Hello, everyone. Thank you for joining Yum China third quarter 2020 earnings conference call. Joining us on today's call are our CEO, Ms. Joey Wat, and our CFO, Mr. Andy Yeung. 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 three sections. First, Joey will provide an update regarding recent development. She will offer some highlights around our quarterly results.
Andy will cover the financial results and provide an update on our full-year outlook. We'll open the call to questions. You can find a webcast of this call and a PowerPoint presentation which contains operational and financial information for the quarter on our IR website. I would like to turn the call over to Ms. Joey Wat, 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 two challenging quarters, we delivered system sales growth for the third quarter. 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+ stores. Go 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 1,400 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 adds to the resilience of Yum China. We achieved much in 2020 despite the COVID challenges. First, we opened our 10,000th store this quarter, marking a significant milestone. Secondly, our brands demonstrated innovation and execution excellence, capturing the shift to off-premise dining early. KFC and Pizza Hut pioneered contactless 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 offerings. Third, we formed a joint venture with Lavazza and opened the first flagship coffee shop in Asia. We will continue the journey together to explore the China coffee market.
Fourth, we complete the acquisition of Huang Ji Huang and formed a Chinese dining business unit to tap the massive Chinese cuisine market opportunity. Last but not least, we are listed on the Hong Kong Stock Exchange in September, becoming the first 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 day parts and occasions. A portfolio of brands built organically and through a disciplined M&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 1,000 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-conscious 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 logistic centers to IT solutions. We will need to strategically deploy capital for both offline and online assets. Future-proofing our leadership as we build the next 10,000 stores. Secondly, portfolio growth. We are proud to welcome the Huang Ji Huang 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 Huang Ji Huang brands in the areas of franchisee development, seasoning distribution, and supply chain. Huang Ji Huang franchise partners are already leveraging Yum China's strong delivery capabilities to improve store economics, and we are excited for further synergies. Similarly, leveraging our COFFii & JOY experience, our partnership with Lavazza has seen early success. The three 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 third growth initiative is in digital and membership. Last quarter, we shared some of our thinking around digital memberships 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 technology is 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 third quarter, supported by our value campaigns and digital initiatives.
Domestic tourism and transportation have volume slowly recovered. 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. 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 Thursday to Wednesdays and Fridays. Pizza Hut brought back a hugely popular All You Can Eat program in September. Apart from great value, our innovative products excite customers.
At the national level, we launched the Durian Chicken Burger at KFC and a Chinese-style Braised Beef Pizza , Dongpo Niurou, at Pizza Hut. We also trialed regional flavors in selected markets, such as Wuhan Hot Dry Noodles , Wuhan Re Gan Mian, and late-night delivery of Sichuan Spicy Crayfish , Sichuan Ma La Xiao Long Xia. Delivery drove strong growth across our entire portfolio, accounting for approximately 28% of sales in the third quarter. We continue improving our takeaway menu and offers to complement delivery. Together, off-premise dining account for over 55% of sales at KFC and 40% of Pizza Hut. Digital orders were 78% of sales, well above pre-COVID levels. Fueled by digital, members grew to over 285 million. During the quarter, we sold 19 million Privilege memberships at KFC and Pizza Hut, covering multiple categories.
Other than the signature delivery and Family privileges, we sold over 8 million Chicken Lovers memberships. In Chinese, we call it Wangzha 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 CNY 320 million of operating profit, excluding special items, was the 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 will hand over the call to our CFO, Andy Yeung. Andy?
Thank you, Joey, and hello, everyone. I will first address key financials and development in the third quarter, then provide some color on our outlook. Unless noted otherwise, figures mentioned refer to the third quarter 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 our 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 second quarter and 89% in the first quarter. Improvement was largely driven by effective value promotions and digital initiatives. Same-store traffic recovered to 90% from 80% in the second quarter. Our transportations 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 second quarter and 69% in the first quarter. Value campaign, All You Can Eat, and membership initiative were effective in driving traffic and ticket average. Overall, dine-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 Huang Ji Huang 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 secure favorable locations, with more flexible store formats 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 campaigns to drive store traffic and sales was partially offset by commodity inflation of 1% at KFC. In particular, we work closely with our major poultry 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 were deferred. Labor productivity improvement has largely offset the impact of wage inflation and increase in delivery rider cost. 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 CNY 40 million in the first quarter and CNY 15 million in the second quarter, we received approximately CNY 10 million in rent reductions and government relief. We expect this to phase out. G&A expenses increased 6%, mainly due to a lapping of prior year's government incentives and impact of consolidating G&A expenses at Huang Ji Huang and Suzhou KFC. Excluding the impact of consolidation, year to date, G&A expenses decreased 1% year-on-year.
We achieved operating profit of CNY 556 million, including a remeasurement gain of our existing equity stake in Suzhou KFC of approximately CNY 239 million. Excluding special items such as remeasurement gain, adjusted operating profit was CNY 320 million, representing a year-over-year growth of 5%. Our effective tax rate was 25.6%. Net income was CNY 439 million, and adjusted net income was CNY 263 million.
If we exclude CNY 29 million net investment gain in Meituan, it would be CNY 234 million, 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 $0.12 in the fourth 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 raised in our secondary listing in Hong Kong, we will focus on, one, accelerating new builds and maintaining store remodeling across the Yum China portfolio. Two, stepping up investment in our digital logistics and delivery infrastructures to support and drive growth.
Three, maintain a disciplined approach to M&A and investment while exploring opportunities to invest in brands with excellent growth opportunity, new capacities, and technologies. As this year has 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 fourth quarter, we are encouraged by sequential quarterly 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, one, the lingering effect of COVID-19 on consumer behavior.
Two, transportation and tourist volume, while recovering, continue to be heavily impacted. Three, additional precautionary measure that consumer and/or government may take as we enter the colder months and as flu season approaches. 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. Phasing out of COVID-19 related relief. Increased staffing levels to balance services and efficiencies. Finally, store impairment review factoring in the impact of COVID-19. It's important to note that the fourth 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 wage inflation to be low- to mid-single- digit.
Commodity inflation to be flat to low-single-digit , driven by lower poultry prices. In terms of store opening, including Huang Ji Huang, we now target to open more than 900 new stores. As a reminder, following our secondary listing, we ended the third quarter with 419 million shares 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, which resulted in testing for millions of people. This is a good reminder that the recovery will be non-linear and uneven. We continue to face cost pressures on multiple fronts.
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. Wage 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. Accelerating 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 targets with our Q4 earnings release in early 2021. I will pass you back to Debbie to start the Q&A. Debbie?
Thanks, Andy. We'll now open the call to proposed questions. In order to give as many people as possible the chance to ask questions, please limit your questions to one at a time. Operator, please start the Q&A.
Thank you so much. Ladies and gentlemen, we will now begin the question and answer session. As a reminder, if you wish to ask a question, you will need to press star and one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Again, it's star and one if you wish to ask a question. Our first question comes from the line of Sijie Lin from CICC. Your line is now open.
Hi, management. Thank you for taking my questions and congratulate on the good performance. I can ask one question, right? My question is on Pizza Hut. For Q3, we see that the near 17% of restaurant margin is really a high level, even through its history. Could we know more about what happened behind this, and is it sustainable looking forward? Thank you.
Thanks. This is Andy. I will address your question regarding margins at Pizza Hut. I think overall margins, if you look at the overall margins for the quarter, we do have pretty 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 sales. That's more than offset by the labor productivity improvements. If we look down at each cost item, if we look at, for example, cost of sales, we see that there is an improvement about almost like 1.7%. The main part of that is commodity inflation that's offset by lapping of promotions in 2019. 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 the shortage of part-time workers this quarter. Also, we also benefit a little bit from the lower social insurance contribution. A big improvement here is actually on what we call O&O, and that has a lot to do with a number of cost initiatives at the restaurant level, including utilities, maintenance cost. We also got some rental relief of cost.
Okay. Thank you, Andy.
Thanks.
Thank you so much. Your next question comes from the line of Brian Bittner from Oppenheimer. Brian, your line is now open.
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. I will give you some color and then Joey may want to feel free to jump in later. I think, as we mentioned, at the beginning of the year, first half of this year, we certainly have low impact from COVID-19 in terms of our store opening. As we have mentioned in our prior earnings calls, our development teams have a lot of projects in the pipeline at the time, but obviously because of the pandemic, there was some delay in construction because the limited mobility in March and April time frame. They have been trying to catch up, obviously. They have done a good job this quarter. That's why we're confident that we can meet the target and raise that to, from previously, we guided to about 800 - 850 stores to now more than 900 stores.
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 was 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. If you look at our current situation right now, we do think that we still have a lot of opportunity in China for growth, for store network expansion. If you look at the number of cities that we're in right now, it's a little more than 1,400 for KFC and I think 800 + for Pizza Hut.
We're still tracking about probably close to 500-600 or more cities that we can penetrate in the future. Those are the white space. Also, in term of increasing penetration in the top tier cities, and also lower tier cities, we think there's also a lot of opportunity as well. Looking at the store density compared to not only to North America, but also to other Asian countries and regions, our store density is still relatively low. Particularly, with the shift to a smaller store format and also with cater more to delivery and takeaway, I think we do have a lot more opportunities in terms of increasing the penetration of our store network in the existing market that we're in right now. Hopefully, I addressed that your question.
Thank you, Andy. Brian, I would just like to add three comments on your question. One is, we always emphasize on the quality of stores. We will be aggressive and open-minded about new stores if we see the opportunity of opening good stores, profitable stores, or at least breaking even stores. That's the bottom line we hold very close to our hearts. Thus, bottom-up approach is if we find those, we'll open them. Second is, as Andy mentioned earlier, I just want to make it more specific is, at the Tier 1, Tier 2 city, we are going for smaller stores to adjust our store portfolio strategy because the growth of delivery and takeaway, and also to handle the rent and other costs as well. It's quite an efficient model to fill in the gap of the trade zone.
For the lower tier cities, we have been working on the lower tier city store models, this year we have further breakthrough in our models. Not only the investment cost for the lower tier city model is getting even lower, we find the innovations to do that, but also we have customized menus for the lower tier cities. To give you example, we have opened a few such stores this year. We feature something called Crazy Store Manager Offer, which will feature a combo, a lunch set of CNY 15, which is a bit more than $ 2. Our normal combo for four item in Tier 1, Tier 2 city will be CNY 30-CNY 35 , et cetera. So you see the gap. The products are different. We are not going to sell the same product at such big price gap.
The lower-tier city, particularly in the western and northern part of China, require a different understanding of our menu. Point 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 from 140 square meters to a much smaller size, cut it by half per se. And the menu is slightly different, too.
As of this year, we are going to have about more than 20 satellite stores, and I'll 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. Your next question comes from the line of Linda Huang 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 three to four years, but right now it is three to five years. I just want to know that whether in the future we continue to expand the store, and do we worry about operation efficiency issue? Can you also share with us about the Huang Ji Huang, its payback period? Thank you.
Hi there, Linda. Let me address the Huang Ji Huang, and then I get back to the earlier part of that. For Huang Ji Huang, mostly a franchise model. Almost all the store, large majority of the store are franchise model. That same go for Real Pizza. In terms of payback period, it's not very meaningful for us and especially the franchisees. What we can say is that the franchisees themselves are actually relatively happy with their payback, and that's why we continue to see pretty decent build out in terms of the franchise operations over there. Hold on one second. What's the question? Okay.
It's the-
Oh, sorry.
Payback period for Pizza Hut.
Okay.
Linda, for the Pizza payback period, I think because of the COVID-19 and the way that we calculate numbers, a rolling number. Of course, during Q1, Q2, it impact our payback period a little bit. We still overall are confident with the overall trend of the payback period 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. Linda, I just want to remind folks that when we disclose the payback period, generally, we are using actual number. They will reflect the impact on the recent month, which is, I guess Joey mentioned, impacted by COVID-19, right? 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, 93% for Pizza Hut. In that sense, I think, we may still seeing that rolling average being impacted, but fundamentally, we haven't seen a material change in terms of how our store are performing. Also in terms of longer-term outlook, I think as the recovery, even though it's going to be non-linear and uneven, but I think eventually, the pandemic will be over.
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 format. For Pizza Hut, for example, we also have these satellite store format are being rolled out. Nevertheless, I think the fundamental haven't changed. Maybe more delivery, more takeaway, in terms of sales, a smaller store format going forward. I think haven't changed our view on the payback in the future.
Okay, got it. Thank you.
Thank you so much. Your next question comes from the line of Xiaopo Wei from Citigroup. Your line is now open.
Good morning, Joey and Andy. Congratulations again for the strong recovery in third quarter. We are now in fourth quarter, which is a low season. I will be more interested in the upcoming 1 Q next year, which is a peak season. In my view, that is Joey and team have to facing tougher choices next year, first quarter, because on one hand, you have to be more proactive in terms of recovery the sales further. On the other hand, you have to hedge against any risk of disruption due to any coming back of the COVID cases. Like Chinese saying, how could you balance the two with your strategy operation, i.e., in terms of innovation, value campaigns, delivery, and menu offering, et cetera? Thank you.
Thank you, Xiaopo Wei. That's a good way to put it. In fact, that's exactly sort of our approach for this particular year since January, the happening of COVID-19. How are we gonna do that for 2021? It's not gonna 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 dine-in actually continued to recover. We also worked very hard on strong value campaign to drive traffic for both KFC and Pizza Hut. At the same time, we are very well aware of the lingering effect of outbreaks, and thus our repeat caution to our investors and analysts about the uncertainties of COVID-19. We just have to live with it, really.
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 shareholder, for our customers, and for our employees. If we just recap, let's say KFC and then Pizza Hut, what happened here for Q3 or for 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-19, particular during the most difficult time, when we actually could not do advertisement very effectively, we actually could focus on our membership to still launch new product, conduct marketing campaign.
On top of the pillar of the membership, we work on our delivery. Our delivery improved, continued to grow with double-digit growth for Q3, Q2, and Q1. Delivery is very agile and resilient business. Transportation of the tourist is still being challenged. The sales is still below pre-outbreak period. It's still about 20% less. We continue to work on it. The regional differences. Regional differences also means regional opportunities too. Eastern China is still better than Northern China. The lower tier city is still better than higher tier city. The recovery in weekend and weekday, right now it's even out. In the past, we were doing a bit more promotion in weekdays, a bit less in weekend, because our weekend traffic was quite stable, quite encouraging and vibrant. COVID-19, the weekend traffic, the pattern changed. It's okay.
We make ourselves more agile and flexible, we learn better way how to deal with the weekend and weekday traffic recovery. Then that's the KFC. For the Pizza Hut, despite the COVID-19, we still fulfill our promise of sales first and profit later, which we have been talking about for a few years now. We have seen progress in the menu, the value campaign, the perception of value and expanding takeaway channel. Thus, by Q3, we've recovered our sales to 93%, and driven not only due to the improvement of traffic, but ticket average. How do we do that? Less discounting. Well, actually, more targeted discount marketing campaign. Increased party size and All You Can Eat.
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.
Thanks. Joey.
Thank you so much. Your next question comes from the line of Chen Luo from Bank of America.
Thank you, Joey and Andy. Congratulations again on the strong Q3 results. I got a question on Pizza Hut, which actually offer a quite big upside surprise for Q3. Typically in the past, same-store sales growth for Pizza Hut should be weaker than KFC. This time, Pizza Hut was quite close to that of KFC. The pace of Pizza Hut recovery also seems to be faster. What's the reason behind that? Is it because of all the measures that we have taken to revitalize Pizza Hut? It is also partly because of the assumption that maybe casual dining in China is actually recovering at a faster pace for the industry as a whole?
Also with regard to margin, the food and paper cost as a percent of sales declined quite dramatically for Pizza Hut, 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 trends for Pizza Hut in Q3? Thank you.
Let me make a comment on the sales recovery side. Andy can address Luo'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. As I mentioned earlier, we've been talking about our focus, our promise of sales first and profit later for Pizza Hut for few years now. Actually, Pizza Hut 2019, we delivered the first recovery of traffic, particularly the dine-in traffic, which was very critical for our business. Before 2019, the last time we had positive traffic growth in Pizza Hut dine-in business in particular was back to 2014. 2015, 2016, 2017, 2018, it was hard work, and by 2019, we get our customer back, and that's the most important part of the improvement.
We have been also talking about the few pillars of the revitalization. The menu, food. We changed 70% of the menu, so the food is 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, dine-in 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 three years. No price increasing for three years. It's a very strong commitment. To bring back the value for money, which is absolutely critical for Pizza Hut's business model.
During the COVID-19, 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. That add another leg to our business. It's not due to one or two 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. I'm certainly quite proud of our team's hard work that producing the result right now. We do believe that the fundamental change and improvement of the business model will continue to help Pizza Hut have ongoing improvement. It's not done yet.
We are still working on the breakfast day part, for example, because it's still an opportunity for us as well. That's just ongoing. With that, I'll pass the question to Andy to give some color about the margin question for Luo.
Sure. Thanks, Joey. Actually, I want to supplement your comment a little bit. I think it's important for us to put things in perspective. I think KFC actually have improved quite well in terms of SSG. Last quarter, their SSG was about 90. This quarter, they're about 94. If you look at Pizza Hut, last quarter, their SSG was 88, and obviously we're pleased that they're at 93 now. Both brands have actually seen quite a bit of improvement in terms of recovery. More importantly, I think, if we look at the impact in the third quarter, for example, at the beginning of the third quarter, we were still having impact from regional outbreak in Beijing. We're also further impacted by, obviously, the shortened school holiday. In light of that, I think we are pretty pleased with both brands' trajectory at 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. If you look at transportation and other locations, as Joey mentioned, is still down quite a bit. More than 20% in terms of traffic over there. Those are important part of our business account for the high single digit of business. If we look further a little bit more, we still have some recovery to do at the dine-in business. The traffic at our store right now is 90% of last year's level. Getting the last group of people to feel comfortable and venture out in dining may take a bit more time.
That's why we say we feel pretty good about the third quarter result, but we are cautiously optimistic in the fourth quarter, and the emphasis is on the cautiously, especially as we go into the winter season and the winter flu season. 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 Joey mentioned, our strategy have always been to fix the fundamentals. We charge store traffic and sales and then profitability. This is obviously a little bit unusual and extraordinary in the sense that at the beginning of the year, we've seen a very significant decline in sales due to COVID-19.
We are very glad that Pizza Hut team take a very quick actions in term of cost saving as well as delivering new product for the situation. When we look at cost of sales, for example, overall for Pizza Hut as I mentioned, it was about 0.7% better. We still under some inflationary pressure in terms of commodity side for Pizza Hut. Obviously this year, the focus on cost savings and also targeted market promotions, we would benefit from wrapping up very heavy promotions in comparison to last year. In term of cost of labor, we still have wage 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. It's more of in line.
I think if you look at wage inflation, we're probably looking at low single digit this year. We do expect some catch-up there. The other one is that they have been some labor shortage that also accentuated the labor productivity gains, right? People actually have to work a bit extra harder. As Joey mentioned on his 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 efficiency as well as service level. In terms of, you mentioned O&O, I think 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 maintaining cost and rent relief there as well.
I think in terms of the margin perspective, I think the commodity inflation in certain areas is moderating a little bit, compared to the early part of this year. We'll still be looking into that, especially when we go into next year. In 2021, we basically will be stacking up two years of inflationary pressure. For example, wage increase, as I mentioned before, likely there's going to be some catch up in some of those costs. Some of those initiatives are sustainable. If you look at, for example, in cost of labor, we do see both good gains from using technology, as we have mentioned a few times. The automated scheduling, the Pocket Store Manager , real-time tracking, all these would help us in the longer-term focus to the improvement.
As I mentioned, the labor shortage, and the increased staffing level in the coming months, it may reverse some of those gains. The subdued inflation this year may have some catch up with you next year. All in all, I think some of those labor efficiency improvements will stay. Some of them may need to ease up a little bit so that we don't go overboard. In terms of commodity inflation, I think if you look at overall inflationary pressure, it's easing a little bit. Still, pork is still very elevated in terms of prices. It's probably 20%-30% higher compared to last year. For poultry, like chicken, that pressure have eased a bit as the supply come back in. That may help us a little bit on the cost of goods sold.
However, as Joey mentioned, value promotions, value for money is very important proposition for consumer, in this new normal. We may give back some of those savings, in terms of poultry prices, back to consumer to drive more traffic back to our store. Hopefully addressed your question.
Yes. Thanks a lot, Joey and Andy, and congratulations again.
Sure.
Thank you so much. Your next question comes from the line of Lillian Lou from Morgan Stanley.
Thank you, Joey and Andy, and congratulations again. I think my question on margin is well answered by Andy previously. I think my next question is more on the development of China cuisine. I know that the faster the expansion of units partially is from Huang Ji Huang, but I want to check what's more longer term thoughts behind the development of this newly set up division. Thanks.
Hi, Lillian. This is Andy. 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 in terms of dining outside. There's more opportunity for us. In terms of Chinese cuisine business, with the consolidation of Huang Ji Huang, and with our existing brand of Little Sheep and East Dawning, we formed the Chinese cuisine business this year, and the unit is led by Ted Lee. He has been obviously responsible for the turnaround of Little Sheep over the last couple of years. In terms of Chinese cuisine business, our goal is really try to leverage Yum China's scales, our supply chain, our franchise communications, and our delivery partnerships, for example, with different aggregator, which offer a significant preferential rate for us.
In terms of, we also want to take advantage of the food innovation capability. If you look at Little Sheep, we launched a char siu product, dim sum products product. We are also looking into, for elevation, for example, growing our product category like barbecue, for example. We also see a great opportunity in the seasoning and sauce business. We have seen Little Sheep growing that business over the past couple of years. Huang Ji Huang also have a very good sauce that they use at the store. We think opportunity for them to actually leverage that up to the consumer business.
If you look at Chinese cuisine business, this year, I think a lot of this work will be focusing on integrations of Huang Ji Huang, making sure that we can drive that synergy, not just above cost, but also product innovations, about distribution channels, about franchisee base opportunity there. In terms of next year, I think we would like to see moving into more growth mode, seeing more growth in the franchise base, as well as more progress on the seasoning and sauce business. This is sort of like our current view of looking at Chinese cuisine business.
Thanks a lot, Andy.
Thank you so much. Your next question comes from the line of Michelle Cheng from Goldman Sachs. Michelle, your line is now open.
Hi, Joey and Andy. Congrats for the good result again. I was just wondering whether you can share some color about the recent trend. Since earlier you mentioned that transportation hub is still around 20% plus below the normalized level. Trying to understand whether we are seeing a more significant improvement in October since we hear some relatively 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 recovery in weekend and weekdays even out, and when it come 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 -20%, even during the big holidays. The international traffic is still very limited due to the ongoing concern of the COVID-19. One thing we would also like to caution our investors and analysts is post-holiday trading is still a challenge.
That's very interesting phenomenon because, usually when customers still have the little concern of the overall economic situation, the job, et cetera, you tend to see pretty good trading during holidays. After the holidays, the little weakness, actually, it shows the psychological impact. It's not only true in one country, it's generally true across different culture, different country. We see a little bit of that too, which we'd just like to caution our analysts about that. 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. The trading is vibrant. 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. That's where we are. Thank you, Michelle.
Thank you, Joey.
Thank you so much. Your next question comes from the line of Christine Peng from UBS. Your line is now open.
Thank you, Joey, Andy, for the very detailed explanation about the result as well as very positive outlook towards the future. I have a separate question which might not be related to the quarter result, but Joey, I want to get your thoughts. Recently we've read from some news reports that your company is launching Kaifengcai, which is a packaged food brand, throughout in China, starting from the KFC retail units. Can you share with us your mid to long term thoughts towards this business initiative? If you can share with us more colors in terms of the branding, pricing, distribution strategies, that'll be very much appreciated. Thank you, Joey.
Thank you, Christine. I mean, obviously, it'll be hard to serve you Wuhan Re Gan Mian because it need to be Wuhan. It was only served in Wuhan. Hopefully we will be able to have the opportunity for yourself to try our Kaifengcai product. 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-19. During the COVID-19 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. People, product, and occasion. The home occasion, the consumption is increasing, and we can see that. Pizza Hut respond during the COVID-19 very quickly by launching the prepared steak, but it is cooked at home, and the result is very good.
KFC has its own take of the home occasion opportunity. 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 product that could be consumed at home. So far, we have launched the chicken soup, Ji Tang. We have launched the Luosifen. It's a kind of rice noodle from Guangxi area with very strong smell. We have launched others like the chicken breast. We launched the 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. The result is very encouraging.
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. They can buy the product in the store, and they can be delivered via our own in-house delivery team. You can see how we do it. We leverage the product innovation team, our distribution channel, our store team, our delivery infrastructure to expand the business. That's where we are now, and still early days, but we are quite excited about the progress. The name of Kaifengcai, I probably mentioned it before, if I repeat it, 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 Kaifengcai. People got it immediately because that has been a name being used for many, many years, but never been used officially. We make it official. That's where we are, and of course, you might notice that we have also launched the coffee capsule. We call it because it's in a little, tiny, small coffee cup, and it's an upgraded version of instant coffee with different flavors, stuff like that. Again, we try in top-tier city and we are happy with the testing and the progress. 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. Your last question comes from the line of Anne Ling from Jefferies. Anne, your line is now open.
Hey. Hi, management team. Thank you for taking my question. Just one minor thing. Regarding management mentioned earlier that in third quarter, delivery business, one of the key driver has been the corporate delivery. May I know, is this corporate delivery mainly from KFC, or is also for Pizza Hut? What is the growth potential over here? How much of the sales or the delivery sales is actually coming out from this corporate delivery? I understand that we also start to launch delivery to park and all these initiatives. Just want to see, are these the new growth driver for the delivery side? Thanks.
Thank you, Anne. For the corporate delivery, we have been working on the system development because all these need to be supported by a very strong IT system since last year. Originally, we targeted to expand our business to 5,000 companies for this year. Then the COVID-19 hit. We delivered a lot of free meals, about 170,000 free meal to over 1,450 hospitals and community centers in over 28 provinces. Suddenly we became famous for the corporate delivery due to our effort in COVID-19 by trying to do the right things. No matter how difficult the delivery, even for the food is free, we always emphasize on hot food, and that's our commitment.
That gave us extra opportunity for company delivery, because when the business start to recover, back to March, April, KFC and Pizza Hut is 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. We have this unique opportunity, and suddenly, the demand is much higher than we thought, and we respond very quickly. The benefit of corporate delivery for KFC and Pizza Hut in 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 a new brand or business. We have all our stores. We have more than 10,000 stores right now in 1,400 cities. Our store manager and their managers, they are fantastic people and driver behind it.
As of right now, we have worked with more than 20,000 companies on that. Not only the breakfast, but the overtime meal and the Double 11 is coming. You can imagine we'll provide very strong support as well. To do that, not only it require a more customized menu, but also require system integration of the payment. Because we want it to be very convenient for staff to order KFC or Pizza Hut or other brand food in their own company website or with their own payment, or partly subsidized by their company, et cetera. It could be a very complicated combination, but we will make that all easy, convenient for them. Thus, this business is growing from strength to strength. With that said, KFC and Pizza Hut in Yum China, the base is so big.
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 big percentage of sales, given our base is so big. It's very meaningful, particularly meaningful for the stores that have the opportunity to support some companies. You can imagine the sales increase is meaningful. That's where we are right now. We continue to expand our network of providing good food and good value for our customers. 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. That's where we are right now.
When it comes to smaller things like opening stores in parks or even having those small kiosks in some very convenient locations. You can see it from the paradigm that we are trying to use our store as a network to further increase the connection point with our customer by improving the convenience to the customer. 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 spot of the office building, et cetera. These are all the things that we are exploring, but it's all from customer's point of view, good value, good food, and convenience. Thank you, Anne.
Thank you.
Thank you so much. There are no further question at this time. Speakers, you may continue.
Thank you very much.
Thank you for joining.
Thank you.
Yeah. 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.
Thank you. That does conclude our conference for today. Thank you for participating, and we all now disconnect.