dine-in traffic, we quickly adjusted marketing campaigns, operations, and supply chain to drive demand for off-premise. Delivery sales grew 23% year-over-year or 62% on a two-year basis, and contribute approximately 34% of sales in the third quarter. New retail business grew rapidly with sales in the third quarter almost equal to the first two quarters combined. Our ability to engage customers digitally was essential during this difficult time. In the third quarter, over 60% of system sales came from members. We added about another 20 million members, ending the period with a total member count of over 350 million. We sold 19 million privilege subscriptions, including the popular KFC Chicken Lovers Card, Wang Zha Card, which is a summer exclusive.
Having taken important initiatives to drive sales, we saw a sequential recovery in September. For the quarter, system sales growth was positive compared to last year and to pre-COVID. New unit growth more than offset the same-store sales decline. We broke records by opening 524 new stores, ending the quarter with 11,415 stores. However, we do not compromise quality for quantity. We have proved a new store approval process and carefully track the performance of each new store. New store payback remains healthy at around two years at KFC and three years at Pizza Hut. Our smaller store formats enable us to increase store density in higher tier cities and further penetrate into lower tier cities with lower CapEx and rent. Let me provide some color on our key brands. First, KFC.
We set up value and promotional campaigns to drive traffic, and we introduced great food items. Juicy whole chicken was sold out within a week. Our meat sauce Wagyu or Angus beef burger also proved popular. Our premium beef burgers have been very successful since becoming permanent menu items. We are building a beef burger platform covering different price points. We're taking menu innovation and localization to the next level. Following the success of hot dry noodles, Re Gan Mian, in Wuhan, we rolled that out nationwide in September. In a week of launching, we sold over 1 million bowls. It's the best performing limited time offer breakfast item in the past three years. We also introduced steamed dumplings, xiaolongbao, to more stores in Eastern China. More recently, we launched hot pepper soup, the very famous hula tang in Henan. All of these are very well-received by our customers.
KFC has added nearly 1,000 stores and entered 150 new cities over the past 12 months. As we mentioned during the Investor Day, we are now tracking 1,200 potential cities that we could enter in the future with multiple store formats. Next, let's talk about Pizza Hut. Years of transformation has improved Pizza Hut's fundamentals and resilience. In the third quarter, Pizza Hut opened 103 stores, the highest number of store openings in a quarter since 2016. Satellite stores and other smaller formats accounted for over 70% of the new stores and enable us to capture the strong demand for delivery with higher store density. We upgrade our buy one, get one pizza promotion. For the free second pizza, customers were given more flexibility to choose when, where, and what pizza they would like to have.
This mechanism was a breakthrough for us, enabled by our upgraded digital platform. The promotion was exciting for customers and created sales uplift for us. During this 10-day campaign, we sold approximately 1 million buy one, get one pizza sets. For a limited time, we also offered new pizza flavors modeled on popular Chinese dishes, such as [Non-English content] pizza with pickled vegetables and spicy stir fried pop pizza, mala xiang guo. These innovative products were Pizza Hut's take on localization and positioned us to attract young consumers who love to try new things. Moving on to coffee, our third growth engine. We are very excited about our deepened partnership with Lavazza. This 126-year-old Italian brand offers a truly authentic Italian experience. Our Italian coffee exclusively uses high-quality Lavazza beans roasted in Torino, Italy. In addition to coffee, customers love the delicious food.
Popular item like Emiliano, which is toasted sandwich, and mini croissants with ham and cheese are made fresh in our fully equipped kitchen. The high proportion of food, which is 25%, contributes to a higher ticket average. At the end of September, we had 26 Lavazza stores in four top-tier cities. We expand beyond Shanghai to Hangzhou, Beijing, and Guangzhou, where our stores received great customer feedback. Our first Beijing store is already ranked the most popular café in Chaoyang District. Encouraged by the positive results, we expect to enter into more top-tier cities and more than double our current store base in the fourth quarter. Despite recent challenges, our commitment to China's long-term growth remains unshaken. We are always planning for the future and have been executing on the strategies outlined during our September Investor Day.
Despite the difficulties posed by the outbreak, we work diligently to build our store pipeline. We now expect to open over 1,700 robust new stores in 2021, up from 1,300. I'm also excited about our investment in Hangzhou Catering Service Group. This will allow us to accelerate growth across our brands in the Zhejiang Province. Lastly, we continue to enhance capabilities in supply chain and digital. These are our core enablers for sustainable growth in the long term. Last week, we opened our digital R&D center with three sites in Shanghai, Nanjing, and Xi'an. The center is a key part of our strategy to build a dynamic digital ecosystem. The R&D center will consolidate and expand dedicated resources to develop solutions and services to optimize customer experience and operating efficiency.
We plan to invest CNY 100 - 200 million and to employ up to 500 staff over the next five years for this particular initiative. As for supply chain, in addition to the logistics center in Chengdu, we have another one under construction in Huai'an, which is in Jiangsu Province. There are also several sites in the pipeline. As we mentioned during the Investor Day, we plan to operate about 45-50 logistic centers and consolidation centers over the next several years to support our expansion and to further increase efficiency. With that, I will turn the call over to Andy.
Thank you, Joey, and hello, everyone. Let me first review our third quarter financial performance and then discuss this year's outlook. Unless noted otherwise, all percentage changes are before the effect of foreign exchange. Let me first cover the third quarter performance. Actual results are in line with the business update that we released in mid-September. Third quarter performance was disrupted by the Delta variant outbreak, resulting in same-store sales decline of 7% year-over-year. However, we still deliver positive revenue growth and system sales growth, which is led by new unit contribution. Total revenues grew 2% year-over-year and reached $2.55 billion. System sales increased 1%. Similar to prior quarters, we are providing pro forma measures here for convenient comparison with 2019. Same-store sales were approximately 87% of the third quarter 2019 level.
KFC's same-store sales were approximately 92% of the last year level and 87% of the 2019 level, with same-store traffic at approximately 82% of 2019 level. Average ticket price, ticket grew roughly 6% versus 2019, mainly due to the increase in delivery mix. Pizza Hut same-store sales were approximately 95% of last year and 89% of 2019 level. Same-store traffic is on par with the 2019 level, while average ticket decreased by about 10%, driven by the increased mix in off-premise occasions, which have a lower ticket than dine-in. KFC was slightly more affected than Pizza Hut again this quarter, as KFC had a higher store mix in transportations and tourist locations.
These locations experienced a sharp decline in sales, down approximately 40% on a two-year basis in the quarter. Restaurant margin was 12.2%, down 640 basis points compared to last year. This was mainly caused by sales deleveraging, more value promotions, higher wages, and increased delivery costs associated with more delivery orders, as well as lower COVID-related relief this year. Cost of sales was 32.2%, 100 basis points higher than last year. Modest decline in commodity prices year-over-year partially offset the step-up value promotions to drive customer traffic and phasing out of plastic packaging and other packaging upgrades. Cost of labor was 25.6%, 400 basis points higher than last year. This is due to a few factors. First, wage inflation was 6% in the quarter, notably higher than the previous quarters.
Second, increased delivery volume contributed to higher labor cost percentage. Third, additional labor hours were scheduled going into the third quarter, which is typically a seasonally strong trading period for us. We also scheduled more labor hours for increased safety protocol during the outbreak. We were quick to adjust labor scheduling to mitigate the sales deleveraging impact. Occupancy and other was 30%, 140 basis points higher than last year, mainly attributable to the sales deleveraging impact. In addition, we received $10 million COVID-related one-time relief in the third quarter last year, while the amount was only $2 million this year. G&A expenses increased 6% year-over-year, mainly due to higher compensation costs and increased headcount. We were profitable in the quarter with operating profit of $178 million.
Excluding a non-cash remeasurement gain of our existing equity interest in Lavazza joint venture of $10 million, adjusted operating profit was $168 million, a 52% decrease year-over-year or a 48% decrease compared to 2019. Our effective tax rate is 28.3%. We maintained the full year effective tax rate outlook at 27%-29%. Net income was $104 million, and adjusted net income was $96 million. Excluding $32 million net investment loss of Meituan, it was $128 million, down 50% year-over-year. Diluted EPS was $0.24 . Mark-to-market loss in Meituan negatively impacted our diluted EPS by $0.07. In the quarter, we returned $85 million to shareholder in the form of cash dividends and share repurchases.
As we look ahead to the fourth quarter, we remain cautious. Strict public health measures are still in effect. Consumers are cautious about spending and are traveling less. According to government statistics, for the seven-day National Day holiday starting October 1st, the number of travelers was down 2% compared to the same period last year and down 30% versus 2019. Related travel spending was down 40% compared to 2019. While we are seeing a slight sequential recovery, same-store sales still remain below prior year and pre-COVID 2019 levels. Overall dine-in volume and traffic at transportation hubs are still significantly impacted. We expect the recovery of same-store sales to take time with a non-linear and uneven pattern.
Recently, we have seen a resurgence of cases across 12 provinces and municipalities, including Inner Mongolia, Jiangsu, and Beijing. We will continue to monitor the development and stay agile. In addition, the fourth quarter is seasonally the smallest quarter for sales and profit margin. Based on what we are seeing so far, we expect the margin and operating profit in the fourth quarter to be significantly impacted by one, sales deleveraging as same-store sales remain below prior year and pre-COVID levels. Rising commodity pricing. Since the fourth quarter of 2020, we have benefited from a deflationary environment, which will very likely end in the fourth quarter. Cost of sales will also be pressured by aggressive campaigns as we continue to drive traffic through attractive promotions. Three, wage inflation, which is expected to be in the mid-single digit range.
Rider costs are likely to continue to increase as delivery trends further upward. Please note that the fourth quarter last year include several one-time items, including one, COVID and other one-time relief from government and landlord, almost $13 million. Two, lower staffing level due to shortage of part-time workers. These are unlikely to repeat this year. Now, despite the near-term challenges, we remain committed to driving long-term growth. In the short term, we will focus on keeping our operation agile and resilient in the face of considerable disruptions and uncertainty caused by the pandemic. For the long run, we'll focus on fortifying our competitive moat and growing our business and making continuous improvement in our business model and store operations. We have a strong track record of managing our cost structure and growing our business possible over the years.
We will continue to focus on product innovation and leveraging the strength in our supply chain to mitigate the impact of commodity price swing. On the COL front, we will continue to invest in technology, automation, and digital infrastructure to improve labor productivity. On the other hand, the near-term challenges, while tough for the restaurant industry as a whole, also create favorable conditions for us to expand our store network and capture growth opportunities. As Joey mentioned, we now expect to open 1,700 new units in 2021, almost five stores per day. We're maintaining our previous capital expenditure target of $700 -800 million, which benefited from our ongoing efforts to reduce CapEx spending per new store. Looking ahead, we will continue to invest in accelerating growth and fortifying our resiliency as outlined at the Investor Day in September.
We'll provide you details on 2020 target during our fourth quarter earnings release in early 2020. With that, I will pass you back to Michelle to start the Q&A. Michelle?
Thanks, Andy. We'll now open the call for questions. In order to give us as many people as possible the chance to ask questions, please limit your questions to one at a time. Lyndon, please start the Q&A.
As a reminder, to ask a question, you will need to press star one on your telephone. Your first question comes from Michelle Cheng from Goldman Sachs. Your line is open.
Hi, Joey, Andy. Thank you for taking my questions. My question is about the commodity cost inflation. We hear many companies starting to talk about price hike recently. Understanding the consumption sentiment is still very challenging. Can you share with us your pricing strategy? And also, compare with the previous chicken cost inflation cycle back in 2018, 2019, when we managed the margin pretty well. What could be the difference now versus the past experience? Thank you.
Good morning, Michelle. Thank you for your question. Regarding pricing, you know, as we have a long-term strategic pricing strategy here at Yum China, we want to provide good food at, you know, good value for consumers. You know, over the years, we always have been very cautious about, you know, price increase. We do pass through partial, you know, inflation to consumers for consumers, but mostly we will try to find efficiency in our operations to offset those, inflationary pressure. Now, you know, if you look back, you know, in the last few years, obviously there's commodity price, you know, fluctuations, right? Sometimes it go up, sometimes it come down. You know, over the years in China, we always have seen, you know, labor inflation, right?
You know, labor inflation generally is in the mid-single digit to high single digit range. I think, you know, sometimes, you know, when there's a sudden surge or disruptions in the market, you know, then you do see, you know, the impact on our margin. You know, for our quarter, this quarter for example, the biggest impact obviously is our sales, right? Because of COVID outbreak, and so you have a deleveraging impact, which is, you know, disproportionately, you know, impacting the margin. And then, you know, so if you think about commodity prices, we generally have a very... Over time we will have new product innovation, how to make use, you know, our material better.
We would also, you know, have diversifying, you know, the different protein, right? We have chicken now, we have, you know, beef, we have duck and, you know, variety of fish and other seafood. You know, that also helps us to, you know, to balance, you know, the commodity price increase over time. Obviously, we have a very strong supply chain. We always work with our supplier closely to try to mitigate some of this price and fluctuation. We generally have a, you know, sort of like, you know, place our order or sign a contract a quarter or two ahead, you know, of the quarter.
So that, you know, we sort of know how to manage that cost increase over time. Then we also work with our supplier obviously to know when good times, you know, their prices go up, you know, they just have to earn a little less. You know, when times are bad, you know, we also have to try to support them. Over time, we have a stable supply chain situation for them and for us as well. That's generally how we deal with it. When you talk about labor inflation, you know, over the years, you know, you have seen that, you know, we have invested quite a bit in digital automation and technology in our infrastructure. Overall, it is trying to improve labor productivity.
As we have outlined it, you know, in the Investor Day, you see, you have seen Leila have presented, you know, how technology help us, you know, like, improve labor productivity. You know, a few years ago, we have 400,000 plus employees. Today we have similar number of employees, but we have, you know, significantly high number of stores. You know, our labor productivity have improved. If you look at our KFC margin or, you know, look at our restaurant margin, it have remained markedly stable, right? You know, I think in 2016 it was roughly 15% range. You know, and then in 2019 was about 16%, and then last year was about, you know, 15%. All in all, we...
Over time, we're able to manage, you know, all these different cost components, the cost structure pretty well, maintaining the margin. Thank you.
Thank you, Andy. That's clear.
Your next question comes from Lillian Lou from Morgan Stanley. Your line is open.
Thanks, management. My question is more on the CapEx plan, 'cause we definitely increased the gross new opening quite a lot versus the previous guidance, but maintain the CapEx overall. Maybe a little more detail. I know that company talked a bit for some time in terms of the unit CapEx per store with this small format model. Can you share with us a little bit more about details of what we have been doing in the recent quarters in terms of the unit CapEx and the unit economics versus before, that causes us maintaining the similar CapEx with much more count of stores? Thank you.
Thank you, Lillian. So you know, obviously, you know, this quarter we did set up our CapEx budget for the whole year, we already, you know, is probably higher than last year. I think our CapEx year to date is about $480 million. And I think, let me check that number here. Yeah. So you know, obviously as we have outlined in our capital expenditure plan in our Investor Day, investment you know for CapEx is to drive organic growth and also to build competitive moat. So that's you know multiple component to it. The one is obviously store network opening. And we are accelerating that.
As we have mentioned before, we have over the past few years reduced, you know, the CapEx per store upfront investment. You know, if you think about, you know, a few years back, you know, our CapEx per store was about RMB 2.5 million. Then, you know, now is, you know, under RMB 3 million, close to RMB 2.5 million. You know, as we continue to, there are two key drivers for that, right? One is obviously, you know, the size of the store change. The other one is the overall per store square footage cost reduction. You know, our team work very hard, our brand team work very hard to do that, make it more efficient.
I think, you know, with our new smaller store format, for example, you know, Pizza Hut, we have the new town models and more small store format catering to our delivery and takeaway. I think we still have some opportunity to further reduce that, you know, CapEx per store going forward. Also, you know, the other component obviously is, you know, remodeling. I think, you know, that over time will continue to trend up just because we have a bigger portfolio of store. The third part is, you know, investment in supply chain and infrastructure, as we have outlined before and invest is to drive efficiencies, resiliency in our supply chain, is to drive labor productivity improvement through, you know, investment in technology, digitalization and et c.
I don't think there's material change to our plan. Hopefully, you know, we can give you more update next quarter in terms of our full year CapEx spend. Thank you, Lillian.
I'll just add a few comments on this one, Lillian . For today, we update the new store guidance for the year from last quarter, 1,300 store to 1,700 stores for the year. We did not increase the CapEx spend for the year. It still stays at RMB 700 - 800 million range. What happened here? What happened here, obviously, as you guys know us quite well, we don't chase after a blind store number. We open good quality stores. If we can find a good quality store with additional profit and sales, then we will open it. In terms of store economics here, I would like to give you three comments.
One is the smaller store are driven by increased off-premise mix, means the delivery and takeaway. The smaller store help that business, and the smaller store help us increase the store density in the top tier city in particular. These are the Pizza Hut satellite store, the KFC smaller store. These stores with the lower investment and incremental sales and profit, it help penetrate into the smaller cities because we have variety of different business models for different locations. Number two comment, it's normal that these smaller store have smaller sales per unit. As I mentioned earlier, it drives incremental sales and profit, and it demand less CapEx per store, as Andy mentioned earlier. It's the payback is healthy.
You know that KFC payback is always about two years. Pizza Hut right now, if you notice what I said earlier, is the Pizza Hut, the store payback is at three years now in total. That is improvement, because in the past we always, you know, concluded the payback for Pizza Hut is about three-four years. Now it has improved to three years because the small store, the Pizza Hut satellite store right now, the payback is at two-three years. In total, the improvement is at three years. I hope that give you a sense about why we are increasing the new store guidance for the year, because if we look at our system sales growth number, it also tell the story.
For the entire Yum China versus 2020, we are driving 15% year-to-date same-store sales growth. That includes 12% year-to-date system sales growth for KFC and 20% system sales growth year-to-date for Pizza Hut. Then for KFC, even compared to 2019, for year-to-date, we are also achieving 4% system sales growth despite all the challenges of the outbreak and all the same-store sales. Let me conclude the question here. Thank you, Lillian.
Thanks a lot, Joey and Andy, that's very detailed and helpful.
Your next question comes from Xiaopo Wei from Citi. Your line is open.
Hi, good morning, Joey and Andy. I have a very brief question on your acquisition. In the press release this morning, you mentioned that you acquired 28% stake in Hangzhou Catering Services, which operating a few great local Chinese brand. My question is, will you opening some store on standalone basis under those brand, pursuing to any arrangement with the Hangzhou Catering company? Or you are more looking at bringing those great local cuisine like Zhi Wei Guan and et c., to your existing KFC stores or Pizza Hut to diversify your portfolio to bring more great local food to the Chinese consumers. Any color would be highly appreciated. Thank you.
Thank you, Xiaopo. We have been working with Hangzhou Catering, this company, for a few decades now. This is our joint venture partner of Hangzhou KFC store. Hangzhou market is one of our best market in terms of sales and profit. We are very grateful that we have the opportunity to invest 28% into the Hangzhou Catering. That enable us to achieve consolidation of Hangzhou KFC business, which is about 700 stores with future very nice expansion opportunity ahead. That's point one. Point two is, while Hangzhou Catering has other business such as Zhi Wei Guan and Fuyong Guan, etc., our focus is still on our KFC business. In terms of future cooperation, we do see cooperation in two areas.
One is working with them on their central kitchen or factory, whatever you call it. They have very high quality facilities in there. Actually, we did already work with them. Our xiaolongbao launch in Hangzhou market, Zhi Wei Guan xiaolongbao. Guess what? They were produced by the central kitchen or the factory of Hangzhou Catering. The second area we see we are going to further expand our cooperation is store opening. Because another key shareholder of Hangzhou Catering is a very successful and important player in the commercial properties in Zhejiang province. We already work with them to open our first and the most important flagship store for Lavazza in Hangzhou.
These are the two areas that we certainly will see accelerate our cooperation on top of KFC store expansion in Zhejiang Province and particularly Hangzhou. Thank you.
Thank you very much.
Your next question comes from Chen Lu from Bank of America. Your line is open.
Thank you, Joey and Andy. My question is on the margin side. Our Q3 restaurant margin saw over 60% year-on-year decline. I understand that it has been negatively impacted by the COVID outbreak in the quarter. However, if we look at Q2 and Q3 last year, we had similar or even higher same-store sales growth decline, but our margin trends were better back then. I'm just curious to get more color on the different dynamics behind. In particular, our labor cost ratio was up 4% year-on-year, which was higher than the magnitude of labor cost increase in Q1 last year, which was the worst time of the COVID outbreak.
Apart from the wage inflation and sales leverage, can you actually elaborate a bit more on other reasons for us to better understand the dynamics behind the labor cost increase? In addition, our occupancy and other cost ratio have also increased. Normally, in normal times, it is always trending down and serves as a big driver to our gross margin. Do we still see further room for cost savings on this line item in the future barring extraordinary situations like Q3 this time? Thank you.
Thank you, Chen Lu, for your question. I think, let me try to address, you know, the question here. First of all, I think before, you know, we go into, you know, the line item, I want to really emphasize that, you know, sales leverage is real. You know, we run a restaurant business, so when sales come down, you know, it would have impact, you know, on our labor costs and on our O&O. You know, I don't want any misunderstanding. I know we have done very well over the last couple years, and last year was also some special situation, obviously. Let me address that here on, for example, on the cost of labor or on the sales dynamic.
You know, if you know, look back in, you know, for example, in 2020, right? You know, as we have mentioned at that time, we have a very strong sales trading going into the Chinese New Year period in 2020. You know, the period before Chinese New Year and during Chinese New Year normally is a very important, very good trading season for us for both in terms of sales and profitability. We have a benefit at that time for that first month. Okay? Because if you recall, the outbreak was right around Chinese New Year period. The timing difference.
In terms of, you know, for example, this quarter, for example, in the third quarter, the outbreak happened and impacted the full quarter at the beginning to the end. Okay. So we have this full quarter impact, you know, in the same-store situation there. So that's why, you know, when you have a very profitable quarter, for example, you know, especially for us, you know, which is July and August time period before they go back to school, you know, that same-store sales would have impact on the sales leverage. The other one is commodity prices, obviously. You know, this year we have a couple things that is going to impact us.
One is, you know, as we have mentioned before, we're facing higher plastic in our packaging. We have mentioned that last year. That's going to have an impact on us. You know, then, when we look at, you know, the other part of sales leverage, and obviously, you know, we have all this infrastructure to deliver product to our restaurants. When sales leverage happens, you know, it will impact, you know, the cost per package, for example, that is delivered to the restaurant.
If you look at labor, for example, this year as we have mentioned in last quarter, we raised our staff wage in June and July, then after you know sort of like holding it back and help control the costs for the first half of the year. You know, our labor inflation was about 2-3%. In the third quarter, it's about 6-7% increase. It's higher.
Another thing is very important to note, just that. As I mentioned on our prepared remarks, usually it is a peak trading season, so we have planned, you know, some of the labor scheduling ahead of time. The other part is that, you know, during the outbreak, we also have to step up staffing to make sure that, you know, we have, you know, even tighten up, you know, our follow-up that, you know, tighten up health protocol. Right? We measure temperature, we check, you know, throughout all to do more frequent, you know, table cleaning, et c. That's the still our impact there.
Y ou know, obviously we have some variable costs, but, you know, whenever you open a restaurant, you will have utility costs, you're gonna have, you know, some of the rent, right? Rent is some of it is fixed and some of it is variable. You're going back to that, you know, sound investment impact on the margin. I think in the longer run, you know, we have been able to manage the cost structure quite well. We have seen obviously, as mentioned before, commodity price fluctuations from labor cost increase. Again, you know, going back to what we do best.
We're working with, you know, our team, our food innovation team to introduce good products at great value for consumer. One example that we have recently done is, you know, we have a fried, you know, chicken bone as a snack, the whole carcass. That's a good way to utilize, you know, obviously part of the, you know, chicken that we have not used previously. We also use that for example, soup, right? Product innovation is very important for us and we'll continue to do that. Working with supply chain is very important. I think a couple years ago when price, you know, again, was surging or coming down, we have mentioned consistently to folks that we work with our supplier for the long term.
We help each other, you know, in good time and bad time. In that case will help us to sort of mitigate, not completely eliminate, the impact, but we'll try to mitigate. We'll continue to do that working with our supply chain on same-store sales. Same-store sales obviously, it's very important to notice that delivery costs, volume go up in pandemic, it's gonna have an impact on same-store sales. We're able to manage that long term. You know, sometimes some of the short term change in the delivery and timing mix will also have impact. We're gonna invest in technology, infrastructure, automation, including investment in our personal delivery and make it more efficient, right?
Food production, queuing for food production, you know, the route optimization for our rider, you know, trace zone, you know, how we design the trace zone and all that. We're trying to continue to make the operation more efficient. Thank you, Chen.
Thank you for the helpful color, Andy. I also look forward to having a try on the when I'm in China next time. Is it just a nationwide launch or just offered in Northeastern China?
Many other products. All of these are fantastic.
Right. Thank you, Chen.
Okay. Thank you, Andy.
Thank you.
Your next question comes from Anne Ling from Jefferies. Your line is open.
Thank you. Hi, management team. I also have questions, you know, regarding your acquisitions, the Hangzhou Catering Group. Does it mean that you're now owning 73% of the company? Meaning that, you know, moving forward you consolidate that 700 stores in terms of sales and operating profit, and then you take out your minority at the minority line. If this is the case, number one is that, you know, will there be any exceptional gain on the revaluation of your KFC like in the investment or subsidiaries in the Q4?
Second question is like, you know, how should we be expecting in terms of the sales and, or the operating profit impact? Is it I mean, they in Hangzhou, their sales per store possibly will be higher. And what will be the profitability impact like? The minor question is regarding, if it is currently an associate, then, I'm not sure my calculation is correct. It seems that, third quarter, it was a loss of $6 million. I'm not sure whether it is related to the Hangzhou business or it is something else. Thank you.
Sorry. Like the last part, I didn't get it. Like, what's the $6 million related to?
Oh, the $6 million loss is the associate, the equity contribution below the operating profit line. It's the equity contribution from your investment. It's in the cash flow in your
You know, like.
Okay. I didn't quite understand the question, so we may have to take that question offline.
Oh, sure.
I will try to address, you know, the first questions. I think, you know, first of all, like, you know, we did not acquire Hangzhou Catering. We invest, you know, 25%, the-
28%.
28%, you know, in Hangzhou Catering. We have a 28% stake in that company, not acquisition of that company.
Okay.
The other part is that, but because of that and also because of you know, you know, you know, the sum of other public government arrangements, so now we actually have you know, basically control of the Hangzhou JV. So now we will consolidate that. You're correct, similar to prior consolidation of our JV at Wuxi and Suzhou, generally you know, we would have a measurement gain you know, because you know, obviously those are very successful JV, right? But you know, it is kind of complicated accounting. It's part of a business combination, right?
It's under U.S. GAAP, even though you only acquire a portion of the stake, you know, you generally treat it as a business combination. You treat it as a whole, you know, what's the gain of your entire consolidation, your portion of that. It's not just a proportion, you know, to the interest that you acquire, but, you know, the overall company. That's why normally you would see this disproportionate remeasurement gain. Eventually it will flow into the balance sheet, you know, because, you know, obviously it's based on, you know, the acquisition or business combination allocation. Generally we see an increase in goodwill, as well as, you know, intangible.
You know, that process is similar to our treatment of that in Suzhou and Wuxi. Okay. You know, if you want more detail, I would refer you to our filing, the 10-Q and the 10-K statement. It will have more detailed explanation and a technical explanation.
Mm-hmm.
You know, of the kind of treatment of such a combination.
Just to be very clear, we have originally a minority control of our Hangzhou joint venture of KFC. With the additional 28% investment into Hangzhou Catering, Yum China will control and consolidate our Hangzhou KFC with approximately 60% equity interest directly and indirectly.
That's right. Yeah. In terms of the impact, you know, obviously, you know, it would not impact the system sales. You know, it would probably, you know, increase that, you know, KFC sales. In terms of, you know, the profitability or will that increase that, we're still assessing it because as we mentioned, you know, there will be some, you know, amortization coming from this and then also the measurement of, you know, the franchise right. It's a lot more complicated, so we're still assessing it. It's, you know, but it will be similar to, as we mentioned, to the impact of, you know, consolidation of, you know, like the accounting impact will be similar to that of, you know, Suzhou and Wuxi.
In terms of profit, it is not as straightforward as, you know, gonna be immediately accretive or dilutive.
Okay. Got it. Thank you very much.
Sure.
Operators, there are no further questions at this time.
Oh, thank you for joining the call today then. We look forward to speaking with you on the next earnings call. Have a great day.
Thank you.