Hello, everyone, thank you for joining Yum China's First Quarter 2021 Earnings Conference Call. Joining us on today's call are our CEO, Ms. Joey Wat, and our CFO, Mr. Andy Yeung. Before we get started, I'd like to remind you that our earnings call and investor presentations contain forward-looking statements, which are subject to future events and uncertainties. Our actual results may differ materially from these forward-looking statements. All forward-looking statements should be considered in conjunction with the cautionary statement in our earnings release and the risk factors included in our filings with the SEC. This call also includes certain non-GAAP financial measures. You should carefully consider the comparable GAAP measures. Reconciliation of the non-GAAP and GAAP measure is included in our earnings release.
Today's call includes three sections. Joey will provide an update regarding recent developments in our first quarter 2021 results. Andy will cover the financial performance in greater detail. We will 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.
I would like to turn the call over to Ms. Joey Wat, CEO of Yum China. Joey?
Thank you, Debbie. Hello, everyone, and thank you for joining us today. Our first quarter results demonstrate the resilience of Yum China. We delivered $342 million in operating profit. System sales grew 34% year-over-year as same-store sales recovered with 10% growth. We accelerated our store expansion, opening 315 new stores in a quarter. First quarter trading was adversely affected by the resurgence of COVID outbreaks and tightened public health measures. The impact was particularly pronounced in Northern China, where cases spiked and in transportation locations due to sharply lower passenger volumes. I would like to thank our 400,000+ employees and riders for their contributions during this difficult period. Many of them did not return to their hometown to celebrate the holiday with their families, instead serving our customers and communities. We delivered these strong results with the dedication and agility of our people.
The pandemic has introduced volatility and uncertainty to our trading patterns. Our team acted and reacted nimbly to changing conditions. By planning for a variety of possible situations and deploying resources flexibly, we overcome operational challenges. Partnering with our suppliers and through inventory and production planning, our in-house supply chain managed complexities and potential disruptions to fulfill the demand of our 10,000+ store network. Our operations team ensured best possible level of restaurant staffing and delivery riders. Our operational effectiveness is facilitated by our digital capabilities. Amid the fluid situations, we were able to quickly adjust offers and deploy labor as demand patterns shifted. It certainly reinforces our determination to continue investment in digital technology and supply chain to fortify our competitive advantages.
Let me now update you on our core brands. First, let's start with KFC. KFC delivered operating profit of $327 million. System sales grew 24%. KFC continued to rapidly expand, opening 253 new stores in the first quarter. During Chinese New Year, we kept our operations simple to address the heavy foot traffic. We focused on our signature product of fried chicken and burger. Our Golden Bucket offered abundant value and resonated well with customers. With a variety of buckets, we captured different party sizes. In the off-peak periods, we brought back KFC's signature beef wrap and added crayfish to make it more premium and exciting. We also launched the new Chongqing chili pot burger. As part of the offering, we ran a special promotion with the popular action role-playing game, Genshin Impact, which was very well-received by younger customers.
Our leading digital and delivery capabilities enable us to stay agile in this fluid situation. Despite the recovery in dine-in, delivery remains popular and accounts for 28% of sales, up 10% compared to pre-COVID level in first quarter of 2019. We drove this rapid pace of growth through our hybrid delivery model. Omnichannel marketing in our own Super App and aggregators drive demand, while fulfillment is done by our own dedicated riders. This allowed us to capture delivery demand with sufficient riders, which was especially crucial in ensuring the success this Chinese New Year. Delivery growth was also enabled by our continuous investment in strengthening our delivery capabilities. We started trade zone-based rider sharing in 2019. Last year, we upgraded our rider platform to improve zoning, rider routing, and monitoring.
We also started testing rider sharing between KFC and Pizza Hut. This is the first time we put the platform to test during Chinese New Year peak period. We are pleased with the progress. Leveraging our digital assets and direct connections with our over 290 million members, we were able to shorten the lead time of our marketing campaigns and modify them so that we can be more responsive to changing market conditions and consumer demand, of course. Our digital infrastructure also allow us to deploy the appropriate supply and staffing level where needed. Digitization is essential to operating efficiently. As part of our end-to-end digitization initiative, we pilot launched an AI-enabled restaurant inventory management tool, leveraging historical data, recent trends, and real-time inventory levels. This tool improves forecast accuracy for our limited time offer. This enable us to optimize inventory and improve productivity.
Let's move on to Pizza Hut. We are encouraged by Pizza Hut's strong recovery in the first quarter. Same-store sales grew 38%, and operating profit reached $60 million. These results reflect our efforts to improve fundamentals. Let me provide an update along the four key pillars. First, our product offerings have significantly improved over the past few years. We have several successful product launches during Chinese New Year, such as Surf and Turf platter with sea bass and steak [Non-English content] a Flower Stuffed Crust Pizza, and Year of the Ox holiday feast set. These products work great for sharing and were well received by consumers. In March, Pizza Hut refreshed its menu, replacing 40% of the menu with new or upgraded offerings such as beef Wellington and roast beef tapas. We also introduced Portuguese chicken curry, our popular dish on the delivery menu, to dine in.
We also have been unlocking the growth potential of breakfast and afternoon tea. We strengthened the menu with new offerings such as French toast for breakfast and a three-layer tea set for afternoon tea time. Apart from good food, we have also been actively engaging customers both offline and online. During Chinese New Year, we celebrate the festival with consumers by bringing in some of China's intangible cultural heritage, such as shadow puppetry and paper cutting into our stores. On the digital front, we have been strengthening our membership program and Super App to engage members and improve customer service. Our member base exceeded 90 million and contribute 55% of total sales, up nine percentage points year-over-year. Digital ordering increased to over 80% of sales from 65% a year ago, as tableside mobile ordering became more popular.
We are also applying digitization and automation in our kitchens to improve operations. As part of our multi-phase intelligent kitchen project, we started to roll out an AI-enabled tool to pace food preparation and provide real-time metrics of kitchen performance. Initial results have shown improved efficiency and customer experience. Third, Pizza Hut is strengthening its delivery, takeaway, and ready-to-cook offerings. Delivery accounted for 35% of sales, an increase of over 10% from pre-COVID-19 levels in first quarter 2019. While growing from a small base, we are expanding our takeaway and ready-to-cook business through menu innovation and making them more convenient for consumers. Lastly, we enhanced our store portfolio through accelerated remodels and new store formats. Since 2018, we have refreshed nearly half of Pizza Hut stores to make them more relevant to our consumers. This is over 1,100 stores.
As we promised in the 2019 Investor Day, average store age is now below three years. The stores look great. The new small store format, which includes the hub and spoke model, which is also mentioned in the 2019 Investor Day, is creating more opportunities for Pizza Hut's expansion, enabling us to capture the growing demand for off-premise dining. Of the 44 new units that we opened in the first quarter, over half are in small store format. I'm confident that we will unleash Pizza Hut's growth potential through this combination of much improved fundamentals, strong digital capabilities, multiple sales channels, and rejuvenated assets. In summary, we're pleased that our brands react quickly to the fluid market conditions and delivered strong operating profits despite those pressures. Most importantly, we remain optimistic about our long-term growth opportunity in China.
We will continue to accelerate store expansion for our core brands, grow our emerging brands, and enhance end-to-end digitization and intelligent supply chain to build a bigger and nimble Yum China. While we are optimistic about our future, we remain cautious about near-term conditions. Occasional COVID outbreaks, like we saw recently in Yunnan, are a constant reminder that we are not back to normal yet. Tightened public health measures continue to be a daily routine and continue to have a lingering impact on consumer behavior. Dining volume is still well below pre-COVID levels, but we are not sitting still. Our nimble and innovative culture enable us to adjust marketing and operations quickly as things evolve.
With that, I will turn the call over to Andy. Andy?
Thank you, Joey. Hello, everyone. Let me now provide additional details on our first quarter financials, then share perspective on this year's outlook. Unless noted otherwise, all percentage changes are before the effects of foreign exchange. Let me first cover our Q1 financial results. We experienced substantial year-over-year growth in the first quarter as we began to lap COVID-19 impact period last year. Total revenue grew 36% year-over-year, led by same-store sales growth of 10%, new unit contribution, and substantially fewer temporary store closures. Because of the volatility induced by the pandemic in 2020, the year-on-year comparisons are less representative. Looking at the two-year change give a better sense of how we are trending back to pre-COVID levels. We are providing pro forma measures here for convenient comparison with 2019. Same-store sales recovered to approximately 94% of the first quarter 2019.
Total revenue grew roughly 7% compared to Q1 2019, benefiting from new units and consolidation of Suzhou KFC and Yum China. As we discussed in the last earnings call, the sales recovery was disrupted by the resurgence of regional outbreaks and significantly reduced traffic. Travel volume during the 40 days Chinese New Year period was down approximately 40% year-over-year, and 70% compared to 2019. These impacts were more pronounced for KFC as it has more stores in the transportation locations. On a year-over-year basis, KFC same store sales grew 5%, driven by the recovery of dine-in sales, while delivery remains popular. On a two-year basis, sales recovered to approximately 94% with the same-store traffic at approximately 87%. Average ticket grew roughly 8% versus 2019 due to increase in delivery mix. The respective average ticket of delivery and dine-in remain flat.
Pizza Hut same store sales grew 38% year-over-year, driven entirely by the recovery of traffic. On a two-year basis, sales recovered to approximately 95%, led by a 2% increase in traffic. This is a true testament to the success of the brand has achieved in executing its revitalization plan. Unlike KFC, the increase in delivery and takeaway mix contributed to lower ticket average versus 2019. Restaurant margin was 18.7%, up eight points compared to last year. This was mainly driven by sales leverage, operational excellence, and favorable commodity prices. Cost of sales was 30.2%, which was 180 basis points lower than last year. Commodity prices declined by 7% year-over-year, mainly helped by lower poultry prices. The impact was partially offset by investment in promotion to drive traffic. Cost of labor was 23.3%, 220 basis points lower than last year.
Sales leverage and labor productivity improvement more than offset wage inflation and diminished government subsidies. Given the labor shortage that we are experiencing, we are still actively seeking to hire additional restaurant staff. Occupancy and other was 27.8%, four points lower than last year, mainly attributable to sales leverage and savings in other operating costs. We also received approximately $6 million in rental reductions and government relief. Compared to 2019, restaurant margin was relatively flat. Productivity gains and cost control offset sales leverage, investment in value promotions, and increased rider costs associated with the rise in delivery volume. G&A expenses increased 24% year-over-year, mainly due to a timing shift of government incentive, gradual phase-outs of COVID-19 related relief, and the consolidation of Huang Ji Huang and Suzhou KFC. Excluding this impact, G&A increased 3% reflecting our ongoing cost controls. Operating profit was $342 million compared to $37 million last year.
The increase was mainly driven by sales and restaurant margin improvement, partially offset by the increase in G&A expenses. Our effective tax rate was 29.6%. Net income was $230 million, and adjusted net income was $233 million. Excluding $16 million mark-to-market investment loss, it was $249 million, up 225% year-on-year. Diluted EPS increased to $0.53. This reflects common share that were issued as part of our secondary listing in Hong Kong in September 2020. Let's turn to the outlook. As Joey noted, we are optimistic about our growth opportunities in China. We remain cautious about the near-term environment. While the pandemic impact is subsiding, we must be mindful that the pandemic is not over yet. The full recovery takes time, with an uneven and non-linear recovery path. We are confronting a couple of realities here.
First, preventive measures will remain in effect. This will have a continuing impact on consumer behavior. Sporadic outbreaks remain, remind consumer of the lingering risk. Social distancing and smaller gathering may persist for some time. Dine-in occasions are still well below pre-COVID levels. Consumer spending is cautious. Government data shows that despite apparent recovery in domestic travel volume during May holiday weekend in April, the related travel spending was still down over 40% comparing to pre-pandemic level in 2019. In fact, sales at our transportation location remain well below 2019 levels. Against this backdrop, we expect it will take time for same-store sales to fully recover to pre-COVID levels. We will focus on driving top-line growth with compelling value propositions, more marketing campaigns, product innovations, and digital engagement with consumer for both dine-in and off-premise occasions. While necessary, this initiative will pressure our margin.
Apart from that, we face other cost headwinds. The tailwind of favorable commodity prices in the first quarter will likely gradually subside. At this time, we expect poultry prices to rebound and potentially turn into inflationary pressure later this year. In addition to replacing plastic packaging with eco-friendly materials, we will also invest packaging upgrade for delivery and takeaway. We expect labor costs to increase in the subsequent quarters. There are two components to that. First, wage inflation was 2% in the first quarter as minimum wage increases were deferred in certain markets. We expect wage inflation to pick up in the second half of the year. Full-year wage inflation should stay at mid-single digits. Second, increased hiring. In the past few quarters, we have been short of part-time workers due to COVID-related restrictions. We are working to increase restaurant staffing levels.
While this will increase training hours and wage expenses, it is critical for our customer services and long-term viability. We had approximately $6 million of temporary relief from the government and landlord in the first quarter. This was partly due to a timing shift of amount previously applied in 2020. We expect this support to taper off as the year progresses. As a reminder, we are lapping over $100 million relief in 2020. In the second quarter 2020 alone, we received approximately $50 million in relief. Step-up investment in technology, end-to-end digitization, and operational infrastructure will strengthen our capability and further solidify our competitive position. In the near term, this will pressure our margins and operating profits.
Wrapping up, we're working diligently to drive same-store sales recovery and accelerate store expansion. We are also committed to invest to drive accelerated growth and create value for our shareholder in the long term.
With that, I will pass you back to Debbie to start the Q&A. Debbie?
Thanks, Andy. We will now open the floor 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.
Excellent. Just a reminder, if you wish to ask the question, it is star one. To withdraw your question, please press the pound hashtag key. Once again, it is star one. Thank you. We have multiple questions in the queue. Our first question is from Brian Bittner from Oppenheimer. Please ask your question, Brian.
Thank you. I hope you all are doing well and staying safe. Can you help the investors in the United States just better understand, who are not in China, better understand what type of consumer trends you're seeing in your store base that are not located in the transportation hubs? I understand the transportation locations are challenged given the transportation trends, but overall, you've already recovered 94% of your pre-COVID sales volume, so you're pretty close to a full recovery. Are you seeing a more clear path to pre-COVID sales levels in those markets that are outside the transportation hubs, or is there still a lot of volatility and headwinds related to the pandemic in those more traditional markets?
Thank you, Brian. We are all staying quite safe in Shanghai. China is recovering quite smoothly despite not completely out yet. An overall picture about the Chinese New Year trend, and then compare the KFC versus Pizza Hut, and then a bit specific about the non-transportation hub. Hopefully, that give some ideas about what's going on here. Let's start with the Chinese New Year. We had a lot of uncertainties before going to Chinese New Year because the trading was a bit soft. What our company has done is to pair, have quite a few scenarios planned. We react quickly. As we adapt to the market condition, the trading picked up during Chinese New Year and was robust. After the Chinese New Year, we continued to see some weaknesses in trading, particularly in transportation hub. Outside transportation hubs, to answer your question, the dine-in volume is still well below the pre-COVID level.
That's why we remind our investor that we are not out of the wood yet. What can we do? We stay agile, and we plan for the possible scenario. That's point one. In terms of point two, which is a big picture of KFC versus Pizza Hut. We are happy with both brands' recovery, because the Q1 results show the resilience and the energy of both brands. The sales was disrupted, but with the scenario planning, the year-on-year same-store sales for KFC, Pizza Hut, and I'm referring to two years, so pre-COVID-19 level, KFC was -6%, which is 94%, and that includes the impact of the transportation hub. Pizza Hut recovered to 95% compared to 2019 Q1, without much of the transportation hubs in their store portfolio. That gives a sense, because 2020, the numbers are a bit unusual.
When we look at the system sales, Pizza Hut compared to 2019 is still minus 2%, because Pizza Hut did not open that many store last year, although we are picking up in Q1. KFC system sales recovered to + 6% versus 2019 because we opened a lot of store last year. I hope that gives a sense that, with or without the transportation hub, the same-store sales is still having a little bit gap versus 2019. Come to a bit more specific about the trend and the trading. Andy talked about the transportation hub business. It's still 40% down compared to 2020, and that's the traffic. In terms of sales, it's pretty much in line, although we do slightly better than the traffic number.
In terms of city tier, I'm talking about KFC, because KFC store covers over 1,500 cities in China. That give a better big picture of what's going on here. The lower tier cities have better same-store sales than the higher tier cities, mainly because the higher tier city stores have the element and mix of transportation hub stores. The delivery growth is better in lower tier cities. The eastern part and western part of China led the recovery. Northern part and northeastern part of China, because of the regional outbreak, they have been a bit softer.
Weekend and weekday, our traffic is pretty much back to where it need to be, or where we want it to be, because we have a bit more promotion to drive the weekend traffic, which was a bit soft before, but now it's back to pretty normal. For the non-transportation hub stores, just single out these store, it's about 2% GAAP versus 2019 or pre-COVID-19 level. Brian, I hope that gives you a comprehensive view of the trading. From consumer behavior point of view, they're still quite value cautious, and therefore, we still have to be mindful about the value that we can pass on to consumer. That's not the only thing they want. They still want new product. Other than value, we still launch new product to make sure that we encourage the customer to come back.
I'll pause here. Andy?
Yeah. Just a couple of things to add there, Brian, good evening to you. I think, for the folks outside of China, I think it's important to keep in mind that, we're still facing quite a bit of uncertainty and challenges related to COVID-19. Even though things seems to have come down a lot here, we did have a regional resurgence at the end of last year and beginning of this year, right? That have an impact on our first quarter trading. When we look around, I think we still have quite a bit of health preventive measures that is still in place. That was due, government is continuing to remind folks to stay alert. Not to be alarmed, but stay alert, on the COVID situation.
As we look outside of China, we have seen the resurgence in some other country in Asia, including Japan and more recently, the situation in India. That reminds us that we're not out of the woods. Still a lot of challenging times ahead. As Joey mentioned, obviously, transportation hub is an important business for KFC. It accounts for high single-digit of the sales. That will continue to be a challenge for them to overcome to reach that fully recover access compared to the pre-COVID level. Same thing for the dine-ins. Dine-in, I think in the first quarter, where traffic was still at about 87% level as compared to pre-COVID level. Our delivery business is doing fantastically well. Grew very strongly last year. I think this year we're still growing at mid-double-digit number.
That continued to be a bright spot for us even compared to pre-COVID level, obviously, grew more than, I think 60%-70%. That's the overall situation. Thank you.
Thank you. Thank you both for the perspective.
Next telephone question is from Chen Luo from BofA Securities. Please ask your question, Chen.
Thank you, Joey and Andy. I've got the question on the margin side. It seems that Pizza Hut posted pretty strong margins for Q1 this year. In fact, if my calculation is correct, it should be the highest ever since 2018 or when we started the revitalization process. What's our future strategy with regard to Pizza Hut in terms of balancing margins and same store sales growth? Is it fair to say that the future margin trend of Pizza Hut could be above the level that we saw during the past few years when we are in the process of revitalizing Pizza Hut? Thank you.
Hi, Chen Luo. This is Andy. Let me try to address your questions, see if Joey have any follow-up. I think if you look at Pizza Hut, obviously, we're very pleased with the execution there. I think over the past couple of quarters, they have demonstrated that they have executing their revitalization program really well, they are building on that resiliency. I think some of those, as we mentioned before, obviously, is improvement. I think if you look at the fundamental, we continue to look at that improvement based on the fundamentals that we have laid out before. Store, remodeling, the menu, the food. We also work on the digitization program, which worked out very well for us in the pandemic. We were able to pivot very quickly.
If you look at the digital number for table top orders, it's quite incredible right now. It's almost like 80% of that. I think they have did a really good job in revitalizing the fundamentals. Their recovery is quite strong, but I don't think we can say, as a whole company, we cannot say that we're out of the woods compared to pre-COVID level. The top priority for them still is driving traffic. We're glad that for first quarter in 2021, we see, actually, the traffic increased not only year-over-year, but also compared to the 2019 level in the first quarter. The next one is obviously drive that sales number. There's still some work there, and I think we will continue to emphasize on value for money.
As Joey mentioned, very important for consumer now, as they're coming out from the impact from COVID-19. Again, we're pleased with the progress in cost control, executions. I think profit is still not the number one priority for us. We still, for Pizza and also KFC, obviously, is to drive that store traffic, drive the consumer back to the store, then aim for that full recovery in the same store sales compared to pre-COVID level. I think if you look at Pizza Hut, some of their improvement will definitely continue. Some of that, as we mentioned before, for example, as we see the poultry prices are going up, as the year progresses, we may see inflation refresher there. Both brands are doing packaging improvements. Transitioning from plastic to eco-friendly material, also investing more into packaging for upgrade for delivery and also for takeaway products.
That would also be somewhat of overhang there. Labor productivities, we have seen a lot of labor productivity improvement using technologies, the tool, the AI tool that we enable the restaurant operation. Some of that is due to the labor shortage that we have seen in the second half last year. We have mentioned that. We continue to try to resolve that. We are looking into increasing the staffing level, make sure that we continue to maintain a high level of customer services. That's very important in the long term viability of the brand. Those are the couple of things.
Then again, if you look at the overall margin plan, last year, we received $100 million from government relief. This year is already phasing out. We have $6 million in the first quarter. We will expect that to continue to phase out as the year progress. All in all, we still have some positive, and then we also see some headwinds in terms of margin and cost.
Luo Chen , I think I just want to add two comments. One is we have been very consistent with the path of recovery for Pizza Hut since the time we committed to turnaround. We have always been very clear about our priority, which is sales first, profit later, and we focused on improving the fundamentals of the business in the last few years, and we are grateful that we are seeing the results. That's point one. Point two is what is next? The next is to focus on improving all aspects of the changes that we made in the last few years and cement the changes made to make Pizza Hut a resilient business model. That's what we want. Because that's what we have been trying hard to achieve for KFC, which is a very resilient business, and we want Pizza Hut to be a resilient business model as well.
At least in two aspects we want to continue. One is sales first, profit later. That's the path in the last few years. Next, we want both sales and profit. As I mentioned other occasions before, sales is vanity, profit is sanity, and we want a bit of both. The second aspect of the resilient business model. You can see we have been building our off-premise business. Now between the delivery and takeaway, the off-premise business is over 40% of the business. This is important because we are not relying too heavily on dine-in business. It's much better to have dine-in, delivery, and renowned takeaway or ready-to-cook product as well. Four pillar of the business, instead of two pillar. These are two examples of resilience that we're looking for. Thank you, Luo Chen.
Thanks a lot, Joey and Andy.
Our next telephone question comes from Michelle Cheng from Goldman Sachs. Please ask your question, Michelle.
Hi, Joey , Andy. My question is about the occupancy and other costs. We actually noticed that these costs have seen huge savings in the past few quarters. Can you give us more colors on the breakdown and also more specifically on rental ratio? We heard from other leading restaurant trends, they have a pretty favorable rental term post-COVID. Just wondering that compared with the pre-COVID level, are we also seeing a good rental saving and how sustainable these other cost saving can be seen in the next few quarters? Thank you.
Michelle, thanks. This is Andy. Regarding your question on O&O, I think you're right. We've seen quite substantial improvement coming from the O&O segment. 7% year-over-year lower, then roughly 1.4% lower than 2019 same period. I think, as you can see these two numbers, O&O in a big part is driven by sales leverage. That's the most important factor that's driving that. The other one is that, if you look at utility, there's two things that's going on there. I think over the past few years, the government have sort of reduced the utility cost to basically try to improve their business environment, especially during the pandemic. That also helped. How long this will last, I think maybe end of the year or early next year.
The other one is obviously over the past couple of years, we have tried to improve our kitchen automation operations. We have mentioned smart utility device that we have installed in some of the stores, several procedures. That also lowered that. Also we mentioned that some of the savings is due to rent relief, temporary relief, and some of the government relief in terms of security payments and whatnot. That, I think in the first quarter, we do have sort of $6 million. All these combinations help us sort of improve that O&O as a percentage of our sales. I think some of those carry forward, but a big part of that would probably have to do with the sales leverage that we've seen.
Yeah. Thank you, Andy.
Sure.
The next telephone question is from Anne Ling from Jefferies. Please ask your question, Anne.
Hi, Andy. Hi, Joey. I have a question regarding the operating, the last bit. It's a very good margin that we have experienced in the first quarter. I'm just wondering whether there is any, not one-off, but it's like a catch-up, because the sales have been so strong. There are some of the investment that we need to do it, but because of the time shift. The question I want to ask is that what should we be expecting in terms of the operating margin in the coming couple of quarters? Is there some of the other investment that we need to play a catch up because the first quarter was so good that there are some of the costs that might have lagged behind? That's my question.
Also a side question is on the delivery side. With this effort in terms of sharing the riders between Pizza Hut and KFC, in that case, in the past, we talked about a little bit of the margin dilution for the delivery business. With all these exercises, do you think that at some point our margin for delivery business will be at par to the dine-in, given the fact that the sales mix is getting higher and higher on the delivery side? Thank you.
Hi, Anne. This is Andy. Let me try to address your questions about some of the one-off and whatnot. Obviously, I think, last year we have received government subsidies and whatnot, then as you mentioned, that is continuing to phase out. In the first quarter, we have a $6 million. I think that will continue to be the trend there. The other part is that, for the cost of sales, for example, I think after a couple years of rising protein and commodity prices, beginning of second half last year, we've began to see that easing up. We benefited quite a bit in the first quarter. We see a 7% year-over-year decline in the poultry prices, for example. As you have probably noticed that on the news, we see corn prices, all those feeding stocks, their prices going up.
We're already seeing the poultry prices going up both here in China but also overseas. Our contracts are locked up probably one-two quarters ahead of time. As you mentioned, we would see that tailwind beginning to subside as the year progress and likely potentially turning to inflationary pressure later on this year. The other one is, obviously, we have embarked on the phasing out of plastic. As we see delivery and takeaway as increasingly important part of our business, we are also investing into improving the packaging for those operations. You would probably also see the packaging cost would go up as the year progress, as we continue to roll that out. When you have labor, I think, part of that is obviously labor productivity.
Now, that we have been ongoing for a number of years now. The goal is really to continue to see that labor productivity improvement by providing new technologies and toolkits to improve the restaurant operations. I think there's two issues there. One is that we did experience some labor shortage since second half last year, as I mentioned. We try to rectify that, try to step up the hiring, but I think we're still not at the level that we would like to see. We'll continue to drive that. The other one is obviously wage inflation. As the economy, the pickup, as the pandemic impact subside, as you mentioned, you're getting really kind of tied from restrictions by government on mobility for some of the frontline worker. Overall, I think the labor market will be getting tighter and tighter, we're likely going to see wage inflations potentially also stepping up.
You have to remember that it's compounded for two years, right? That's something that we have to work through. For delivery, I think it's more complicated story for the margin, because we need to look at holistically. Obviously, we have the delivery cost, that just add up to it. We also to see if we can improve our operation inside the restaurant, right? Improve margin. If you look at our margin, for example, before the pandemic, you see that the stuff like ZLL margin remarkably stable, despite our delivery volume or percentage mix of sales increased from, I think 6%, maybe, in 2016 to almost like 30% in 2019. We are able to find ways to offset that increase in delivery cost. We'll continue to do that as we invest.
That will likely continue to be a pressure, but we're trying to find ways to offset that. That's overall. I know we have delivered very strong profitability, and we're very proud of our team in her cost control. You're right, going into the next few quarter, we're going to see some tailwind in terms of costs et cetera.
Anne?
Hi.
Hi. I just want to add three points to Andy's comment. In terms of cost side, we continue to work on it, of course, such as the Delivery 3.0 upgrade with rider personnel upgrade, AI-enabled zoning, rider routing optimization to help. What I really want to point out is point two and point three. These are the other aspect of the equation. Point two is about the sales upside during peak trading period and peak trading hours. If we can have enough riders, we actually have more sales upside during the peak trading period and peak trading hour, and Chinese New Year is a very good example. It would be a bit misleading to ourselves if we just look at the cost side. That's point two. Point three , if you think about it, when Andy said earlier it's a holistic approach, it is a holistic approach.
It's not necessarily that straightforward to think that having more store help the delivery cost. Indeed, it works that way. When we increase the store portfolio density, then we reduce the average circle of delivery distance. For example, when we have more store, we can reduce the delivery distance of the rider from 5 km to 3 km, and that reduce the cost. It's not only just the cost. We have other quite a few aspects that we can do to both increase the sales and to manage the cost. Our number has shown that we have been able to do that in the last three years. Thank you, Anne.
This is Andy. Just want to add a little bit on Joey's comment. There's two things. One is, Joey's correctly pointed out, if the incremental sales, the profit margin is much higher, right? Obviously, the incremental margin should be higher. The other one is that, in terms of the rider network effect. Is a very interesting thing that I think we're still looking to see how the dynamics work, right? The high density network. That's enabled by the fact that we run our own delivery network. We have a hybrid model.
Correct.
We work with the aggregator, you know with the traffic and our own app. The delivery, we manage that operation ourselves. We have dedicated rider. We can continue looking to improvement on the network effect there that benefits from that. That may be a little bit different from the U.S. restaurant operators and some of the most restaurant operators here in China. We want to create this model.
Got it. Thank you.
Thanks.
The next telephone question is from Lillian Lou, from Morgan Stanley. Please ask your question, Lillian.
Hi. Thanks. Hi, Andy and Joey. I have actually one of the follow-up questions because most of the question were answered. That's still about the comment that Joey just made about to look at the business on the holistic approach. Compared to a couple of years ago when delivery was still relatively smaller amount of the revenue, right now is close to 30%. The store network in the lower tier cities, the intensity is actually higher. Compared to then, what kind of margin impact to this kind of dynamic changes? In particular, like delivery, we know that it depends on the calculation. It probably still margin dilutive, compared to a couple of years ago, what kind of margin impact of these delivery and also lower tiers store changes to the margin?
What kind of projection we can make for the next couple of years? Will it be incrementally positive to margin? Thank you.
Okay. Thanks, Lillian. This is Andy. Let me take a crack at this and then maybe if Joey have more additional to add, she can add a little bit more later. In term of delivery, I don't know if it's fair to say, the delivery margin is dilutive to the overall corporation. As we mentioned before, we generally look at the restaurant operation holistically, right? We have multiple way of delivering the product to our customer, dine-in, right? Takeaway and delivery. It's important to look at obviously the restaurant margin for us, because food is unlike e-commerce, right? E-commerce, you just warehouse and distribute to the consumer. Food, you need to deliver to consumer at certain time, right? To ensure quality of the food, and then the customer satisfaction. Having a production or restaurant location is almost a must.
For us, if you look at the delivery has been growing very rapidly. I think, we believe that that's incremental to our overall sales. The other part is that, if you look at overall restaurant margin, for example, for KFC, before the pandemic, it was relatively stable, right. It's about 18% in 2017, 2018, 2019. We are back to some similar level, in the first quarter of this year. All through this period, obviously delivery has been increasing mix, as I mentioned before. Delivery was about 11% of our sales in 2017, and now it's about 30% plus, right. We're able to maintain that margin. Obviously, it's hard work. There's a lot of work going through it, but it hasn't been particularly dilutive to us.
The other one is that if you look at the labor cost expenditure, for KFC. It has been also relatively stable, despite obviously we continue to see wage inflation in China as before the pandemic is to high single-digit level, right? If you look at KFC's cost of labor, which including the rider cost there, was about 20%-21%. It is stable from 2018 and 2019, both markets is probably 20%-21%. Yeah, about 21%. Right. In this year, we are at about 22%. Overall, I think, as Joey mentioned, it is not necessarily dilutive for us. If it is incremental sales coming bring in by delivery, we actually have higher margin because the marginal contribution from additional sales is actually pretty high.
Thank you, Andy. I just have one more point to add, Lillian. Actually, the shift to the delivery business actually help our rental percentage as well. Just maybe bring that into equation. Why? If our store is relying too heavily on dine-in business, the location cannot be compromised too much. It has to be very good location. Otherwise, you don't get the business. When we are building more and more delivery-friendly stores, relying more and more on delivery, we actually open up more opportunity for locations that are at slightly lower rent. That's not a small deal for us. As we expand our store portfolio, moving towards delivery, certainly it helps. Okay. Thank you, Lillian.
Thanks a lot, Joey and Andy.
Sure thing.
Our next telephone question comes from Christine Peng from UBS. Please ask your question, Christine.
Hi, management. I just have one quick question regarding the outlook provided by the management earlier. You mentioned about there are still some uncertainties in China regarding COVID-19 situation. Having said that, we actually observed a very strong pickup in the domestic traveling activities, especially going into the Labor Day holiday. Can you maybe give us more colors in terms of the sequential trend you are observing in China in the past one, two months so that investors can get a better feeling in terms of what is expectation we should be setting for the upcoming one, two quarters same-store sales recovery compare with pre-COVID-19 level. Thank you.
Hi, Christine. This is Andy. I think, you're correct that if the massive travel volume have picked up quite a bit, I think this year and especially Spring Festival and potentially going into the Labor Day holidays weekend. That's the overall traffic volume side. I think that has improved. The difference is that the consumer behavior still remain cautious. If you look at the trip that they take, generally shorter trip. If you look at overall spending level, it's still down, I think, quite significantly, probably down 40% plus compared to pre-COVID level. Right. I think there's two things that we need to separate, right? The trip that people take, but the type of trip that they take may be different, and also the spending level is different. I think that is similar to what we observed before, right?
Like Joey mentioned, generally when we see there's some pent up, sort of urge to go out and when there's holiday, right? To relax. We see that sometimes the holiday sales will be relatively strong. There's post-holiday season, sort of softening. People generally still are cautious about the COVID situations and then also the economy, economic situations, right? That obviously infuse that risk and uncertainty for folks. That's what's going on here. I think if you look at the overall situation, it is much better compared to 2020, obviously, in term of COVID situation. Again, as we have mentioned before, we need to stay alert. Not to be alarmed, but alert. The reason is because if we look at, in China, we have a mini resurgence of COVID situation in the end of last year and early January.
When things calm down, I think it's easy for folks to think like everything's back to normal. I think reality is that we're not. I think that what's happening internationally would also have an impact on the overall consumer sentiment here. We have seen the situation in India. Our heart go out to the folks in India that impacted by COVID-19. It's a constant reminder for us that we're not out of the woods. We continue to expect the full recovery to be nonlinear and even. It's just not a saying, I think it's our firm belief, and it's how we operate and plan for different scenario, different situation. We encourage analysts and investors to do the same. Not to extract linear extrapolation. That's how we plan. That's why we say the full recovery for our same store sales take some time. Thank you.
Our next question is from Lina Yan from HSBC. Please ask your question.
Hi. Thanks, management, for the very detailed analysis on your performance. I have a question regarding the base effect of sales at the traffic hubs. I think you started talk about the very negative growth at the traffic hubs from second quarter last year. It has always been high single digit of your sales, like from second quarter last year. Would you comment that the base for traffic hub sales will become more favorable from second quarter onwards? Thank you.
Yeah, likely, right? Because we have a big impact, obviously, the lockdown, I think last year in the beginning, in the first quarter, and then we see a rebound in the traffic over the year. I think the volume is still significantly below the pre-COVID level. I think on a year-over-year basis, you will see improvement. On a two-year period compared to pre-COVID level, I think it will take quite a bit of time for a full recovery. Obviously, we're encouraged by the fact that the government is rolling out the vaccine program. The situation here in China is relatively calm after the resurgence in December and also in January period. I think it was more impactful for KFC because you have more store in the traffic hub location.
The other part is that the international, don't forget, we have international locations. International travel is still pretty much immaterial right now, right? Until country open up border and we see international travel, that will continue to be a big overhang for the traffic hub.
Okay. Thank you very much. I think every comparison is referred to two-year comparison basis. Thank you.
That's right. Yeah.
There's no more further questions at this time. I would like to hand the call back to the speakers for closing remarks. Please continue.
Thank you for joining the call today. We look forward to speaking with you on the next earnings call. This concludes today's call. Have a great day.
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