Hello, everyone, and thank you for joining Yum China's 3rd Quarter 2020 Earnings Conference Call. Joining us on today's call are our CEO, Ms. Joey Watt and our CFO, Mr. Andy Yang. 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 included in our earnings release.
Today's call includes 3 sections. First, Joey will provide an update regarding recent developments. Then she will offer some highlights around our quarterly results. Andy will then cover the financial results and provide an update on our full year outlook. Finally, we will 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 Ms. Joey Hua, CEO of Yum China. Joey?
Thank you, Debbie. Hello, everyone, and thank you for joining us today. As I reflect on this challenging period, I want to thank our employees, our customers, our partners and our shareholders for your continued trust in Yum China. Resilience is only proven when tested, and we certainly were tested. Following 2 challenging quarters, we delivered system sales growth for the Q3.
This is the result of the tireless dedication of our staff and partners, working to safely provide good food, great value and convenience for customers across our 10,000 plus stores. Hold fast, stay true. Throughout the COVID pandemic, we hold to our key operating disciplines. Food safety, employee care and customer focus guide our actions. In over 1400 cities we operate, we provide employment, career progression and a commitment to improving our local communities.
We stay true to our culture of innovation, building on our leadership in digital and delivery. All these add to the resilience of Yum China. We achieved much in 2020 despite the COVID challenges. 1st, we opened our 10,000 store this quarter, marking a significant milestone. Secondly, our brands demonstrate the innovation and execution excellence, capturing the shift to off premise signing early.
KFC and Pizza Hut pioneered content less delivery in late January. We engaged with over 20,000 companies regarding corporate delivery, tapping into another segment of new customers. Pizza Hut celebrated its 30th anniversary by driving menu innovation, improving its takeaway and individual set offering. 3rd, we formed a joint venture with Lavaza and opened the 1st flagship coffee shop in Asia. We will continue the journey together to explore the China coffee market.
4th, we completed the acquisition of Quanjivan and formed a Chinese dining business unit to tap the massive Chinese cuisine market opportunity. Last but not least, we list on the Hong Kong Stock Exchange in September, becoming the 1st Delaware Incorporated Company to list on both NYSE and Hong Kong Exchange. This listing in one of the most vibrant trading markets in Asia brings investors closer to our consumers and partners. At the same time, we maintain our strong corporate governance and discipline. The Yum China of the future will have a much larger footprint across China.
Stores will remain new or freshly remodeled. We will continue to serve innovative food across daypads and occasions. Our portfolio of brands built organically and through a disciplined M and A process will target strong growth segments. This will be supported by key infrastructure, whether in supply chain, logistics or digital marketing. We are committed to investing in this future.
A future of market leadership enabled by growth in stores, growth in our portfolio and growth in digital and membership capabilities. Let me elaborate on each of these growth initiatives. Firstly, store growth. It took us over 15 years to open the first one thousand stores. In the last four quarters, we opened over 1,000 stores as well.
We have the capability, infrastructure and proven store models to build profitable new stores at scale. Importantly, as delivery and takeaway become more popular, we are adapting our new stores to smaller sizes and lower CapEx. Increasing store density gets us closer to our customers, serving them faster and better while capturing incremental sales and profits. We are piloting store models, which are tailored for lower tier cities to penetrate new markets with greater flexibility and efficiency, Localized menus, store layouts and operating models enable us to serve a more value cautious customer. China is a large diverse market with regional differences in economic development and policy.
We will adopt region specific strategies to create the flexibility and pursue accelerated growth trends regionally. Multiple channels, different models and regional strategies are crucial to expansion, enable us to develop a strong franchisee network. Market leadership will also require investments in our infrastructure, from more logistics centers to IT solutions. We will need to strategically deploy capital for both offline and online assets. Future improving our leadership as we build the next 10,000 stores.
Secondly, portfolio growth. We are proud to welcome the Huang Zhihuan and Lavazza brands to our Yum China family this year. In addition to our core Western dining brands, Chinese dining and coffee represent exciting new segments for growth. Over the past few months, we have found opportunities to collaborate between our little sheep and Huangshijuan brands in areas of franchisee development, seasoning distribution and supply chain. Guanjuan franchise partners are already leveraging NEM China's strong delivery capabilities to improve store economics, and we are excited for further synergies.
Similarly, leveraging our COVID and JOY experience, our partnership with Lavazza has seen early success. The 3 Lavazza stores in Shanghai are receiving great customer feedback. Yum! China's capabilities in digital, data and delivery are creating an ecosystem for our consumers and will drive growth across our portfolio of brands. The 3rd growth initiative is in digital and membership.
Last quarter, we shared some of our thinking around digital membership and their importance as a growth driver. We will invest in creating a customer centric digital marketing platform. Additionally, end to end digitization and the application of AI technologies, Vital, from farm to fork, our goal is to track, analyze and automate across our value chain. From receiving of goods to real time control of inventories and operations, Investments in digitization empower us to improve operational efficiency and drive customer satisfaction. Crucially, this will give us added confidence to accelerate working with our franchisee partners and reach further into more remote areas.
Strong digital and membership programs create synergies within our portfolio of brands. This improves unit economics, in turn driving store growth. All of these growth initiatives are interdependent. Investments across all three are necessary to build on our leadership and agility. Now a few observations from this quarter.
KFC sales demonstrated improvements in the 3rd quarter, supported by our value campaign and digital initiatives. Domestic tourism and transportation hub volume slowly recovered, but international travel and tourism is still weak. Pizza Hut continued to make great progress With new offerings, refreshed restaurants and strong execution capabilities, Pizza Hut recovered sales to 93% of prior year period. Our actions across the pillars of revitalization continue to bear fruit as ticket average improved sequentially. Restaurant margins improved by over 5 percentage points and operating profit grew 59% year over year in constant currency.
Value for money is important to consumers during this difficult period. Across our brands, we ensured a strong value proposition. KFC extended Crazy Thursdays to Wednesdays Fridays. Pizza Hut brought back a hugely popular all you can eat program in September. Apart from great value, our innovative products expect customers.
At the national level, we launched the durian chicken burger at KFC and our Chinese style braised beef pizza, Dongpuan Niro, a Pizza Hut. We also trial regional flavors in selected markets such as Wuhan hot dry noodles, Wuhan Le Ga Mian and late night delivery of Sichuan spicy crayfish, Sichuan Mala Xiaolongxiang. Delivery drove strong growth across our entire portfolio, accounting for approximately 28% of sales in the 3rd quarter. We continued improving our takeaway menu and offers to complement delivery. Together, off premise demand account for over 55% of sales at KFC and 40% of Pizza Hut.
Digital orders were 78% of sales, were above pre COVID levels. Fueled by digital members grew to over 285,000,000. During the quarter, we sold 19,000,000 privilege memberships at KFC and Pizza Hut, covering multiple categories Other than the signature delivery and family privileges, we sold over 8,000,000 Chicken Lover memberships. In Chinese, we call it Wanza Ka at KFC during the summer holiday. This paid membership tripled frequency and sales per member during the subscription period.
We generated meaningful profit in this quarter. Despite the pressure from sales deleveraging, our $320,000,000 of operating profit, excluding special items, was a result of the strong efficiency improvement we have made. As we look forward, the end of the year and into 2021, we remain cautiously optimistic. We must continue to be vigilant and agile. I need to remind our stakeholders that China is a large diverse market and regions will experience varying levels of COVID impact until the new vaccines are developed.
The recovery will continue to be nonlinear and uneven, but we are well positioned to navigate these uncertain times. With that, I'll hand over the call to our CFO, Andy Yong. Andy?
Thank you, Zhou Yi, and hello, everyone. I will first address key financials and developments in the Q3 and provide some color on our outlook. Unless noted otherwise, figures mentioned refer to the Q3 of 2020. All percentage changes are before the effects of foreign exchange. Revenue was flat year over year with same store sales recovered to 94% of the prior year period.
All brands have sequential improvement in sales. This is a testament to the hard work and dedication of employees to drive top line in the challenging environment. KFC same store sales recovered to 94% of the prior year period compared to 90% in the Q2 and 89% in the Q1. Improvement was largely driven by effective value promotions and digital initiatives. Same store traffic recovered to 90% from 80% in the Q2.
Our transportation and tourist hub sales improved, but still remain under pressure. Pizza Hut same store sales recovered to 93% of the prior year compared to 88% in the 2nd quarter and 69% in the Q1. Baidu campaign, all you can eat and membership initiatives were effective in driving traffic and ticket average. Overall, dai in volumes recovered to over 80% of prior year for our core brands. Strong contributions from delivery and takeaway continue with over 50% of our sales being off premise.
The consolidation of Wangzhi Wang contributed 3% to total system sales in the quarter. Together with the consolidation of Suzhou KFC, their contribution to total revenues was 2%. We opened 312 stores, new builds accelerated as our development teams secured favorable locations with more flexible store format also helping expansion. Despite the same store sales decline, restaurant margins were 18.6%, up 0.9% compared to last year. Sales deleveraging was more than offset by our aggressive efforts to control costs and improve operational efficiencies.
Cost of sales was 31.2%, almost flat year over year. This was largely driven by a 1.7% reduction at Pizza Hut as they lapped aggressive promotion made last year. KFC had a 0.7% increase in cost of sales. The impact of more aggressive promotions and value campaign to drive store traffic and sales was partially offset by commodity deflation of 1% at KFC. In particular, we work closely with our major grocery suppliers to take advantage of a more benign inflation environment.
Cost of labor was 21.6%, almost flat year over year. Wage inflation was 3%. It was subdued in many of our markets as government mandated minimum wage increase will differ. Labor productivity improvement has largely offset the impact of ratio inflation and increase in delivery rider costs. Labor productivity improvement was accentuated by shortage of part time workers in the quarter.
We intend to increase staffing levels in the coming months to balance service and efficiency. Compared to RMB40 1,000,000 in the Q1 and RMB50 1,000,000 in the second quarter, we received approximately RMB10 1,000,000 in rent reductions and government relief. However, we expect this to phase out. G and A expenses increased 6%, mainly due to a lapping of prior year's government incentive and impact of consolidating G and A expenses at Wangzhi Wang and Suzhou KFC. Excluding the impact of consolidation, year to date, G and A expenses decreased 1% year on year.
We achieved operating profit of RMB556 1,000,000, including a remeasurement gain of our existing equity debt in Suzhou GFC of approximately RMB239 1,000,000. Excluding special items such as We Measurement gain, adjusted operating profit was RMB320 1,000,000, representing a year over year growth of 5%. Our effective tax rate was 25.6%. Net income was RMB439 1,000,000 and adjusted net income was RMB263 1,000,000. If we exclude CNY29 1,000,000 net investment gain in Meituan, it would be CNY234 1,000,000, up 8% year on year.
Diluted EPS was $1.10 and adjusted diluted EPS was $0.66 I would like to touch on our capital allocation strategy. Following a careful review of our financial position, we will resume our cash dividends at RMB0.12 in the 4th quarter. Our capital allocation focuses on driving the long term growth of Yum! China, while providing adequate liquidity to navigate any sudden disruption to our business. With the capital raise in our secondary listing in Hong Kong, we will focus on: 1, accelerating new build and maintaining store remodeling across the Yum!
China portfolio 2, stepping up investment in our digital, logistics and delivery infrastructures to support and drive growth 3, maintain a disciplined approach to M and A and investment, while exploring opportunities to invest in brands with excellent growth opportunity, new capacities and technologies. As this year have shown, having sufficient liquidity is paramount to operating in an uncertain environment. Our strong balance sheet provide us the capacity to deal with potential contingencies, while allowing us to make targeted investments to drive growth and capture market opportunities. We believe this approach to capital planning will drive long term shareholder returns. In terms of outlook, as we look ahead to the 4th quarter, we are encouraged by sequential quality improvement.
However, we must be mindful that the pandemic is still not over yet. The remaining journey to recovery is going to be challenging. We expect our store traffic and sales continue to be impacted by: 1, the lingering effect of COVID-nineteen on consumer behavior 2, transportation and tools volume, while recovering, continues to be heavily impacted 3, additional precautionary measures that consumer and or government may take as we enter the colder months and as flu season approach. At the same time, we also expect margins to be impacted by sales deleveraging and a continued focus on value campaigns to drive store traffic, facing out of COVID-nineteen related relief, increased staffing levels to balance services and efficiencies And finally, store impairment, we view factoring in the impact of COVID-nineteen. It's important to note that the 4th quarter is not only seasonally the lowest quarter for sales, but also the biggest quarter for store remodeling.
Small changes in operating results or investment can have a significant percentage impact on operating profit. In terms of inflation outlook for 2020, we now expect ratio inflation to be lowtomidsingledigits, commodity inflations to be flattomowsingledigits, driven by lower grocery prices. In terms of store opening, including Wangji Wang, we now target to open more than 900 new stores. As a reminder, following our secondary listing, we ended the 3rd quarter with 419,000,000 share outstanding. As for 2021, we are operating under the new normal of reduced travel and social activity.
Sales momentum will continue to be impacted until the pandemic is over. With bouts of COVID related disruptions, different regional markets will likely experience varying performance. In October, there were regional outbreaks in Qingdao and Western China, resulted in testing for millions of people. This is a good reminder that the recovery will be nonlinear and uneven. We continue to face cost pressures on multiple funds.
As part of our commitment to the environment, we will begin to phase out the use of plastic packaging, which is expected to materially increase our cost of sales. Rate increases have been mostly deferred or delayed in 2020. We expect this to catch up. We will also step up investment to build out our digital logistics and delivery infrastructure. Accelerate investment in these areas will be critical in maintaining our market leadership.
With our digital infrastructure, solid execution and strong balance sheet, we are prepared to capture opportunities for recovery and growth. We will provide additional details on specific 2021 target with our Q4 earnings release in early 2021. With that, I will pass you back to Debbie to start the Q and A. Debbie?
Thanks, Andy. We will now open the call to people questions. In order to give as many people as possible the chance to ask questions, please limit your questions to 1 at a time. Operator, please start the Q and A.
Thank you so much. And our first question comes from the line of C. G. Lin from CICC. Your line is now open.
Hi, management.
Thank you for taking my questions and congratulate on the good performance. So I can ask one question, right? My question is on Pizza Hut, because for Q3, we see that the near 17 percent of restaurant margin is really high level even through its history. So could we know more about what happened behind this? And is it sustainable looking forward?
Thank you.
Thanks. This is Andy. So I will address your question regarding margins at Pizza Hut. I think overall margins, if you look at the overall margin for the quarter, we do have very strong performance on both KFC and Pizza Hut. Overall, if you look at Pizza Hut, for example, certainly, we are still impacted by sales deleveraging, roughly more than 2%.
For inflations, we do see continuing commodity pressure, pricing pressures for the cost of good balance. But that's more than offset by the labor productivity improvement. Now if we look down at each cost item, if we look at, for example, gross sales, we see that this is an improvement about almost a part like 1.7%. The main part of that is commodity inflation that's offset by lapping of promotions in 2019. Now for cost of labor, we see about 1.4% improvement despite sales deleveraging, wage inflation.
We see that labor productivity gains. Part of that, as I mentioned on the prepared remarks, is accentuated by shortage of partner workers this quarter. And so and also we also benefit a little bit from the lower social insurance contribution. The big improvement here is actually on what we call O and O, and that has a lot to do with a number of cost initiatives at the restaurant level, including utilities, maintenance costs. We also got some rental with these costs.
Thank you and congratulations on navigating this environment. Your unit growth outlook for 2020 continues to be very strong despite the pandemic. Are you able to give us a look into the pipeline for 2021 or give us any color on how you're starting to think about the unit growth opportunity in 2021?
Hi, Brian. This is Andy. So I will give you some color and then Joey may want to feel free to jump in later. I think as we mentioned, we at the beginning of the year, first half of this year, we certainly have low impact from COVID-nineteen in terms of our store opening. As we have mentioned in the prior earnings calls, our development teams have a lot of project in the pipeline at the time, but obviously, because of the pandemic, there was some delay in construction because there are limited mobility in March, April time frame.
So they have been trying to catch up, obviously. So and they have done a pretty good job this quarter. We and that's why we're confident that we can meet the target and raise that to from peers to date, we guided to about 800 to 850 stores to now more than 900 stores. As we have mentioned, as Joey mentioned, our next milestone would be another 10,000 stores. It took us quite a while to get to the first 10,000.
It took us almost 33 years. We certainly think that we will do it much faster this time around. In terms of the pipeline for 2021, I think right now, we're still in the planning process. It's too early to provide you that information, but we would give more details in our planning. However, but if you look at our current opportunities in China for growth for store network expansion.
If you look at the number of cities that we have we are in right now, it's a little bit more than 1400 for KFC and I think 800 plus in for Pizza Hut. So that's we're still tracking about probably close to 500, 600 or more CDs that we can penetrate in the future. So those are the wide space. Also in terms of increasing penetration in the top tier cities, I think we and also lower tier cities, we think there's also a lot of it as well. Looking at the small density compared to not only to North America, but also to other Asian countries and regions, our store density is still a lot below.
So particularly with the shift to a smaller store format and also with catering more to delivery and takeaway, I think we do have a lot more opportunities in terms of increasing the penetrations of our store network in the existing market that we're in right now. Hopefully, I addressed your question.
Thank you, Andy. Brian, I would just like to add 3 comments of your question. One is, we always emphasize on the quality of stores. So we will be aggressive and open minded about new stores if we see opportunity of opening good stores, profitable stores or at least breaking even stores. So that's the bottom line we hold very, very close to our heart.
And thus, bottom line bottom up approach is if we find those, we'll open them. 2nd is, as Andy mentioned earlier, I just want to look at more specific is, as a Tier 1 city Tier 1, Tier 2 city, we are going for smaller stores to adjust our sole portfolio strategy because the growth of delivery and takeaway and also to handle the rent and other costs as well and it's quite an efficient model to fill in the gap of the trade zone. For the lower Tier 3, we have been working on the lower Tier 3 store models. And this year, we have further breakthrough in our models. Not only the investment cost for the lower tier CEE model is getting even lower.
We find innovations to do that. But also we have customized menus for the lower Tier 3. To give you an example, we have opened a few such stores this year. We feature something called Crazy Store Manager Offer, which will feature a combo, a launch set of RMB15, which is a bit more than $2 And our normal combo for 4 item in Tier 1, Tier 2 city would be 30 to 35, etcetera. So you see the gap and the products are different.
We are not going to sell the same product as such big price gap. But the lower tier city in some particularly in the western and the northern part of China require a different understanding of our menu. 0.3, Pizza Hut. We have been talking about the satellite store model since last year, and we've been working on it because essentially what the satellite store means is huge reduction in terms of CapEx investment and quite a different store operating model. For example, our kitchen need to move around 140 square meter to much smaller size, cut it by half per se.
And the menu is slightly different too. And as of this year, we are going to have about more than 20 satellite stores. And I will be happy to say that the initial results are encouraging and we are happy to see what we are seeing right now. For both satellite store, for Pizza Hut and for the lower tier city stores for KFC? Thank you, Brian.
Thank you, Joey. Thank you, Andy.
Thank you so much. And your next question comes from the line of Linda Wong from Macquarie. Linda, your line is now open.
Hi, management. I have one question regarding for the store expansion. Because I noticed that the payback period, especially for the Pizza Hut slightly increased. Before I think payback period is 3 to 4 years, but right now it's 3 to 5 years. So I just want to know that whether in the future we continue to expand the store and do we worry about the operation efficiency issue?
And can you also share with us about HuangJihuang, its payback period? Thank you.
Hi there, Linda. So let me address the 1Q1 and then I get back to the earlier part of that. For 1Q1, you will see a franchise model. So almost all of the store, large majority of the store are franchise model. That same goal for real shift.
And so in terms of pay per pay, it's not very meaningful for us and especially the franchisees. But what we can say is that the franchisees themselves are actually massively happy with their payback, and that's why we continue to see pretty decent build outs in terms of the franchise operations over there.
It's the paper period for Pizza Hut. Linda, for the Pizza Pizza period, I think because of the COVID-nineteen and the way that we calculate numbers, it's a rolling number. So of course, during Q1, Q2, it impacted our payback a little bit, but we still overall are confident with the overall trend of the payback to of Pizza Hut, particularly with the innovation on satellite store. We are quite happy to see what we are seeing right now in Pizza Hut. Thank you.
Andy?
Right, right. So Linda, so I just want to remind folks that when we disclose the payback period, generally, we are using actual number. So they will reflect the impact on the recent month, which is, I guess, Joey mentioned impacted by COVID-nineteen, right? So but overall, I think if you look at the store recovery in terms of the sales recovery, we're on a I think the right direction. Overall, if you look at SSG is back to 94% for KFC and then 93% for Pizza Hut.
And so in that sense, I think we may still seeing that rolling average being impacted, but that should I mean, fundamentally, we haven't seen a material change in terms of how our stores are performing and then also in terms of longer term outlook. I think as the recovery, even though it's going to be nonlinear and uneven. But I think eventually, the pandemic will be over. And then I think we're comfortable that we will not fundamentally change our store economics. Obviously, there were some operational changes in terms of how our store as Joey mentioned, we would continue to experiment with different store formats.
For Pizza Hut, for example, we also have this satellite store format that's being rolled out. So it would do it. But nevertheless, I think the fundamental haven't changed, maybe more delivery, more takeaway in terms of sales, smaller store format going forward. But I think haven't changed our view on the payback in the future.
Okay, got it. Thank you.
Thank you so much. And your next question comes from the line of Xiaopui from Citigroup. Your line is now open.
Good morning, Joey and Andy. Congratulations again for the strong recovery in the 3rd quarter. So we are now in Q4, which is a low season. I will be more interested in the upcoming 1Q next year, which is a peak season. In my view, that is a dual and team will have to facing tougher choices next year Q1 because we on one hand, you have to be more proactive in terms of recovery sales further.
On the other hand, you have to hedge against any risk of disruption due to any coming back of the COVID cases. So like Chinese saying, So how could you balance the 2 with your strategy and operation, I. E. In terms of innovation, value campaigns, delivery and
a menu offering, etcetera? Thank you.
Thank you, Xiaobo. That's a good way to put it on. In fact, that's exactly sort of our approach for this particular year since January, the happening of COVID-nineteen. How are we going to do that for 2021? It's not going to be too different in terms of the general approach.
We will be prepared, we'll be agile, we'll be flexible and we'll be cautious, but we'll also be optimistic. If we look at particularly Q3 this year, all of our brand improved in terms of the SSSG, the dyeing actually continue to recover. But we also work very hard on strong value campaign to drive traffic for both KFC and Pizza Hut. But at the same time, we are very well aware of the lingering effect of outbreak and thus our repeat caution to our investors and analysts about the uncertainties of COVID-nineteen. We just have to live with it really.
But when we come to the business, we still have to focus on each core pillars of the business. And we have to make sure each pillar is strong and sound and agile and flexible because we are in a very good position to manage all the challenges and actually still achieve innovations and result for our shareholders, for our customers and for our employees. And if we just recap what, let's say, KFC and then Pizza Hut, what happened here for Q3 of this year so far. As I mentioned earlier, we focus on the value promotion, LTO, the new product. And then we focus on the privilege subscription, so our membership.
Throughout the COVID-nineteen, particularly during the most difficult times, when we actually could not do advertisement very effectively, we actually could focus on our membership to still launch new product, conduct marketing campaign. And on top of the pillar of the membership, we work on our delivery. And our delivery improved, continue to grow with double digit growth for Q3, Q2 and Q1. So delivery is very agile and resilient business. And transportation hub and tourist is still being challenged.
The sales is still below pre outbreak period, it's still about 20% less, but we continue to work on it. And then the regional differences. Regional differences also means regional opportunities too. The Eastern China is still better than Northern China, the lower tier city is still better than higher tier city. And then the recovery in weekend and week right now it's evened out.
But in the past, we were doing a bit more promotion in weekday, a bit less in weekend because our weekend traffic was quite stable, quite encouraging and vibrant. But COVID-nineteen, the weekend traffic is the pattern changed. But it's okay. We make ourselves more agile and flexible and we learn better way how to deal with the weekend and weekday traffic recovery. And then that's the KFC.
And for the Pizza Hut, despite the COVID-nineteen, we still fulfill our promise of sales first and profit later, which we have been talking about for a few years now. And we have seen progress in the menu, the value campaign, the perception of value and expanding takeaway channel. And thus, by Q3, we've recovered ourselves to 93% and driven not only due to the improvement in Shravi, but ticket average. And how did we do that? Less discounting well, actually more targeted discount marketing campaign, increased party size and all you can eat.
So all in all, with our flexibility and with our focus on each of the pillars driving the business, I think we have demonstrated our resilience for 2020. And I would like to believe our resilience and our team's ability to deliver during very difficult time of 2020, we shall continue to do that for 2021. Thank you, Xiaopo.
Okay. Thanks, Joey.
Thank you so much. And your next question comes from the line of Chen Li from Bank of America. Your line is now open.
Thank you, Joey and Andy. And also congratulations again on the strong Q3 results. So I got your question on Pizza Hut, which actually offer a quite big asset price for Q3. But typically in the past, same store sales growth for Pizza Hut should be weaker than PSC. By this time Pizza Hut was quite close to that of KFC and the pace of Pizza Hut recovery also seems to be faster.
What's the reason behind that? Is this because of all the measures that we have taken to revitalize Pizza Hut? Or it is also partly because of the assumption that maybe karyudine in China is actually recovering at a faster pace for the industry as a whole. And also with regard to margins, the food and paper cost percent of sales declined quite dramatically for Pizza Hut, even if we are and at the same time, we are getting less promotional than last year. If that is the case, how should we reconcile that with encouraging same store sales growth trend for Pizza Hut in Q3?
Thank you.
Let me make you comment on the sales recovery side and then Andy can address Lawson's question on margin. I would say your thought about the Pizza Hut recovery is due to the overall model recovery, overall business recovery is what I agree and what we believe and that's what we have been working on. And we have been as I mentioned earlier, we've been talking about our focus, our promise of sales first and profit later for Pizza Hut for a few years now. Actually, Pizza Hut 2019, we delivered the first recovery of traffic, particularly the dining traffic, which was very, very critical for our business because before 2019, the last time we had positive traffic growth in Pizza Hut Dining business in particular was back to 2014. So 2015, 2016, 2017, 2018, it was hard work and by 2019, we get our customer there and that's the most, most important part of the improvement.
And we have been also talking about a few pillars of the revitalization, the menu, food, we changed 70% of the menu. So the food is very, very different. The delivery we rebuilt, our delivery team, we took it in house, it was painful, but we got it done without impacting the sales growth or the margin. We work on the perception of value, food taste, service level, dining environment. I don't know whether it's clear to our stakeholder, but we actually had the commitment for Pizza Hut for not increasing the price for 3 years.
No price increasing for 3 years is a very strong commitment to bring back the value for money, which is absolutely critical for Pizza Hut's business model. And during the COVID-nineteen, we also looked at it as a well, of course, it's a challenge, but it's also a trigger point to do even more innovation in takeaway, because we were building the system before that, the self order, mobile order system before that. And we launched in a big way and the takeaway business took off. So that add another leg to our business. So it's not due to 1 or 2 things, it's due to many things that we have been doing.
All the key pillars of the transformation are delivering the result. Thus, we are quite pleased to see the progress. And I'm certainly quite proud of our team's hard work that producing the result right now. And we do believe that the fundamental change and improvement of the business model will continue to help Pizza Hut deliver ongoing improvement. It's not done yet.
We are still working on the breakfast daypart, for example, because it's still an opportunity for us as well. But that's just ongoing. With that, I'll pass the question to Andy to give some color about the margin question for Rotten.
Sure. Thanks, Shui. And actually, I want to supplement kind of a little bit. I think it's important for us to put things in perspective. I think KFC actually have improved quite well, Intel SSG.
Last quarter, their SG of about 90, and this quarter, they're about 94%. If you look at Pizza Hut last quarter, their SG was 88%. And obviously, we're pleased that they're at 93% down. So both brands have actually seen quite a bit of improvement in terms of same store growth in GOVRI. And more importantly, I think if we look at the impact in the first in the Q3, for example, at the beginning of the Q3, we will still have an impact from the original outbreak in Beijing.
And then we're also further impacted by, obviously, the strong school holiday. So in light of that, I think we are pretty pleased with both trends' trajectory this time. Obviously, as we mentioned before, the recovery pace as we get closer and closer to full recovery is going to be more challenging. The reason is because we still are not out of the woods. And so if you look at transportation and this location, as we mentioned, is still down quite a bit, right, more than 20% in terms of traffic over there.
And those are important of our business, account for the high single digit out business. If we look further a little bit more, we still have some even coverage due at the dining business, right? The traffic at our store right now is 90% of last year's level. So getting the last group of people to feel comfortable and venture out in dining, making a bit more time. And we so we that's why we say like we feel pretty good about the Q3 results, but we are cautiously optimistic in the Q4.
And the emphasis is in the cautious especially as we go into the winter season and the winter flu season. And so there we should expect some potential regional outbreak or additional measure that will be taken by consumer or government as time goes by. In terms of margins, I think if we look at the overall margins, especially at Pizza Hut, I think they obviously, as Stewie mentioned, our strategy have always been to fix the fundamentals, in charge of store traffic and sales and then profitability. This is obviously a little bit unusual and extraordinary in the sense that we at the beginning of the year, we've seen a very significant decline in sales due to COVID-nineteen, and we are very glad that Pizza Hut team take very quick actions in terms of cost saving as well as their new product for the situation. So when we look at cost of sales, for example, overall for Pizza Hut, as I mentioned, it was probably like up 0.7% better.
And we're still under some inflationary pressure in terms of commodity side for Pizza Hut. But obviously, this year, the focus on cost savings and also targeted market promotions, we will benefit from lapping of very heavy promotions in comparison to last year. So in terms of cost of labor, we still have ratio inflation, but it's much more moderated this year for both brands because a lot of the minimum wage increase mandated by government have been delayed or postponed. So it's more of a night. I think if you look at rate inflation, we're probably looking at low single digit this year.
And so but we do expect some catch up there. The other one is that there have been some labor shortage that also accentuated the labor productivity gain, right? So people actually have to work with it extra harder. So we as we mentioned on the prepared remarks, we do think that in the coming months, we may have to increase the staffing levels to ensure that we have a balance of efficiencies as well as service level. And in terms of you mentioned O and O, I think that this there's a lot of improvement there.
And I think, again, this is coming down to a number of things. It's not just one initiative. There's a lot of cost initiatives. We have seen lower utility costs. We also see lower maintenance costs in rent to beef there as well.
So I think in terms of the margin perspective, I think the commodity inflation in certain areas is moderating a little bit compared to early part of this year. But we still we're looking to do that, especially when we go into next year. In 2021, we basically will be stacking up 2 year of inflationary pressure. For example, wage increase, like I mentioned before, likely there could be some catch up in some of those costs. Some of those initiatives are sustainable.
So if you look at, for example, in cost of labor, we do see both due gain from using technology, as we have mentioned a few times, the admin scheduling, the pocket store manager, real time tracking, all these would help us in the longer term for growth to be improvement. But as I mentioned, the labor shortage and the increased staffing levels in the coming months, we may reverse some of those gains. So and then the subcu inflation this year may have some cash up with you next year. But all in all, I think some of those favorable safety improvements will stay. Some of them may need to ease up a little bit so that we don't go overboard.
In terms of promoting inflation, I think if you look at overall inflationary pressure, it's easing a little bit. Still, the part is still very elevated in the prices. It's probably 20%, 30% higher compared to last year. But for poultry, like chicken, that pressure have eased a bit as the supply come back in. So that may help us a little bit on the corporate good sell.
However, as Joey mentioned, value promotions, value for money is very important proposition consumer in this new normal. And so we may give back some of those savings in terms of purchase price back to consumer to drive more traffic back to that store. So hopefully, I addressed your question.
Yes. Thanks a lot, Qiaoyang Andy, and
congratulations again. So I think my question on margin is well answered by Andy personally. So I think my next question is more on the development of China cuisine. So I know that the fastened Huang Zhihuan, but I want to check what's more longer term thoughts behind the development of this newly set up division? Thanks.
Hi, Yuan. This is Sandy. Let me try to address your question here on the Chinese cuisine business. Obviously, we think that the Chinese cuisine is a very big market. Chinese cuisine take a lion share for consumer here in China terms of dining outside.
So that's one opportunity for us. In terms of Chinese cuisine business, with the consolidation of Wangji Wang and with our existing brand of leadership and Eastonning, We formed the Chinese cuisine business this year and the unit is led by Ted Li. And he has been obviously responsible for the turnaround of wheel ships over the last couple of years. In terms of Chinese cuisine business, we have well, our goal is really try to leverage Yum! China's scales, supply chain, our franchise communications and our delivery partnerships, for example, with a different aggregator, which offer a significant provincial rate for us.
In terms of we also want to take advantage of the food innovation capability. So if you look at ownership, we launched a subsidy product, similar parts products. And we are also looking into for evolution, for example, growing out of product category like barbecue, for example. And then we also see a great opportunity in the seasoning and sauce business. And so we have seen leadership growing that business over the past couple of years.
WangJi Wang also have a very good sauce that they use at the store and we see opportunity for them to actually leverage that up to the consumer business. So if you look at the Chinese cuisine business this year, I think a lot of this work will be focusing on integrations of Wangzhi Wang, making sure that we can drive that synergy, not just at cost about cost, but also product innovations, about distribution channels, about franchisee base opportunity there. So in terms of next year, I think we would like to see a moving into more growth mode, seeing more growth in the franchise base as well as more progress on the seasoning and sauce business. So this is sort of like our current view of looking at Chinese cuisine business. Business.
And your next question comes from the line of Michelle Cheng from Goldman Sachs. Michelle, your line is now open.
Hi, Joe, Yandi. Congrats for the good result again. And I just want to I'm wondering whether you can share some color about the recent trend. I think earlier you mentioned that transportation hub is still around 20% plus below the normalized level. So trying to understand whether we are seeing a more significant improvement in like October since we hear some relative positive data points from other retailers and restaurants?
Thank you.
Hi, Michelle. For the trends, I mentioned a bit earlier about KFC, the key pillars for the business recovery. The delivery is still growing. The regional difference continue, but the gap reduced. The recovering in weekend and weekdays even now and when it comes to the transportation hub and tourist location, the transportation hubs business for KFC because Pizza Hut does not have much business in transportation hub, so it's mainly for KFC.
It's still below the pre outbreak period and we mentioned about probably about minus 20%. Even during the big holidays And the international traffic is still very limited due to the ongoing concern of the Pacific 2019. But one thing we would also like to caution our investors and analysts is post holiday trading is still a challenge. And that's very interesting phenomenon because usually when customers have concerns, still have the little concern of the overall economic situation, the job, etcetera, you tend to see pretty good trading during holidays. But after the holidays, the little weakness actually shows the psychological impact.
It's not only true in one country, it's generally true across different culture, different country. So we see a little bit of that too, which would just like to caution our analysts about that. But the overall trend is good. I mean for China, we are grateful for that. The life in China is quite normal right now compared to U.
S. And Europe. And the trading is vibrant. So we are very, very grateful for that. And let's hope that the good improvement, the ongoing recovery of our life back to normal will continue.
So that's where we are. Thank you, Michelle.
Thank you, Joy.
Thank you so much. And your next question comes from the line of Kristen Peng from UBS. Your line is now open.
Thank you, Joey and Andy for the very detailed explanation about the result as well as very positive outlook towards the future. So I have a second question, which is which might not be related to the Q3 result, but actually I want to get your thoughts. So recently, we've reached out from some news reports that your company is launching Kaifeng Tai, which is packaged food brand throughout China starting from the KFC retail units. So can you share with us your mid- to long term source towards this business initiative? And if you can share with us more color in terms of the branding, pricing, distribution strategies, that will be very much appreciated.
Thank you, Joey. Thank you, Christine. I mean, obviously, it will be hard to serve you because it need to be in Wuhan. It will only serve you. But hopefully, we will be able to have the opportunity for yourself to try our Kaifeng Tai products.
For our experiment in the retail business, partly is natural. Why do I say that? I'll explain it later. Partly because of the innovation that we come up with during the COVID-nineteen. So during the COVID-nineteen time, obviously, we have seen the trend, which is related to Michelle's question earlier is one trend is the increase of the home consumption, than Huachang, right, the people, product and occasion.
So the home occasion is the consumption is increasing and we can see that. And Pizza Hut respond during the COVID-nineteen very quickly by launching the steak, the prepared steak, but it is cooked at home and the result is very good. And KFC has its own take of the home occasion opportunity. And we leverage our product innovation team, which is a fantastic team. They come up with all sorts of very yummy and great product, and they come up with a lot of these products that could be consumed at home.
And so far, we have launched the chicken soup, Jitang. We have launched the Lo Sifu and it's a kind of rice noodle from Guangxi area with very strong smell. And then we have launched others like the chicken breast, right? So we launched a product innovation team and right now we are testing it and selling it in mainly top tier cities, because it takes time to build up the volume because this is a volume game as well. And the result is very encouraging.
And we leverage our current existing channels such as the e commerce channel, such as our own app, such as our own current stores to sell the product and customer can buy the product through our stores as well. So they can buy the product in the store and they can be delivered via our own in house delivery team. So you can see how do we do it. We leverage out the product innovation team, our distribution channel, our store team, our delivery infrastructure to expand the business. So that's where we are now and still early days, but we are quite excited about the progress.
And the name of Kaifeng Chai, I probably mentioned it before, if I repeat, I'm sorry, it's a name that customers in China tease KFC. This is the local version local name for KFC, but it's more in a funny way. We just take it as a compliment, so we call ourselves Capon Tai. And people got it immediately because that has been the name being used for many, many years, but never been used officially. So we make it official.
So that's where we are. And of course, you might notice that we have also launched coffee capsule. We call it Xiaodang because it's in a little tiny small coffee cup and is the upgrade version of instant coffee with different flavors stuff like that. And again, we try in top tier city and we are happy with the testing and the progress. So the retail business of KFC and Pizza Hut is an area that we are still learning and we are looking forward to delivering more this kind of yummy products to our customers.
Thank you, Christine. Thank you, Joey.
Thank you so much. And your last question comes from the line of Ann Lee from Jefferies. Ann, your line is now open.
Hi, management team. Thank you for taking my question. Just one minor thing regarding management mentioned earlier that in Q3 delivery business, one of the key driver has been like the corporate delivery. May I know like is this corporate delivery like mainly from KFC or is also for Pizza Hut? And what is the growth potential over here?
How much of the sales or the delivery sales is actually coming out from this corporate delivery? And I understand that we also start to like launch like delivery to park and all these initiatives. So just want to see like are these like the new like growth driver for the delivery side? Thanks.
Thank you, Ann. For the corporate delivery, we have been working on the system development because all these need to be supported by very strong IT system since last year. And originally, we targeted to sell to expand our business to like 5,000 companies for this year. And then the COVID-nineteen hit, and we deliver a lot of free meals, about 170,000 free meals to over 14 50 hospitals and community centers in over 28 provinces. And suddenly, we became famous for the corporate delivery due to our effort in COVID-nineteen by trying to do the right things.
Because no matter how difficult the deliveries, even for the food is free, we always emphasize on hot food. And that's our commitment. And so that gave us extra opportunity for company delivery because when the business start to recover back to March, April, KFC and Pizza Hut are one of the few trust brands that we still have majority of our store open and people came to us trusting our brand and food quality. So we have this unique opportunity and suddenly the demand is much higher than we thought and we respond very quickly. And the benefit of corporate delivery for KFC and Pizza Hut and Yum China is we don't have to hire a new set of sales team to do that, which is something quite essential if you are new brand new business.
We have all our stores, we have more than 10,000 stores right now in 1400 cities. And our store manager and their managers, they are fantastic people and driver behind this. So as of right now, we have worked with more than 20 1,000 companies on that. And not only the breastfeeds, but the over time, new and the 11 is coming, you can imagine we'll provide very strong support as well. To do that, not only it require more customized menu, but also require system integration of the payment, because we want it to be very convenient for staff to order kiazza or Pizza Hut or other brand food in their own company website or with their own payment or partly subsidized by the company, etcetera, etcetera.
It could be very complicated combination. But we will make it all easy, convenient for them. And thus, this business kind of is growing from strength to strength. But with that said, KFC and Pizza Hut in Yum China, base is so big. So when it comes to your question about what's the percentage of sales, it's still quite small.
And it's very, very hard to get 6 percent of sales given our base is so big. But it's very meaningful, particularly meaningful for the stores that have opportunity to support some companies. You can imagine the sales increase is meaningful. So that's where we are right now. We continue to expand our network of providing good food and good value for our customers.
So you can imagine we have the network of over 10,000 stores right now and between one store and another store, there are a lot of connections here we can do more by offering corporate deliveries or working with our business partner to deliver the service required for our customers. So that's where we are right now. And when it comes to smaller thing like opening stores in parts or even having a downtown, those small kiosks in some very convenient location. You can see it from the paradigm that we are trying to use our store as a network to further increase the connecting point with our customer by improving the convenience to the customer. And you actually will start to see some, it's not a lot yet, but one example is in Qingdao, is the delivery box.
There's a wall of delivery box and customer will pick it up at a certain point a certain spot of the office building, etcetera, etcetera. So these are all the things that we are exploring, but it's all from customers' point of view, good value, good food and convenience. Thank you, Anne. Thank you.
Thank you so much. There are no further questions at this time. Speakers, you may continue.
Thank you very much. Thank you
for joining the call today. We look forward to speaking with you on the next earnings call. This concludes today's call. Have a great day.
Thank you, everyone.
Thank you.
That does conclude your conference for today. Thank you for participating. You may all now disconnect.