Ladies and gentlemen, thank you for standing by, and welcome to the China 4th Quarter and Fiscal Year 2020 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to our first speaker today, Ms. Debbie Ding. Thank you.
Please go ahead.
Thank you, operator. Hello, everyone, and thank you for joining Yum! China's 4th quarter 2020 earnings conference call. Joining us on today's call are our CEO, Ms. Call is Joey Watts and our CFO, Mr.
Andy Young. Before we get started, I'd like to remind you that our earnings call and investor presentation contains 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 the SEC. This call also includes certain non GAAP financial measures.
You should carefully consider the comparable GAAP measures. Reconciliation of the non GAAP and GAAP measures is included in our earnings release. Today's call includes 3 sections. First, Joey will highlight our accomplishments over this past year and review our strategy and key priorities. Andy will review our financial performance and outlook in greater detail.
Finally, we'll open the call to questions. You can find the webcast of this call and 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 Joey Watts, our CEO.
Thank you, Debbie. Hello, everyone, and thank you for joining us today. I hope you and your families are safe and healthy no matter where you are. First, I want to acknowledge the great work of our 400,000 plus employees and express my heartfelt appreciation. With their dedication, creativity and tireless efforts, we have been navigating the difficult times and effectively managing our business.
Looking back at the past year, we put the health and safety of our employees and customers as our number one priority. Our team kept most of the stores open even at the peak of the outbreak. Our execution capabilities and agility helped us overcome many challenges. We captured off premises consumption opportunities and drove recovery in dining volume. Sales and travel recovered sequentially since the Q1.
Our operating profit remained solid and grew double digits year over year in the second half. This is the result of strong execution and efficiency improvement. KFC remained resilient. We accelerate store expansion with attractive returns and maintain solid profitability. We made remarkable progress in strengthening the fundamentals of Pizza Hut across all aspects.
That is reflected in the sales and margin improvement. Going forward, we will continue to fortify the resilience of Pizza Hut's business model. At the core of all these is our ability to innovate. KFC's premium Wagyu beef burger resonate well with consumers and was sold out within and their sweet pumpkin congee, is the perfect item for the winter. Portuguese chicken curry at Pizza Hut became an instant hit on the delivery menu.
We demonstrate our commitment to be a responsible corporate citizen. The pandemic reinforced our determination to look after our employees. We extended our family care coverage designed for our restaurant managers to 13,000 restaurant management team and supervisors and their families. Our efforts are recognized in the industry. For the 3rd consecutive year, we were certified as the top employer in China included in the Bloomberg Gender Equality Index.
We were also recognized for our commitment to sustainability, and we were named an industry leader in the 2020 Dow Jones Sustainability Index. Let's move on to growth strategy. Despite the challenges, we are optimistic about the future opportunities in China. We have been staying the course With our long term strategy centering around 3 key growth initiatives, let me give you some update on our latest thinking. 1st, store growth.
We opened 11 65 new stores in 2020, marking the highest new store openings in the 33 year history of operating in China. This is equivalent to opening 1 new store call every 8 hours. Our new stores payback remain healthy at approximately 2 years for KFC call and 3 to 4 years for Pizza Hut. We intend to sustain the store building momentum into 2021 and beyond and reach the next 10,000 stores much faster than the first. There's still plenty of web space in which we can expand.
We are tracking over 700 cities in which we have no presence in China. To penetrate new markets, KFC is piloting small town model designed for the needs of Tier 6 cities or below. This model has localized menus, Store layouts and operating models that require less CapEx. We are encouraged by the initial result of these pilot stores, and we will open more small town model stores in 2021 in KFC. In more established cities, we will increase store density with our multiple store formats.
As the mix of off premise occasions continues to increase. We have further reduced the average store size and CapEx per new store. One example is Pizza Hut's hub and spoke model, which we introduced in 2019 Investor Day. I'm excited to report that with nearly 50 stores, 50 hub and spoke stores at the end of 2020, The results are very promising. We will roll out more of these stores and other small store formats and accept our store models to evolve in consumer needs.
To create an even stronger foundation to accelerate expansion, we are stepping up investment in our infrastructure. More details will be provided by Andy later on. 2nd, portfolio growth. While KFC and Pizza Hut remain quarter. Our key growth drivers, we are also leveraging Yum China's resources, execution capabilities and learnings to develop our emerging brands.
Great things are brewing in coffee. We now have 3 distinct brands with clear segmentation and strategies. We are committed to accelerate expansion of our coffee business and make it meaningful part of Yum! China. K Coffee fulfills that daily ritual with good quality coffee at affordable prices at over 7,000 KFC restaurants in China.
1 140,000,000 cups of K Coffee were sold in 2020, making us one of the top 3 players in terms of cups sold. Coffee and Joy has evolved to offer specialty coffee for coffee lovers, while utilizing an asset light model. We are working on improving the profitability of C and J and exploring other potential avenues of growth. Meanwhile, Lavazza offers premium coffee in an indulgent atmosphere. We now have 5 beautiful stores in Shanghai, and we are pleased with the initial results.
We plan to accelerate openings in 2021 to test different store models ranging from mini to flagship store. On the Chinese Q3 market post acquisition integration of Huangjihuan has progressed well. We have driven synergies in product innovation, franchisee quarter. 21 sales recovered sequentially and delivered solid profit since acquisition. We will further work on the menu and operations for our Chinese cuisine brand to drive store expansion and growth in the seasoning and packaged food business.
The 4th growth initiative is digital and delivery. The COVID pandemic highlighted the power of digital from member engagement delivery to operations. Our membership has grown to over 300,000,000. Member sales now account for 60% of our sales. Privileged subscription program is effective in boosting frequency.
We sold 38,000,000 subscriptions in 2020. The average spending of privileged members doubled during their subscriptions. More targeted promotions help us keep marketing expense down. Delivery has been growing rapidly and even faster during the pandemic. It now accounts for 30% of our sales.
In 2020, we upgraded our rider platform with AI enabled zoning, rider routing optimization and real time monitoring. In the test market, on time rates, Customer satisfaction and efficiency have improved. We also tested rider sharing between KFC and Pizza Hut in Eastern China. We will expand this initiative into more brands and more markets. In 2021 and beyond, We are allocating more CapEx to further strengthen our digital and delivery capabilities.
To make our organization more efficient in the long run, We will deploy AI and automation in more of our operations and continue to advance end to end digitization from farm to fork. We are committed to driving long term growth with the 3 growth initiatives. Investments across all three are necessary to build leadership and agility. Let's move on to 2020 Q4, and I would like to make a few comments. First, sales improved sequentially from the Q3, although the pace of recovery was impacted by regional outbreak of COVID.
October sales benefit from the National Day holiday. The sales in November December was pressured by increased regional outbreaks. Traffic at transportation has remained significantly below the prior year due to reduced travel. Sign in remained pressured, but recovered a bit sequentially. Delivery and takeaway remained popular options and accounted for over 50% of sales.
Digital orders increased to 83%. Pizza Hut tablesign mobile ordering has increased in popularity as we enhance the user interface. It now accounts for over 35% of sales, up from just 7% in the prior year period. Operating profit grew to $180,000,000 Andy will cover the financials in detail in his session. As we look call.
Into the Q1 of 2021, we see the resurgence of COVID-nineteen adversely impacting our business. Nationwide, Authorities have tightened preventive measures and advised against travel, large gatherings and dining out, especially during the Chinese New Year holiday period. Given the current situation, we see significant headwinds for the Q1. Our teams are closely monitoring the situation and leveraging learnings from the past year. Our marketing programs encompass a wide array of compelling offers targeting both dining and off premise locations and different party sizes.
We will stay agile to adjust the marketing programs and operations to the evolving situation. Most importantly, We remain confident in the long term potential of China and stay focused on generating sustainable shareholder returns. With that, I will turn the call over to Andy. Andy?
Thank you, Zhou Yi, and hello, everyone. I will first address key financial and developments in the Q4 then provide some color on our 2021 outlook. Unless noted otherwise, All percentage changes are then before the effects of foreign exchange. Let me first cover our Q4 financial results. Revenue grew 5% and same store sales recovered to 96% of the prior year period.
The sequential improvement was supported by continuous strength in delivery and takeaway, while dine in volume gradually recovered. KFC's same store sales recovered to 96% of the prior year period compared to 94% in Q3. Our transportation and tourist hub sales improved but remained challenging. System sales grew 3% year over year, reflecting the contribution of new build acceleration. Pizza Hut same store sales were down to 95% of the prior year, compared to 93% in Q3.
Same store transaction volume recovered to 98% of the prior year period. Wangji Wang and the consolidation of Suzhou KFC contributed to 4% of total revenue. We opened 505 stores in Q4, which helped us achieve the record level new store opening for the year. Restaurant margin was 15.1%, up 2.7% compared to last year. I want to thank our team for their excellent work in driving operating efficiencies and managing costs.
Cost of sales was 31%, 1.2% better than last year. This was mainly helped by lower poultry prices and more targeted value promotion at Pizza Hut. Cost of labor was 24.2%, almost flat year over year. Wage inflation and increase in rider costs associated with Delivery volume increases were largely offset by labor productivity improvement and shortage in part time workers. Occupancies and orders were 29.7%, 1.7% better than last year, mainly attributable to reductions in advertising and savings in other operating costs.
We also received around $7,000,000 in rental and government relief, which is expected to phase out in 2021. G and A expenses decreased 9%, mainly due to lower performance related compensation, timing shift of government incentives and cost controls. Operating profit was $180,000,000 up 78%, mainly due to restaurant margin improvement. Please keep in mind that some of the factors driving Q4 profit are not expected to recur, such as lower advertising costs and performance related compensation and one time relief. Some of the productivity improvements due to labor shortage is also temporary as we intend to increase staffing levels.
Our effective tax rate was 28%, net income was RMB151,000,000 and adjusted net income was RMB153 1,000,000 Excluding RMB23 1,000,000 of net investment gains in Meikuan, it was RMB130 1,000,000, up 65% year over year. Adjusted EPS increased 43% to 0.35¢. Now let's turn our turn to our outlook for 2021. Heading into the Q1, cluster of outbreak surge impacting a large swath of the countries, especially in Northern and Northeastern China, Beijing and Shanghai. Government implemented stricter public health measures across China, such as advisory against travel, large gatherings and dining out.
Several cities have also been put on citywide quarantine, including Shijiazhuang, a city of 11,000,000 people. We anticipate significant headwinds for the Q1. Our transportation and tourist locations, representing high single digit of sales will likely be more significantly impacted. Government statistics show that the number of travelers was down over 70% in the 1st few days of the Chinese New Year travel this year, which started in late January. Overall, dine in traffic has been affected.
We expect trading during the important Chinese New Year holiday period to be subdued, with sales impacted by substantially less travel, Small gatherings and generally reduced social activities. Sales in lower tier cities, which represent over half of our sales, will also be impacted as fewer people will return to their hometown for Chinese New Year. As KFC has a higher percentage mix of stores in lower tier cities and transportation hubs, it will be disproportionately impacted. So Q1 will be all hand on deck. In response to the headwinds, we have stepped up our value campaigns and tailored our marketing standards according to city tiers and trade zones.
We have also adjusted our operations and delivery resources to capture shifting dine in and off premise demand. We will endeavor to do everything we can to mitigate the headwinds. Please also keep in mind that January Q1 will be a tough comparison. Last year, COVID related lockdowns started only in late January. On a year over year basis, last year sales benefited from strong 1st few weeks leading into Chinese New Year.
We anticipate the recovery will remain nonlinear and uneven, influenced by regional outbreaks, reduced travel and lingering effect on consumer behavior. In 2021, margin will remain subdued compared to pre COVID level as we face several headwinds. We expect full recovery of sales to pre COVID levels to take some time. Compelling value campaigns to drive traffic will continue to be our focus. We expect 2 year wage increase since 2019 to be high single digit, including 3% in 2020 and mid single digit in 2021.
We are setting up our efforts in sustainability. In light of the latest regulations in China, we are replacing plastic packaging with more EcoFining materials. It is expected to increase our cost of sales by over $30,000,000 in 2021. On a year over year basis, we are lapping over $100,000,000 of COVID related government and rental relief in 2020, which is mostly phased out now. On the positive side, our commodity prices are expected to decline by low to mid single digits, mainly driven by lower poultry prices.
Since we usually lock our poultry contracts 1 quarter in event, Prices may still fluctuate throughout the year. We will build on our momentum in 2020 and target to open approximately 1,000 new stores in 2021. We will step up investment in digital, logistics and other operational infrastructures to support accelerated growth. Total CapEx in 2021 will increase to approximately $600,000,000 This investment will impact profitability in the near term, but will yield benefits in the long term. With that, let me cover our capital allocation framework.
With over RMB4.3 billion in cash quarter. And short term investments and strong cash flows, perhaps as much as RMB8 1,000,000,000 of capital will be deployed over the next 5 years. As we think about our long term capital allocation, our key goals are to deploy capital efficiently to accelerate growth and to create long term value for our shareholders. Now before I outline the use of cash, I want to emphasize that we will continue to run a prudent financial strategy, ensuring sufficient cash on hand for working capital and sufficient reserves to deal with potential contingencies. Organic growth remains the most important driver For our long term strategy, as Shouyi mentioned, we aim to achieve the 20,000 store milestones much faster than the first 10,000 store milestones.
We'll prioritize our capital to support organic growth. Hence, we will more than double our CapEx over the next few years. A majority of our CapEx will be used for accelerating store network expansion and store remodeling for our core brands KFC and Pizza Hut, growing them while keeping them fresh. We also plan to invest several $100,000,000 in our emerging brands, especially the coffee business, building them into meaningful scale and a mature part of our business mix. While expanding the network of physical store is an important growth driver, enhancing our digital and delivery capabilities and logistic infrastructure is equally important to our future success.
To efficiently and adequately support a network of 20,000 stores would require a bigger, more robust and more agile digital and physical capabilities and infrastructure. In addition, we also like to see greater digitization, automation and intelligence across our operations. So we have earmarked over $1,000,000,000 investment to advance our end to end digitization program, including digitizing our stores, marketing, supply chain and back office operations. Roughly another $1,000,000,000 has also been year marked to expand our logistic infrastructure to enhance automation capabilities to drive efficiencies. The rest of the capital will be allocated for shareholder returns and M and A.
We resumed cash dividend in the 4th quarter and have returned $1,200,000,000 to shareholders since the spin off. In the future, we expect steady returns to shareholders in line with our profit growth. We will also maintain a disciplined approach to M and A and investment, while exploring opportunities to invest in brands with excellent growth potential, to acquire new capabilities and technologies and to build and support our ecosystem. We believe this approach to capital planning will drive long term shareholder returns. All in all, we are encouraged by the solid financial results we delivered in 2020.
We will continue to invest for the long term. I'm confident that we are on the right path to emerge from the COVID pandemic stronger and better prepared for future growth. With that, I will pass you back to Debbie to start the Q and A. Debbie?
Thanks, Andy. We will now open the call for questions. Call. Operator, please start the Q and A.
Ladies and gentlemen, we will now begin the question and answer session. Please limit to one question at a time. If you have follow-up questions, please request to rejoin. Our first question comes from the line of Xiaopo Wei. Please ask your question.
Good morning, Joey and Lee, and thank you for taking the first question. My question will be regarding the China New Year. As Jio, you mentioned that there are very challenging environment in the Q1. But we know that Yum! China and yourself are so good at handling the challenges as we have seen last year.
So After learning a lot of experience in coping with the COVID situation in 2020, how could you do differently and make your This is
more flexible
to capture any emerging demand and well protect yourself on the downside in from the business in the upcoming Chinese New Year. Any color would be appreciated. Thank you.
Thank you, Xiaopo. The quarter 1, which is driven mainly by the Chinese New Year, would be a quarter that is rather difficult to model Because as I mentioned earlier, we do anticipate significant headwinds and we do expect recovery will take some time because the situation is still fluid. Certain three things for sure in terms of trend. 1 is the surging cluster outbreak and that result in tightened preventive health measure or advice against travel large group gathering and signing up. 2nd is the traveling and the social activities significantly reduced.
So we already have seen the 1st few days of the travel volume, it's down significantly. And then the lower tier city sales, which is more than 50% of our sales, particularly for KFC and large party size ticket will be reduced. And also we do also expect more competitors will stay open during Chinese New Year versus 2020. The first thing we know is KFC is likely more impacted than Pizza Hut because of higher mix in the lower tier cities And transportation locations. I mean, the next important question is how are we going to deal with it.
And certainly, we take all the learning From 2020, the overall tone and the importance And the priority is still the safety of our employees and customers. And on that foundation, The focus is to stay nimble and agile. We do closely very closely monitoring we are Closely monitoring the situation. And there are 2 focus here in terms of staying nimble and agile. 1 is to step up the value campaign and to line up all our digital and delivery resources, including our membership program to prepare for the Chinese New Year.
2nd is we adjust our marketing calendar according to city tier, trade zone party size and location. I suppose compared to the 2020 program is this time, when we plan the marketing campaign, We have you can see we have multiple scenario planning. And that shall help us Stay even more agile compared to last year. Last year, things happened before we know it's going to happen. So we react really fast and our team is doing a fantastic job.
For this year, we have more scenario planning and that shall help our team still react quite fast to the evolving COVID situation. Thank you, Xiaopo.
Yes. A quick follow-up on the new store. You did a great job in 4Q Opening many stores, but if you look at the result, actually, we didn't see that a new store really dragged down the gross margin. So looking forward, shall we say that a new store will be the key driver for the growth without compromising our margin on a sustainable basis?
Thank you, Xiaopo. Quick answer as well. When we open stores, As you guys know us already, we have rough idea how many stores we want to open, but The most important decision is whether this is a good store or not. So if we see opportunity To open the store will open more or less depending on the quality. So we always keep our quality.
And as you can see, we still are opening more stores in lower tier cities. Our quality control continue there. So it's always the disciplined approach that we have been following and will continue to pursue. Thank you.
Thank you.
Our next question comes from the line of Li Na Yan from HSBC. Please ask your question.
Hi, thanks management for the presentation and congratulations on the very good results. My question is also related to the store opening. We have seen like the very high quality store opening in 4Q, but we also know like normally like there will be more remodeling in 4Q. And as Xiaobo said, like new stores might not contributing so much to profitability. So I'm wondering like whether what we have I think 4Q is sustainable, as like asked earlier, like when we expect like the store opening might continue to be the expectations, whether it's going to lead to higher than like the contribution to total revenue will increase as well as driving higher profit growth as well?
Thank you.
Lin, this is Andy. Thank you for your question. Let me first address the question about the store opening pace. Obviously, we are very pleased that we have opened 505 stores in the Q4. But I also want to remind folks that Even though it's probably still higher than what we expected, but we have already told folks that because of COVID impact, the store opening will be more back end loaded.
And so with a little bit easing in the COVID situations in fall and winter past year, Our development team have reaccelerated the pace and tried to take advantage of that window and opened as many as stores as possible. And then we also tried to push Some of the store openings earlier in the Q4, so in anticipation of the Chinese New Year Holiday period. So as we mentioned, we expect to open 1,000 stores this year And it's a very high pace, right? So you think about our store right now, we have more than A little more than 10,000 stores and it's almost like opening almost like 10% of for new store. Now putting perspective for you, last year, we opened almost like one store every I think 8 hours and so that's a very fast pace.
So we'll see Zuill maintain in a fast pace, but probably not at the level that we've seen Every quarter, 500 plus stores. I don't think that is sustainable, at least in the near term. We do have plans, as we mentioned on the prepared remarks to accelerate store network expansion and we will put an allocate result to do that. Now in terms of the profitability of the new store, as Zhou Yi mentioned, We have a disciplined approach to store openings. So if you look at the payback period for KFC, It's very strong 2 to 3 year and have been very consistent over the past few years.
Now Pizza Hut, it's about like 3 to 5 years And also with very strong returns. So we have a lot of incentive to open a store as many stores as possible. But within that framework of disciplined approach to store openings, make sure that we have the right financial return. So hopefully and then one thing, as you can tell, obviously, with that kind of fast pace of store openings, it demonstrates our confidence in the market in China and also the potential opportunities here in China. So we always encourage investors to look at the overall system sales, whatever than sometimes to focus on the same store sales growth Because China is the right growth market.
Okay. Thank you very much, Andy.
Our next question comes from the line of Michelle Cheng from Goldman Sachs. Please ask your question.
Hi, Joe, Yandi. Congrats on the good results. My question is about Pizza Hut. I think Clearly, last year, even the leverage pressure was so significant, we see a strong margin improvement. And also in the Q4, we also see we actually opened in the store.
So can you share with us after like 2 years of revitalization plan, What's our new focus into 2021? And whether we will start to see improving same store sales trend and also further margin upside? Thank you.
Thank you, Michelle. For Pizza Hut, I think Overall, we did what we promised about sales 1st profit later in our turnaround journey and our second half OP more than doubled compared to the previous years. And the focus of Pizza Hut in the last few years is about improving the fundamentals of the business, which we believe will have an impact for years to come. And I think that kind of set the tone of our focus going forward. So our focus going forward is to continue to improve across all these key aspects to cement the changes made in the last few years and make Pizza Hut a resilient business model.
I think this is a very important work because I think we believe we have a very resilient KFC business now. And after few years hard, Pizza Hut business will be also resilient as well. So in terms of Focus, maybe I'll just highlight three things that we have done we have worked very hard in the past For years, and they will continue to do that in the coming few years. One is the new menu. Our new menu rollout in late Q2 It's 75% item on new or upgrade compared to 2 years ago.
And food I mean, I cannot emphasize how important it is, right? And one example I mentioned earlier is the Portuguese Chicken Curry. It's fantastic food and it's innovative and we'll continue the innovation. And then the second highlight is our double digit growth in off premise dining, which including The delivery and takeaway because we all understand our concern towards dining business rightly so. So after a few years hard work, you can see the mix right now is a lot healthier.
I mean, it's 40% plus of the total sales. So that also makes our overall business more resilient. 3rd, digital order. The digital capabilities Absolutely critical in any restaurant business right now. The ability to connect the online and offline operation is part of the efficiency, is part of the customer service experience.
So Let's take one example, the tableside ordering. We moved the mix of tableside ordering. Q4 actually is 37%. So 37% of our orders on the tables are done digitally And that's compared to 5% during 2019. And we only started to work on this back to 2018.
And you can imagine that all improved the customer service and of course the labor So on top of that, the 4th thing, we also launched ready to cook steak and pasta To capture home consumption trend or demand, and that is partly as a result of the pandemic, Such growth is the opportunity the growth opportunity is has become even more visible and we captured that. So as a result of all these 1, 2, 3, 4 and more efforts and initiatives, we have seen The improvement of our money to value perception value for money perception and also Overall customers' perception towards the food, the service level, the value, the dining environment, Therefore, the fundamental and the momentum is promising. And as I Mentioned earlier, sales first, profit later. So now the sales is in good decent place and we start to see The improvement in profit and we want a bit of both going forward. Thank you, Michelle.
Thank you, Joining. Our next question comes from the line of An Lin from Jefferies. Please ask your question.
Hi, thank you very much. I have a question regarding CapEx and also in our investment. In the past, we have around like $400,000,000 to $500,000,000 CapEx and depreciation roughly similar as well. So with the step up in terms of like more store opening and also a step up in the CapEx of $600,000,000 Does it mean that we will have just a proportionate increase in terms of depreciation from year 2021 onwards, I. E.
EBITDA growth will be higher than that of the EBIT growth. And then our 2,000,000,000, dollars 1,000,000,000 each investment in digitization and also on the logistics, does that include this 600,000,000 CapEx plan? And how does it roll out like for each year, how much will we spend on this part and how will it impact our P and L? Thank you.
Thanks, Ann. So CapEx spending, I think if you look at our historical CapEx spending, it have been Very efficient and very stretched actually. If you look at over the past 5 years or 3, 5 years, Our CapEx spending was roughly RMB415 1,000,000 plus or minus some. And then we have been opening store more and more. So if you look back a few years ago, we're opening maybe like 500, 600 stores A year and now we're opening more than 1100 stores in 2020.
So we were able to do more with less And the team have been very frugal in how they spend the money, looking into savings in store development and infrastructure. Now what we want to do with this capital allocation plan is really sort of like reframe this plan To focus more on growth, driving more efficiency and the thing about this longer term. So we will still have a very disciplined Store investment strategy, as we have mentioned earlier, for new store openings. But we will definitely look into ways to accelerate Our market penetration, both in terms of loyalty cities, we have tracking 700 cities that we have not As a present yet for KFC and a thousand more for Pizza Hut. So there's a lot of right stay ahead of us.
And then for Citi that have already a restaurant, we're likely going to try to increase density, especially We will invest more in store that tailored to delivery and takeaway. So definitely, the majority of our CapEx spending is going to be in store expansion accelerated store expansion for our core brand KFC and Pizza Hut. Now if we look a little bit longer and we also try to grow our emerging brands, especially coffee. As I mentioned in the prepared remarks, we want to grow that into scale and also become a material part of our business. We're going to invest more.
And so for investment in new emerging business in the near term, You're likely going to see an impact on some of the costs and expenses because obviously, Ramping about new brands require some investment. The other one, I think, for CapEx spending, as you mentioned, is digital. $1,000,000,000 in digital is going to be a very large investment over the next few years. But this is a very important transformation for the restaurant industry. For us, our company has undergoing that for a number of years, and we're going to accelerate that in a much bigger way.
And you will see more technology being deployed Through our operations, you would also see more automations deployed in our restaurant, in our supply chain. You will also see more intelligent data analysis that would help us in marketing, supply chain and overall operations in the back office. So all these so you think about this, right, like if you think about 30 years ago, CapEx is probably all invested in and store opening. But today, investment in digital, the digital capabilities, having the right robust infrastructure to For a very large network of stores, we require a significant increase in investment. So we're basically trading capital for labor.
So you think about our store operations, we have able to run more stores over the past few years. We've stabilized stable workforce somewhere between 400,000 to 500,000 employees. And all that It's possible because of the investment and infrastructure that we have built. So as I mentioned, store expansion is important, the depreciation investment in digital The infrastructure is equally important to the success of our future. So yes, so in the near term, as we ramp up, as we mentioned, we over the next 2 years, we're going to ramp up doubling our CapEx spending that would have the impact on depreciation.
But But I think in the long run, you will see gains from other area, productivities, greater sales and the long run will be a fantastic return for our investors. So Hopefully that address your question, Anne.
I just have one little point to add for Anne. Over if we look at these savings in terms of efficiency from Automation and technology investment. Just think about it, 2015, we have roughly about 7,000 plus stores. 2020, we have 10,000. So our number of employees actually Still stay at the number of 400,000 plus.
So that gives you a sense of the achievement the Last 5 years and hopefully that gives you a sense about what kind of potential achievement we would like to achieved with the investment further investment in digital delivery And the supply chain infrastructure, because Before opening the stores, we need to get the infrastructure in place in order to enable the acceleration of store expansion. Otherwise, if the infrastructure is just catching up to the store expansion, then we are dragging our feet to if I could describe it that way, if that makes sense. Thank you, Anne.
Right. And also I want to give you one more anecdotal evidence of How important digital and infrastructure investment is and how that help us to actually be more focused and keep costs down. You think about our membership program, we developed that and invested in that over the past couple of years. Our whole digital CRM program will help us to keep our A and P Lower compared to our revenue growth. And that's all possible because we have the ability to reach our customers and effectively utilizing the guidance.
So you may see cost increase in part of the P and L, but hopefully in the long run, you'll see also improvement on the other side. And again, as we mentioned, if you think about China today, over the long term, you'll see more labor shortage at the public page. So it's very important for us to stay one step ahead of the game and anticipate that and invest in productivity and technology and infrastructure. Call.
Our next question comes from the line of Chen Luo from Bank of America. Please ask your questions.
Thank you, Joey and Andy. So I would apologize if my Question has been addressed by previous speakers as my line was disconnected during in the middle of the call. So I'm more interested on the food and paper cost side. So we understand that The chasing cost is coming down pretty dramatically these days. Meanwhile, we are also stepping up our value initiatives.
During our recent China checks, we also noticed that actually we possibly have actually raised price A little bit for KFC at the beginning of the year. So we guess this should be more than enough to offset the cost associated with our eco friendly initiatives. So given all these kind of moving pieces, is it fair to say that for the paper cost is not going to be a major concern for 20 21? Thank you.
Thank you, Sheng Luo. And I think that's right. So if you think about the cost The poultry have came down over the last few months, and we have locked up the contract a month ahead of time. I think in the near term, that would be a tailwind for us in the cost of sales. However, as you correctly mentioned and we have mentioned, We see quite a bit of headwind for the Q1, lower traffic in terms of Transportation hubs, that's going to lower traffic in the transportation hub business for the CNY sectors.
And then we also see other headwinds in terms of Less Sosu gathering, small sized group, less Sosu activities. So we do see some headwinds for our Q1 Sales. And so at this stage of the recovery, it's very important for us continue to focus on value proposition to consumers. And so you should expect we will stepping up the campaign as You have seen in earlier part of the Q1. And traditionally, we don't do as much value campaign for Chinese New Year, But this year, you probably will see a little bit more.
Now on the other hand, I think the sustainable initiative this year, as I mentioned, would likely It cost us about $30,000,000 for the full year in packaging by replacing Plastic with other eco friendly materials for packaging. I think it will be ongoing initiative To ESG. And so in the future, we will you probably will see additional initiatives as well. So it's not a one off event for us in terms of ESG initiatives. So but all in all, I think we would For overall sales, it will have commodity prices that would probably at least ease the
Luo san, I would like to just add the philosophical comment on food costs. Our Yum China and probably all know that we believe in saving all the costs we could save, particularly the G and A, hotel, No, whatever. So we don't save on the food cost for customers. It's our sincerity and our belief that we shall serve the best food we could to the customers. If we do get some savings from the commodity costs, we actually We'll reinvest the saving, big part of the saving to treat our customers better as well.
And we believe that is the right thing to do in the short term and in the long term. Thank you.
Thank you, Julie and Andy. So just a very quick follow-up, if I may. I understand that we see a lot of headwinds coming into Q1. So meanwhile, we also need to bear in mind that with a very weak February March last year, of course, The company is taking some measures at the moment. But last year, we were talking about nationwide lockdown with almost everything being shut down for about 2 months.
So I do believe heading into February March, things or comps will be looking much better. So it's fair to say that We actually could see year on year recovery in Q1, but maybe it could be a bit difficult for us to return to the level of store In Q1 of 2019. Would that be a fair comment? Thank you.
Chen Luo, let me address this question. I really appreciate the challenge to model the Q1. And internally, we also see a lot of moving parts. And one thing I want to emphasize is that definitely this year, The number of infected cases are relatively limited by 1,000 plus. However, it does not mean that the preemption measure would be, in fact, the opposite, because the learnings from last year, Government authorities are more cautious and consumers are more cautious and taking a lot more preventive measures.
So as we have mentioned, if you look at the CNY Chinese New Year period for travel. The government have put out advisory against travel and encourage folks To stay put in the cities to celebrate Chinese New Year and we have seen railroad traffic and of course air traffic as well down More than 70% in just the 1st few days are very important Chinese New Year period. Now Chinese New Year period have been historically very important to our business, Especially for KFC, which have high single digit of the sales and especially in Chinese New Year period, Double digit in terms of the sales are coming from the transportation hub and tourist locations. That would be disproportionately impacted. Now if you also look at the trading situation, it will be more complex.
Historically, once folks go home, they celebrate, they go out with families. So you generally see a boost in sales at lower tier cities. Now given the people are staying The cities, that will be a little bit different situation. So again, this would probably have a bigger impact on EFC Because you have presence in more lower tier cities. And so that's one complexity there.
Now the other complexity that going on there is that if you think about last year, we're going into the first A few weeks in January last year, we have very strong momentum. And then a lot of that only happened In late January, we don't have that benefit this year. So that's another thing. So the thing is that if you go to KFC, you have recovered very Strongly in March and later part of 2020. The reason is because we were able to keep our lot of our stores open.
We're able to ensure safety of our employees and customers. We see tremendous boost in our delivery business. And then even though a Baifuels store We're close at that time. We're able to enlarge those trade zones to serve those customers. Now with most of we've almost Most of our store opened, fair few stores closed, less than 1% of stores closed because of the impact today.
The trade The delivery trades will have been withdrawn, so therefore things of the pattern will be also more challenging. So All in all, I think that's why we want to highlight that both in our prepared remarks and also in our Our earnings will be so that we can give a fuller picture to folks outside of China, in Hong Kong, in the U. S. And Europe, so that they can understand even though The pandemic, in fact cases, may be less, but the preventive measures, stricter preventive measures And the impact on consumer behavior is not less. And with the Chinese New Year complexity, More challenging for people to model.
We're trying to give you a sense that's quite what happened in the Q1.
Lawson, the TC and TA of last year Q1 summarize what Andy just described Because although the same store sales for Q1 last year was minus 11, which is a Pretty decent number given the pandemic due to all the things that Andy just described. The TC was down 30%. However, with everything that we did, including when people are going back to work because scheme? Our stores were many of our stores still open. We benefit a lot from it.
And also, We focus on the high ticket item of delivery. The TA increased by 27%. So TCE was down 30%, TA was up 27%. And that supports the same store sales for Last year Q1. And you could imagine for this year, such benefit of the ticket increase will be very difficult to lap?
Thank you.
Thank you, Julian. And actually, I I took a train from Shanghai, Tuohang Liu last week. So I can understand how empty railway stations are at the moment and all the changes that you are facing. And we really appreciate all the high efforts that you are making to sustain the business. Good luck.
Thank you.
Thank you, Mr. Chen. We try to be straightforward and Present the fuller picture here on the ground.
Our next question comes from the line of Lily Yu from Morgan Stanley. Please ask your question.
Thanks, Joey and Andy. Also my question answered, I have a simple follow-up question Because Zhou Yi at the beginning mentioned this year and going forward in the next couple of years, multi format store going to be a focus. Just trying to understand the economics of the small format, I. E. The small town format.
The Unit sales basis, how much it lower on per unit sales versus our previous average? Because I understand If we look at the Yunei store sales pre COVID-nineteen level, it's about US1.1 million dollars per year per store. And just trying to get some picture of how lower it could be when we get more new stores in a smaller format? Thank you.
Thank you, Lillian. I just have two quick comments. One is, we forever Yum! China, At least while the business is going through such high growth, we are always struggling to balance the system sales with the same store sales growth, Because it's absolutely the right thing to do to drive the system sales when we can't open that many stores, but it has certain pressure on the same store sales growth as well. But we have to continue to do the right thing by hopefully delivering both system sales and same store sales growth.
For the smaller store, the revenue is smaller, But we can open more stores, while the profitability level is comparable to big store. And that I think is very important. Therefore, net net, the system sales is improving when we open more smaller stores. In the past, not only now, in the past, we actually already have multiple store format, Big stores, smaller stores, depending on the location. But just right now, when we are going into Tier 6 Citi and below.
We are open even smaller store and With lower CapEx, but the return will still be comparable.
Right. I'll just add a little bit to What we mentioned, obviously, with the store format, we would likely see a smaller sales footprint. But we have a disciplined process and that help us to be comfortable that the I believe will be comparable and the return to our investment will be comparable. Now I think there are a couple of reasons we have like the smallest to penetrate The lower tier cities, we are also developing developing small stores that are geared toward more delivery and takeaway, especially in the urban center area. I think it's important to note that for delivery and takeaway, there's a network effect, right?
They're closer, more impact, the more dense your network is That helps customers improvement their delivery speed and then also drive incremental sales because folks, You ask them to walk 2 kilometers, how are we going to do a takeaway, right? And then if you want delivery for like 5 miles, Fiberometer, they found not as good neither. But when you can shrink that into 3 mile and you can shrink the walking distance The 500 meter, a lot more folks would probably be happy to do that. So that is some of the things that we're doing, And we have been doing that for the last couple of years. But obviously, the COVID-nineteen pandemic have Accentuate and accelerated that consumer behavior change.
And so we're going to accelerate that kind of development as well. So hopefully, we have addressed your question.
Thanks a lot, Duyi and Andy. Yes. Thank you.
Thanks, Liam.
Our next question comes from the line of C. J. Lin from CICC. Please ask your question.
Thank you, management, for taking my questions and congratulations on the strong readouts for
Sorry, Sijian. We have very hard time to hear you. Would you mind Speak up a little bit, please.
Sorry, could you hear me now?
Better.
Okay. Okay, sure. So thank you for taking my questions. And I have one question on margin. KFC's margins still recorded a year over year decline in Q3, but recorded significant YY increase in Q4.
So I wonder that what's the reason behind this and will this continue into next few quarters? Thank you.
Thank you, CZ. In terms of margins, obviously, as we have mentioned a little bit in the prepared remarks, There are some of the factors in the 4th quarter that was not expected to recur. For example, Some of the government and rental relief and then we're also looking at Some of the timing shift in GAAP representative that may not recur in the next year And likely not incur next year, especially for the COVID related rental relief and gas relief. Now the other second part of that is that our Our labor productivity improvements have been very strong. And we however, part of that is also due to Some labor shortage, part time workers.
So that as we have mentioned before, we It's going to be temporary and when we increase our staffing level that may also ease a little bit. But all in all, I think we have done team have done a tremendous drop in controlling costs. And so some of those cost control will continue to next year. Now and we have a little bit discussion about commodity prices. Mobile prices also eased a little bit in the Q4.
So that also helped our cost of sales despite we're stepping up Motion activities. So that's another part of that. So I think, in short, is that some of those Cost savings, some of those margin improvements due to productivity improvements would carry forward next year. Some of them would likely be a more temporary situation. But all in all, I think this year in 2021, the focus really is to continue to drive that sales And traffic recovery.
So we should expect stepping up in cost Of sales in terms of promotional activities, we also should expect increase in advertising spending. And again, Because this 2 year period lap impacted by 2019, our same store growth is No, it's not as strong as the past couple of years. But if you look at our cost of reach, it would be the increase we commented for 2 years. So that's why we in our prepared remarks, we cautioned folks that in 2021 Margins overall compared to pre COVID level will still remain subdued. And one thing is that we still have some ways to go Before we see sales, we cover to the preferred level.
So that's why despite some of the Productivity improvement, some easing in commodity prices, we are still over cautious on the margin side.
Thank you. Thank you, Julian and Andy.
Thank you. Thank you very much.
Our next question comes from the line of Terrance Liu from CLSA. Please ask your question.
Okay. Thank you, management, for taking my questions. So I'm just curious about your statement on your coffee business? Because based on our standing previously, I think you have been talking about refiling the business model and call? I think store format for your coffee business, especially as to the coffee and joy.
So that So I think Emily just mentioned a couple of times and you will accelerate the expansion of your coffee business in a couple of years to scale up to your meaningful skills. So I'm wondering, does this mean that you are satisfied with the current business model or the store format? Or you have already filed found a replicable model for your Coffee and Joy business going forward. So could you just elaborate more about your strategy as to your call? Coffee business for next 3 to 5 years, especially in terms of the like the store openings and any sales contribution.
So anything you can share with us, it's highly appreciated. Thank you.
Thank you, Terence. Let's talk about C&J a little bit and then we'll move on to Lavaz. C and J, we so far have roughly about 50 stores And we have been working on the business model and then refine it and build on it. The focus is on getting the fundamental right. For example, we build a day car, we build a delivery, we improve the store economics.
To give you a sense, quarter 4 of 2020, the delivery business is already 30% sales of the D and J, which is much, much higher compared to the year before, The delta here is the availability of the system and also food and etcetera. And then For C&J, we are also building the B2B business. It has a 3 year partnership with another company So that we supply coffee in the office in the office that's provided by our partner. And that partnership is about opportunity for 100 sites and we'll continue to explore that. So the potential avenue of growth is on store expansion opportunity, but also on the store economics.
Because when we have 50 stores, we have certain scale, then we can really work on the economics. It's very hard So we really have a true sense of economic when we have few stores. But let's move on to Lavada. Lavada, we only have 5 stores right now in Shanghai. However, the improvement of economic the speed of improvement is quite fast.
As I mentioned earlier, We're actually quite happy with the result. I mean the brand is very well received by the customers. And because of the technology and all the fundamentals we work on C and J and that helped The delivery day part of Lavazza immediately as well. So we our delivery business for Lavaz, even with FIFO, it's already a quarter of the sales. And of course, we are also building the CRM and we already start to improve the economics.
And the Lavaz business for 2021, We do plan to accelerate the opening quite fast in 2020. And we shall go out of Shanghai for the last this year as well. So I think without going into more and more detail, I'll pause here.
I will add a couple of things. I think as Joey mentioned, we see the fundamentals as C and J is fee? Improving. So if you look at a store over more than a year, I think they have returned to positive SSG in late 2020. And then with better sales and better mix of products, we also see more store viewing Breakeven.
So that's, I think, overall a positive trend there. And for Lovato, you obviously view a very new initiative, but No, I think what we can say is that the reaction from consumer and the initial sales number were better than what we have initially forecast. So still early in the game for coffee for us, but we have greater confidence. And more importantly, I think we internally have decided Coffee is a very important category for us in the longer term, and we will invest what's needed to make it successful and material and Any important part of our business going forward.
All right. Thank you.
Okay. Thanks, Andy. Enjoy. Thank you.
I would now like
to hand back the conference to today's speakers. Please continue.
Thank you for joining the call today. We look forward to speaking with you on the next earnings call. That concludes today's call and have a great day. Thank you.
Thank you, everyone.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.