Yum China Holdings, Inc. (YUMC) Q4 2023 Earnings Call Transcript

Yum China Holdings, Inc. (NYSE:YUMC) Q4 2023 Earnings Conference Call February 6, 2024 7:00 PM ET

Company Participants

Joey Wat – Chief Executive Officer

Andy Yeung – Chief Financial Officer

Michelle Shen – Director of Investor Relations

Conference Call Participants

Michelle Cheng – Goldman Sachs

Brian Bittner – Oppenheimer

Xiaopo Wei – Citi

Lina Yan – HSBC

Sijie Lin – CICC

Kevin Yin – J.P. Morgan

Chen Luo – Bank of America

Operator

Thank you for standing by, and welcome to the Yum China Fourth Quarter and Fiscal Year 2023 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to Ms. Michelle Shen, IR, Director. Please go ahead.

Michelle Shen

Thank you, Operator. Hello, everyone. Thank you for joining Yum China’s fourth quarter 2023 earnings conference call. On today’s call are our CEO, Ms. Joey Wat; and our CFO, Mr. Andy Yeung.

I’d like to remind everyone that our earnings call and investor materials contain forward-looking statements, which are subject to future events and uncertainties. Actual results may differ materially from these forward-looking statements. All forward-looking statements should be considered in conjunction with the cautionary statement in our earnings release and the risk factors included in our filings with the SEC.

This call also includes certain non-GAAP financial measures. You should carefully consider the comparable GAAP measures. Reconciliation of non-GAAP and GAAP measures is included in our earnings release. You can find the webcast of this call and a PowerPoint presentation on our IR website. Please note that during today’s call, all year-over-year growth results exclude the impact of foreign currency unless otherwise noted.

Now, I would like to turn the call over to Joey Wat, CEO of Yum China. Joey?

Joey Wat

Thank you. Hello, everyone, and thank you for joining us today. As Chinese New Year is coming Saturday, I want to wish everyone a happy and healthy Year of the Dragon.

I would like to kick off today’s call by expressing my sincere appreciation to all our employees. Their incredible effort help Yum China deliver exceptional growth in the fourth quarter and for the full year. 2023 was a pivotal time for our business. This transformation of our business fundamentals in the past few years has enabled us to seize opportunities emerging from China’s reopening and evolving market conditions.

In 2023, we hit record breaking revenue of $11 billion and grew system sales 21% year-over-year, outperforming the industry. Operating profits soared to $1.1 billion, an all-time high excluding special items. Core operating profits grew 79%. We opened a record 1,697 net new stores, expanding our total store count to 14,644 stores. KFC reached 10,296 stores, Pizza Hut reached 3,312 stores.

On today’s call, I would like to walk you through the tremendous growth opportunities we see and discuss our strategies to capture them in 2024 and beyond. For the past 36 years, we have been the market leader in China. During this time, [indiscernible] restaurant operators have [indiscernible]. Instead of being Huang Ji Huang, or the favor of the month, we want to be [indiscernible] or the flavor of the decade, or even next several decades.

In this developing market, where the restaurant industry is still growing double-digit, even during 2023 we see a long runway of growth for our brand. KFC still only serves 1/3 of the China population. Our next ambitious target is to extend our reach to half of the population by 2026. How? By being closer to our customer. That means adding store [indiscernible] in existing cities and entering new cities.

KFC currently operate across 2,000 cities in China, and is tracking an additional 1,000 cities. For Pizza Hut and our emerging brands, the whitespace is even larger. China is fast with significant regional and city tier [ph] differences. In lower tier cities, urbanization and long-term consumption upgrades are presenting attractive opportunities for us. With lower living costs, consumers in these cities have significant purchasing power for our products.

So as an example, premium beef burgers sell well in lower tier cities, just as in high tier cities. Over half of our new stores in recent years are in lower tier cities. These stores have performed well benefiting from lower labor costs and rent, and the ticket average is as good as in higher tier cities. For now, we are mainly serving middle class consumers in these markets.

As we expand, we see further opportunity in widening price points to broaden our addressable customer base. Our mission is to reach 20,000 stores by 2026. We will continue to protect our new store pay back at 2 years for KFC and 3 years for Pizza Hut. Over the past years, we have been improving our fundamental capabilities to reach this target. This is the key reason we can expand at an accelerated speed.

Some of these improvements include: first, flexible store format with lower upfront investment, open up more sites potential across at APS [ph]. Second, cost structure rebasing lower our rent ratio in 2023 to 8.7% of sales, the lowest level in the past 10 years. The majority of our leases are based on variable risks. Third, improved operating capabilities. AI enabled digital tools empower our capable restaurant managers to oversee multiple stores without compromising quality. This also solves the bottleneck of having enough good RGM as we expand rapidly.

Finally, strategic franchise partnerships allow us to gain access to locations that were beyond our reach before, such as highway service centers. In addition to a new store growth, our same-store sales grew 7% in 2023. It was fueled by a 12% increase in transactions indicating healthy growth. Our innovative menus, excellent value for money and effective online channels captured over 1.7 billion transactions last year.

Now, let’s talk about food innovation. In 2023, we rolled out more than 500 new or upgrade products. That means we offered something new every week. Some examples include KFC’s Beef Wrap with spicy blood and chicken taco with bull [indiscernible], and Pizza Hut [indiscernible] pizza. These may sound a bit exotic, but I can assure you they’re very popular in China.

Over the years, many of our most popular products have entered our 100 million club in U.S dollar sales and 2023 was no exception. Our Golden SPA chicken burger, (Huang jin SPA ji pai bao) launched in quarter four of 2022 joined our 100 million Club in 2023 with very little spent on marketing. It offers amazing value for money using chicken breast meat and is very popular with younger customers. Chicken breast meat is very high-quality protein, but the cost of breast meat is much cheaper in China than that meat.

Our juicy whole chicken, means [indiscernible] is another remarkable success story. We launched it in 2021 and by 2023, We sold over 50 million whole chicken. Whole chicken and beef burgers combined now contribute close to 6% of our sales, more than the original recipe chicken that we have been selling in the last 36 years.

K-COFFEE also grew rapidly in 2023, driven by product innovation and improving accessibility. 190 million cups were sold last year, a 35% increase year-over-year. Our coffee offers great value for money as low RMB9.9 per cup. Great value for money remains a key factor to drive traffic. In addition to the great food that I just mentioned, we have strategically enriched our menus with entry price point products to attract incremental customers. Our super in-house supply chain empowers us to innovate and offer fantastic value, while protecting margins.

At KFC, apart from our long lasting value platform, Crazy Thursday, (Feng kuang xing qi si), we identified entry price combos as huge underserved market segments. Last year, KFC expand the choices of its RMB20 combo including our recent Chinese burgers [indiscernible], which have been well received by customers. For pizza, the under RMB50 segment represent a significant portion of the market, but it’s underserved at Pizza Hut.

In November last year, we launched four entry priced pizza, including the delicious Texas barbecue chicken pizza. We will continue to add more cost cautious choices to our menu this year to capture incremental sales. We also see amazing potential to further grow delivery sales. We are adjusting our delivery pricing structure to be more aligned with market norms. This will help us capture incremental traffic, especially in the smaller ticket segment and from more price sensitive customers.

Our third traffic driver is the effective use of our own and third-party online channel. In 2023, our digital sales surpass $9.2 billion, of that about 1/3 came from our own Super APP, 1/3 from many programs, and 1/3 from aggregators. Our own Super APP sales grew rapidly last year, up 35%. We continue to actively recruit and engage members.

Our loyalty programs exceed 470 million members, [indiscernible] a record 65% of our sales. The purchase frequency of our [indiscernible], our most loyal customers, was more than 100x a year. Our collaborations with major eCommerce and social media platform extend our reach beyond physical stores. This allows us to attract new customers and promote new offers in a cost effective manner. We consistently lead the industry in terms of sales generated on this platform. A brand that deeply ingrained in China, well loved and trusted by consumers, we continued to deliver amazing growth despite operating in a challenging environment.

KFC’s pricing remains our key growth engine with a record operating profit of $1.2 billion in 2023. Pizza Hut is taking off adding 409 stores in 2023 alone, compared to just 41 stores in 2019. Their 2023 core operating profit tripled year-over-year. Lavazza is on the right track with sales support and notable improvements in store economics.

Taco Bell is making notable progress. Yet, there’s more work in store model refinement and manual localization to be done. Little sheep returned to profitability in 2023. Its innovative store model which caters to smaller party sizes has achieved initial success. We expect good momentum in opening stores, both in China and overseas.

Huang Ji Huang continues to be resilient, maintaining profitability every year since we acquired it in 2020. In 2023, Huang Ji Huang tripled profit and opened 14 net new stores. We will continue expanding our store footprint in China and overseas this year. [Indiscernible] into 2024, we are serving up a combination of exciting menu items, awesome choice and gains for Chinese New Year.

KFC’s newest innovation, the [indiscernible] fried egg in spicy sauce chicken burger [indiscernible] is absolutely delicious. Its comfort food for your soul. We are also offering our wildly popular Golden Bucket again this year. It has a very lucky and [indiscernible], which means get rich soon. And the first letter also stem for KFC. So right now it’s getting around, getting more popular to reach each other KFC in China.

Pizza Hut is launching a key new product, including Wagyu beef pizza [indiscernible] pizza at just RMB69, the abundant choices and value are amazing. Although consumers are more rational and price sensitive in the current economy, there is a strong desire to indulge, especially during holidays. Our enticing offers are designed to generate excitement and attract traffic. I eagerly anticipate this vibrant trading period.

With that, I will turn the call over to Andy. Andy.

Andy Yeung

Thank you, Joey, and Happy Chinese New Year everyone. Today I will discuss our fourth quarter and full year 2023 financial results followed by our outlook for 2024 as well as our capital allocation strategy. We deliver robust results in the fourth quarter and reached significant milestone for the full year. In response to current operating environment, we adopted our strategy and launched attractive campaigns. This allow us to drive incremental traffic and sales.

We maintained 21% of system sales growth in the quarter, same as the full year. Core operating profit in the fourth quarter quadrupled year-over-year and restaurant margin improved on a comparable basis. As you may have noticed, we have introduced core operating profit to enhance [indiscernible] of our results and provide additional transparency on how we evaluate the performance of our core operations. This metric excludes for exchange impact, special items and other items affecting compatibility. For further details, please refer to the reconciliation table in our earnings release, and presentation.

Let’s now look at our fourth quarter performance in more detail. System sales increased 21% year-over-year, led by 12% net new unit contribution, 4% same-store sales growth and lapping temporary closure from the pandemic in the prior year. By brand, KFC system sales increased 20% year-over-year. Same-store sales grew up 3% mainly came from 16% same-store traffic growth and 11% lower ticket average.

To put it into perspective, ticket average in the fourth quarter was RMB, the same as last quarter and higher than 2019. Overall ticket average remain stable in the past 5 years and our focus has been to grow our traffic. A strong rebound outside in sales, especially for [indiscernible] and successful expansion of our entry price offering contrary to lower ticket average.

Pizza Hut system sales increased 24% year-over-year. Same-store sales growth of 6% was driven by strong traffic growth of 15% and ticket average increase of 8%, [indiscernible] by design and consistent with our revitalization strategy since 2017. Our recent focus has been to expand pizza offering below RMB50 and smaller party size options. The strategy has proven effective in expanding our addressable market and capturing incremental traffic.

Our restaurant margin was 10.7%, 30 basis points higher than last year. On a comparable basis, our restaurant margin grew by 170 basis point. The improvement was mainly from sales leveraging, lower rider costs, more favorable commodity prices and lower advertising expenses. This more than offset increased marketing campaigns and wage inflation.

Now, let’s go through the key item. Cost of sales was 32.4%, 50 basis points higher year-over-year. During the quarter, commodity prices were favorable, [indiscernible] to consumer by offering better value for money. Cost of labor was 29.0%, flattish year-over-year, or improved 40 basis points on a comparable basis. Sales leveraging, lower rider costs and efficiency gains more than offset ratio increases for frontline staff.

Occupancy and other was 27.9%, improved 100 basis points year-over-year or up 180 basis points on a comparable basis. This came from lower rent and depreciation expenses as well as more efficient management of marketing and advertising expensive. G&A expenses increased 6% year-over-year, with highly managed costs and headcount to keep G&A both below revenue growth.

Operating profit was $110 million. Core operating profit quadrupled. Our effective tax rate was 24.2% in Q4 and 26.9% for the full year. Lower effective tax rate on a year-over-year basis was mainly due to more preferential tax benefits and higher pre-tax income. Diluted EPS was $0.23, excluding special items, foreign exchange and major investment, the increase was 164%.

Now let’s turn to our outlook. We remain excited about the vast growth opportunities in China. In 2024, we anticipated opening 1,500 to 1,700 net new store. After 36 years in China, it’s amazing that we’re still growing our store at double digits. [Indiscernible] new store pay back give us confidence to continue expansion and reach 20,000 store by 2026.

As we shared at our Investor Day last year, we aim to grow system sales and operating profit by high single-digit to double-digit compound annual growth rate, and EPS by double-digit compound annual growth rate from 2024 to 2026. We’ll continue to capture our new opportunities by innovating new products, launching engaging camping and widening price points. These help us to expand our addressable customer base and drive incremental sales.

We’re confident in executing our 3-year plan, cost structure rebasing continues to be a key focus. Our efficient cost management will enable us to pass the savings back to customers and drive traffic, while protecting margin.

Before I delve into the first quarter outlook, I would like to remind everyone that first quarter 2023 was a phenomenal quarter, during which we achieved record setting profit. We capture robust demand from the reopening, delivering solid sales. On the cost side, we benefited from substantial temporary relief in VAT deduction benefits, which is not expected to recur this year. We also benefited from labor productivity gains from labor shortage in the first quarter last year.

Looking ahead to the first quarter this year, as Joey mentioned, we’re now operating under a new normal. Consumers are more rational in spending, yet have great expectations and appetite for new and exciting products and that can offer great value for money. In response, we have statistically planned a very intensive number of new product launches and attractive promotion. We have also dedicated more resources to drive sales and capture the peak Chinese New Year traffic.

In light of these challenges, we will work hard on productivity improvement and cost control, including G&A expenses. Our aim is to maintain our core operating profit markedly stable on a comparable year-over-year basis in the first quarter. This will exclude temporary relief, VAT deduction benefits and changes in foreign exchange rates.

Now, let’s turn to capital allocation. There’s no better investment than investing in our own organic growth, while delivering excellent returns to our shareholders. With a strong focus on efficient capital return, CapEx in 2023 totaled $710 million at the low end of our original target. In 2024, CapEx is expected to be in the range of $700 million and $850 million.

Since the spinoff, we have returned $3 billion to shareholders, and we plan to return another $3 billion in the next 3 years. We accelerated return to shareholders in 2023, returning a record $833 million in cash dividends and share repurchases. In 2024, we plan to further accelerate return to shareholders to around $1.5 billion. We raised our dividends by 23% from $0.13 to $0.16 cents, that would be roughly $250 million for the full year.

As for share repurchases, we already have a $750 million program in place and plan to further increase repurchases by around $500 million. So, a total of $1.25 billion share repurchase in 2024. This is equivalent to around 9% of our market cap at the current share price. The setting up of returns demonstrate our confidence in our cash sharing capability and commitment to return accepted cash to our shareholders.

Let me pass it back to Joey for closing remarks. Joey?

Joey Wat

Thank you, Andy. Before we turn to Q&A, I would like to just summarize, in 2023, we reached record, top line and bottom line as well as net new store opening. And we returned record level of cash to our shareholders through dividends and buybacks. These achievements were made possible by the transformation we implemented in our fundamental capabilities ranging from flexible store format and put innovation at scale to support supply chain management and industry leading AI application.

We have showcased our expertise and agility to navigate diverse market conditions. And knowledging the high expectations our shareholders hold for us, we in turn, set equally high standards for ourselves. We are fully committed to a 3-year growth target and generating long-term sustainable value for our shareholders.

I would like to thank our shareholders for your continued support. With that, I will pass it back to Michelle.

Michelle Shen

Thank you, Joey. Now we will open the call for questions. In order to give more people the chance to ask questions, please limit your questions to one at a time. Operator, please start the Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Michelle Cheng with Goldman Sachs. Please go ahead.

Michelle Cheng

Hi, Joey, Andy. Congrats for a very resilient result and also the interesting shareholder return. While we understand the company’s strong long-term position, but my question still want to focus a bit on the short-term. So can you give us some colors regarding these pre-Chinese New Year traffic and same-store sales trend? And also I think Andy mentioned about in first quarter we are looking for more steady core operating profit. So can you kind of clarify [indiscernible] refer to like profit level or margin? Yes, so that’s my question. Thank you.

Andy Yeung

Thank you, Michelle. So let me address your question about clarification on our statement on new store operating profit. In the first quarter, we are looking at the overall level, not margin side. I think it’s important to keep in mind that in the first quarter last year was exceptional, phenomenal quarter that we achieved record profit, which was both by obviously the sales leverage from the initial reopening demand search, and then also some significant temporary relief VAT reduction and labor gains from labor shortage. So, those factors we don’t expect them to repeat again this year. And so I hope I answered that question and clarification.

Joey Wat

For the Chinese New Year — for the Chinese New Year trading Andy has mentioned in his presentation earlier, it’s very, very tough [indiscernible] lab because last Chinese New Year we have a phenomenal trading during the 2022 Chinese New Year. But we have prepared very full [ph] and exciting calendar for the Chinese New Year, not only the excitement of the marketing campaign, but product. And this is first time we launched five new burgers five weeks before going to the Chinese New Year. The excitement is there. So solid — so far has been trading — has been — the trading so far has been solid. But it’s still a bit earlier because we really need to anticipate until the first day of the Chinese New Year. And then right now, the weather to a certain standard, the extreme weather is a bit of a wildcard. So that’s where we are and the focus going into the Chinese New Year after the first day of Chinese New Year is about our Golden bucket. That was our total focus of all our operation team. But it’s very, very tough quarter. So we’ll be happy if we actually can stay flat with the same-store sales. That’s where we are right now.

Operator

Your next question comes from Brian Bittner with Oppenheimer. Please go ahead.

Brian Bittner

Hi, thank you. As it relates — I understand the first quarter is a very difficult comparison versus last year. But your goal is to keep the operating profits flat, as I heard it. So what type of sales trends or same-store sales do you need in order to keep those operating profits flat? And then Andy, once we get past this first quarter difficult comparison, how do you think about the way the year will build? How do you think about the second half of the year, and the opportunity to grow sales there versus say maybe the first half of the year, which seems to be a more challenging setup?

Andy Yeung

Thank you, Brian. Yes, so I guess there’s a lot of question about the first quarter outlook. Why so? But before — again, like dive into more details on the first quarter outlook, let me just point out a couple things, right. Overall, consistent with our 3-year plan, we are confident that we will maintain stable operating margins in the long run. As I mentioned, [indiscernible] here is a long one, because in the near-term, we are going to have certain factors that affect the near-term situation.

And then over the long-term, we will also look into potential opportunity, as we have been doing so to restructure our cost base, looking to improve our occupancy and other costs, and then also leverage our digital capability to better manage, better use of more effective advertising and also G&A expenses. Now, when we looked at — in 2023, restaurant margins and OP improved quite meaningfully. That’s driven by same-store sales growth, right, and as well as [indiscernible] instruction. So, for [indiscernible] offering a very high-level of margin, and then Pizza Hut has more room for improvement in the long-term.

Now, if we look at the quality fluctuation, no, that’s to be expected. As we mentioned, this is the first year, so normalizing operating costs reopening. And in the first quarter and every quarter will be driven by some seasonality and then also will be driven by, obviously, the sales trends and other factor because sales is always a very important factor in determining margin for us.

And, as you mentioned and mentioned last year, it was the holidays. We achieved again — like [indiscernible] model in the quarter with record setting operating profit. And so — and then there was also some one-off as we mentioned in the [indiscernible] $30 million of one-time that we see last year. So that’s set up a high base for us this year. Obviously, we work hard to manage our costs and drive sales. And in the first quarter, we [indiscernible] offering under a new normal, right, and as we have mentioned in our prepared remarks, consumers are more rational in terms of their spending, and eager for new and good value for money products.

And so, as soon as I just mentioned, we have set up a number of very intensive number of product launches in our calendar. And then we also will make sure that we have nothing resorted [ph] and campaigns to drive that sales and traffic, especially around Chinese New Year, okay? So, on — again like Chinese New Year right now it’s too early to give a very solid outlook, because this year Chinese New Year is a bit later, compared to last year. So, right now, as we look at — under our plan, under the new normal is on track. However, as we mentioned, there’s quite few uncertainty with Chinese New Year because millions, hundreds of millions of people are travelling in a very short period of time. And so the weather conditions, as we have observed recently, may or may not have an impact there.

So, we will continue to monitor the situation and [indiscernible], we always have been quickly to respond to any changes, if necessary. And so on the call side, as mentioned, obviously, we’re focused on productivity improvement, cost control, and then as the goal is really to maintain a stable core operating profit after adjusting for the noncurrent item and foreign exchanges. Thank you.

Operator

Your next question comes from Xiaopo Wei with Citi. Please go ahead.

Xiaopo Wei

Good morning. Thank you for taking my question. I just look at a little bit longer term in terms of the business. And the first thing is, if you look at the financials, in 2023, actually a very good controlled G&A. If we look at the G&A to sales ratio, actually going down. If we look at ’24, as Joey and Andy mentioned, there are some factors which you cannot control in short-term, like weather, like macro, so shall we be certain that the G&A to sales ratio will continue to go down in ’24? Because that we have more control, a management or our admin costs at headquarter level? That is the first question. The second question is, Andy and Joey mentioned that the consumers are more rational this year. So, could you comment on your competitors? Well, competitor will be more rational as well with more rational consumers. Thank you.

I will just quickly talk a little bit about our cost effort in conjunction with the G&A. So you can see that over the past few years, and last year, we have a lot of efforts to restructure our cost base. Our overall target for fuel ads have been trying to actually stable and we have kept it stable around 31% over the past few years, obviously, fuel ads move seasonally, somewhat. And we generally kept it around like 31% plus minus 1% for the full year.

And then the other one is labor costs, labor costs, obviously, over the past year because of the pandemic, we did see some impact on cost inflation and also delivery mix shift [indiscernible] labor costs, but we’re able to more than offset that to the reductions in occupancy and other costs. It was significant improvement compared to even [indiscernible] almost like 250 basis points. Our brand new ads record low right now as potential sales. And so, so that’s the long — longer term trend and our appreciation costs also come down because we have improved CapEx efficiency, and then also optimize our portfolio. So those are the longer term trend.

In terms of the margin lever for us is marketing and advertising because we have invested a lot in digital. And we — member base right now is very large 400 something million member, cover almost 65% of our sales already. So we think we’d be able to work on that in the future. In terms of G&A, G&A expense as percent of sales has improved this year to 5.8%. We continue to aim to continue to sustain that trend by ensuring that G&A growth remain significantly lower than sales. Through that obviously we will continue to improve a bit like our efficiencies in in-house, new technologies and other automation tools to help automate some of those administrative tasks. Thank you.

Joey Wat

Xiaopo, I think, I’m going to address your question by taking a step back by looking at the trends, the industry trends, the competitive trends, the consumer trends, and then our own observation of our trading trends. And that hopefully will give you a holistic sense of our long-term view.

First, industry. As widely reported everywhere the Chinese economy is growing at mid single-digit. But it’s rarely reported 2023, our industry actually grew at double-digit — actually 20%. So the recovery of the restaurant industry was very vibrant for 2023 and we are doing slightly better than the industry average. However, for 2023, it was not easy to [indiscernible] many sectors, including the growth or the recovery. One reason is sometimes the headlines could be misunderstood. I’ll give you an example. for quarter three,

Yum China’s performance, the headline was reported we grow sales revenue by 9%, least expectation by 5.7%. In reality, that is due to the foreign exchange difference in our operating currency, which is the renminbi in China, ourselves both was 15%. But the reporting currency is the U.S dollar. So it’s reported as 9%. So if we aggregate the foreign exchange from the operating currency, we see the difference. But fundamentally, our industry is growing very nicely. And then of course, quarter two actual recovery, in terms of the system sales was as much as 32%. So net-net, the industry recover by 20% for 20 23. And that explain why other than Yum China, there’s so many competitors have been so aggressive to open those doors, because opportunities are there. Is that competitive? Yes, absolutely. But fortunately, let’s not forget, it has always been competitive in the last 36 years as well. And we have always been able to stay as a market leader in the last 30 Some years as well as. That’s point one.

Point.2 consumption trends. What I’m going to share is not the mainstream thinking, so we can agree to disagree. The mainstream thinking is China is going through consumption [indiscernible] with many challenges. [Indiscernible] true, but to a certain extent, customers are just getting more rational. However, what is not being mentioned at all, is even with 5% GDP growth, or mid single-digit GDP growth, consumption upgrade is still also happening.

Urbanization in China is still happening. And we don’t even need to look at the restaurant industry. We can look at China’s top 6,000 shopping malls which we trap because we open a lot of stores in those shopping malls. Within this segment of top 6,000 shopping mall, 2023 alone there were 400 new shopping more often, not a small number and two thirds of them open during the second half of the year quarter three and quarter four.

We are happy to report to our shareholders that these shopping mall location stores are better at trading better than the rest well, apart from the tourist and transportation location. So when a shopping mall open near the highest rate or close the highest rate, you can imagine the traffic moves to something more and that itself is consumption upwards. So come back to the rationalization of the customer. How do we respond to it? We are the market leader. We — our focus, our focus in the last 30 some years and our ongoing focus is how to build a brand with a combination of good value, amazing product and opening up the price point.

As a combination of all these, good food is always number one and you can see why we continue to roll out so many good food but at the same time, we are very cautious about the price point. There’s a reason why original recipe chicken after 36 years the price is less than five eggs of the price we launched 36 years ago only if the China housing price increased by the same ratio of original recipe then I think many Chinese people are even happier.

So we do arrange of the product launch. We launched regular [ph] beef burger that priced as much as RMB50.But at the same time, we also introduced the market, the entry price value combo at 20 [ph]. This is the range we’re going for, it’s working. Point three, come through the trading type pattern what have we seen during quarter four and that will give us some idea about the 2024 going forward. We celebrate 10,000 store of KFC during December 15 this year. It was very meaningful for us and it also I hope give some confidence to our investor that Western QSR is solid and has nice growth.

Quarter four start with a bit of soft — softness. We don’t have to reiterate again, but the trade improved in November and then improved a bit more in December. Good to know the trend is all right. And then the rebound on [indiscernible] is very strong. However, the [indiscernible] remains popular. It’s still 36% of our business. Customer like the [indiscernible].

By trade zone or improve. As I mentioned earlier, tourist location and transportation are recovering very well, other than that shopping mall are doing the best and the others. By region recovery happen across all region for Puerto Rico. And we’re northern part of China recovery to recover the best because last year COVID lapping they were very difficult last year. Across the year, Eastern part of China, which is the most important part of our business is still the most resilient region. In City Tier, Tier 2 [indiscernible] central part of China are recovering the best or doing the best. They are the regional hub, vibrant economy, the [indiscernible].

One good example is, Guangzhou [ph] is the destination for foodie in China. A lot of amazing food concept there. People go to Guangzhou just to enjoy the [indiscernible] food, but little do people know Guangzhou’s rent is only about 10% to 15% of Shanghai and yet ticket average is not too different. And these are the example of the cities doing the best and going forward. And Pizza Hut are doing very well in lower tier cities and that prove that the pizza business model works for lower tier city.

Last, but not least, our weekend trading right now is better than weekdays. This is phenomenal for our team because if you remember in a previous earning call our — we can travel it was more challenge after the pandemic. People’s behavior changed. The traffic during weekend throb, what do we do? We launched the whole chicken and the product — the whole chicken product target very, very — has a very clear focus to drive the delivery business during the weekend, customer can buy the whole chicken, put it on the table, have the veg and some rice and this is a very nice meal. It works. So now our weekend sales actually is better than weekdays. Huge milestone for us, for our team’s ability to build new product, new skill to grow with a change of customer. Thank you for indulging me it’s a long answer. But I hope that gives you give you some sort of long-term view of the way that we trade our business. Thank you, Xiaopo.

Operator

Your next question comes from Lina Yan with HSBC. Please go ahead.

Lina Yan

Hi, management. Thanks for the very detailed walkthrough of your business. And your points are well taken that you’re very nimble in reacting to competition. But when I talk to my clients, what I heard most over the last quarter was the market the fair, as you probably think your price point is, especially by launching more entry price offerings. In my drop down your ticket size, obviously and issue some numbers, your ticket size, certain night was very, like a stable quarter-over-quarter, while why in fourth quarter. But I’m wondering if you could give us more color in terms of how those entry price offering products affecting your sales mix. And what’s the impact on ASP and the number of transaction tickets, so that you can maintain a relatively stable type [indiscernible] ticket size. And on top of that, what will be the impact of enterprise [ph] price offering on your GP margin? Thank you.

Joey Wat

Thank you. Let me reiterate, we have been able to protect our ticket and ticket size and even grow a little bit over the years. So 2019 pre-pandemic, the ticket average 37, 2019 — 2020 is 40 and then 39, 42 and then 41 for 2023. So this is the long-term trend. We even go back even another 5 years, it’s not too far away. So this is always our trading strategy to keep the ticket average relatively stable. To go to specific, the introduction of the entry price product always comes with the new product, it’s a new product and also comes with the introduction of the high priced product. I mentioned that the beef burger, the beef burger grow by 18% last year, by the way to the category. So 50% [indiscernible] beef burger and RMB50 were good beef burger and RMB20 combo is a good balance. What also help is when we do promotion like even for Chinese New Year, we always try to help customer to trade up to a higher ticket average by having very attractive discount. So it’s a combination of the marketing campaign that we have been doing to protect the ticket average.

But specifically for the entry price product, it has three purpose and we are happy to see all three purposes there. One is it does attract incremental customer as we become more and more mass market, particularly for Pizza Hut. By the way pizza’s ticket average move from 122 right now 90 over the last 5 years as part of the turnaround strategy. Obviously what — because we want to open more store, become more mass market, we need to have product and price point that cater for the incremental customer. So it we’re into what percentage is about 5% right now is not like huge proportion that will offset the balance of our margin. That’s point one. Point two is interestingly when we have the enterprise product, it doesn’t mean most of the customer will go there, not necessarily. The thing about customer psyche, many customer will still go for the product above the entry price product and feel good. It feels good to choose something in the middle not the cheapest one, right? You are the customer yourself, ask yourself how would you choose? So it really actually improve the price perception

By having something very low cost there, I’ll give you a one example I did 10 years ago with [indiscernible]. I lower the small, Pepsi coke price in our menu, lower there because it looks good, it looks very affordable. But how many people actually went for it? Not that many. But the perception is important. It’s almost as important as the reality to a certain extent. So I hope that gave a sense about how do we treat the entry price product, but certainly it helps when we go down to tier five, tier six city to introduce — to introduce our product to certain customers. By the way, it’s a fantastic way to recruit young customers such as student as well, particular with amazing product like the Golden SPA, chicken burger, its breast meat. Breast meat in the U.S., you can sell at a higher price than duck meat, but in China, it costs us less. So the margin, of course, we protect the margin, the margin is just fine. Thank you.

Operator

The next question comes from Sijie Lin with CI CC. Please go ahead.

Sijie Lin

Thank you, Joey and Andy. So we have talked about a lot about the competition. I want to ask one question about Pizza Hut. Do we see that Pizza Hut had a quite good performance on margin in Q4, driven partially by the labor productivity gain and lower right of cost. And we also mentioned before that pizza has margins still lower than KFC and there’s room for improvement. So, what else we can do to further reduce costs and improve efficiency, thank you.

Andy Yeung

Thank you, Sijie. So again, we — when we look at our costs and focus, as we have said many times including whatever you have earlier mentioned, we generally try to aim for record sales, to be remarkably stable over the long-term on a year-over-year basis. And that’s because we have a very excellent supply chain team, very disciplined with our pricing. And this also comes from our commitment to continuously innovate and also introduce new products every year. And then also, as we have mentioned many times, we make the best effort to using every part of a chicken or a cow, so that we can enhance the resource usage, minimize costs, and all these [indiscernible] have allowed us to provide great value for money for our consumer, while keeping our costs of self market disabled.

There will be some new quality seasonalities and punctuation [ph] there, but if you look at our track record, we have been able to keep it around like 31% plus and minus 1% over the past few years, including last year, which is [indiscernible] 31%. Now, when we look at the overall costs, labor costs, obviously right now, soft capital economy, so, you will be probably more modest in terms of inflation increase. But more importantly, over the year, we have utilized digital and automation too in the technology, like AI assisted scheduling or inventory that we have mentioned before to enhance labor productivity and manage costs.

We are also with the RGM initiative basically, we try to streamline administrative tasks and then like equipment or training et cetera to a more central hypothesis as well as centralized food processing to further improve restaurant labor efficiency. And so, obviously [indiscernible] but in the long-term, we aim to keep labor costs roughly stable in the long run. Again the emphasis here is on the runway, because in the short-term is going to be while we can buy sales leverage, Now, occupancy and others, this goal same for KFC and same for Pizza Hut. It’s the area where we will have opportunity and compared to pre-pandemic, as I mentioned earlier, we improved by almost 250 basis points

Now, when our sales ratio is one, we have good long-term contracts. And then we also have optimized our stock portfolio. As we expand into lower tier cities, they genuinely also come with lower rent, as mentioned — as we mentioned, the brand in [indiscernible] lot lower than the [indiscernible] for example. And then we also have more flexible format, that are targeting, delivery and takeaway that are smaller and also more cost efficient in terms of rent to sales ratio.

Now depreciating cost is another one. We continue to work on, as you can see, every year, our CapEx per stall has improved compared to few years ago, it’s more like 2.5 million U.S — sorry, RMB [indiscernible] around like RMB1.5 million and RMB1.9 million [indiscernible] stall. So our depreciating cost also improved and marketing leverage [indiscernible]. So I think for Pizza Hut, obviously, labor, potentially the improvement opportunity there, O&O definitely. As I mentioned before, KFC is already running every [indiscernible] offering level. So the room for improvement potentially will be in the O&O side.

Joey Wat

Let me give like a — give an overview and take a step back again. We’ve been very consistent with the Pizza Hut strategy since 2017 when we embarked on the pizza turnaround. Its sales first, profit later and then resiliency comes after that. Sales is and obviously you remember, we work on a product, we work on a marketing campaign, we work on the business model, we work on unit economics of each of the stores. Once we turn around the same-store sales within 18 months after we make that promise, then we really turn the focus to profit because sometimes you have to do the trade off, particularly at the very beginning of the turnaround or building a brand. The trade off is always sales first, profit later. So later on, we work on the cost line or the details Andy just go — went through with you a minute earlier and we’ll continue to do that and we want a bit more profit bit by bit on every element.

What is after? Its resilience, it’s more profit. We are going to open more stores, obviously, across all city tier to improve — to utilize the scale of our business, to get better rent, to get better cost of sales, et cetera, et cetera. And then next is resiliency. We want to build a very resilient business even more resilient than now as resilient as KFC. Well, it’s a very challenging goal, but unfortunately, when you have two brothers, and of course, two brothers compete with each other, it’s just normal. So for example, one challenge we give it to ourselves, which we got it already 2023 is we want each quarter to be profitable, because Pizza Hut is quite a seasonal business even more seasonal than KFC. So you can see that for the full 2023 we remain profitable, it’s very important because I just don’t like business and make a lot even though that’s big and small quarter. And then we’ll continue to improve their seasonality and we’ll even continue to improve the resource allocation during the peak hour and slow hour of the day. And that’s how we improve the resilience of the business not only for the shareholder, but for our employees as well. Thank you

Operator

Your next question comes from Kevin Yin with J.P. Morgan. Please go ahead.

Kevin Yin

Thank you. Thank you Joey and Andy. My question is on the ASP, okay. So good to see the ticket size went up from 39 to 42 which is very good, but we’d like to better understand if the fourth quarter ’23 give it a bit of different versus before. So for example, like-for-like basis, KFC average ticket size down what percentage and traffic coming by what percentage of points. So just try to quantify, in the fourth quarter ASP down and traffic [indiscernible], okay. Secondly, also like to know your thoughts for 2024, your conviction level to maintain flattish same-store sales growth in 2024. And if we considering the contribution from the G&A cost cutting et cetera, what’s the minimum same-store sales growth level for you to maintain the restaurant margin in 2024? Thank you very much.

Andy Yeung

Okay, Kevin. Thank you for the question. So a little bit [indiscernible]. So for KFC, we have same-store sales growth of about 2% and transactions, the TC can increase by 16%. And then the average ticket size was down to 11%. For Pizza Hut, the same store sales growth was about 6% and then the traffic growth was 15%. And then the average ticket change was about 8%. So — but as I mentioned before, the TA trend, the average ticket trend is pretty consistent with our overall strategy and [indiscernible] our market reach. And, as Joey, you mentioned, the strategy is to expand our [indiscernible] point, especially in the small city, expanding our pricing point, and then offer consumer more product options to drive incremental traffic and sales. So, there’s significant growth that we have observed, both in transaction and overall system sales — well, remind everyone for both KFC and Pizza Hut system sales grew more than 20%. And on both — in the fourth quarter, but also for the full year. So obviously if you look at the sales number, our strategy is working effectively.

Now, when we look at the ticket average changes on a year-over-year basis is worth noting that 2023, obviously, was the first year of the opening. So this is a important context to keep in mind when we look at the TA movements. And as we have mentioned before, KFC, we’re seeing very robust ticket average in the fourth quarter, RMB39, which is consistent with the third quarter and about what we have seen in the pre-pandemic. In fact, ticket average, as we have mentioned earlier, have been pretty consistent and over the past 5 years. Obviously, with the recovery in a [indiscernible] strong this year, coupled with [indiscernible] performance in our breakfast and coffee sales has contributed to the year-over-year movement of the average ticket size for KFC. It’s also consistent with our cost to expand the pricing range, and are part of options that, again, effectively draw very robust [indiscernible].

Joey Wat

Let me just add a little bit here about the quarter for ticket average and then anti trend to wrap up this question. Kevin, the ticket average for quarter four is not that unusual. As Andy just point out, 2022 is the unusual year because it was still lockdown, its 42, that’s very hard. If we go back to 2021, quarter four is 38. Like this, the 2023, quarter four, is 39. But 2021 quarter four is 38. 2020, quarter four is 38, 2019, which is one of our best year, the ticket average for quarter four is 37. So it’s not that different. I mean, the over feeling is the market is getting more promotional etcetera, etcetera. But as I went through in great detail that we’re the market leader, and when we do we’ll try to [indiscernible] that which is not new to us, by the way. We always have a combination of good promotion, but good product, good, mechanism to protect the TA et cetera, et cetera. Therefore, we are able to maintain the TA even during the quarter four across multiple years. Thank you.

Andy Yeung

Right. Thank you, Joel. Again, like your starting point to keep that context in mind, because, as you know, remember as it seems like a long time ago, but it was only fourth quarter 2023 — 2022 that we have this reopening a big surge in infection. At that time it will be also experience some labor shortage because of the infection, right. So — and then the ticket I think the delivery makes at that time was 45%, which is very high. And so those are the contacts with that. And then turning to Pizza Hut, right, if you look at Pizza Hut is a very consistent strategy for us. Since 2027, with the turnaround strategy, which is to — as Joel mentioned earlier, dry customer traffic first, then sales, and then finally, enhancing profitability. So we have successfully mapped those three goals, if you look at [indiscernible]. This approach is very much in line with our latest strategy, which is aimed to reach underserved customer segments by expanding our price range, especially for pizza that is less than RMB50 per category. And we also want to offer more options, for consumer that are suitable for smaller size or individual type. So thank you. Thank you, Kevin.

Operator

Your next question comes from Chen Luo with Bank of America. Please go ahead.

Chen Luo

Thank you, Joey and Andy. Sorry, actually my line got distracted — disconnected just now, although actually [indiscernible] call at 6:30 am in the morning. So forgive me if I ask some questions about how what were they being asked previously. So basically, it’s actually on margins. So I noticed that our restaurant margins for 2023 actually has already recovered to a level even slightly higher than 2019, so making it the third highest margin since our spin off. But compared with 5 years ago, our margin structure has significantly changed. So our labor costs as potential revenue has risen significantly, but our occupancy and others have reduced significantly.

So going forward, do you think that there’s room for us to maintain a largely stable labor to sales ratio, especially given that recently our channel checks such as we have taken a lot of measures to control the rider costs, such as the introduction of [indiscernible] as our future vendors as well as our continual rollout of the RGM, macro program. So do you think there’s room for us to see a large [indiscernible] labor costs as opposed to the rising labor costs trend in the past few years. And meanwhile I noticed that our food and paper cost as [indiscernible] revenue has risen by 50 bps, 80 bps for KFC and 50 bps for the whole group, giving them very promotional environment? Do we think it’s going to be a new normal for the entire year of ’24.

And lastly, just now, I heard about guidance for [indiscernible] for the full year, excluding FX and one-off items. But then if you look at reported level, I remember, last year, we booked a one-off gain of 27 million in now OP that may actually lead to a missing or digit impact. And then, given the FX is another 5% impact. So is it fair to say that on the reporting level, actually, the OP may possibly decline by around 10%-ish? Of course, I think this is — this should be the worst case. But hopefully, if everything is going in the right direction, the actual decline could be better than that. So these are all my questions. Thank you.

Joey Wat

Thank you, Chen Luo. Let me actually answer one question that the Kevin and another and Brian early and now come to your question is about the same-store sales growth. Let me just point out that 60% of our store in our portfolio right now portfolio right now are built after 2019. So there’s a reason why we really, will continue to drive the same-store sales, but the system sales growth is incredibly important for business. And then come to the cost side, O&O. The labor costs — let’s talk about O&O, first. We have been operating with the guiding principle that we always are sincere about getting the best food to a customer has all the saving, past a lot of savings to our customer. So if you look at our cost of sales over the last few years, it has been very stable. Very, very stable, through better time, or more challenging time. So if I start with 2019, pre-pandemic, or even, well, 2019 pre-pandemic throughout the time.

2019, 31.3%, 2020 31.7%, 2021 31.4%, 2022 31.1%, 2023 31%. It’s really less than 1% swing around the 31%. It’s always [indiscernible] because whenever we have saving, we pass the savings to the customer through food, or you can be assured that we’ll continue to stay around 31%, about the cost of sales, because if my team goes in this country below that number, they will have a very hard time for myself. And they all know that.

Second is cost of labor. Cost of labor even in a year, like this year, yes, it has increased because there are a lot of sort of the insurance and et cetera, et cetera. All these costs are going up. And labor costs is always sort of going up. I spent 10 years in U.K even when the GDP was going [indiscernible] during the 5- year [indiscernible] labor costs were still going up. So we have to every year find ways to help our staff to become more productive, which we have been doing it and going forward, you can see we even go as far as one store managing multiple. So it has gone up few points [ph]. 2019, its 22.8% and then go up to ’23, ’25 and ’26 now its staying at 26% over the last 2 years.

And the way that we run this business, we generate savings from O&O. From rent from depreciation, from everything that we could save, and then process saving to our staff, we pay them at fair pay, and we’ve hopefully paid them well we give them really good health insurance, et cetera, even though because we want to have the best staff to provide the best service for our customer. So that will be the direction, we will continue to drive. In terms of OP, as a result foreign exchange et cetera. I’m sorry, cannot forecast that is beyond a company’s to the validity. So we will do everything we could to generate sales and to manage costs and then produce the result as a result of good effort. Thank you, Chen Luo.

Chen Luo

Thank you.

Operator

Thank you. That is all the time we have for questions today. I’ll now hand back to Ms. Shen for closing remarks.

Michelle Shen

Thank you, Ashley, and thank you everyone for joining the call today. For further questions, please reach out through the contact information in our earnings release and our website. Have a great day.

A – Andy Yeung

Thank you. Bye, bye.

A – Joey Wat

Thank you.

Operator

That does conclude our conference for today. Thank you for participating. You may now disconnect.