Hello, everyone, thank you for joining Yum China's third quarter 2019 earnings conference call. Joining us on today's call are Ms. Joey Wat, CEO of Yum China, and Mr. Andy Yeung, 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 risk factors included in our filings with the SEC. This call will include certain non-GAAP financial measures. You should carefully consider the comparable GAAP measures and ratios by carefully considering that too. Today's call includes four sections.
First, Joey will cover Yum China's third quarter 2019 highlights, and Andy will cover the financial results before Joey provides an update on our strategic priorities. We will then open the call to questions. The webcast of this call will be available on our IR website. A PowerPoint presentation which contains operational and financial information for the quarter is available for download as well. At this time, I would like to turn the call over to Ms. Joey Wat, CEO of Yum China.
Thank you, Florence. Hello, everyone, and thank you for joining us today. Let's start with the overview. We are pleased with our continued strong performance and robust operating profit growth in the third quarter. We continue to build on our market-leading position in China and further strengthen our competitive advantages in the area of innovation, digital, and delivery across the whole of our business. Let me share some highlights from the quarter. First, we delivered our 12th consecutive quarter of system sales growth since spin-off, with positive same-store sales growth at both KFC and Pizza Hut. Second, we are on track to hit the high end of our new store target of 800 to 850 for 2019. This is driven by the good performance of our brands, in particular KFC, and the many attractive opportunities to expand our portfolio across China. Third, we continue to innovate on multiple fronts.
This includes launching exciting new products and leveraging technology to drive sales and operational efficiency. We continue to see strong growth in our digital KPIs, including total members' contribution to sales, digital orders, privilege subscriptions, and delivery sales. I also want to formally welcome Andy Yeung, who has recently joined as our new CFO. Andy brings a wealth of finance experience, specifically given his tenure serving as CFO at other companies, including a New York Stock Exchange-listed technology company. I would like to thank Jacky for his leadership over the last several years and wish him all the best as he relocates back to Hong Kong to be closer to family. With that, I would like to walk you through the third quarter performance. Let me start with the progress we have made on the digital and delivery front, as they are a crucial driver of our success.
Maintaining our market leadership in our digital and delivery capabilities is a key component of our vision to be the world's most innovative restaurant company. We continue to leverage our powerful digital ecosystem to drive sales, improve the customer experience, and increase operational efficiency. The bedrock of our success is our large and growing digital memberships. KFC and Pizza Hut together have grown by over a third in the last year to 230 million digital members, and they account for half of our sales. Digital orders continue to grow materially as our customers embrace the convenience offered. Our privilege subscriptions continued to be very popular, with over 4 million sold during the quarter.
Other than the delivery privilege membership that you are familiar with, we launched several new attractive offers, including an updated coffee privilege program at KFC and steak privilege program at Pizza Hut, aiming to drive adoption and stickiness of these categories. All are showing encouraging results. Delivery continues to grow and now accounts for 20% of sales, with sales via our own channels growing faster than that by aggregators. We continue to drive improved efficiency and performance with the ongoing optimization of our recently upgraded delivery dispatch system and the rebuild of our in-house Pizza Hut capabilities. In addition to the digital and delivery initiatives, we have also leveraged technology to improve our operational efficiency, for example, in improving our real-time monitoring and management of our supply chain and labor productivity. Let me walk through the performance of our key brands, starting with KFC.
KFC reported another strong quarter with system sales growth of 10% and same-store sales of 3%. We delivered margin expansion and operating profit growth of 16% in constant currency, despite a slightly moderated sales growth compared to the first half of 2019. This is the result of lowering the intensity of promotional activities, which we highlighted last quarter, strong management of the chicken cost increase and improvement in labor productivity. Let me provide some detail about these initiatives, starting with our menu innovation. For menu, meeting and exceeding customer wishes for new and improved products has always been our focus. To this end, we launched several exciting burger LTOs during the quarter. We offer our first vegetarian burger, a premium Portobello Mushroom Burger, showcasing our protein innovation capabilities.
The Double Down boneless chicken burger is an example of a popular KFC product launched by Yum! Brands internationally that we were able to leverage and launch in China. Aside from burgers, we launched an exciting new trial of spicy skewers and stewed bowls, in 10 cities, and we are gradually expanding the coverage. Spicy skewers are Szechuan-flavored street food, particularly popular for late-night dining. Lastly, we drove strong sales growth in our key categories of breakfast, coffee, and dessert with exciting new products, and captured cross-selling opportunities enabled by our digital memberships. We have witnessed our privileged members more than double their spending during the subscription period, driving incremental operating profit. For example, our coffee marketing has been primarily driven by digital initiatives, and we have sold 98 million cups of coffee in the first 9 months of the year, exceeding the total sold for full year 2018.
With respect to promotions, we continue to focus on smart value. Our signature value promotion, Crazy Thursday, continued to grow sales above the results from last year's successful campaign. As we adjust our offer, we were able to increase average ticket and improve margin. Next, allow me to spend some time describing our approach to cost management. The team has done an excellent job of managing the impact from commodity inflation, in particular, the recent increase in chicken prices. This has been achieved through a combination of, one, leveraging our scale and long-term relationships with our suppliers to negotiate lower than market increases. Two, focusing on menu innovation capabilities on optimizing the mix of chicken products used and diversifying away from chicken through the introduction of new non-chicken menu options. On labor, we drove strong year-on-year productivity gains during the quarter.
This was due to careful planning for peak summer staffing and new real-time automated labor management tools. These tools were particularly effective in optimizing management of the seasonal labor demands during the peak summer season. To conclude, during the quarter, we strategically lowered our promotion intensity and drove double-digit system sales growth through our menu innovation, digital and delivery initiatives, and new store openings. Despite the pressure from ongoing elevated chicken prices, our diligent cost control, enabled by our scale and improved labor productivity, allowed us to drive excellent operating profit growth. This was a successful execution of the short-term strategy we outlined last quarter. The results highlight our resilient business model and ability to adapt effectively to changing market conditions in China. Our long-term strategy for KFC remains unchanged.
To continue to open stores across China and innovate across the business to serve our customers' evolving demands while maintaining a strict focus on efficiency. I'll provide some color on Pizza Hut's performance. Pizza Hut continues to cement the progress being made in its Revitalization Program, with near-term priorities on driving traffic and sales. We achieved our third consecutive quarter of same-store sales growth and fourth consecutive quarter of traffic growth, led by a significant increase in dine-in traffic. Our investments in revitalizing the brand has impact our operating profit in the third quarter. We are focused on the long term and believe we are doing the right things for the successful revitalization of the brand. Short-term flexibility is required to achieve our long-term objectives.
Let's talk about the four pillars of our revitalization program, starting with fixing the fundamentals, which is really about getting our menu, promotions, operations, and service right. For our signature Scream Wednesday promotions, we introduced new offers on items like appetizers and desserts. Various additional promotions were targeted directly to our customers via our digital memberships. We have seen good consumer response both in sales and consumer survey results. We also launched various new products such as seafood platter and Chinese-style double chili chicken pizza. Steak remains an important growth category. Sales of steak was up strong double-digit year-over-year to account for about 13% of sales. To give you an idea of scale, this amounts to over 30 million servings of steak during the past 12 months. Turning to our second pillar, digital.
In addition to the achievements I mentioned at the beginning of the call, we launched the national test of our carryout function on our Super App, see great potential from promoting this efficient off-premise dining opportunity. Delivery. Our third pillar grew to 26% of sales. This has been powered by strengthened operations as we rebuild our in-house delivery infrastructure. Overall, delivery growth has been driven by our own channels, thanks to our successful digital CRM program and dedicated promotions. Lastly, we are enhancing our asset portfolio, our fourth pillar, through accelerated remodels and multiple store formats. You can see our remodeled stores on slide 19 of the presentation. We remodeled 126 stores in the third quarter, a significant increase in pace compared to the first half. We will continue to accelerate the pace aggressively in the fourth quarter and target to complete above 500 for the full year.
Together, these four pillars are having a very positive impact on the business. Moving forward, we will maintain focus on these four pillars to drive the long-term restoration of traffic, then sales, and then profitability. We will continue cementing our positive changes along the way while anticipating quarterly fluctuations as we continue to invest and adjust appropriately as the revitalization matures. Finally, we announced in August an agreement to acquire controlling interest in Huang Ji Huang, a restaurant chain focusing on simmer pot, 焖锅, a subcategory of hot pot. Huang Ji Huang has over 640 restaurants, almost all of which are franchise operated. We will provide additional details once the deal is completed, currently expected in early 2020, subject to the satisfaction of closing conditions. With that, I'll hand over the call to our new CFO for the first time, Andy.
Thank you, Joey. Good day, everyone. Thank you for joining us today. I'm very excited to have joined Yum China recently. I look forward to meeting with everyone in the coming months. Let us turn our attention to the third quarter financial results. Total revenues reached $2.3 billion in the third quarter of 2019, up 8% year-over-year, excluding foreign exchange translation. Total system sales grew 8% year-over-year, excluding FX, driven by same-store sales growth of 2% and new store openings. We opened 231 new stores during the quarter, increasing our total portfolio to 8,917 restaurants as of the end of September. We have opened 646 restaurants year-to-date and are on track to hit the high end of our target, which is 800-850 new store openings for 2019. KFC same-store sales grew 3%, driven by a 4% year-over-year increase in ticket average.
This was due to increased share of delivery, lower promotional activities, and increased pricing. Traffic decreased 1% year-over-year, primarily due to fewer value promotions. Pizza Hut achieved its third consecutive quarter of same-store sales growth of 1%. Traffic increased 6% year-over-year, remained positive for both dine-in and delivery. This was largely driven by increased promotional activity year-over-year, which also drove a 5% year-over-year decrease in ticket average. Overall, Yum China restaurant margin was 17.7%, slightly up compared to the same period last year. Wage inflation was 5%, while commodity inflation was 2% compared to the same period last year. We continue to expect overall commodity inflation to be low single digit for 2019. KFC restaurant margins increased 0.9% year-over-year to 20.1%. It was driven by sales leverage, low intensity of promotions, and excellent management of core sales and labor productivity during the critical summer peak season.
This more than offsets margin pressure from wage inflation and commodity inflation. The margin also benefited from a one-time adjustment during the quarter. This is related to tariff rebate that added approximately 0.3% to the margin. Pizza Hut margins during the third quarter was 11.4%, down 2.4% year-over-year. The margin pressure was primarily due to, one, our investment in higher promotional activities to drive traffic. Two, acceleration of remodels. Three, ongoing wage inflation. Partially offsetting these factors were savings in commodity costs as we leverage our scale and optimize product offerings. We began to lap some very successful initiatives that were implemented during the second half of 2018. The significant year-over-year savings in labor productivity, as seen in the first half of 2019, were not repeated in the third quarter. Net-net, year-to-date, Pizza Hut margins are still slightly above last year's levels.
A strong achievement given the long-term investment being made to revitalize the brand. G&A expense was up 3% year-over-year and 7% year-to-date ex FX. The 3rd quarter benefited from higher government incentive, in part due to some incentive received in the 4th quarter last year, but we received them in the 3rd quarter this year. Yum China operating profit for the 3rd quarter of 2019 increased 11% year-over-year. Due to depreciation of RMB against the U.S. dollar, foreign exchange translation negatively impacted our total operating profit by $9 million or 3% during the quarter. Excluding FX, operating profit 14% year-over-year. Our effective tax rate during the 3rd quarter was 26.9%, 2.7% higher than the same period last year, primarily due to higher accrued residual U.S. tax.
Our best estimate of the effective tax rate in 2019 continues to be below 28%, excluding any impact from the mark to market gain or loss from our equity investment in Meituan. Finally, diluted EPS was $0.58 in the quarter, compared to $0.51 in the same period last year. Diluted EPS includes a mark to market gain of $12 million or $0.03 per share from our equity investment in Meituan. Next, let me cover capital allocation. Our strong cash flow generation continued in the quarter. In the first nine months of 2019, we generated more than $1 billion net operating cash flow and $735 million free cash flow after subtracting $310 million in capital expenditures. In the third quarter, we returned $109 million to shareholders, including a cash dividend of $45 million and share repurchase of $64 million.
At the end of September, there was roughly around $750 million remaining under the share repurchase authorization. Our quarterly dividend remains at $0.12 per share, and we will continue to review our dividend policy in conjunction with the board quarterly. We will continue to invest for growth given the strong return for new build. However, with tremendous effort in optimizing new store and remodel CapEx, we now expect full year CapEx for 2019 to come in at the low end of our $475 million-$525 million range, including the expected impact of currency translation. I will turn to our outlook for the fourth quarter of 2019. While we continue to drive sales across all of our brands, we are facing some tough comparisons as we begin lapping some very successful sales initiatives that started in the second half of 2018.
We will step up investment in various important areas to ensure long-term vitality of our brand, including a focus on remodels, which will be back-end loaded in 2019. It is important to note that the fourth quarter is not only seasonally the lowest quarter for sales, but also the biggest quarter for store remodeling for us this year. Small changes in operating results or investment can have a significant percentage impact on operating profit for the quarter. Turning to specifics for KFC and Pizza Hut. At KFC, there are some very successful sales initiatives implemented in the fourth quarter of 2018, including the first full quarter of Crazy Thursday. The lapping of this successful initiative and our strategic decrease in promotional intensity to protect margins are expected to result in a moderation of sales growth in the fourth quarter.
We will continue our relentless effort to manage margin pressure from continued elevated chicken prices. Also, investment in remodels are expected to increase year-over-year. This will impact sales and margins in the short term, but it's an important investment for our long-term success. Finally, several one-time benefits in the third quarter, in particular, the tariff rebate and significant year-over-year increase in labor productivity, are not expected to carry forward into the fourth quarter. At Pizza Hut, we are very encouraged by the progress of our brand revitalization program. We do expect quarterly fluctuations as we roll out our initiative at scale. We'll be driving this via value promotions. In addition, our remodeling program will ramp up with approximately half of our full-year program to be completed in the fourth quarter.
These initiatives will impact the restaurant sales and margins in the short term, but are important components of the long-term revitalization of our brand. Let me hand the call back to Joey to comment on our current strategic priorities. Joey?
Thank you, Andy. I wanted to take a few minutes at the end of the call today to highlight our overall strategic priorities. In short, we are focusing on a number of key areas that will drive our long-term growth. First, we will focus on expanding our core brands, KFC and Pizza Hut. In the near term, as Andy mentioned, we have a very busy investment program in terms of both remodels and new builds in the fourth quarter. In 2020, we expect to open stores at a similar pace compared to 2019. Second, we will continue to invest in key growth opportunities, including our smaller brands. We expect to accelerate the store openings of our smaller brands. In particular, we'll be increasing our investment in expanding our presence in the coffee category.
We believe coffee has a bright future in China, but it will take additional patience, hard work and investment to fully realize this segment opportunity within our diversified portfolio. Third, we will leverage and increase our investment in our industry-leading digital and technology capabilities. Fourth, we will be vigilant on controlling costs and driving efficiencies to protect margins. That being said, given the current pressures across the protein supply due to pork shortage, we anticipate 2020 will be another challenging year for commodity inflation. We will be prudent on the portion of these costs passed on to our customers, particularly for Pizza Hut. We'll continue to build on recent gains made in our value for money perception. We will provide additional details on specific 2020 targets with our Q4 earnings release in early 2020. With that, I'll pass it back to Florence to start the Q&A forum.
Thanks, Joey. We will now open the call for questions. In order to give as many people as possible the chance to ask questions, would you 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. Once again, it's star and one if you wish to ask a question. Our first question comes from the line of Michelle Cheng from Goldman Sachs. Michelle, the line is now open.
Hi. Thank you, management. Congrats for the very good results, especially KFC in such a competitive and high protein cost inflation market, we still deliver store market improvement. Can you please give us some color about the chicken cost increase in third quarter or year to date? I believe you probably have some visibility on the first quarter's cost trend. Can you also share with us? Given we have such a strong product innovation and cost efficiency, can we have some idea about how should we look at the margin trend into next year for KFC? Thank you.
Okay, I will take this question. This is Andy. Regarding overall commodity price inflation, I think it was 2% in the third quarter for us and about 3% in the first half this year. For full year, again, we expect that to be at low single digits. I think all through this year, we've seen significant price increase in protein in China, driven by the African swine fever. That is likely going to continue. Commodity prices are volatile, so this is hard to predict going forward. Chicken prices, as far as we know, up almost 20%-30% year-over-year in China this year. For us, because we have very strong supply chain and procurement management, so we are able to manage that significantly below that. In fact, we have probably managed that below 10% this year.
In term of commodity prices, again, it's very hard to predict because if you look at pork prices, for example, in September, I think it reached a new record up almost 60%+ year-over-year. I think we'll continue to monitor the situation and keep you guys updated. Again, I want to mention that our team have done an amazing job in mitigating the impact of elevated chicken price inflation through sourcing initiative, supply chain relationship, leveraging our scales and long-term partnership with our suppliers. Our team also have tremendous product innovation, creating product using our part of the chickens and also non-chicken protein sources. We have been able to manage that commodity prices quite well this year. You think about this, without the effort, the impact will be more significant. Chicken is about 40% of our cost of sales.
It has increased about 20%-30% this year. That would normally mean 8%-12% commodity inflation, just from chicken alone. About 2.5%-3.5% impact on our margin. Obviously, we have not seen that kind of impact on our overall margins and CFO increase. Hopefully our team will continue to be able to do a good job in managing that pressure as well. Joey, anything?
Sure. I just want to add two comments, Michelle. One is, we are excited and committed to our vision of becoming the most innovative restaurant company in the world. In facing the challenge of chicken price hike, we certainly take this vision even more serious than otherwise it would be. For Q3 alone, we have some really exciting new products, like the Portobello Mushroom Burger, which we replace the meat with the entire piece of Portobello mushroom with cheese in the middle. We have the duck wrap. Other than chicken wrap that we traditionally have, we have the duck. We also, in our combo, start to introduce chicken strips to replace chicken wings. Although it's still chicken, but the cost of chicken strips, which is essentially breast meat, which is not very popular among the Chinese customer, the price of chicken strips is lower.
Our product innovation will continue for the rest of the year and going forward for next year, and it's very exciting. We even get to the point of selling a lot of 鸡翅尖, which is the last small tip of the chicken wing, which is not something you think that we can sell, but we could, because there are a group, not huge group, but there's still a group of people who just love it. That's point one. Point two is our commitment to good food. If we look at our cost structure, let's say we take Pizza Hut. We can see improvement of the cost management in almost every line. We leave the flexibility to cost of sales. Why? Because it's our commitment. We would push ourselves to try efficiency and effectiveness in everything.
We have the commitment to pass all the savings back to food to serve our customers. Even though we are big business, but we need to have that sincerity, and good food is sincerity to a customer, and we have the commitment, and thus, we always have the flexibility there, in terms of the investment to food. We must have the good product first to drive good traffic and then good sales. Thank you, Michelle.
Yeah.
Thank you.
I think it answers the same question, some part of the questions, which is about the margin trend for KFC. A couple things, right? One is that I think in the fourth quarter, as we mentioned before, we're going to accelerate our store remodeling, that will have an impact on our sales and margins. Also, if you look at KFC, also benefit from some one-time items, including the tariff rebate, which benefit the margin by 0.3%. Also, we also benefit, as Joey mentioned, a very successful rollout of some of our productivity tools, especially in the summer peak season. We gained a lot of productivity improvements, that may not be as prominent in the fourth quarter, which is traditionally a smaller quarter and not peak season for us.
In the overall, I think for the sales, if you look at KFC, we'll be lapping some very successful initiatives, right? We have the first full quarter of Crazy Thursday that roll out in 2018. That would be a tough comparison lapping that. All in all, I think for margin trend, we have done a great job and I think better than we have expected probably in the third quarter. I think it will normalize more in the fourth quarter.
Thank you.
Thank you so much. Our next question comes from the line of Chen Luo from Bank of America Merrill Lynch. Chen, your line is now open.
Thank you, management. I've got a question on the sales. Just now, Andy mentioned that we expect a moderation of sales growth in fourth quarter. Are we talking about the slowdown of same-store sales growth as compared with Q3? We also highlight that in Q3, we have purposefully scaled back the promotional intensity to achieve a balance between margins and same-store sales growth. Going forward, we are going to see very tough laps of same-store sales growth. Are we going to continue with this balanced strategy, or if necessary, we are going to actually step up promotional again to sustain same-store sales growth? Any color on that front will be helpful. Thank you.
Thank you, Chen Luo. Yeah, you're right. If you look at the third quarter, the margin improved at KFC, partially due to the strategic management of promotional activities. Again, I think our team will continue to look at balancing between promotional activities versus protecting margins and respond to the market appropriately. We do expect that selective in promotion activities is likely in the fourth quarter for KFC. Hope that answered your question.
Yeah. Okay.
[audio distortion] I think Andy just mentioned a bit earlier, is we just have to remind ourselves that quarter four last year for KFC was very strong. That's the first full quarter of Crazy Thursday, which is one of our best promotion now. With that strong result, naturally, we will have the challenge of lapping this year for the Q4. At the same time, as we mentioned a few times already, given the cost pressure, particularly in Q3 and looking at Q4, we also look for ways to protect our margin as well. The third point is same-store sales really is not the only criteria for Yum China. Despite the scale of our business, we are still growing very fast, and the market opportunity is still very exciting there.
We will not be doing something good and fair for our shareholders if we do not have a good balance of same-store sales and system sales growth. If we look at Q3 for KFC, the same-store sales 3%, but the system sales 10%, which is fantastic given the scale of our business already. Q4, as Andy mentioned, while we are driving the same-store sales, this is also a very big quarter for us to build new store. We must keep this pace going to maintain our dominant market leadership in our business. Therefore, you can see the balance consideration from management team's point of view towards Q4. Thank you, Wilson.
Yeah, understand. Thank you very much, Andy and Joey.
Thank you so much. Your next question comes from the line of Xiaopo Wei from Citigroup. Xiaopo, your line is now open.
Good morning, Joey and Andy. Welcome to the company. I have one question regarding the new opening. As you mentioned on the release that you accelerate opening in the third quarter, interestingly, we are seeing very impressive improvement in KFC restaurant margin. Shall we say that actually the new store restaurant margin on like-for-like basis actually is better than last year? We are seeing you are opening more store looking forward. Shall we say that the drag of a new store looking forward on a like-for-like basis actually will be much less than previous years? I'm seeing the trend that your top line is more driven by the new opening looking forward rather than the same store.
If your restaurant margin for the new store, it is better than previous years, shall we say that the margin pressure will not be as much as we feared by normal operation? Thank you.
Thank you, Xiaopo. Let me take this question. For the Q3 restaurant margin, there are a few contributing factors. One Andy mentioned earlier, is there are some one-off benefit, like the tariff rebate, like the government incentive that was happening in Q4 last year. This year, it moved to Q3. More importantly, actually, we have some very impressive labor productivity gain during the Q3. I mean, that number is big, and that number is from all stores. There are reasons behind it, and the cost does not go down by itself. Usually, it's a result of very aggressive management and hard work behind. The hard work behind the all-store labor productivity, and thus the restaurant margin, is our new real-time automated labor scheduling system in place.
Right now, for all my store managers in KFC, the data of the operational detail, particularly for labor scheduling, is real-time and is in their phone. We call it 手机经理. The manager in your pocket. The transparency of the data and then the automation of the labor scheduling gives our store manager a very good tool so that they can respond and react immediately. This particular benefit is very, very important, and it was proven in our Q3, which is our peak trading season for the summer, right? It's very, very significant. Thus, Andy also mentioned earlier that such benefit is less likely to replicate in Q4, because Q4 is a very small quarter. When we spend a lot of money on labor cost, and the saving there is slightly more impressive.
The restaurant margin, really, the improvement is a result of all store margin, not only new opening. All our new opening store, we do have a bottom-up approach. Each store, the decision to open one single store, any store in Yum China, we have very robust process to approve it. However, when the new store mature, we are expecting a bit more benefit from it as well. Thank you, Xiaopo.
Thank you, Joey.
Thank you so much. Your next question comes from the line of Anne Ling from Jefferies. Anne, you may now ask your question.
Hi. Hi, management team. Hi, Joey, and also Jack. I have a question regarding Pizza Hut. Pizza Hut, with all these promotion, we noticed that, not only in the Scream Wednesday, but also Scream Monday, Tuesday, and Wednesday for some of the weeks in third quarter. Is that 1% same-store sales up to management's expectation? We also see margin a little bit more volatile. I think we can understand that. What you think that, in terms of restructuring Pizza Hut, what is still missing? In the four pillars, which one will be the one that you want to highlight a little bit more about? Are you happy with the current ASP for Pizza Hut? If not, what are the trends? Maybe just one follow-up question on Xiaopo's question. You mentioned about the one-off gains regarding the labor efficiency.
Is it fair to say that although it happens in third quarter, it might not be that impressive in Q4, this efficiency will come back again in first quarter and third quarter next year because it's a high season? Thank you.
Thank you, Anne. There are quite a few questions here.
Sorry
Start with the big picture. For Pizza Hut, we are very happy with the third quarter of same-store sales growth. Also the consecutive 4 quarter of traffic growth, which is the 1st time we achieved since 2014. The year-to-date margin is actually 12.4%, versus last year, 11.8%. With all the good efforts going in, despite the quarterly fluctuation, we are very happy with the overall trend. Come to the same-store sales growth. Is it online with our expectation? We always want a bit more, if we could. We are happy with the positive same-store sales. In terms of ASP and all the 4 pillars that we are all familiar with, my thoughts are as follow. One is, it's very good for the business in the long term when we are driving traffic, even when the ticket average or ASP is going down.
What does that mean? It means that we are rebuilding value for money, which is absolutely critical for our business. For our dine-in business, the trade-off is very obvious, and the result is impressive. We are increasing 10% TC, TA go down 9%. That's what we wanted. That's good. In terms of four pillars, I guess the question is, what else can we do more? The answer is we continue to drive four pillars, the focus will shift slightly along all four pillars as well. As we get something under the belt, we move on to the next thing that we can focus on. Let me give you an example. The fundamental. We are talking about menu, the product, the value for money, the layout, et cetera.
All these fundamentals are good, and we are very happy that the new menu, that we introduced back to March, that there are only 77 items versus 120 before. What's different? The difference is this new menu continue through the rest of the year, and that's very different because in Pizza Hut's history, we used to do two menu change in the past, and that was massive amount of effort. This year, we managed to have one menu and it carry us through for the whole year. That is good. What else that we need to do? Well, now we got the dine-in menu under the control that we're happy about. What about the delivery menu? We're gonna move our focus to fixing the delivery menu because the requirements are different.
The dine-in menu need to be something very nice, very serene, friendly, that you can put on the video online. The lava cake will flow down. It doesn't work for delivery. We need to move on some menu item that can keep the heat, the temperature much better, that can come out from the kitchen much faster to help us drive the delivery business. Let me also highlight digital. The digital, we launched the Super App 2017, and then we continue to roll out the table side ordering, et cetera, and we're still trying it. What is new this year? Well, we just rolled out the carryout ordering on Super App as well. The carryout ordering right now is still single digit, it's still early stage. It's fantastic because it does not take out space in the store, and it does not require delivery cost either.
Now we started it, and we need to push. We need to get it right first and then push the delivery. I talk about the menu, and we took back the last mile delivery at the end of last year, and we have spent massive amount of effort and work to rebuild the infrastructure. Okay. The infrastructure is rebuilt. Now we have to go to very detailed management of the trade zone. We are going through one trade zone at a time in the entire country where we have the delivery business and try to make it better to reduce the customer complaint. That is the quality. You can even see the delivery business coverage actually reduced from 97% to 91%. Why? Only 91% of our store right now offer delivery business in 97%. Why? It doesn't make sense.
It does make sense, because we realized there are some stores that are doing the delivery business at suboptimal scale. If two stores are close enough, we combine them. We still keep the sales, but we improve the cost, and we improve the quality to the customer. As said, we have done 126 remodeling in Q3, as Andy mentioned. We still have half of remodeling to do for the rest of this few months for the year. It's low season, of course, we're going to work harder, to prepare for next year. The hub and spoke, we mentioned it in the investor day this year. We now have 20 of them, and we continue to test to fine-tune the hub and spoke model. Hopefully, we can roll it out in bigger scale next year.
As I mentioned at the beginning of this year, when we turn the corner of achieving positive same-store sales, which is fantastic. We also mentioned that the business is going to take another 2 to 3 years to cement all the changes. The last bit of your question is for labor productivity, for KFC in particular. We have seen a good result in the Q3 this year. Next Chinese New Year will be the first Chinese New Year we will go through with our production with our real-time automated scheduling. Every single peak season is like a big battle for us. We certainly try our very best. The dynamic is different, because although the Q3 is a peak trading season, the Q1, the Chinese New Year this year is Q1 actually, because it's earlier, is a completely different dynamic.
It's gonna be another lesson-learned experience. We certainly will try our best.
Right. I would add a little bit more to that.
Yeah.
If you look at the labor productivity improvement in the summer seasons, I think that's because during the summer peak season, normally we have a larger temporary crew. Generally, the labor productivity because of that are lower. With this near-time almost automated labor scheduling tool, we're able to see significant improvement in labor productivity. We continue to expect this tool to be helpful in improving labor productivities throughout the year. Obviously, the lowest hanging fruit for that is in the summer peak season, where labor demand and supply are more different. Hopefully that addressed your question.
Thanks. Thank you.
Thank you so much. Your next question comes from the line of Lillian Lou from Morgan Stanley. Lillian, your line is now open.
Thanks, Joey and Andy. I think a lot of questions were answered. I have a follow-up question. I think so far, Pizza Hut is on a very good trend. As Joey mentioned, that positive traffic is very important metrics that we need to follow at this stage. In terms of balancing Pizza Hut and KFC, rolling over to 2020, I know it's still early to give exact guidance, but in terms of strategic focus between those two, what's the most biggest challenge in 2020 for KFC and Pizza Hut?
Let me share my thoughts, Lillian. Thank you. The 2020, for more specific target guidance, we'll give in Q4. I think, as we can look at it right now, for KFC, obviously the same-store sales. Because the Q1, Q2 this year was very, very strong. It was phenomenal, like 5% same-store sale. Plus, the new store opening, that is very, very tough to lap. The chicken price, it will continue. The chicken price pressure, it will continue. The third bit is the labor productivity, while we are very happy with the Q3 improvement. For next year, every year is a challenge because of the government minimum wage challenge to the fundamental nature to our business, and how are we going to continue to learn to use our new automated scheduling tool.
These are the sort of the top three challenges that we are paying a lot of attention to. Last but not least, the new store opening. Obviously, while we are targeting and pushing ourselves for same-store sales, for positive same-store sales, we are acutely aware that there's huge opportunity in China market because we're only in 1,300 cities, and there are still 700, 800 cities that we don't have a KFC, and we still want to keep a pace. To balance the multiple sort of focus for the business is always a tough gig. For Pizza Hut, the revitalization will continue.
As I mentioned many times before, the focus is still on four fundamentals, and it does take two to three years' time after turning around the same-store sales to cement all the changes I mentioned along the four key pillars and others that I did not mention. For revitalization process, because Pizza Hut is still very profitable, it just require tweaking the key dimension of the business, but also everything else. There's still fundamental difference between the two business. What are the differences here? For our priority of making decisions, we are very clear. We want the traffic first, we want the sales, and then we want the profit. Pizza Hut, because of where it is, we certainly focus on the traffic and sales, and we give a bit more flexibility to the profit, because that's where the business is. For KFC, the requirement is higher.
Not only we want the traffic, we want the sales, but we also want the profit. This is something someone clever described that sales is vanity, profit is sanity. As a good business people, we want a bit of both. We certainly want a bit of both for KFC, and we are probably okay for Pizza Hut. We have a bit more vanity than sanity for the time being. Thank you, Lillian. Andy, any?
Yeah. I think it's a little bit too early to provide specific guidance for our outlook for 2020. As Joey mentioned, I think, the couple focus that we're gonna have, right, one is that, we're gonna continue to drive sales through product innovations. Again, because we're going to face some headwinds in the commodity prices. The second part is that we will also invest in a number of area, right? Store remodeling. We'll also invest in technology, very important for us next year as well. We'll also continue to invest in our own delivery platform. It will be likely our investment year for us, in 2020 as well. Overall, I think we will see some tough comparisons, for example, because both Pizza Hut and KFC have very strong first half 2019. It will be tough comparison.
If you remember, we achieved same-store sales growth of almost 5% in the first half for KFC. Those will be pretty tough comparisons. As Joey mentioned, we expect them to have both vanity and also sanity. That would be an important balance for them, to balance between continuing sales growth and also maintaining, protecting margins going forward. Thank you, Lillian.
Thanks a lot, Joey and Andy.
Thank you so much. Your last question comes from the line of [Dylan Chou] from CLSA. Lillian, your line is now open.
Thanks very much. Thanks for the opportunity. Actually, most of my questions have been cleared. Thanks for a lot of details. I guess could I please maybe ask about your coffee strategy? As I recall, Joey mentioned this is still a large potential area. You still needed the patience. I'm just wondering if you could elaborate a bit on that. Sort of what kind of signs would you need to see, or what kind of metric would you need to see before you wanna invest in coffee a bit larger scale? What kind of initiatives would you drive to do that? Just slightly longer term, coffee is certainly a big potential category. Currently it seems mostly food drives coffee. Coffee is sort of a supplement to our other food categories.
In the future, do you think coffee has the potential to drive food the other way around, at least in some of the day parts? Just any color on that would be really helpful.
Thank you, Lillian. We believe in the great potential of the coffee business, we are committed to grow our coffee category. There are two areas that we are focusing on right now. One is KCOFFEE, because KFC is a very resilient business model already, and we are introducing or growing the coffee as a product inside the business. As I mentioned, year to date, we show 98 million cups already, and that's more than the total of 2018 full year, which is about 49%. Let's round it up, call it 50% increase. That's very, very impressive growth. This number of coffee cups growth is comparable to some other pretty significant other coffee player in the market. However, given the base of our business, our coffee business, even with almost 100 million cups sold, is only 3% of our business.
We are very happy with the growth and the 3%, but it just gives you the sense of the scale of the overall KFC business and Yum China business, and thus, I mean, the challenge of growing. The other bit of the coffee strategy is the C&J, the COFFii & JOY, which we are building or rolling out. This is a new brand. When it comes to building a new brand, it takes time, right? Whatever successful brand that we can think of in China, like KFC, Pizza Hut, and others, it does take time. Not only it takes a great product that customer know already, but we have to build a store prototype, build a brand, build a supply chain, build a member base, build a talent pool, and the complementary offerings such as food in order to build a brand.
Right now, we are also testing the scale and network effect as we increase density of our store in a given trade zone. Where we are right now, we have opened 19 stores in Q3 by Q3. We are targeting to get to 40, 45 stores by the end of the year. Next year, we are committed to increase our investment. The decision is always dynamic. It's a dynamic process, which is the same as Pizza Hut and KFC when we come to new store opening. It's a dynamic process. It's a bottom-up process. We are committed to grow the scale so that we can continue to learn all these building blocks of a new coffee brand, including the scale and the network effect. That's where we are in terms of the coffee strategy. Lillian, thank you very much.
Thank you very much.
All right. Thank you. Thank you all for joining the call today, and 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.
Thank you.
That does conclude the conference for today. Thank you for participating. You may all now disconnect.