Hello, everyone, and thank you for joining Yum China's 4th Quarter 2019 Earnings Conference Call. Joining us on today's call are Mr. Joey Hua, CEO of Yum China and Mr. Andy Yang, CFO of the company. Before we get started, I'd like to remind you that our earnings call and investor presentation contain forward looking statements, which are subject to future events and uncertainties.
Our actual results may differ materially from these forward looking statements. All forward looking statements should be considered in conjunction with the cautionary statement in our earnings release and the risk factors included in our filings with the SEC. This call also includes certain non GAAP financial measures. You should carefully consider the comparable GAAP measures and reconciliations thereto. Today's call includes 3 sections.
First, Joy will cover Yum China's 2019 and Q4 highlights and recent developments of the coronavirus situation. Then Andy will cover the financial results and 2020 outlook. We will then open the call to questions. You can find the webcast of this call and a powerful presentation, which contains operational and financial information for the quarter on our IR website. At this time, I would like to turn the call over to Ms.
Joy Luo, CEO of Yum! China.
Thank you, Debbie. Hello, everyone, and thank you for joining us today. Before we dig into the details of the quarter, I want to step back and offer some perspective on the past year and on our long term strategy. We achieved solid performance in 2019. This was supported by our unique competitive advantages, including our leading development and supply chain expertise, as well as our ability to innovate.
Customers are drawn to us for four reasons: 1, our delicious food 2, great value 3, a pleasant customer experience, which is enhanced by our digital efforts and 4, convenience through delivery and mobile ordering. Let me very briefly review the progress we made in 2019 in each of these strategic areas. I will start with the fundamental core of our business, the food. Our customers expect delicious new menu alternatives, and we exceed those expectations last year. Whether it was the shrimp or crayfish burgers we introduced at KFC in Q1 or the Double Chili Chicken in Q3 or the Christmas Snow Pizza featured at Pizza Hut in Q4, we are continuously refreshing our menu.
To support menu innovation, we opened our innovation Center in Shanghai last February. That facility represents our full commitment to sustain our leadership in offering delicious, high value menu alternatives. 2nd, we are focused on offering great value to our customers. We offset higher food costs with greater efficiencies in order to keep price increases to a minimum. We kept customers engaged through various smart value promotions and digital offerings.
Finally, we used the promotions in a more strategic and targeted manner. Crazy Thursday at KFC and Scream Wednesday at Pizza Hut remain effective, and we continued to spoil our members with exclusive or tailored offers. 3rd, our digital engagement is key to creating a closer relationship with our customers, driving loyalty and traffic. In general, digital significantly improves our marketing efficiency. With digital membership programs, we can understand customer behavior, their life and their life, price sensitivity, etcetera, you name it.
We can then tailor promotions down to the individual. In our experience, this is far more powerful than any sort of mass marketing we can do. We introduced useful functions such as Yumchi Pay. In addition, our exciting offers within the privilege program drove frequency, value perception and customer loyalty. One example of the power of digital is coffee marketing, which is primarily driven by digital initiative.
In 2019, we sold 137,000,000 cups of coffee at KFC, up 48%. 4th and finally, we are committed to creating more convenient ways for customers to access our menu. Delivery continued to ramp significantly during the year and account for 21% of sales. Sales via our own channels grew faster than that via third party aggregators. Our convenient mobile ordering and kiosk ordering are becoming more popular.
They also free up our store staff for other in store functions, making our restaurants more efficient. Each of these strategic initiatives enable us to meet or exceed our goal in 2019. We opened over 1,000 new stores. This was the highest annual store openings in our history. We also remodeled almost 1,000 stores, solidifying the appeal of our new designs.
Over half of the remodels were the new design at Pizza Hut. Same store sales growth was 3%, reflecting strength at KFC and revitalization at Pizza Hut. KFC and Pizza Hut's combined digital membership grew by over a third to 240,000,000. Those numbers contribute half of our sales. Importantly, all of these result in solid profit growth.
We also continued to develop our emerging brand portfolio. Littleship has 300 stores in 11 countries, including New Zealand, Myanmar, which are new markets we entered in 2019. We opened 40 coffee and joint units, bringing us to 53 total in 10 cities. Taco Bell now has 7 stores in Shanghai. In addition to the customer facing digital and delivery initiatives, we are further leveraging technology across our entire business.
We are using technology to enable our operations to be nimble and flexible, and that, coupled with our in house and integrated supply chain, enable us to launch new products and promotions at national, regional or even store level with increasing speed and efficiencies. Our IT investment is also enabling greater efficiency in staffing. We have utilized AI based technology to implement store based hourly sales forecasting, which supports labor scheduling and inventory management. We also started to roll out smartwatches, enabling our GMs, our managers to closely monitor the ordering and serving status in restaurants. We will step up investments in IT infrastructure and supply chain.
This is money well spent as it helps us to create a tremendous amount of flexibility and agility in our daily operations. Now let's drill down to the 4th quarter performance. We are pleased with our strong performance in the 4th quarter. We delivered our 13th consecutive quarter of system sales growth since the spin off with positive same store sales and expanding margins. Let's start with menu innovation.
To this end, we launched several exciting limited time offers LTOs during the quarter. At KFC, we launched new products for our premium burger line, including the Turkey and Spicy Chicken Burger and the Thick Cut Australian Steak Burger, both are proving quite popular. 1st, continue to be one of our key growth drivers and grew faster than other dayparts. We launched thinly sliced beef congee, Senguan Niu Rouzou to enrich our Chinese menu offerings. We also drove strong sales growth in coffee with new products such as Flat White and Carmel Macchiato.
We also launched hot taro tea drinks as new additions to the Oolong Tea series, Jirong Jin Yu, which is available in all 1400 dessert kiosks across the country. At Pizza Hut, we launched various new products such as the Snow Cheese beef pizza, roasted turkey thigh and sea salt caramel milk tea to capture the festive spirit. Steak sustained its momentum as well. Sales grew mid teens and accounted for 13% of our Pizza Hut sales now. Our digital and delivery strategies are designed to ensure great customer experience on top of great food.
Here's the progress we make this quarter. Our privilege subscriptions continue to be very popular with over 3,000,000 sold during the quarter. Since we launched our 1st privilege program, we have sold 15,000,000 subscriptions. Privilege sales continue to increase in the mix of total sales. In November, we used our partnerships and our super app to capitalize on the hype around single days on 11th, the so called Double 11 shopping holiday.
We enabled consumers to indulge themselves across the Yum China family of brands. The results were outstanding. Notably, KFC doubled GMV compared to last year and ran number 1 on Tmall in the restaurant category. Pizza Hut grew GMV by over 1 third and ranked number 1 on Meituan in the food category. Digital orders, which includes delivery, mobile orders and kiosk orders reached 61% of sales and digital payment exceed 90%, both well ahead of last year.
Now let me cover some details of the performance of our 2 largest brands, starting with KFC. KFC reported another strong quarter despite a tougher lap compared to the prior quarters in 2019. We maintained solid momentum with 10% system sales growth. This was driven by same store sales growth of 3% and accelerated new store openings. On a full year basis, KFC opened 742 new stores, which is equivalent to 2 stores per day and entered over 100 new cities in China.
We offset elevated chicken prices with diligent cost control and creativity in our menu. One example of our creativity is the wingtip bucket, We delivered operating profit growth of 20% in constant currency. Next, Pizza Hut. Pizza Hut continues to cement the progress we made in its revitalization program. In Q4, we achieved traffic growth in both dining and delivery.
Margin also improved. In addition to digital marketing campaigns, Pizza Hut also enhanced table sign mobile ordering. This better user experience resulted in an uptick in usage. Delivery grew to 28% of sales, mainly driven by our own channels, thanks to our digital platforms. We are enhancing our asset portfolio through accelerated remodels.
We remodeled 281 stores in Q4, bringing the total to 513 for the full year. Over 1 third of the Pizza Hut stores now feature the new design. Overall, we are seeing progress at Pizza Hut in operating metrics and consumer satisfaction, which tell us we are pursuing the correct long term strategy for this brand. In 2020, we will continue to expect customers with good food and good value, including a menu event. Before I hand the call to Andy to go through the financial results, I would like to update you the health situation in China and what we are doing.
First of all, our top priority is the safety of our employees and customers. We are closely monitoring and implementing the requirements of local government and health authorities. Because the situation is fast changing, we are implementing all measures as rapidly as possible. We have outstanding operations and supply chain teams that we can mobilize. For example, our procurement team secured enough face masks for all our staff.
All restaurant staff and riders are required to wear face masks and measure their body temperature. We have stepped up cleaning and disinfection of all areas and equipment in our restaurants and we are complying with local authority health requirements. We also took the opportunity to improve our operation by launching content less delivery. This arrangement helps to reduce the risk of human to human infection and protect our staff, riders and customers. Having been in China for over 30 years, we are determined to overcome this challenge and do our part to assist the communities we serve.
With the support of our staff in Wuhan, we are providing free KFC and Pizza Hut meals to the medical staff at 7 hospitals in the city. This represents over 1,000 meals per day. We also have donated RMB 3,000,000 to assist medical workers involved in fighting the outbreak. Chinese New Year is an important trading period for us, usually driving Q1 performance. This year, the outbreak right before Chinese New Year is causing significant interruption to the business.
We expect there will be material impact to our Q1 and full year sales and productivity. Nevertheless, we believe that our operating excellence and financial strength enable us to withstand challenges like this. We remain fully confident in the long term opportunity of the China market. With that, I will hand over the call to our CFO, Andy Yong. Andy?
Thank you, Joey. Good morning, everyone. As we start a new year, we are going to make a small change to how I review the financials. Because you can find all the figures and comparisons you need in our press release and supplemental slides, we will not repeat all the numbers here. Instead, we will focus on the primary factors that influence our results.
Unless I note otherwise, any figure I mentioned now refer to the Q4 2019. All figures are before the effect of foreign exchange and all comparisons are year over year. Now, 4th quarter financial results. Total revenues grew 8%. It was driven by both new stores and same store sales growth.
KFC same store sales growth of 3% was driven by higher ticket average, which is a function of higher prices, fuel promotions and more delivery. Pizza Hut same store sales growth offset by promotions that reduced ticket average. There was also one less long weekend compared to 2018. And then as Joey mentioned, new store openings were well ahead of our initial expectations. We posted planned openings from 2020 into 2019 to capture more of the holiday selling season before the Chinese New Year.
The strong performance of KFC also allow us to open more stores than expected. The increase in restaurant margin was due to better margins at both KFC and Pizza Hut. At KFC, sales leverage and improved labor productivity more than offset rate and commodity inflation. At Pizza Hut, margin was improved mainly due to more efficient restaurant operations and contribution from packaged revenues recognized. The jump in G and A expense was in part due to the lapping of government incentives that were received and reduced G and A in 4th quarter in 2018, but were received in the Q3 in 2019.
We also have higher performance related compensations in 2019. Our goal is to keep G and A increase in line or less than revenue growth. We achieved operating profit growth of 16% due to sale leverage, net new unit growth and productivity improvement, which more than offset higher costs from inflation, promotions and G and A. Net income increased 23% to 90,000,000 driven by the operating profit growth just mentioned and the mark to market gain from our equity investments in Meituan. This is partially offset by the lapping of tax benefit in the Q4 2018 that was related to the U.
S. Tax reform and higher tax accrual in 2019. Similar to net income, diluted EPS and adjusted EPS growth was partially driven by the mark to market gains from Matrix Investments. Excluding that, adjusted diluted EPS grew 5% in 4th quarter and 13% in the full year. Next, let me cover our capital allocation.
In full year 2019, we generated over $1,100,000,000 in net operating cash flow. About a third of that cash flow was directed to CapEx. Of the balance, about 60% or over $440,000,000 was returned to shareholders through dividends and share repurchases. Including what we returned in 2017 and 2018, we have now returned over $1,000,000,000 to shareholders since our spin off. The balance of our cash and short term investment remains strong at $1,660,000,000 We maintain our quarterly dividend at $0.12 per share.
We also have approximately $700,000,000 authorization remaining for the share buyback. Now let me turn our turn to our outlook for 2020. The recent coronavirus outbreak have caused significant interruptions to our business. The impact come from temporary closure of our restaurants as well as substantial decline in sales at the restaurant that we may open. We start closing some of our restaurants right before the Chinese New Year.
As recent days, more than 30% of of suspended facilities and shortened operating hours as people avoid going out. For the restaurant that remain open, same store sales since the Chinese New Year declined by 40% to 50% year over year, after adjusting for the timing of the Chinese New Year holiday. While dining in traffic was hot hit as people avoided public gatherings, delivery is holding up well. To better serve our customer and protect our employees, we roll out contentless delivery, which is very well received by our our customers. In addition, we also rolled out order online, pick up install, contentless services and saw some encouraging early results as well.
However, at this time, we cannot forecast when nor at what rate the closed restaurant will be reopened and the traffic will be restocked. Furthermore, we may be required or otherwise decide to close additional stores or modify our operations in response to the outbreak. The situation is rapidly evolving. While we cannot yet fully ascertain the expected impact, we may experience operating losses for the Q1 of 2020. And if the sales trend continues for the full year of 2020.
Future operations, cash flow and financial position may be materially and adversely influenced by the further development related to the outbreak, including potential additional announcements and action from the or other reasons. However, despite the headwinds from the current situation, we are optimistic and committed to the long term opportunity in China. So we will continue to roll out more new stores as some of our planned new stores in 2020 were accelerated to open in 2019, we expect to build 800 to 850 new stores this year. Obviously, this is subject to revision based on the impact from the coronavirus. We will evaluate throughout the year and revise the target as needed.
Seeing the clear power of our digital strategy, we intend to step up the investments in digital, technology and supply chain this year. We expect full year CapEx for 2020 to be in the $500,000,000 to $550,000,000 range, which include new store, store upgrades, digital, IT related investments as well as operational infrastructure related investments. We will continue to invest in our emerging brands, which we believe is the right thing to do for the long term growth of our business. The Wangxi Wang acquisition is on track and is expected to close in early 2020. We expect inflation, it is still a challenge.
The pork shortage puts pressure not only on the price of chicken, but on all proteins. We do not yet have full visibility for the full year. Our best estimate of the commodity inflation now is for lowtomidsingledigits in the first half of twenty twenty. By the end of 2019, rmb have depreciated 4% during the course of the year. If the exchange rate continues at current we expect there will be again foreign exchange translation pressure in 2020.
So all in all, we expect 2020 will be very challenging. During this difficult and challenging time, we will continue to focus our efforts to protect and to serve our customers, our employees and our communities that we're operating in. And we, Yum China, are here for the long run, so we will continue to invest in the future to ensure that we are well positioned for long term growth opportunities in China. With that, I will pass you back to Taeppy to start the Q and A.
Thanks, Andy. We will now open the call for 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. Ladies and gentlemen, we will now begin the question and answer you. And our first question comes from the line of Michelle Cheng from Goldman Sachs. Michelle, your line is now open.
Hi, Joey. Hi, Andy. Congrats for the good results and really appreciate the colors on the recent development. And my question is about the cost. Can you share with us more details about how you can manage the cost in this situation?
Maybe like related to how to possibility to renegotiate the rent with landlords or the staff cost and understand we use a lot of part time. So is there like a potential that we have some arrangement on the part time or the staffing management? And also, is there any like insurance coverage in this kind of situation for business interruption? Thank you.
Let me take this question then. So I would just ask the question about cost. So if you look at in the short term, obviously, during the Chinese New Year, we have plans for the Chinese New Year selling season. So I think in the short term, those costs are largely fixed. Now like if we look at going forward, obviously, if you look at our cost structure, for example, we have some variable costs, right?
As we mentioned, in the restaurant level, we have while we have some full time staff and salary employees, we also have some temporary or part time workers. So a portion of that restaurant labor force would be variable. Now if you look at the cost of sales, obviously, that is very related to the sales of the restaurant. If you look at our operational occupancy and other expenses, as we have previously disclosed, a large number of our contracts have a variable components to it. And but however, there's also some fixed costs in that rental arrangement as well.
So that would be a mix of variable and fixed. And then in terms of our overall corporate G and A expenditure, we of course, given a very challenging time, we're going to implement significant cost control programs going forward. So we're targeting, obviously, the controlling of the labor cost increased as well as some of the discretionary spending like travel expenses as well as other professional service fees that Regeneron would incur. So in terms of overall impact, I think this year, we'll continue to monitor the situation and implement additional cost control if necessary. In regard to your second question, which is about business interruption insurance outbreak, I think since the SaaS outbreak in 2003, our business insurance, because of that, a lot of insurers no longer provide that kind of insurance.
So it does not cover the outbreak.
Thank you. Michelle, just a little bit extra color on the cost. The moment that we see the impact of the outbreak, which is the weekend of January 18, the management is experienced enough actually to pull the AMP immediately. The advertising cost for Chinese New Year is a big investment. So we are very quick to react to prove that because otherwise we will be in a situation of lost sales, but then sort of invest A and P, that will be very unfortunate.
So we did that already. And in terms of labor costs, you can be sure that management is doing everything we could to manage labor costs. However, the timing this year is the challenge because Chinese New Year, the 1st 3 days has tripled 3x labor costs according to the labor law. And then the extended holidays for the staff implied double labor costs for our staff as well. So and these become sort of fixed in a way, because we are complying to our government requirements.
But you can be sure that we are doing everything we could to manage the cost while doing everything that is the right thing for our staff, for our customer, for our community as well. Thank you, Michelle.
Thank you, Joy.
Thank you so much. And your next question comes from the line of Sarah Santur from Bernstein. Sarah, your line is now open.
Yes. I have a question actually about the unit growth. You pointed out that 1,000 storage is the highest number in history. And even before coronavirus, you were expecting a slightly lower number of gross adds in 2020. I was just wondering if 1,000, there's some sort of natural limit to how many stores you can open again setting aside what's going on now with the virus.
But over time, as think about the growth rate and your store base increases, I think you've been leaning more heavily on unit growth and a little bit less on comp. So as we think about the rate of growth, should we think about 1,000 units as being kind of the highest number you can open in a year because of either human capital or real estate or whatever the gating factor can be. So can you just talk long term about what the unit growth might look like? And what the limiting factors would be if you really can't open more than 1,000 stores a year? Thank you.
Thank you. In general, at a very high level, the number of new stores is a function of how well the business is operating. For example, last year, we opened 742 KFC stores and then 132 Pizza Hut store. But back to 2013 2014, actually we opened more Pizza Hut Store than KFC Store. So as KFC business performance improve, we are able to open more stores because we are able to pay more rent and then also the quality of the store is better, so we can open more.
So in general, it is a function of business performance. When it comes to is there a natural limit, we actually don't really chase after a particular figure. In general, we have a pipeline that's more bottom up and then we try our best to open as many good store as possible because lost making store is not a good thing to our business. We don't chase after a number. Just say 2019, we set a target and then we exceed the target because the business is doing better and we find more pipeline.
But for 2020, we set a target, but as we experience business interruption, we will expect we will revise the pipeline as we go through the rest of the year. The third point I want to make is for businesses like ours, although we emphasize a lot on new store opening, but also at the same time management team has balanced 2 more factors. 1 is the impact on the same store sales. Of course, the new store opening has impact on same store sales and we won a bit of both. We won the new store, also we want the same store sales.
Technically in an emerging market, we probably want to focus on system sales growth more than just same store sales. However, our learning is that our investors still want us to focus a lot on same store sales. So we kind of have to deliver both new store and same store sales. But again, other than the same store sales, the management also has to balance the 3rd bit, which is remodeling, because right now, you can see we are reaching the number of 9,200 stores by year end. And in China, particularly in China, we are targeting to maintain the age of our store at 3 years.
That means every 3 years we're going to refit or remodel or do something about the store to look to make the store look lovely and appealing to the customer. So while we have opened more than 1,000 stores last year, we also have opened have remodeled 1,000 stores at the same time, because if we just keep opening new stores, but not remodeling new stores, the quality of asset will go down. So you can see we not only try to open store, good new store, we want to maintain the same store sales, we also want to maintain the speed and the pace of remodeling. If we don't maintain that pace, we will get to the situation of 2016, we actually we fit almost 1800 stores during 2018 as a catch up. And right now Pizza Hut, we are also doing the catch up.
Therefore Pizza Hut, after last year catch up, we are 1 third of our new store have the new design. So I hope that gives you a holistic view of the way that we look at the new store opening. It's just not only about new store opening. It's about the same store sales. It's about remodeling.
It's about keeping the business going and it's about having good number, a good profitable number for the new store as well. Thank you.
Thank you.
Thank you so much. And your next question comes from the line of Shen Du from Bank of America. Shen, you may now ask your question.
Thank you, Joey and Andy. I've got a question on our outlook guidance in the result release. So we are actually not ruling out the scenario of a full year loss if the current situation continues. So what is the underlying revenue assumption? Or what kind of what kind of what level of revenue decline are we looking at to achieve that scenario?
And also related to that is more color on our cost structure. Just now, Michelle also asked about the question. So the food and labor cost food and paper cost is largely variable, but for the labor cost and occupancy and others, how much is variable and how much is fixed in nature? Thank you.
Luo Shen, Let me sort of give you some color about the current store opening situation and then I'll pass on to Andy. The overall situation is the situation is very fluid. And it's still early days to predict and to have a sort of more concrete number. But we are closely monitoring the situation and following the guidelines from the relevant authorities. Let me talk about the store close situation first.
So roughly we are 30% of our stores are closed and that's the sort of the current number and we don't know what is next. Let me talk about the key component of the 30% then you would have better understand of our current situation. We from the very beginning decided on the condition that our staff are safe, we have done everything we could to protect the safety of our staff, our customer. We would like to continue to serve our community. And that means we would like to continue to open the store while we operationally could, because I think in this crisis, it's very important to try very fast to keep life going as normal as we could.
So we start to close the store in Wuhan first because that's the center of the outbreak and that was 3% or 4% of our sales, Wuhan actually 2%. And then as situation become evolve then we close the store in Hubei, which is the province Wuhan is, right? And then as the situation evolve, we closed significant number of stores in the surrounding provinces such as Henan, such as Hunan. So that's a group of the stores that we have closed. And then as situation evolve, most of the stores in our tourist location and transportation hubs and that roughly about 5% to 6% of our portfolio were closed.
And then the situation continues to evolve and some stores in the lower tier city in particular around the countries were closed because there are a lot of travel restriction that these activities were canceled and operationally it became too challenging to open the stores. So there so you can see the progression of our store closing as the situation evolves. So what is next is a bit too early to tell. So as the store close, what are we doing? What are the impacts on our business and what are we doing to mitigate the situation?
Obviously, you can imagine the dialing traffic was severely intact. However, as we mentioned earlier, the delivery business holds up relatively well. Also thanks to the quick reaction of our operation team, we launched a contactless delivery service to our customer and that was well received. And the little, little, little, little, little, butting opportunity right now we can see is the catering opportunity that we can see. And part of the catering opportunity come from the fact that due to our commitment to serve community, we reopened 6 restaurants in Wuhan, not to do business, but just to serve free meals to the doctors and the medical staff as our contribution to the community.
And therefore, for the rest of the country, in other markets, we also follow similar practice. And as a result, we receive a lot of requests in terms of catering services, because we are trust and we are truly grateful to the trust that our customer and our community gave us. So that's the overall picture of our sales side. And obviously, you can imagine despite the fact that the delivery sales hold up, catering business is growing, The same store sales for our business was also impacted due to the travel restriction, less traffic and also short term operating hour, particularly in shopping mall, etcetera. So with that, I'm going to pass the question to Andy to talk about the revenue and cost side.
Okay. So as we mentioned earlier, if you look at the interruptions caused by the outbreak, it's quite significant to our business. We have basically 2 impact. 1 is the store closure. As Suni mentioned, it's quite expensive right now.
So about 30% of our stores are closed right now. And of course, this is a very fast and evolving situation. So it's very hard for us to know what's coming next. The second part is that for the store that we remain open, the impact on the traffic was also quite significant, especially for Daim business, as Sohin mentioned. So although our Blue Root business is actually holding up pretty well.
So the same store growth for those restaurants down about 40%, 50%, right? So overall, if you look at the impact on the total system sales growth is actually systems is actually solid. So as we mentioned, if the trend continue in at the current level, we expect to go into operating losses. So to address your questions, we don't actually have a target for the revenue losses, revenue that would drive into losses. I think there's a lot of variable factors right now for us to address these issues.
Obviously, stock token is one of them and the ongoing trading trend is another one. And so we will talk a little bit about what's the driver for the costs, so maybe can help you in your modeling. So Chinese New Year is a very critical trading period for us, so in the Q1. So as I mentioned, the considerable portion of our costs are fixed and already incurred before the Chinese New Year trading period. And then that including food ingredients, right, that's stored in the restaurant themselves.
And then also the scheduled labor, right, which is paid at 3 times. And then also, as Tony mentioned, during the extended holiday period now, it is also in overtime pay. So I think that would lead to decline in our profitability for sure in the Q1. Portion of the fixed cost, cost is like this, okay? Cost of sales, as I mentioned, were at the restaurant level.
Labor at the restaurant level are partially fixed. The monthly salary and point management team and staff, we do have some flexibility there. So a big portion of our frontline workers are part time workers that we can have more flexibility. A portion of the fixed costs and then is in the occupancy, right? So as we mentioned, a portion of our brand is in fixed and then a portion of that is in revenue cost.
As we mentioned, a sizable number of our contract actually have an element of the revenue cost. Obviously, that element varies quite significantly from location to location. We for when we also obviously, you probably have noticed on the news that there is a time that it's called for sacrifice in the country right now. So if you look at some of the real estate companies, they have also participated and then also have provided some rent relief. And I think if you look at other activities, we'll continue to seek opportunity to minimize our costs during these type of crisis.
In terms of other store costs, for example, FEMI is largely fixed. If the store is open, but if it is not open, then it's almost 0, right, so for utility and all that. So in terms of G and A, as we mentioned, right now in the short term, it's going to be rapidly fixed under the current expenses. But we going forward for the rest of the year, we're going to implement additional cost control to lower that overall corporate G and A. So we may also incur some write offs for our cash flow items, right?
So some of the inventory that we have stock up may be write off. So we don't know, depend on going forward or just trading condition there. So yes, and then if you look at we have mentioned before, we have done a lot of good work in terms of reducing wastage and improved labor productivity. But during this time of lower trading volumes, it's possible that the rate stage and also labor productivity for our staff and also the riders may also reduce as well. So as we mentioned, we expect very challenging for the Q1 for sure and then maybe for the rest of the year.
And so it may take some time for business to recover. And so and then a lot of these as mentioned before, these fast changing conditions, it's very hard for us to predict what's going to happen in the next few weeks or few months. So a lot of our results in operation will be influenced by future development of the corona situation coronavirus situation. So it may include additional stockpiling or other action that is required either both by the central government and local authorities or our own operational needs. So hopefully that can help you address your questions.
I know you still get a lot of uncertainty. I think under current situation, I think we are under operating under some uncertainty right now.
Thank you. That's very helpful. So I firmly believe that our company can overcome the situation and in fact the whole restaurant industry is facing even bigger challenges. Good luck. Thank you.
Thank you, Lawson.
Thank you so much. And our next question comes from the line of Lillian Li from Morgan Stanley. Lillian, your line is now open.
Thanks, Joey and Andy. Very quickly, before I ask my question is just to verify in terms of your guidance of loss making in 1st Q, you kind of ended a similar assumption that 30% or more still going to be closed and the remaining store are seeing kind of 40 percent to 50% same store sales decline. That's just very quick to verify. And the question is more on the raw material trend, because you mentioned I think Zhou Yan and Andy mentioned in the presentation that we're still seeing some challenge in the raw material trend. And most recently, I think there are some disruption in the logistics for the supply.
And also we are seeing not necessarily just in China, but in other countries as well, there's Avian flu coming up. So do you see there's additional cost pressure going forward, not necessarily just in the virus time, but also it could linger around for a longer period of time to depress our margin? That's my question. Thank you.
Okay. Yes. So Liam, thank you for your question. So just to confirm, like our assumption regarding the 2020 possibility of incurring losses, yes. So as we mentioned, if we assume the current sales trend continues, we would expect potentially full year 2020 losses.
But addressing and then that's based on the 30% plus stall close right now and then obviously our 40% to 50% decline in the same store sales growth of the store that's being open. So that's the current situation. And but again, like this is a fast evolving situation. So this is probably difficult to predict what's going to happen. Now in terms of commodity inflation, I think if you look at in the soft quarters, it's actually come down a little bit for chicken prices for us.
But however, if you look at the market itself, actually, we saw a spike in the chicken prices in November. As we mentioned in the prepared remarks, for this year, we don't have to fully yet. But for the first half, we do expect the commodity inflation for us will be at the low to mid single digit in the first half of this year. The reason why we have a little bit visibility is because a lot of these commodity contracts, especially for chicken, we have contract a lot probably a quarter at least ahead of the time. And then also we have some inventory in our pipeline.
So that's how we get some visibility there. So as you mentioned, there's a number of things that is moving parts in the marketplace for the commodity prices. Obviously, one is the U. S. And China trade deal that provides us some positive headline, but a lot of details are yet to come.
So it's very hard to see. The U. S. Chicken imports here in China traditionally have been markedly small. So the impact may not be as big.
And then also you mentioned that there's potentially even in other regions. I think you're probably addressing the Wunan situation. And we don't actually source from Wunan. So at the current rate, we don't see any material impact from us. But we'll continue to monitor the situation for sure.
I think
just want to add the color there. I think 2019 we have proven ourselves to be pretty good at innovating not only with chicken, but with different parts of chicken and different protein. So even with the very big pressure on chicken price, we managed to control our cost of sales at very reasonable level and we did not disappoint our customer. Anything as curky as the chicken wingtip, which is curky for the national customer, but it's very well received for those customer who love chicken wingtips. Of course, the cost is very desirable to the alternative proteins such as crayfish burger for KFC for the Chinese New Year and also, the salty 8 Yolk Cod Fish Pizza.
These are protein. So we are pretty good at innovating the protein. And the mentality that our team, our R and D team is, if we are good chef, we are good at looking at whatever ingredient we can get and prepare very good food for customer. And the goal is we don't disappoint our customer while managing our cost of sales. Thank you, Lilya.
Thanks a lot, Dewey and Andy. Very detailed. Thank you.
Thank you so much. And your next question comes from the line of Xiaopu Wei from Citigroup. Xiaopu, your line is now open.
Good morning, Julie and Andy. I know that is thank you for giving us a color on the development of the coronavirus. I know nobody have a crucible on what's going to happen. So I have a question for more Luke beyond the midterm and long term. My understanding that the company has developed a very comprehensive business model with a lot of toolbox.
I just want to know in the midterm, have you thought of adjusting your strategy operationally and financially to absorb the short term shocks? For example, will you put the Pizza Hut revitalization as less priority and give more priority to restore the sales of KFC? And also, will you be more aggressive in pushing digital and delivery to make up for the sales loss in the die in? And thirdly, I think in this situation, reserving the cash is very important. Are you thinking of reducing the dividend or share repurchase to Prisma Cash or any unfortunate negative outlook?
Thank you.
Thank you, Xiaopo. We have established our strategy for Yum! China, for KFC, for Pizza Hut. We do some tweaking based on the current challenges, yes. Will we dramatically change our strategy?
No. So let me just share with you my thoughts about some of your questions and then I'll pass on to Andy about the cash pay. In terms of priority, both Pizza Hut and KFC are important. We have 2 big kids now, 2 kids are all the kids are important. And for Pizza Hut, the revitalization strategy will continue.
Pizza Hut has its own dedicated brand team to make that happen. And KFC, of course, is the most important business for Yum! China, but it also has its own very strong dedicated brand team to pursue the strategy as well. So both businesses are important. In terms of question about our focus on digital and delivery, we make it even more important.
It has been in our strategy to accelerate the investment of digital technology. As Andy mentioned earlier, we are going to invest heavily in our digital and technology to pursue our end to end digitization strategy. We will continue if we could accelerate, we would, but we will not push for it just for the sake of pushing. So the ongoing strategy will continue, but we will certainly tweak and react very quickly. As the situation is fluid, I can share with you the management team, We have daily meeting to respond on the app to adjust not only strategy, but operationally what we need to do in a store, in supply chain, in human resources arrangement, etcetera, etcetera.
One example is we pulled the health program for our restaurant management team forward. Originally,
we are going
to announce this program in March, But given March, we are not going to have our RGM convention. We'll pull it forward because we believe that this is something that our restaurant management team will appreciate. What it is, The program is about we're going to enhance and upgrade the health coverage for our restaurant management team's families that include the spouse, the kids and their parents up to 75 years age. So that we put forward. So things like that you can see we'll continue to manage on daily basis.
So with that, I'll pass on to Andy.
Okay. Thanks. So regarding the our cash and dividend policy, I think I'm very lucky that we inherit a very prudent and conservative financial management program here, we have about $1,660,000,000 in cash and short term cash. So in time of crisis or situation that we are in right now, this is a very good strong financial position. Our number one party obviously is to ensure that we have enough liquidity for our operational needs as well as for the investment that we plan for our futures.
So if you look at our press release today, we have just declared dividend payout for March, reflecting that our current strong accretive position. In terms of the current trading environment or the current situation here, operationally is very challenging. So as we mentioned, preservation of cash, insurance liquidity is paramount as a financial function for us. So we'll consider all options and we'll continue to review our dividend and share buyback program periodically and with the Board as well. So if you look at our firm positions, we're very strong at $1,600,000,000 cash and cash balance.
So as we mentioned, we also would for the year, as we mentioned, option open including cost control, right? And then also view of the capital allocations going forward as needed.
Thank you very much.
Thank you, Xiaopo.
Thank you so much. And your next question
So I just want to clarify, Andy mentioned for existing opening stores, your same store sales declined by 40% to 50%. So does that include the delivery service? So I want to ask, is there any bottleneck for you to further grow your delivery service? And if you allow, I want to ask another question is regarding your licensee fee paid to Yum! Brands.
You normally pay 3%, but under current critical situation, is there possibility you can like have some concession from Yum! Brands on that? If you can share with us if there's any risks to potential disruption to your supply chain? That will be like highly appreciated as well. Thank you very much.
So I think let me clarify a little bit. For the stores that remain open, our operations include both dine in and or delivery. So the same store sales growth for those restaurants are down about 40% to 50%. That's including both dine in and also delivery. As we mentioned before, dining has been impacted more significantly and then the delivery sales actually help up very well.
So we will continue to as we mentioned, we roll out Condellix delivery. We also roll out the online order, pick up at store, just kind of like services at our restaurant as well. So we continue to utilize our digital assets, right, to continue to serve our customer. I think our investments in the digital side really help us quite a bit here in current situation to serve our customers. In terms of bottleneck to delivery, I think obviously there's a couple of things where in China right now in some of the cities there are some restrictions on travel or traffic.
And so that would probably have some impact on the delivery side. And also, if you look at both in terms of some of the labor force for delivery is also probably impacted by some of these travel restrictions as well. So that could potentially be one of the items there. In terms of young brand licensing fees concessions due to the situation, at this time, very difficult and challenging situations. Obviously, we seek help from our business partners.
So but I think contractually, there's no obligation for young brands to take a concession. But we welcome any help that we can get. Obviously, if that happens, it will be a great real gesture and we will appreciate that very much. In terms of risk to supply chain disruptions, we actually have our Chief Logistics and Supply head here, Danny, and maybe Danny can help us adjust that a little bit.
Sure, Andy. Thank you. Yes, Selina, this is Danny. On supply chain, first, let's talk about on logistic impact. Obviously, the biggest impact is in the city of Wuhan and the province of Wuhan, where the government has imposed travel restrictions that is banning non essential civilian traffic in our of those cities.
But as you know, we have a wide network of logistics centers with 24 logistics centers across the country. So for example, the stores that were served by Wuhan Logistics Centers in the neighboring province such as, say, Jiangxi is now being served by our logistics centers from Changsha or Hunan province. So really, we a key element of the supply chain is really contingency planning. So that network of our logistics centers really allows us to continue to support our stores' operations. Obviously, as you know, nationwide, there's an increasing number of provinces and cities imposing travel and route traffic restrictions.
As we mentioned multiple times, the situation is fluid. We're monitoring on daily basis. But for now, we manage we are able to deliver to all the stores that remain open as of today. Now moving on to suppliers. We obviously have some we have more than 300 plants supplying food and beverages material to Yum China.
A very small number of the suppliers are in Hubei province. But again, because of contingency planning, we're able to allocate the volume other suppliers. And so for now as of now, we do not foresee any disruption to our supply chain at all. Again, like I said, I want to stress that the situation continues to evolve, so we'll continue to monitor and we'll manage from there.
Thank you.
Thank you very much for sharing, Andy, Danny. I just like to follow-up. Like Andy, can I say you have reached your peak delivery capacity during this difficult period or you still have room to further grow? That's end of my question. Thank you very much for
sharing. Well, I don't think we have a fair limit right now. Obviously, as you would probably know, this is the Chinese New Year period and a lot of times people at this time would be referring to work. And but the situation is very fast evolving, so it's very hard to say what's the situation there. But in terms of our online capabilities, as you have probably seen in some of the news report, we have done a very good job in rolling out this content delivery and which is very well received by a consumer and also recognized as a good service during a situation like we are in right now.
We and so in terms of labor costs, as we mentioned, we continue to look at different ways to alleviate that. And then the labor force right now is a big fluctuation, a big unknown way now because people are beginning to return to work next week. And so we'll see how that's going to happen. In addition to that, as we mentioned, we also grow our customers, order online and pick up in store services, right, which is also pretty well received by customer. I think right now we do have the capability to serve our customers at the location that we can their location that we can continue to remain open.
So We'll take one more question.
So we have time for one more question.
Yes, we do. And that question comes from the line of Kristen Peng from UBS. Kristen, your line is now open.
Hi, management. I think your previous comments pretty much addressed most of my questions. Just a very quick question on Pizza Hut. So obviously, Pizza Hut has achieved a turnaround in same store sales growth, although there is a bit of fluctuation in terms of the same store sales growth in Q4 of last year. Looking ahead, if we disregard
the virus,
what is the outlook for management for Pizza Hut brand in the next 12 to 18 months? Thank you.
Christine, you're asking the outlook for pizza in the next 12 to 18 months, right? For 2019, we are pleased with the progress actually. 1% of same store sales growth, Most importantly, the underlying driver of the growth is from improved traffic from both dining and delivery. The improvement of the dining traffic is critical because that shows that we are doing the right thing to improve the fundamental of the business. And not only the sales has improved, but also the profit has improved as well and all the other consumer metrics like customer satisfaction, like how young the brand is, etcetera, etcetera.
We do see Pizza Hut does need more time to cement the revitalization both in areas of the fundamental such as product, digital delivery and asset, the core fundamental area that we have talked about many, many times. We are particularly pleased with the fundamental improvement such as the product introduction. The product that I talked about earlier, the Xianda Huang Xiayu Pizza, the 38 year old coffee pizza, that's from National Banquet. And that's the aspiration of our food innovation right now, really good appealing food, but so at Pizza Hut price level and has amazing promotion Methylene subjects screen Wednesday. So both the product is good, the value proposition, value for money is very good.
And then the delivery platform, the infrastructure is improving very, very well. And then the digital experience is improving by through seeing the increase of the privileged members program and also the rollout of the super etcetera. And then the asset, 1 third of our store has the new design. Like one third, there's no scientific number to prove that one third is important, but just based on my experience, one third of the entire asset is in new design, customer perception towards the brand, towards the overall brand asset start to move. It's just based on my experience.
So all good. However, the current coronavirus is hitting us hard, particularly Pizza Hut. Actually, it's hitting harder in Pizza Hut than KFC, because KFC has the advantage of very high delivery percentage, but also well established model of takeaway. So if we look at KFC's business 20% delivery, 20% plus delivery and then actually 30% takeaway. So customers are very, very familiar with the model.
So when we launch the content less delivery, not only content less delivery, but content less pickup. So there are some stores that we open just to provide a delivery service and pickup, so customer just picked it up from the door and it's okay. So that help us hold up the business better. However, when it comes to Pizza Hut, while we have very high delivery service, the pickup service is yet to be well established. So the dining business still drives the bulk of the business and therefore the impact on Pizza Hut unfortunately is harder than KFC.
However, we do believe it's short term. I mean how long this will last, we don't know yet, we cannot tell. But as Andy mentioned from the very beginning, we do still very much believe in the long term potential of this market and we do believe in the business model of Pizza Hut. We need a bit more time. We probably need a bit more time to cement all the good stuff that we are doing to Pizza Hut right now.
Thank you, Christine.
Thank you. Thank you for joining the call today. We look forward to speaking with you on the next earnings call. That concludes today's call. Have a great day.
Thank you.
Thank you.
And that does conclude our conference for today. Thank you for participating. You may all now disconnect.