Xiao Pua Wei

Xiao Pua Wei from Citi questioned the lack of significant positive operating leverage in KFC's business, despite strong sales growth (2% same-store, 5% system), given the 5% restaurant profit growth and 6% operating profit growth. He asked if delivery-driven growth inherently limits operating leverage and what plans are in place to expand KFC's operating profit margin.

Answer

CFO Adrian Ding stated that KFC's restaurant margin is expected to remain broadly stable in the mid to long run, as it is already at a healthy level (around 17%). He explained that sales leverage is shared with partners (suppliers, landlords, staff) and a portion retained for shareholders. He attributed the Q3 margin dynamics to a significant increase in delivery mix (to 51% from ~40% last year), causing a 160 basis point headwind in cost of labor for KFC, which was offset by benefits in cost of sales and occupancy.

Xiao Pua Wei questioned the lack of significant positive operating leverage in KFC's business, despite strong sales growth, and asked about plans to improve KFC's operating profit margin going forward.

Answer

CFO Adrian Ding reiterated the philosophy of maintaining KFC's restaurant margin as broadly stable in the mid-to-long run, given its healthy level. He explained that sales leverage is shared with partners, and tactically in Q3, a significant increase in delivery mix (to 51%) caused a substantial headwind in cost of labor, which was successfully offset by benefits in cost of sales and occupancy and other costs.