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spk07: Ladies and gentlemen, thank you for standing by and welcome to the China Fourth Quarter and Fiscal Year 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press Par 1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to our first speaker today, Ms. Debbie Ding. Thank you. Please go ahead.
spk04: Thank you, operator. Hello, everyone, and thank you for joining Young China's fourth quarter 2020 earnings conference call. Joining us on today's call are our CEO, Ms. Joey Watt, and our CFO, Mr. Andy Yang. Before we get started, I'd like to remind you that our earnings call and investor presentation contains forward-looking statements, which are subject to future events and uncertainties. Our actual results may differ materially from these forward-looking statements. All forward-looking statements should be considered in conjunction with the cautionary statement in our earnings release and the risk factors included in our filings with the SEC. This call also includes certain non-GAAP financial measures. You should carefully consider the comparable GAAP measures. Reconsideration of the non-GAAP and GAAP measures is included in our earnings release. Today's call includes three sections. First, Joey will highlight our accomplishments over this past year and review our strategy and key priorities. Andy will review our financial performance and outlook in greater detail. Finally, we'll open the call to questions. You can find the webcast of this call and a PowerPoint presentation which contains operational and financial information for the quarter on our IR website. Now, I would like to turn the call over to Joey Watts, our CEO.
spk05: Thank you, Debbie. Hello, everyone, and thank you for joining us today. I hope you and your families are safe and healthy no matter where you are. First, I want to acknowledge the great work of our 400,000 plus employees and express my heartfelt appreciation. With their dedication, creativity, and tireless effort, we have been navigating the difficult times and effectively managing our business. Looking back at the past year, We put the health and safety of our employees and customers as our number one priority. Our team kept most of the stores open, even at the peak of the outbreak. Our execution capabilities and agility helped us overcome many challenges. We captured off-premises consumption opportunities and drove recovery in dining volume. Sales and travel recovered sequentially since the first quarter. Our operating profit remained solid and grew double digits year over year in the second half. This is the result of strong execution and efficiency improvement. KFC remained resilient. We accelerated store expansion with attractive returns and maintained solid profitability. We made remarkable progress in strengthening the fundamentals of Pizza Hut across all aspects. that is reflected in the sales and margin improvement. Going forward, we will continue to fortify the resilience of Pizza Hut's business model. At the core of all these is our ability to innovate. KFC's premium Wagyu beef burger resonated well with consumers and was sold out within days. And their sweet pumpkin congee, is the perfect item for the winter. Portuguese chicken curry at Pizza Hut became an instant hit on the delivery menu. We demonstrate our commitment to be a responsible corporate citizen. The pandemic reinforced our determination to look after our employees. We extended our family care coverage designed for our restaurant managers to 13,000 restaurant management team and supervisors and their families. Our efforts are recognized in the industry. For the third consecutive year, we were certified as the top employer in China and included in the Bloomberg Gender Equality Index. We were also recognized for our commitment to sustainability, and we were named an industry leader in the 2020 Dow Jones Sustainability Index. Let's move on to growth strategy. Despite the challenges, We are optimistic about the future opportunities in China. We have been staying the course with our long-term strategy centering around three key growth initiatives. Let me give you some update on our latest thinking. First, store growth. We opened 1,165 new stores in 2020, marking the highest new store openings in the 33-year history of operating in China. This is equivalent to opening one new store every eight hours. Our new store's payback remains healthy at approximately two years for KFC and three to four years for Pizza Hut. We intend to sustain the store building momentum into 2021 and beyond, and reach the next 10,000 stores much faster than the first. There's still plenty of white space in which we can expand, We are tracking over 700 cities in which we have no presence in China. To penetrate new markets, KFC is piloting small-time model designed for the needs of tier six cities or below. This model has localized manuals, store layouts, and operating models that require less . We are encouraged by the initial result of these pilot stores, and we will open more small-time models stores in 2021 in KFC. In more established cities, we will increase store density with our multiple store formats. As the mix of off-premise occasions continues to increase, we have further reduced the average store size and capacity per new store. One example is Pizza Hut hub and spoke model which we introduced in 2019 Investor Day. I'm excited to report that with nearly 50 stores, 50 hub and spoke stores, at the end of 2020, the results are very promising. We will roll out more of these stores and other small store formats and accept our store models to evolve in consumer needs. To create an even stronger foundation to accelerate expansion, we are stepping up investment in our infrastructure. More details will be provided by Andy later on. Second, portfolio growth. While KFC and PISA remain our key growth drivers, we are also leveraging Young China's resources, execution capability, and learning to develop our emerging brands. Great things are brewing in coffee. We now have three distinct brands with clear segmentation and strategies. We are committed to accelerate expansion of our coffee business and make it a meaningful part of Yum! China. K-Coffee fulfills that daily ritual with good quality coffee at affordable prices at over 7,000 KFC restaurants in China. 140 million cups of K-Coffee were sold in 2020. making us one of the top three players in terms of cup sales. Coffee & Joy has evolved to offer specialty coffee for coffee lovers while utilizing an asset-light model. We are working on improving the profitability of CNJ and exploring other potential avenues of growth. Meanwhile, Lavazza offers premium coffee in an indulgent atmosphere. We now have five beautiful stores in Shanghai and we are pleased with the initial results. We plan to accelerate openings in 2021 to test different store models, ranging from mini to flagship stores. On the Chinese cuisine market, post-acquisition integration of Huang Ji Huang has progressed well. We have driven synergies in product innovation, franchisee development, and supply chain. Huang Ji Huang's sales recovered sequentially and delivered solid profits since acquisition. We will further work on the menu and operations for our Chinese cuisine brand to drive store expansion and growth in the seasoning and packaged food business. The third growth initiative is digital and delivery. The COVID pandemic highlighted the power of digital from member engagement, delivery to operations. Our membership has grown to over 300 million. Member sales now account for 60% of our sales. Privileged subscription program is effective in boosting frequency. We sold 38 million subscriptions in 2020. The average spending of privileged members doubled during their subscriptions. More targeted promotions help us keep marketing expense down. Delivery has been growing rapidly and even faster during the pandemic. It now accounts for 30% of our sales. In 2020, we upgraded our rider platform with AI-enabled zoning, rider routine optimization, and real-time monitoring. In the test market, on-time rates, customer satisfaction, and efficiency have improved. We also tested rider sharing between KFC and Pizza Hut in eastern China, We will expand this initiative into more brands and more markets. In 2021 and beyond, we are allocating more capacity to further strengthen our digital and delivery capabilities. To make our organization more efficient in the long run, we will deploy AI and automation in more of our operations and continue to advance end-to-end digitization from farm to fork. We are committed to driving long-term growth with the three growth initiatives. Investments across all three are necessary to build our leadership and agility. Let's move on to 2020 Q4. And I would like to make a few comments. First, sales improved sequentially from the third quarter, although the pace of recovery was impacted by regional outbreak of COVID. October sales benefit from the National Day holiday. The sales in November and December was pressured by increased regional outbreaks. Traffic at transportation hubs remained significantly below the prior year due to reduced travel. Buying remained pressured but recovered a bit sequentially. Delivery and takeaway remained popular options and accounted for over 50% of sales. Digital orders increased to Pizza Hut table-side mobile ordering has increased in popularity as we enhance the user interface. It now accounts for over 35% of sales, up from just 7% in the prior year period. Operating profit grew to $180 million. Andy will cover the financial in detail in his session. As we look into the first quarter of 2021, we see the resurgence of COVID-19 adversely impacting our business. Nationwide, authorities have tightened preventive measures and advised against travel, large gatherings, and dining out, especially during the Chinese New Year holiday period. Given the current situation, we see significant headwinds for the first quarter. Our teams are closely monitoring the situation. and leveraging learning from the past year. Our marketing programs encompass a wide array of compelling offers, targeting both dining and off-premise locations and different party sizes. We will stay agile to adjust our marketing programs and operations to the evolving situation. Most importantly, we remain confident in the long-term potential of China and stay focused on generating sustainable shareholder returns. With that, I will turn the call over to Andy. Andy?
spk00: Thank you, Joey, and hello, everyone. I will first address key financial developments in the fourth quarter, then provide some color on our 2021 outlook. Unless noted otherwise, all percentage changes are done before the effects of foreign exchange. Let me first cover our Q4 financial results. Revenue grew 5% and same-store sales recovered to 96% of the prior year period. The sequential improvement was supported by continuous strength in delivery and takeaway, while dine-in volume gradually recovered. KFC same-store sales recovered to 96% of the prior year period, compared to 94% in Q3. Our transportation and tourist hub sales improved but remain challenging. System sales grew 3% year-over-year, reflecting the contribution of new build acceleration. Pizza Hut same-store sales recovered to 95% of the prior year, compared to 93% in Q3. Same-store transaction volume recovered to 98% of the prior year period. Wang Ji Wang and the consolidation of Suzhou KFC contributed to 4% of total revenue. We opened 505 stores in Q4, which helped us achieve the record-level new store opening for the year. Restaurant margin was 15.1%, up 2.7% compared to last year. I want to thank our team for the excellent work in driving operational efficiencies and managing costs. Cost of sales was 31%, 1.2% better than last year. This was mainly held by lower poultry prices and more targeted value promotion at Pizza Hut. Cost of labor was 24.2%, almost flat year-over-year. Wage inflation and increase in rider costs associated with delivery volume increases were largely offset by labor productivity improvement and shortage in part-time workers. Occupancies and others was 29.7%, 1.7% better than last year, mainly attributable to reductions in advertising and savings in other operating costs. We also received around $7 million in rental and government relief, which is expected to phase out in 2021. G&A expenses decreased 9% mainly due to lower performance-related compensation, timing shift of government incentives, and cost controls. Operating profit was $180 million, up 78%, mainly due to restaurant margin improvement. Please keep in mind that some of the factors driving Q4 profit are not expected to recur, such as lower advertising costs and performance-related compensation, and one-time relief. Some of the productivity improvement due to labor shortage is also temporary, as we intend to increase staffing levels. Our effective tax rate was 28 percent, net income was $151 million, and adjusted net income was $153 million. Excluding $23 million of net investment gains in May 1, it was $130 million, up 65 percent year-over-year. Data EPS increased 43% to $0.35. Now let's turn to our outlook for 2021. Heading into the first quarter, cluster of outbreaks surge, impacting a large wealth of the countries, especially in northern and northeastern China, Beijing, and Shanghai. Government implemented stricter public health measures across China, such as advisory against travel, large gatherings, and dining out. Several cities have also been put on citywide quarantine, including Shijiazhuang, a city of 11 million people. We anticipate significant headwinds for the first quarter. Our transportation and tourist locations representing high single-digit upsells will likely be more significantly impacted. Government statistics show that the number of travelers was down over 70% in the first few days of the Chinese New Year travel this year, which started in late January. Overall, dine-in traffic has been affected. We expect trading during the important Chinese New Year holiday period to be subdued, with sales impacted by substantially less travel, smaller gatherings, and generally reduced social activities. Sales in lower tier cities, which represent over half of our sales, will also be impacted as fewer people will return to their hometown for Chinese New Year. As KFC has a higher percentage mix of stores in lower tier cities and transportation hubs, it will be disproportionately impacted. So Q1 will be all hands on deck. In response to the headwinds, we have step up our value campaigns, and tailor our marketing candidates according to CDTs and trade zones. We have also adjusted our operations and delivery resources to capture shifting, dine-in, and off-premise demand. We will endeavor to do everything we can to mitigate the headwinds. Please also keep in mind that January and the first quarter will be a tough comparison. Last year, COVID-related lockdowns started only in late January. On a year-over-year basis, last year's sales benefited from strong first few weeks leading into Chinese New Year. We anticipate the recovery will remain nonlinear and uneven, influenced by regional outbreaks, reduced travel, and lingering effects on consumer behavior. In 2021, margin will remain subdued compared to pre-COVID level as we face several headwinds. We expect full recovery of sales to pre-COVID levels to take some time. Compelling value campaigns to drive traffic will continue to be our focus. We expect two-year wage increase since 2019 to be high single digit, including 3% in 2020 and mid-single digit in 2021. We are setting up our efforts in sustainability. In light of the latest regulations in China, we are replacing plastic packaging with more eco-friendly materials. It's expected to increase our cost of sales by over $30 million in 2021. On a year-over-year basis, we are lapping over $100 million of COVID-related government and rental relief in 2020, which is mostly phase-out now. On the positive side, our commodity prices are expected to decline by low to mid-single digits, mainly driven by lower poultry prices. Since we usually lock our poultry contracts one quarter in advance, prices may still fluctuate throughout the year. We will build on our momentum in 2020 and target to open approximately 1,000 new stores in 2021. We will step up investment in digital, logistics, and other operational infrastructures to support accelerated growth. Total capex in 2021 will increase to approximately $600 million. This investment will impact profitability in the near term, but will yield benefits in the long term. With that, let me cover our capital allocation framework. With over $4.3 billion in cash and short-term investments and strong cash flows, perhaps as much as $8 billion of capital will be deployed over the next five years. As we think about our long-term capital allocation, our key goals are to deploy capital efficiently to accelerate growth and to create long-term value for our shareholders. Now, before I outline the use of cash, I want to emphasize that we will continue to run a prudent financial strategy, ensuring sufficient cash on hand for working capital and sufficient reserves to deal with potential contingencies. Organic growth remains the most important driver for our long-term strategy. As Jody mentioned, we aim to achieve the 20,000-storey milestone much faster than the first 10,000 store milestones. We'll prioritize our capital to support organic growth. Hence, we will more than double our CapEx over the next few years. A majority of our CapEx will be used for accelerating store network expansion and store remodeling for our core brands, KFC and Pizza Hut, growing them while keeping them fresh. We also plan to invest several hundred million dollars in our emerging brands, especially the coffee business, building them into meaningful scale and a material part of our business mix. While expanding network of physical store is an important growth driver, enhancing our digital and delivery capabilities and logistic infrastructure is equally important to our future success. To efficiently and adequately support a network of 20,000 stores would require a bigger, more robust, and more agile digital and physical capabilities and infrastructure. In addition, we also like to see greater digitization, automation, and intelligence across our operations. So we have earmarked over a billion dollar investment to advance our end-to-end digitization program. including digitizing our store, marketing, supply chain, and back office operations. Roughly another billion dollars has also been earmarked to expand our logistic infrastructure to enhance automation capabilities to drive efficiencies. The rest of the capital will be allocated for shareholder returns and M&A. We resumed cash dividends in the fourth quarter and have returned $1.2 billion to shareholders since the spin-off. In the future, we expect steady returns to shareholders in line with our profit growth. We will also maintain a disciplined approach to M&A and investment, while exploring opportunities to invest in brands with excellent growth potential, to acquire new capabilities and technologies, and to build and support our ecosystem. We believe this approach to capital planning will drive long-term shareholder returns. All in all, we are encouraged by the solid financial results we delivered in 2020. We will continue to invest for the long term. I'm confident that we are on the right path to emerge from the COVID pandemic stronger and better prepared for future growth. With that, I will pass you back to Debbie to start the Q&A. Debbie?
spk04: 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 one at a time. Operator, please start the Q&A.
spk07: Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel a request, please press the pound or hash key. please limit to one question at a time. If you have follow-up questions, please request to rejoin. Our first question comes from the line of Xiaopo Wei. Please ask your question.
spk08: Good morning. Good morning, Julie and Andy. And thank you for taking the first question. My question will be regarding the Chinese New Year. As Julie mentioned that there are very challenging environment in the first quarter. And but we know that young China and yourself are so good at handling the challenges as we can see last year. So after learning a lot of experience in coping with a COVID situation in 2020, how could you do differently and make your business more flexible to capture any emerging demand and well protect yourself on the downside in terms of business in the upcoming trans new year? Any comment would be highly appreciated. Thank you.
spk05: Thank you, Xiaopu. The quarter one, which is driven mainly by the Chinese New Year, would be a quarter that's rather difficult to model because, as I mentioned earlier, we do anticipate significant headwinds, and we do expect recovery will take some time because the situation is still fluid. Three things for sure in terms of trend. One is the surge in cluster outbreak. And that result in tightened preventive health measures or advice against travel, large group gathering and signing up. Second is the traveling and the social activities significantly reduced. So we already have seen the first few days of the travel volume. is down significantly. And then the lower tier city sales, which is more than 50% of our sales, particularly for KFC, and large party size ticket will be reduced. And also, we do also expect more competitor will stay open during Chinese New Year versus 2020. The third thing we know is KFC is likely more impacted than piece of heart because of higher mix in the lower tier cities and transportation locations. I mean the next important question is how are we going to deal with it and certainly we take all the learning from 2020. The overall tone and the importance and the priority is to the safety of our employees and customers and on that foundation, the focus is to stay nimble and agile. We do closely, very closely monitoring, we are closely monitoring the situation and there are two focus here in terms of staying nimble and agile. One is to step up the value campaign and to line up all our digital and delivery resources including our membership program to prepare for the Chinese New Year. Second is we adjust our marketing calendar according to city tier, trade zone, party size, and occasion. I suppose compared to the 2020 program is this time when we plan the marketing campaign, we have, you can see we have multiple scenario planning. and that shall help us stay even more agile compared to last year. Last year, things happened before we know it's going to happen, so we react really fast, and our team is doing a fantastic job. For this year, we have more scenario planning, and that shall help our team still react quite fast to the evolving COVID situation. Thank you, Chapul.
spk08: A quick follow-up on a new store. You did a great job in 4K opening many stores, but if you look at the result, actually, we didn't see that a new store really dragged down the restaurant margin. So looking forward, shall we say that a new store will be the key driver for the growth without compromising our margin on a sustainable basis?
spk05: Thank you, Xiaopu. Quick answer as well. open stores, as you guys know us already, we have rough idea how many stores we want to open, but the most important decision is whether this is a good store or not. If we see opportunity to open the store, we'll open more or less, depending on the quality. We always keep our quality. And as you can see, we still are opening more stores in lower tier cities. Our quality control continues there. So it's always the disciplined approach that we have been following and will continue to pursue. Thank you.
spk08: Thank you.
spk07: Our next question comes from the line of from HSBC. Please ask your question.
spk05: Hi. Thanks, management, for the presentation, and congratulations on the very good results. My question is also related to the store opening. We have seen, like, the very high-quality store opening in 4Q, but we also know, like, normally, like, there will be more remodeling in 4Q. And as Xiaobo said, like, new stores might not contributing so much to profitability. So I'm wondering, like, whether what we have seen in 4Q is sustainable. As, like, asked earlier, like, when we expect, like, the store opening might continue to be the expectations, whether it's going to lead to higher than, like, the contribution to total revenue will increase as well as the drive, the,
spk01: driving higher profit growth as well. Thank you.
spk00: Linda, this is Andy. Thank you for your question. Let me first address, you know, the question about, you know, the store opening pace. Obviously, you know, we're very pleased that we have opened, you know, 505 stores in the fourth quarter. But I also want to remind folks that, you know, even though it's probably still higher than what we expected, but we have already told folks that, you know, because of the COVID impact, you know, the store opening will be more back-end loaded. And so, you know, with the little bit easing in the COVID situations in fall and winter, you know, past year, our development team have really accelerated the pace and tried to take advantage of that window and open as many stores as possible. And then we also tried to push, you know, some of the store opening earlier, you know, in the fall quarter. So in anticipation of, you know, the Chinese New Year, holiday period. So as we mentioned, we expect to open 1,000 stores this year, and it's a very high pace. So you think about our store right now, we have a little more than 10,000 stores, and that's almost like opening almost like 10% of new stores. Now, putting it in perspective for you, last year we opened almost like, you know, one store every, I think, eight hours, and so that's a very fast pace. So we'll still maintain a fast pace, but probably not at the level that we're seeing, you know, every quarter 500-plus stores, you know. I don't think that is sustainable, at least in the near term. We do have plans, as we mentioned on the prepared remarks, to accelerate, you know, store network expansion, and we will put and allocate resources to do that. Now, in terms of the possibilities of the new store, as Joey mentioned, we have a disciplined approach to store opening. So if you look at the payback period for KFC, it's very strong two to three years and have been very consistent over the past few years. Now, Pizza Hut, it's about three to five years, and also is very strong with currency. So we have a lot of incentive to open a store, as many stores as possible, but within that framework of discipline approach to store opening, make sure that we have the right financial return. So hopefully, and then one thing, as you can tell, obviously with that kind of fast pace of store opening, it demonstrates our confidence in the market in China and also the potential opportunities here in China. So we always encourage investors to look at the overall system sales rather than sometimes to focus on the same-store sales growth, because China is still a growth market.
spk07: Okay, thank you very much, Andy. Our next question comes from the line of Michelle Cheng from Goldman Sachs. Please ask your question.
spk06: Hi, Joey and Andy. Congrats for the good results. My question is about Pizza Hut. I think clearly last year even the leverage pressure was so significant. We see a strong margin improvement. And also in the fourth quarter we also see we actually opened many Pizza Hut stores. So can you share with us, after like two years of our revitalization plans, what's our new focus into 2021, and whether we will start to see improving sensors of trend and also further marketing upside? Thank you.
spk05: Thank you, Michelle. For peace of heart, I think overall we did what we promised. about sales first, profit later in our turnaround journey. And our second half OP more than doubled compared to the previous years. And the focus of Pizza Hut in the last few years is about improving the fundamentals of the business, which we believe will have an impact for years to come. And I think that kind of set the tone about our focus going forward. So our focus going forward is to continue to improve across all these key aspects to cement the changes made in the last few years and make Pizza Hut a resilient business model. I think this is a very important work because I think we believe we have a resilient KFC business now. And after a few years hard work, Pizza Hut business will be also resilient as well. So in terms of focus, maybe I'll just highlight three things that we have done. We have worked very hard in the past three years, and we will continue to do that in the coming few years. One is the new menu. Our new menu rolled out in late Q2. It's 75% item new or upgrade compared to two years ago. And food is, I mean, I cannot emphasize how important it is, right? And one example I mentioned earlier is the Portuguese chicken curry. You know, it's fantastic food, and it's innovative, and we'll continue that innovation. And then the second highlight is our double-digit growth in the off-premise dining, which including the delivery and takeaway. Because, you know, we all understand our concern towards dining business. Rightly so. So after a few years hard work, you can see the mix right now is a lot healthier. I mean, it's, you know, 40% plus of the total sales. So that also makes our overall business more resilient. Third, digital order. The digital capabilities are absolutely critical in any restaurant business right now. The ability to connect the online and offline operation is part of the efficiency, is part of the customer service experience. So let's take one example, the table size ordering. We move the mix of table size ordering. Q4 actually is 37%. So 37% of our orders on the tables are done digitally. And that's compared to 5% during 2019. And we only start this to work on this back to 2018. And you can imagine that both improved the customer service and, of course, the labor cost. So on top of that, the fourth thing, we also launched ready-to-cook steak and pasta to capture home consumption trend or demand. And that is partly, you know, as a result of the pandemic, such growth is the opportunity the growth opportunity has become even more visible and we captured that so as a result of all these 1234 and more efforts and initiatives we have seen the improvement of our money to value perception value for money perception and also overall customer perception towards the the food, the service level, the dining environment, therefore the fundamental and the momentum is promising. And as I mentioned earlier, sales first, profit later. So now the sales is in a good, decent place and we start to see the improvement in profit and we want a bit of both going forward. Thank you, Michelle. Thank you, Joy.
spk07: Our next question comes from the line of Anne Ling from Jefferies. Please ask your question.
spk01: Hi, thank you very much. I have a question regarding CapEx and also our investment. In the past, we have around 400 to 500 million CapEx and depreciation roughly similar as well. So with the step up in terms of depreciation, more store opening and also a step up in the capex of $600 million, does it mean that we will have a disproportionate increase in terms of a depreciation from year 2021 onwards, i.e. EBITDA growth will be higher than that of the EBIT growth? And then our $2 billion, $1 billion each investment in digitization and also in the logistics, does that include this $600 million capex plan? And how does it roll out, like, you know, for each year, you know, how much will we spend on this part, and how will it impact our P&L? Thank you.
spk00: Thanks, Anne. So capital expanding, I think, you know, if you look at our historical capital expanding, it has been, you know, very efficient and very stretched, actually. If you look at, you know, over the past five years or three, five years, Our capital spending was roughly, you know, $450 million, plus or minus, you know, some. You know, and then we have been opening the store more and more. So if you look back, you know, a few years ago, we were opening maybe like 500, 600 stores a year, and now we're opening more than 1,100 stores in 2020. So we were able to do more with less, and the team have been very frugal in how they spend the money, looking into savings in, you know, store development, and infrastructure. Now, what we want to do with this, you know, capital allocation plan is really, you know, sort of like, you know, reframe this plan to focus more on growth, driving more efficiency, and think about this longer term. So we will still have a very disciplined store investment strategy, as we have mentioned earlier, for new store openings. But we will definitely look into ways to accelerate, you know, our market penetration, both in terms of loyalty cities. We have tracking 700 cities that we have not present yet for KFC and, you know, a thousand more, you know, for Pizza Hut. So there's a lot right there ahead of us. And then, you know, for cities that have already, you know, a restaurant, we're likely going to try to increase density. Especially, you know, we will invest more in store that tailored to our delivery and takeaway. So definitely, you know, the majority of our cap expanding is going to be, you know, in store expansion, accelerated store expansion for our core brands, KFC and Pizza Hut. Now, if we look a little bit longer, and we also try to, you know, grow our emerging brands, especially coffee. Like I mentioned in the prepared remarks, we want to grow that into scale and also become a material part of our business. So we're going to invest more. And so for investment in new emerging business in the near term, you're likely going to see an impact on some of the costs and expenses because obviously ramping up a new brand requires some investment. The other one I think for CapExpanding, as you mentioned, is digital. A billion dollars in digital is going to be a very large investment over the next few years. But this is a very important transformation for the restaurant industry. For us, our company has been undergoing that for a number of years, but we're going to accelerate that in a much bigger way. And you will see more technology being deployed throughout our operations. You will also see more automations deployed in our restaurant, in our supply chain. You will also see more intelligent data analysis that would help us in marketing, supply chain, and overall operations in the back office. So all this, you know, so you think about this, right? Like, you know, if you think about 30 years ago, CapEx is probably all invested in store opening. But today, you know, investment in digital, the digital capabilities, having the right robust infrastructure to support a very large network of a store will require significant increase in investment. So we're basically training, you know, capital for labor. So you think about, you know, our store operations, you know, we have able to run more stores over the past few years, you know, with a relatively stable workforce, somewhere between 400 to 500,000 employees. And all that is possible because of the investment and infrastructure that we have built. So as I mentioned, you know, Store expansion is important. There's always depreciation. Investment in digital, the infrastructure is equally important to the success of our future. So, yeah, so in the near term, you know, as we ramp up, as we mentioned, over the next few years, we're going to ramp up doubling our cap expanding. That would have the impact on depreciation. But I think in the long run, you would see, you know, gains from other areas, productivity, quicker sales, and the long run would be a fantastic return for our investors. So hopefully that addresses your question, Anne.
spk05: I just have one little point to add for Anne. If we look at these savings in terms of efficiency from automation and technology investment, just think about it. 2015, we have roughly about 7,000 plus stores. 2020, we have 10,000 stores. our number of employees actually still stay at the number of 400,000 plus. So that gives you a sense of the achievement in the last five years, and hopefully that gives you a sense about what kind of potential achievement we would like to achieve with the further investment in digital delivery and the supply chain infrastructure because, you know, before opening the stores, we need to get the infrastructure in place in order to enable the acceleration of store expansion. Otherwise, if the infrastructure is just catching up to the store expansion, then we are dragging our feet to, well, if I could describe it that way, if that makes sense. Thank you, Ann.
spk00: Right, and also I want to give you one more anecdotal evidence of how important digital and infrastructure investment is and how that helps us, you know, to actually be more productive and keep costs down. You think about our membership program. We developed that and invested in that over the past couple years. Our whole digital, you know, CRM program will help us to keep, you know, our AMP lower, right? compared to our revenue growth. And that's all possible because we have the ability to reach our customers and effectively utilize the technology. So you may see cost increasing a part of the P&L, but hopefully in the long run you'll see also improvement on the other side. And again, as mentioned, if you think about China today, over the long term you'll see more labor shortage as the population ages. So it's very important for us to stay one step ahead of the game. and anticipate that and invest in productivity and technology and infrastructure.
spk01: Got it. Thank you.
spk07: Our next question comes from the line of Chen Lu from Bank of America. Please ask your question.
spk08: Thank you, Joey and Andy. So I would apologize if my question has been addressed by previous speakers as my line was disconnected during the middle of the call. So I'm more interested on the foot and paper call side. So we understand that the decision card is coming down pretty dramatically these days. Meanwhile, we are also stepping up our value initiatives. During our recent channel checks, we also noticed that Actually, we possibly have actually raised price a little bit for KFC at the beginning of the year. So, we guess this should be more than enough to offset the cost associated with our eco-friendly initiatives. So, given all these kind of moving pieces, is it fair to say that food and paper costs is not going to be a major concern for 2021? Thank you.
spk00: Thank you, Cheng Lo. And I think That's right. So if you think about the cost of poultry, it came down over the last few months, and we have locked up the contract a month ahead of time. So I think in the near term, that would be a tailwind for us in the cost of sales. However, as you correctly mentioned, and we have mentioned, we see quite a bit of headwind for the first quarter, lower traffic in terms of transportation hubs. And that's going to lower traffic in the transportation hub for the CMY sectors. And then we also see other headwinds in terms of less social gathering, a smaller size group, less social activities. So we do see some headwinds for our first quarter sales. And so at this stage of the recovery, it's very important for us to continue to focus on value proposition to consumers. And so you should expect we were stepping up the campaign, as you have seen in the earlier part of the first quarter. And traditionally, we don't do as much value campaign for Chinese New Year, but this year you probably will see a little bit more. Now, on the other hand, I think the sustainable initiative this year, as I mentioned, would likely cost us about $30 million for the full year in packaging by replacing you know, a plastic with other eco-friendly materials for packaging. I think, you know, it would be an ongoing initiative to ESG. And so in the future, you probably will see additional initiatives as well. So it's not a one-off event for us to come up with an ESG initiative. But all in all, I think, you know, for the overall SIL ads, in the entire commodity prices that would probably elicit ease in the shop.
spk05: Louis, I would like to just add the philosophical comment on food costs. Our Young China employees all know that we believe in saving all the costs we could save, particularly the G&A, hotel, meal, whatever, but we don't save on the food costs for customers. It's our sincerity and our belief that we shall serve the best food we could to the customers. If we do get some savings from the commodity cost, we actually will reinvest that saving, big part of the saving, to treat our customers better as well. And we believe that is the right thing to do in the short term and in the long term. Thank you.
spk08: Thank you, Julie and Andy. So just a very quick follow-up, if I may. I understand that we see a lot of headwinds coming to Q1. But meanwhile, we also need to bear in mind that with a very weak February and March last year, of course, the government is taking some measures at the moment. But last year, we were talking about nationwide lockdown with almost everything being shut down for about two months. So I do believe that heading into February and March, things or counts will be looking much better. So, it's fair to say that we actually could see a year-on-year recovery in Q1, but maybe it could be a bit difficult for us to return to the level that we saw in Q1 of 2019. Would that be a fair comment? Thank you.
spk00: Chen, let me address this question. I really appreciate the challenge to model the first quarter. And internally, we also see a lot of moving parts. And one thing I want to emphasize is that definitely this year, the number of infected cases, a lot of limited, about 1,000-plus. However, it does not mean that the preventive measure would be in fact the opposite, because the learning from last year government authorities are more cautious and consumers are more cautious and taking a lot more preventive measures. So, as we have mentioned, if you look at the CNY Chinese New Year period for travel, the government has put out, you know, advisory against, you know, travel and encouraged folks to stay put in the cities to celebrate Chinese New Year. And we have seen, you know, railroad traffic and of course, you know, air traffic as well down more than 70% in just the first few days of very important Chinese New Year period. Now, Chinese New Year period have been historically very important to our business, especially for KFC, you know, which, you know, have, you know, high single digits of the sales, and especially in Chinese New Year period, you know, double digits in terms of their sales are coming from, you know, the transportation hub and tourist locations. That would be disproportionately impacted. Now, if you also look at the trading situation, it would be more complex. Historically, once folks go home, they celebrate, they go out with their families, so you generally see a boost in sales at low tier cities. Now, given that people are staying in the cities, that would be a little bit different situation. So again, this would probably have a bigger impact on KFC because you have present in more lower-tier cities. And so that's one complexity there. Now the other complexity that goes on there is that if you think about last year, we go into the first few weeks in January last year, we first saw momentum. And then a lockdown only happened in late January. We don't have that benefit this year. So that's one another thing. Third thing is that, you know, if you go to KFC, you have recovered very strongly, you know, in March and later part of, you know, 2020. The reason is because, you know, we were able to keep a lot of our stores open. We were able to ensure safety of our employees and customers. We see tremendous, you know, boost in our delivery business, you know, and then, you know, even though quite a few stores were closed at that time, we were able to enlarge those trade zones to serve those customers. Now, with most of our stores open, a fair few stores closed, less than 1% of stores closed because of the impact today, the delivery trade zones have been withdrawn, so therefore things of the present will be also more challenging. So, all in all, I think, That's why we want to highlight that both in our prepared remarks and also in our early leads so that we can give a fuller picture to folks outside of China, in Hong Kong, in the U.S., and Europe, so that they can understand even though the pandemic, the infected cases may be less, but the preventive measures, stricter preventive measures, and the impact on consumer behaviors and not less. And then, you know, with the Chinese New Year complexity, more challenging for people to model. But we try to give you a sense, you know, that there's quite a lot happening in the first quarter.
spk05: The TC and TA of last year Q1 summarize what Andy just described. Because although the single sales for Q1 last year was minus 11, which is, you know, a pretty decent number given the pandemic due to all the things that Andy just described. The TC was down 30%. However, with everything that we did, including when people are going back to work because our stores were, many of our stores are still open, we benefit a lot from it, and also we focused on the high ticket item of delivery. The TA increased by 27%. So TC was down 30%. TA was up 27%. And that supports the same cell for last year Q1. And you could imagine for this year, such benefit of the ticket increase will be very difficult to lap. Thank you.
spk08: Thank you, Julian. And actually, I took a train from Shanghai to Hangzhou last week, so I can understand how empty railway stations are at the moment and all the changes that you are facing. And we really appreciate all the hard effort that you are making to sustain the business. Good luck. Thank you.
spk00: Thank you. Thank you. We try to be straightforward and present the full picture here on the ground.
spk07: Our next question comes from the line of Lillian Lu from Morgan Stanley. Please ask your question.
spk03: Thanks, Joey and Andy. Most of my questions answered. I have a simple follow-up question because Joey at the beginning mentioned this year and going forward in the next couple of years, multi-format stores are going to be a focus. Just trying to understand the economics of the small format, i.e., the small-town format. On the unit sales basis, how much lower per unit sales versus our previous average? Because I understand if we look at the unit store sales pre-COVID-19 level, it's about $1.1 million per year per store. And just trying to get some picture of how lower it could be when we get more new stores in a smaller format. Thank you. Okay.
spk05: Thank you, Lillian. I just have two quick comments. One is we forever, Young China, at least while the business is going through such high growth, we are always struggling to balance the system sales with the same-store sales growth because it's absolutely the right thing to do to drive the system sales when we can't open that many stores, but it has certain pressure on the same-store sales growth as well. we have to continue to do the right thing by hopefully delivering both system sales and same-store sales growth. For the smaller store, the revenue is smaller, but we can open more stores while the profitability level is comparable to a big store. And that, I think, is very important. Therefore, net-net, the system sales is improving when we open more smaller stores. In the past, not only now, in the past, we actually already have multiple store formats, big store, smaller store, depending on the location. But just right now, when we are going into Tier 6 city and below, we are open even smaller store and with lower capacity. but the return will still be comparable.
spk00: Right. I just, you know, add a little bit to what Joey mentioned. Obviously, you know, with the slower format, we would likely see, you know, a smaller, you know, sales throughput, but we have a disciplined process, and, you know, and that helps us to be comfortable that, you know, the profitability will be comparable and the return for our investment will be comparable. Now, you know, I think there are a couple of reasons because of, like, the small store to expand the trade in the volatile cities, we are also developing smaller stores that are geared toward more delivery and takeaway, especially in the urban center area. I think, you know, it's important to note that, you know, for delivery and takeaway, there's a network effect, right? The closer, more dense your network is, that helps your customer service improvement, your delivery speed, And then also drive incremental sales because, you know, folks, you ask them to walk 2 kilometers, probably not going to do a takeaway, right? And then if you want delivery for, like, you know, 5 miles, 5 kilometers, they're probably not as good either. But when you can shrink that into 3 miles and you can shrink the, you know, walking distance to 500 meters, you know, a lot more folks would probably be, you know, happy to do that. So that is, you know, some of the things that we're doing, and we have been doing that for the last, you know, couple years, but obviously the COVID-19 pandemic have accentuated and accelerated that consumer behavior change, and so we're going to accelerate that, you know, that kind of development as well. So hopefully, you know, we have addressed your question.
spk03: Thanks a lot, Joey and Andy. Yes, thank you. Thanks, Leanne.
spk07: Our next question comes from the line of Sujie Lin from CICC. Please ask your question.
spk02: Thank you, management, for taking my questions, and congratulations on a strong result.
spk05: Sorry, Sujie. We have very hard time to hear you. Would you mind speak up a little bit, please?
spk02: Oh, sorry. Could you hear me now?
spk01: Better.
spk02: Okay. Okay. Sure. So thank you for taking my questions, and I have one question on margin. KFC's margin still recorded a year-over-year decline in Q3, but recorded significant YY increase in Q4. So I wondered that what's the reason behind this, and will this continue into next few quarters? Thank you.
spk00: Well, thank you, CJ. You know, in terms of margins, obviously, you know, as we have mentioned a little bit, you know, in the prepared remark, there are some of the factors, you know, in the fourth quarter that was, you know, not expected to recur. For example, you know, some of the government and rental relief, and then we're also looking at, you know, some of the timing shift in government incentives. that may not occur next year, and likely not occur next year, especially for the COVID-related rental leave and government leave. Now, the other second part of that is that, you know, our labor productivity improvement have been very strong, and we, however, you know, part of that is also due to some labor shortage, you know, part-time workers. So that, as we have mentioned before, it's going to be temporary, and when we increase our staffing level, that may also ease a little bit. But all in all, I think we have done, our team have done a tremendous job in controlling costs, and so some of those cost control will continue until next year. Now, and we have a little bit discussion about commodity prices. Commodity prices also eased a little bit, you know, in the fourth quarter. So that also helped, you know, our cost of sales despite, you know, we stepping up emotional activity. So that's another part of that. So I think, you know, some of the, I think what in short is that, you know, some of those cost savings, some of those, you know, margin improvement due to productivity improvement would carry forward next year. Some of them would likely be more temporary But all in all, I think, you know, this year in 2021, the focus will be to continue to drive that sales and traffic recovery. So we should expect, you know, stepping up in cost of sales in terms of promotional activities. We also should expect an increase in advertising spending, and again, because, you know, this two-year period lab impacted by COVID-19, our same-cell growth, you know, was not as strong as in the past couple years. But, you know, if you look at our cost of wage, the increase would come at it for two years. So that's why, you know, in our prepared remarks, we caution folks that, you know, that in 2021, margins overall compared to pre-COVID level will still remain subdued and, you know, One thing is that we still have some way to go before we see sales recover to the record level. So that's why, you know, despite some of the productivity improvements, some easing in commodity prices, we are still a little bit cautious on the market price.
spk02: Thank you. Thank you, Julian and Andy.
spk00: Thank you. Sure. Thank you very much.
spk07: Our next question comes from the line of Terrance Liu from CLSA. Please ask your question.
spk08: Okay, thank you management for taking my question. So I'm just curious about your statement on your coffee business. Because based on our standing previously, I think you have been talking about refining the business model and I think store format for your coffee business, especially as to the coffee enjoying. I think Emily just mentioned a couple of times that you will accelerate the expansion of your coffee business in a couple of years to scale up to meaningful skills. I'm wondering, does this mean that you are satisfied with the current business model or the store format, or you have already found a replicable model for your coffee and joy business going forward? Could you just elaborate more about your strategy as to your COVID business for the next three to five years, especially in terms of the store openings and any sales contribution. So anything you can share with us is highly appreciated. Thank you.
spk05: Thank you, Terrence. Let's talk about CNJ a little bit, and then we'll move on to Lavazza. CNJ, we so far have roughly about 50 stores, and we have been working on the business model and then refine it and build on it. The focus is on getting the fundamental right. For example, we build a day part, we build a delivery, we improve the store economics. To give you a sense, the quarter four of 2020, the delivery business is already 30% sales of the DNJ, which is much, much higher compared to the year before. the delta here is the availability of the system and also food and et cetera. And then for C&J, we are also building the B2B business. It has a three-year partnership with another company so that we supply coffee in the office, in sort of the office that's provided by our partner. And that partnership is about It's about opportunity for 100 sites, and we'll continue to explore that. So the potential avenue of growth is on store expansion opportunity, but also on the store economics. Because once we have 50 stores, we have certain scale, then we can really work on the economics. It's very hard to really have a true sense of economic when we have a few stores. Let's move on to Lavazza. Lavazza, we only have five stores right now in Shanghai. However, the improvement of economics, the speed of improvement is quite fast. As I mentioned earlier, we are actually quite happy with the result. I mean, the brand is very well received by the customers. And because of the technology and all the fundamentals we work on at CNJ, And that helped the delivery of Lavazza immediately as well. So our delivery business for Lavazza, even with five stores, already a quarter of the sales. And of course, we are also building the CRM, and we already start to improve the economics. And the Lavazza business for 2021, we do plan to accelerate the opening. quite fast in 2020. We shall go out of Shanghai for Lavazza this year as well. So I think without going into more and more detail, I'll pause here.
spk00: I will add a couple of things. I think as Joey mentioned, we see the fundamentals as CNJs improving. So if you look at a store open more than a year, I think they have returned to Passive SSG in late 2020 and then with you know better sales and better mix of products, you know We also see, you know more store viewing to break even so that that's having overall a passive trend there And for Lavata, you know, it's obviously a very new initiative but you know, I think what we can say is that the reaction from consumer and the initial sales number is were better than what we have initially forecast. So, you know, still early in the game for coffee for us, but we're very confident. And more importantly, I think, you know, we internally have decided coffee is a very important category for us in the longer term, and we'll invest what's needed to make it successful and material and an important part of our business. All right.
spk05: Thank you.
spk00: Okay.
spk08: Thanks, Andy, and Joy. Thank you.
spk07: I would now like to hand back the conference to today's speakers. Please continue.
spk04: Thank you for joining the call today. We look forward to speaking with you on the next earnings call. That concludes today's call, and have a great day. Thank you.
spk08: Thank you, everyone.
spk07: Ladies and gentlemen, this concludes today's conference call. Thank you for participating in the email disconnect.
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