Ladies and gentlemen, thank you for standing by, and welcome to the Yum China 20 2nd Quarter Earnings Conference Call. But I will now hand the conference over to your first speaker today. Thank you, and please go ahead, Debbie.
Thank you, operator. Hello, everyone, and thank you for joining Yum China's Q2 2020 earnings conference call. Joining us on today's call are our CEO, Ms. Joey Wat and our CFO, Mr. Andy Yang.
Before we get started, I'd like to remind you that our earnings call and investor presentation contains forward looking statements, which are subject to future events and uncertainties. Our 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 3 sections. 1st, Joy will provide an update regarding recent developments. Then she will offer some highlights around the quarterly results. Andy will then cover the financial results and provide an update on our full year outlook.
Finally, 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. Now I would like to turn the call over to Ms. Joey Hua, CEO of Yum China. Joey?
Thank you, Debbie. Hello, everyone, and thank you for joining us today. I will first update you on COVID developments and then we'll move on to cover performance in more detail. Throughout the COVID pandemic, we have been committed to safely providing good food, great value and convenience for our customers wherever they are. Safety is the key word here.
At our stores, temperature checks, face masks and frequent disinfection and cleaning protocols remain in place. A safe and healthy environment creates confidence for our customers and employees, which helps drive recovery in our business. We approach this challenge with an open mind, with flexibility, speed and courage to try new things. Our nimble marketing enabled by our digital infrastructure helped drive improvements at both of our core brands compared to the Q1. KFC launched Buy 1, Get 1 Weekend in June for the first time for our members.
Pizza Hut drove traffic with its first ever all you can eat promotion, featuring steak and baked Crayfish. We focus our resources on engaging with our members, targeting specific offers and promotions. Our privileged programs drive frequency, spend and cross sells. However, we are still experiencing significant headwinds. The recovery path is nonlinear and uneven.
April May sales improved sequentially, while June was impacted by delayed school holidays and more stringent social distancing due to resurging regional infections. Our transportation and tourist locations continue to experience significant year on year volume declines, which impact KFC more than Pizza Hut. Around 60 of our stores in Wuhan and Northern China remain closed for the time being. Even with short term uncertainty, we are enthusiastic about our long term prospects. In an incredibly challenging environment, we celebrate 3 important achievements.
1st, we opened our 10,000th store in July. This is truly an incredible achievement that would not have been possible without our exceptional employees. We are seizing this opportunity to expand our footprint. 2nd, Pizza Hut has now been serving our Chinese consumers for 30 years. Beginning in June, we kicked off our 30th anniversary celebrations with an all new menu and all you can eat promotion with our long queues and new customers.
We are now a proud food service sponsor of the 2022 Olympic and Paralympic Winter Games in Beijing. We are honored to work with the Olympic Committee to promote Olympic values of excellence, respect and friendship here in China to our millions of members and customers. These achievements show how Yum China has become deeply ingrained in the lives and memories of millions of Chinese people. From the first phase of KFC in 1987 in Beijing to trying something new at Pizza Hut, we are proud to be the largest and still growing restaurant company in China. With the combined effort of our team, we continue our sales recovery and importantly remained profitable in this quarter.
This profitability is a reflection of our resilience, our adaptability and the strong dedicated execution of our team. As we enter the Q3, I look forward to continuing our innovation journey. We are cautiously optimistic. The recent regional outbreak highlight that the recovery is non near and uneven. While the summer season will be challenging, I'm grateful to be leading a dedicated team, ensure that we are building a strong and stronger Yum China.
So let's talk about digital strategy. Benefits of our digital strategy were particularly evident over the past few months. I would like to take some time to talk about how our member program and digital ecosystem have built our resilience, both for the short and long term. Our over 265,000,000 members provide a strong base for engagement. We interact with members within a digital ecosystem supported by our super app, strategic partnerships with online platform and in store digitization, whether letting our customers know about our contactless delivery model or promoting weekend specific offers, we reach our members faster with greater flexibility and at lower cost.
Member sales accounted for over 60% in the Q2. While overall sales declined during the outbreak, our year on year member sales grew by double digits. We acquired new members in innovative ways. Using popular social media apps and websites, we convert online traffic into in store sales. We also engage at the corporate level.
Over 10,000 corporations have signed up to our corporate delivery program, bringing entirely new groups of customer to Yum China. Once members are acquired, we are able to design more targeted promotions, we improve the stickiness of our members as they use our super app or mini program, eventually upselling members into our privilege programs. We have sold close to 10,000,000 privilege subscriptions this year. Frequency and spending of these loyal users is more than double pre subscription levels. Overall, we doubled the average revenue per active member over the past few years.
Our members are increasingly loyal to our brands. Engagement is crucial for our member retention. Over years of consumer insight, we have developed award winning games, marathon clubs, and even one of the largest online children's bookstore on our KFC app. Whether through short term promotions or long term our digital strategy extends across brands and channels from dining delivery to takeaway. With this solid digital foundation, we are well positioned to capture future growth opportunities.
Off premise dining remains a key pillar of growth. Delivery sales accounted for 29% of sales in the quarter, a thirty six percent year on year growth. Our delivery business is top of mind with our consumers. It consistently rate highly in taste, convenience and value. Our dedicated delivery riders once more support growth during this time.
At Pizza Hut, digital engagement drove incremental takeaway growth. We've redesigned the menu and packaging suitable for takeaway. We use our digital channels to communicate the value and convenience of our 1 person set meals. Over half of all takeaway orders were done through mobile. I'm proud of our achievements thus far, but there's much more we are targeting from ready to cook, corporate and late night deliveries.
We have the scale, the resources and the vision to capture those future opportunities. Now let's move on to menu innovation and value promotion. Our digital initiatives rely on an enticing innovative menu to get customers excited. Pizza Hut launched its new platinum menu in conjunction with its 30th anniversary celebration kickoff. Learning from successful limited time offers, this menu is substantially fresher, extending our appeal to young and family oriented customers.
We showcase our pizza innovation with our Pizza AS series, thin crust pizzas that appeal to smaller appetites. We expand our leadership in the steak category with thicker and steak, and importantly, make steak available for delivery. Our Monet afternoon tea sets, with virtual reality effects of Monet paintings in select stores that appealed to our young social media savvy customers. Many menu items also got an upgrade. Our baked crayfish with cheese got high marks on value and our lasagna was appreciated by young and old alike.
I'm really excited about all the innovation in our 30th anniversary menu. The look and feel show our Pizza Hut positioning, which is always something new. So I hope you will try it soon. KFC brought their favorites, beef wrap and Taco Jr. During the quarter, with crayfish in the taco to showcase abundance and premium.
We expanded drinks, dessert and late night delivery lines. Our breakfast tofu pudding, which is quickly became a crowd favorite, and we showcased festival innovations with exciting products such as scallops salty 8 York Rice Dung Heng. In Chinese, that's. To thrive traffic, KFC also launched value campaigns throughout the quarter. Our plant based protein pilot was was may be scaled, this has great potential to bring our brand to new and designing consumers.
Now let me wrap up with a few brand specific observations. 1st, KFC. KFC continued to demonstrate its resilience and operational excellence. 2nd quarter transaction substantially improved compared to the Q1. Compared to the rest of our portfolio, KFC has a higher concentration of stores located in transportation and tourist hubs, and they are impacted by the downturn in business and holiday travel.
Delayed and short term school holidays, together with lingering effects of the outbreak on consumer behavior will continue to pressure sales. We will work on providing value and occasion to draw customers in, but recovery is likely to take an extended period of time. Next, Pizza Hut. Our 30th anniversary All You Can Eat campaign went viral with over 80,000,000 views and comments on social media, driving long queues and outsource. We have seen encouraging signs of transaction recovery.
However, the delayed and short term summer holidays will impact our business as well. We will strengthen our offerings for individuals and for delivery and takeaway, while family dining volumes recover. 3rd, Taco Bell has now expanded beyond Shanghai. We opened our 1st flagship store in Shenzhen and will be opening soon in Beijing. We are excited to bring this new cuisine to more of China and we are working hard to create an appropriate business model just right for Chinese customers.
Finally, integration of our Chinese dining unit is on track. Our little ship and HuangJiHuang store sales are recovering and we are leveraging the Yumxi network in areas of delivery, retail and logistics to further HuangJihuan's capabilities. With that, I will hand over the call to our CFO, Andy Yang. Andy, please?
Thank you, Zhou Yi, and hello, everyone. I will first address financials and developments in the Q2, then provide some color on our outlook. Unless noted otherwise, figures mentioned refer to the Q2 of 2020. All percentage changes are before the effect store open, total Q2 revenues recovered to 93% of the prior year. In the Q1, revenues were 79% of the prior year level.
Both of our core brands have quarter over quarter in average unit volumes in April May, but a weaker June while weekday and dine in recovery benefited from our promotional campaign, regional differences persist. Our transportation and tools hub sales, which accounted for high single digit sales mix, were still significantly and negatively impacted. The higher mix of younger school age customers meant that the delay and shortened school holidays had a bigger impact on KFC and Pizza Hut. Lingering effect of the outbreak on consumer behavior remain a headwind. A headwind.
Pizza Hut same store sales recovered to 88% of prior years. This is improvement from the fiscal quarter the 1st fiscal quarter when sales were 69% of prior year. Market to KFC, Pizza Hut has a significantly lower exposure to transportation hub locations. Our store in lower tier cities continues to perform better than stores in the higher tier cities, partly driven by a higher performance in the lower tier cities. The sales recovery is nonlinear and uneven.
As Joey mentioned, growth momentum was slowed by the resurgence of regional infections, delay and shortened summer holidays and continued anemic sales at major transportation and tourist locations. We opened 169 stores, mostly at KFC. Construction activities mostly normalized and the pace of the new builds is on track. Commercial margins were 13.7 percent compared to 14.7% last year, mainly due to sales leverage, which was partially offset by our efforts to control costs and one off benefits. Cost of sales was 32.9%, a 1.4% year over year increase.
While protein supply eased in the 2nd quarter, our contracts are generally signed 3 to 6 months in advance. Commodity inflation for the quarter was 3%. Viable promotions are key to drive traffic into our stores, which will also impact our margins. Cost of labor was 20 improvement and temporary relief more than offset the impact of sales leveraging and wage inflation. Within this figure, wage inflation was 3%.
This was used in many of our markets as government mandated increases in minimum wage were differ. An increased proportion of delivery sales contributed to higher labor cost percentages. These factors were mitigated by digital scheduling tools and pocket manager real time which drive improvements in productivity. Lastly, reductions in social insurance payments were roughly 30,000,000 dollars We negotiated approximately $10,000,000 in rental relief in this quarter. We implemented cost realignment receipt, G and A costs increased by 8% year over year.
Excluding the impact of timing shift of government and other one time expenses, G and A would have decreased slightly year over year. We recorded impairment charges of $24,000,000 We achieved operating profit of $128,000,000 bolstered by cost realignment and one time relief. Looking below the line, our gain from equity investment in Meituan was 45,000,000 which is before $40,000,000 in U. S. Income tax related to gains recognized during the 2nd quarter and prior periods.
Our effective tax rate was 25.2%. Net income was $132,000,000 Diluted EPS was 0 point 3 $4 and adjusted diluted EPS was 0 point 3 $5 Now I will turn to our outlook for 2020. The situation is still evolving. However, resilience, adaptability and innovation are key strengths as we navigate an unprecedented environment. Our outlook is based on certain key realities.
1, transportation and tourist volumes continue to be anemic. 2, the delay and shortened school holidays will impact sales the recovery to remain non linear and uneven. 4, sales deleveraging will continue to pressure margins, especially as onetime government and rental relief are phased out. In response to this reality, we need to be patient and vigilant in rebuilding and we have seen some successes in building weekend recovery through greater value offering. Lastly, we are taking decisive actions to realign our cost structure.
As we look ahead, we continue to target 800 to 8 50 new stores for this year. Investment in digital, technology and supply chain continues. Our 2020 CapEx plan is unchanged in the range of $500,000,000 to $550,000,000 We expect wage inflation to stay at mid single digits this year as minimum wage increases have been delayed in many provinces. Finally, while protein supply in China appears to be loosening, our best estimate of 2020 commodity inflation is for low single digit. Risk to global supply chain remain, which may have potential implications to our domestically sourced product.
As previously announced, we will increase our stake in the Suzhou KFC joint venture. The transaction is expected to close in August, subject to satisfaction of closing conditions. We see the new normal of reduced travel, social activities with bouts of disruption as secondary regional outbreaks occur and contain. The lingering effect of COVID will impact consumer behavior. That being said, with our digital infrastructure, solid execution and strong balance sheet, we are prepared to capture opportunities for recovery and growth.
With that, I will pass you back to Debbie to start the Q and A. Debbie?
Thanks, Andy. We will now open the call for queue questions. Queue
But your first question comes from Chen Lu from Bank of America. Please ask your question, Chen.
So I noticed that we highlight a few risks and challenges throughout the conference call. And also in the earnings announcement, we also mentioned that these strategies will continue to impact operating operations in July. Can you actually help to give us a little bit more color on how we compare the July performance with June? Are we seeing any sequential improvement? And just now, Joe, you also mentioned that the summer season is likely to be challenging.
And do we have any rough idea as to the trends in Q3 versus Q2? Thank you.
Hi, Jianlu. Let me take these questions first and then maybe so we can add a little bit more color later. In terms of the sequential improvements in July compared to June, and as we mentioned before on our prepared remarks, right now, there's a couple of headwinds that we see, right? So we have seen the transportation hubs as well as the tourist locations, which accounts for high single digit of our sales mix, being impacted quite significantly, right, by the COVID effect, down 50%, 50%, right? So I think unless there are significant changes in the situation, I think that will continue to be a headwind for us.
Now we also mentioned that shortening and delayed school holidays, which should have a larger impact on KFC compared to, say, Pizza Hut. As you know, normally in China, school holiday started in generally, it would be in June. This year, because of COVID situation, they have been delayed until mid to late July, depending on weather location in the provinces and whatnot. So I think we will still have some impact on the in July. For the Q4, we also this year, we have a holiday shift for the mid autumn festival, right, which last year was in September.
This year is going to be in October 1, I think. So there's also a holiday shift impact, right? So that will probably impact couple of points if you look at that, that kind of shift. So those will remain some of these. And then, of course, in June, we have this new outbreak in Beijing that also impacted sales in not just in Beijing but the surrounding provinces.
So that situation has improved quite significantly in Beijing. However, we do see other regional outbreak, for example, in Dongling, right, Dalian and also in Xinjiang. So we do expect that kind of potential regional outbreak to persist until either the COVID-nineteen have a vaccine or the effective treatment, I think we'll still continue to see potentially many outbreak regional impact. Obviously, this summer, we got a lot of rain here in China Eastern Front. Along the entire Yangtze River, I think a lot of provinces have flooding and the flooding is quite severe compared to the past few years.
So we do expect that, that would have some impact on our eastern part of operation, which is our strong base. So in Wagoneli Street, right? So I think we still see pretty strong headwinds, some of these difficulties in the Q3. Now however, as we mentioned, we have a very strong digital platform and we have strong very strong execution, including our logistic operation, which continue to work well even in amidst of the flooding situation in some of the regions. So we would make our efforts to, 1, obviously to drive sales recovery and then also continue to be vigilant on our cost fund as well.
So we have mixed on cost alignment as we have mentioned on our prepared remarks and also our earnings release, that is showing up quite well. So if you look at our labor productivity for the quarter, they have improved. If you look at our G and A, right, so excluding all this one times and timing issues, we actually see G and A decline year over year, which is quite less than given the fact that we normally would have merit increase, wage increase and new hire. So that's my comment. Hopefully, I addressed your questions.
Thank you, Andy. I guess, Rautan, in the last earnings release, we mentioned the challenge in transportation hub and tourist location and the summer holiday delayed and short term. And the delayed short term 2 weeks in June, 2 weeks in July. And for this earnings release, Andy just also mentioned the regional resurgence of the COVID-nineteen and little not so little flooding challenges in different parts of China. So I think we are ready for next question.
Thank you.
Thank you.
Certainly. Your next question comes from Lillian Lu from Morgan Stanley. Please ask your question.
Thank you. I have a follow-up question on
the same store sales growth. Obviously, I think Pizza Hut did very well, actually better than thought in Q2. Well, I think Joey also mentioned in the opening remarks that KFC was more affected. Just wanted to understand a little bit more in detail in terms of the impact to these 2 major banners recovery pace. Why it's a little bit different right now under the headwinds?
And related to that is more the outlook. How are we going to picture KFC and the Pizza Hut same store sales growth recovery pace in Q2 of Q4? Thank you.
Thank you, Lillian. For KFC and Pizza as I mentioned it in my presentation earlier, I'm proud of both of the progress. Q2 has been difficult, but both brands did well in their own different way. And let me make few comments one at a time. KFC reached to 89% same store sales within quarter 1, which is very, very quick supported by few weeks of strong sales before Chinese New Year and also very few trust restaurants opened during the pandemic time.
So KFC rebounded very, very quickly. And Pizza Hut, because of the closure of dining business in many of our stores during Q1, so sales was more impacted. Once the dining business was allowed during Q2, the dining business for Pizza Hut bounced back quite quickly As I can share with you that the Pizza Hut dining business recovered from 40% to 55% during the Q2. So that helps. In terms of the recovery path and outlook, for both trends that really come down to the theme that we talk about the resilience, adaptability and innovations.
And to be specific, I'm going to talk about short term and long term. So for the short term initiative, which something that we have been doing from the very beginning of Q1 and as well as Q2 is value. A lot of value promotions because we see that as a challenge and also opportunity. And as I mentioned in the last earnings release, the weekend was challenged. And thus in the Q2 time, we have shift our promotion towards more weekend and holiday and we are seeing the result.
And then 2nd short term initiative, which is something that we have been doing, have been doing quite well is menu and innovations. I'm talking about the product innovations. So for KFC, we have the exciting Zhongzi, the Dragon Ball Festival Zhongzi. And we have the Douhua, which is a very, very popular item. And then for Pizza Hut, we have something exciting, the roast stick rice and crayfish pasta and for people in Wuhan, we even launched Le Gammian with crayfish with pasta.
It was sold out very well in Wuhan. So these are the short term initiatives that we have been pushing. And then on top of that, we are also taking this year as a challenge, but also opportunity to work on our short term and long term business model transformation through as innovations here. Let me give you some example. So for KFC, we have been working very hard to expand our business to B2B2C, which is the corporation delivery members.
We have been preparing for it and the COVID-nineteen gave us perfect opportunity to give approach. So by now we have signed up more than 10,000 companies in our corporate delivery membership. And you can see the impact of our number in TA increase in both Q1 and Q2. In quarter 1, KFC TA increase is 27%. For Q2, it's 12%.
So it's not only driven by delivery, it's also driven by corporate delivery, very big order. Not to mention it gave us another source of traffic on top of our own app. So that is short term and long term. And then of course the contactless delivery that is very popular throughout the world right now. For Pizza Hut, our hardware in many fundamental capabilities come through.
So we've been working very hard on digital upgrade. And guess what, we get our mobile ordering before Chinese New Year. We did not know that COVID-nineteen was coming. And then COVID-nineteen came, it became a very good platform for takeaway and mobile order. So our mobile order or a seasonal order just increased significantly and Pizza Hut alone, the digital order for Q2 is 61% and that compared to last year is 29%, it's almost double.
So again, the business model transformed and for Pizza Hut, when we add the takeaway business, which is very, very driven, it's very much incremental because it's for 1 person together with delivery, the non dining business become more than 40% of our business. So we became less reliant on dine business. So that is an example of both short term and long term transformation. And then I would like to mention the members, we have reached 268,000,000 members and the members are our digital assets to allow us cross sell between the brands and between the business within the brands to increase frequency and cross sell. As I mentioned in my presentation earlier, we saw the doubling of average avenue per active user and that's very exciting in the past years and for the coming few years.
And last but not least, as Andy mentioned earlier, we are accelerating our digitization to help cost realignment as well. And all these are very long term, but also short term. Last but not least is our new builds and store refresh. So not only we are recovering sales, we are innovating our business model. We are building our long term profit in China because despite the short term challenges here, we are committed to China and we are very excited about the future development opportunity here.
Thank you, Lillian. Thanks a lot, Joey.
Okay. We have our next question from Michelle Ching from Goldman Sachs. Please ask your question, Michelle.
Hi, Joe, Yandi. A question about Pizza Hut. The second quarter improvement is quite encouraging. As you mentioned, we are pushing this takeaway 1% and etcetera. So can you share with us what are we going to focus in second half?
And given these kind of like sales mix change, so like are we going to see like some downsizing of the store or some new store format going forward? Thank you.
Thank you, Michelle. For the revitalization of Pizza Hut, I stay away from the turnaround because Pizza Hut was not never so bad to that neither turnaround. It has always been a very comfortable business. But for the revitalization of Pizza Hut, we always have a very clear step by step progress as good things do take time. In the last few years, it took us 18 months to turn the same store sales from negative to positive, which is not slow.
But let's look at what are the key things that we have done in the last few years. One is about the value for money and the quality of the product. So by last year, we managed to upgrade more than 70% of the menu. And by this year, when we launched the 30 year platinum menu, we further upgraded the menu. So that is in really good progress and the momentum will continue because Chinese customers does want and require good food with great value for money.
So and then what are the other things that we have done? We have take our time to refill our delivery infrastructure. So that's the hardware for 2018. We took the delivery rider back to our system, we rebuild it to improve the quality of delivery. Without the quality of delivery, without ensuring pizza will reach our customer nice and warm, it's very hard to grow the sales.
So we did the hard work and you can see the impact of the delivery business growth in 2019. Now in the last 2, 3 years, we also take the chance to rebuild the digital infrastructure, anywhere from member sales to mobile, to digital ordering, you name it, and right now the digitization. So now we have seen the increase of the pre order, digital order that all help save our labor costs, but also the business on to build a business on takeaway that come through, but it does take time. With these infrastructure in place, not to mention we have also upgrade our team. There are a lot of people movement here in the brand in the last few years and I'm quite happy with the team right now.
I think we have a fantastic team who are focused, who are innovative, who work hard, who can execute well. And what else are we doing to build the business in the short and long term, as you mentioned, Michelle, the new build at store refresh, We have focused on store refresh in the last two quarters in building new store. Actually, if we look at the last 3 years, we have been very conservative with building the new store until we get to the right business model. However, we have not been slow to upgrade our stores. Since 2017, we have refreshed about half of our entire Pizza Hut store portfolio.
In the process, as you can imagine, we've reduced the store size, we upgrade the store look and feel, we improve the efficiency and we'll continue that we'll continue to take aggressive pace to refresh our stores. At the same time, when we are rebuilding the new store, you will be able to see the total portfolio probably won't move that much, but the content component within the portfolio would change from sort of bigger store to smaller store, because even for the new store that we rebuilt in the last two quarters, the majority of them are much smaller store, which is the satellite store that I introduced to our investor back to last year Investor Day, much smaller, much better return of investment, much more suitable to increase the density of the store to improve the quality of delivery. So these are the few things that we are working on. And last but not least, the cost realignment. This is not short term.
I mean, anyone can do the short term cost cut. But what we are looking for is long term cost realignment, so that we are learning enough from this challenge and also taking advantage of the open mine situation or open mine opportunity for our staff during this difficult time to really rethink about our cost structure so that we can benefit from the realignment cost structure in the very long term. Thank you, Michelle. Thank you, Joining.
Your next question comes from the line of Kevin Yin from JPMorgan. Please ask your question, Kevin.
Thank you, Julie and Eddie. I have two questions. The first one for a technical question for Andy. Can you help us to understand why the operating leverage impact on Pizza Hut is not that bad as KFC? Because if you look at the Q1, quarter, their margin, restaurant margin is pretty stable versus KFC has continued declining.
So this is a technical one. Second one, I'd like to know more on the impact from the flood. Can you give some vivid example or vivid case that like in some region or province, how badly the store sales are negative impact, I mean, in some specific region, which we had some very bad flat and how bad is the decline? Thank you.
Thank you, Kevin. So let me take your first questions regarding the impact on KFC and Pizza Hut and how they're different. So I think there's a couple of questions about the performance of the 2 brands. I think as we may have SSG, which is same store growth, was 10%, declined in KFC and about 12% in pizza, which is a quite improvement, right? So in the for KFC case, it's improved by 1% and then more pronounced improvement at Pizza Hut, which in the last quarter was down about 31%, right?
So that's quite broad improvement there. But that's still a massive actual improvement, right? So if you look at both brands, because the SSG calculation actually exclude temporary stall closure, right? And so if you take out if you look at the stall we're opening in the second quarter, the system sales we've covered actually improved quite a bit on both fronts. And on a year over year basis, from a negative 20% in Q1 to about 7% in Q2.
So that's important. And obviously, we also see April and May improvement, sequential improvement in both SSG and also overall system sales As we mentioned, we did get impacted by some events in June and early part of July. One is that there's a regional outbreak in Northern China and then there's a delayed summer holiday. And then of course, as you mentioned, there's flooding in June July, a part of a large, large part of China. So I think that's very personal.
And as we mentioned, obviously, KFC have a very strong recovery right after the outbreak. Pizza Hut in the Q1 more impacted and Air Force CAVAR could be better recovery. But both brands actually have recovered quite well in their operations. In terms of margins as well, so I think if you look at the margin on both at both brands, it has improved. And I think this is hopefully will continue to be the case of sell deleveraging beginning to ease as we move forward in the coming quarter.
But obviously, KFC have been very profitable before, right? The UC margin was about 17%, almost 18%. And then the sales revenue would impact a little bit more on that. Particularly the reason is because if you look at transportation hub, which is a not only account for the high single digit of our sales, but also account for low double digit of our profitability. And that impacting that sales trend over in transportation hub and tourist location would have a disproportionate impact on KFC compared to Pizza Hut.
But I think if you look at both brands, labor productivity, cost control will help us to see sequential margin improvement?
Let me thank you, Andy. Let me make a few comments about the flooding. This year, we do have a lot of water. I mean, the water volume is comparable to 1998, but the impact is nothing like 1998. Let me give you a big picture and then I'll go through why.
The big picture is lower tier city sales actually recover better than that of the top tier cities. And that includes the regions that were more impacted by flooding. That's mainly like Jiangxi and Guadong area, but mainly in the lower tier cities. So why the sales in lower tier cities hold up still hold up slightly better despite the flooding? Because there are five reasons.
One is a lot of these lower tier cities, that means we only have some pocket of store being impacted, not huge scale. So when some stores impacted that is not at the scale of Tier 1 cities, so we can handle that kind of challenge. But also due to the second reason is our stores tend to recover much faster than our competitors. So one example is that one little time, the gas got turned off by the city government, the entire time. But actually that means more business to our store because our store use electricity, not gas.
So when our customer could not have hot food at home, they come to KFC, they could have hot food there, not to mention we always have free charger for your phone and free clean water if needed. 3rd reason is the lack of transportation and tourist hubs in the small town. The transportation hub and the tourist hub, as Andy mentioned, is almost at the very high single digit, almost double digit of our sales. And when it severely impacted, it does impact our overall number, but the small time usually the stores are less impacted by that. And 4th reason is we are one of the few trust brands in the lower tier cities.
So during the difficult time, we actually benefit from it. Last but not least, delivery growth actually is even higher in the lower tier cities than top tier cities. So I hope that gives you a better color of the dynamic of the low tier cities despite the flooding challenges. Thank you, Kevin.
Thank you.
Your next question comes from Anne Ling from Jefferies. Please ask your question, Anne.
Hello, management team. Thank you very much for taking my call my questions. And so I have a question regarding the some of this one off benefit. Andy, you mentioned about the $30,000,000 in Q2 on the social insurance payment and also like 10 year at $10,000,000 rental relief. If we look at like yesterday's stop ups results.
They also mentioned about some VAT extension, which we saw the announcement back in February that all the catering business and lodging business will have this tax reduction. That helped the same store sales as well as their profitability. I just wonder whether for this quarter, are you enjoying any sort of this kind of like VAT exemption benefit? And since this benefit will last till December, may I know how soon we will be able to get this kind of benefit? What are the procedures on this part?
And is there any additional one time benefit in this quarter and in the foreseeable future? Thank you.
Hi, Anne. I will answer your question about it. Hi, can you hear us?
Yes.
Okay. So thank you for the questions. VAT and its impact a little bit more complicated. There's obviously way aware and have looked into the VAT reductions, temporary suspension of that by the government at the beginning of the year. And generally VAT that we collect from our sales is generally less than our VAT credit for our company services for the input cost.
So there's offsetting factors, right? So you have the sales to consumer and we have also used product and services and that's offsetting. So after very careful analysis that we have done, we don't see there's meaningful impact on our top line or bottom line from the VAT exemption that the government have launched this year. Obviously, we'll continue to look into it because tax itself is a very complex issue. But with regard to VAT, we would have very limited impact on our sales or our profitability.
In terms of other one times, so we obviously received the social insurance payment reduction in both the Q1 and the Q2. But as you know, that was because the government launched that in February and then have extended that to June. Unless some new update, that may go away in the Q3. So unless the government extend the program again, we may see that one time relief to go away. The other one is that rental relief.
We received that in the Q1 after negotiating with the rent loss. Demand is less in the Q2 compared to the Q1. We do expect that as the recovery continue that would also be phased out. So I think some of this one half impact may be lessened in the Q3 and then also in the Q4.
Okay. And Andy, when will we know that the government time line on that
part? No.
I think time line on that part?
No. I think it's common policy, so it's really up to the government to announce the program.
Okay, okay. Got it. Thanks.
Your next question comes from the line of Christine Peng from UBS. Please ask your question, Christine.
Thank you, Andy. So I
just have a question regarding the cost alignment that you mentioned earlier in your presentation. So can you elaborate as regards to number 1, what measures you have been taken to do this cost alignment? And secondly, what's going to be the margin implication, for example, in 2021, once the revenue normalize to the pre COVID-nineteen level, especially for Pizza Hut? Thank you. Okay.
Christine, thank you for your question. Yes, so obviously, as we look into the cost structure and we align that, there's 2 sort of like drag and go for us. 1, obviously, is to continue to make our cost structure more flexible to handle contingency such as we have seen in COVID-nineteen. The other part is that we'll continue to try to drive our overall construction more efficiently, so that as Joey mentioned, taking advantage of alignment to push through some of the initiatives that would help us to make our cost strategy cost structure a competitive component. Now so if you look at our, component.
Now so if you look at our, for example, sales ads, obviously almost all wearables. And but we're also focusing on using technologies, using product innovations to sort of improve the restaurant level to manage inventory churn better. So that can handle fluctuations in demand shift, for example. In labor, for example, as we mentioned before, over time, we have shipped some of the labor components into more wearable portion with more flexible crew scheduling, etcetera. Again, it will give us some resiliency in terms of handling the flux in sales changes.
And then also, if you look at obviously, we benefit from sort of benefit, but in the longer term, it's the labor policy improvement that we use technology to drive that will really help us in long run to maintain that labor productivity improvement that we have seen over the past two quarters, right? So we will continue to focus on that, invest in technology digital technologies, both in the storefront as well as in the back of the kitchen as well as our offices to make sure that labor is going to continue to improve. Now if we turn to, for example, occupancy and other expenses, we have a relevant component. Apart that, royalty fees, advertising, marketing, we can that's somewhat tied to sales. But if you look at over the past few years, for example, we have reduced the upfront investment cost for our store opening.
That have a beneficial impact, which is in a per store basis, depreciation have decreased even though it's fixed, okay, per store basis. And if you look at Rand, for example, we have 80% of our lease have a variable components to it. If you look at the rental cost, only 60% of that is fixed. So we have doing some flexibility in our rental expenditure. Obviously, we're working very hard to negotiate better lease and better contract whenever possible given their current situation.
Now if you look at G and A, as we mentioned, we have done a very large initiative looking into G and A and that been ongoing for the last couple of years now. We continue to see our effort there. So if you call it, for example, as you mentioned, you look excluding some one time and trimming shift, you actually see G and A expenses declining year over year. So that
more competitive in the long run. Thank you. Thank you. Thank you. Thank you.
Thank you. Thank you. Thank you. Thank you. Thank you.
Thank you. Thank you. Thank you.
Thank you. Thank you. More competitive in the long run.
Thank you, Andy. Can I just ask
Sure? Sorry, we had one last question from Xiaopo Wei from Citigroup. Please ask your question Xiaopo.
Hi. Thank you for taking my question. I have a quick question on Pizza Hut. If you look at the Pizza Hut recovery actually not only the top line, but also the profit improved a lot Q on Q. You mentioned a lot of factors.
I think it's going to be short term, let's recall what you have been talking about the revitalization effort of Pizza Hut in the past 2 years. Shall we say that the behavior changes of consumer post COVID may actually put Pizza Hut in a better position of revitalization post the COVID outbreak Because we're seeing other kaiju dining players actually recover much slower than Pizza Hut in my observation. Could Julie give us any color on that?
Hi, Xiaopo. Thank you. Well, we are certainly grateful to see the recovery in both top line and bottom line. As I mentioned, the dine in recovery as well. And the bottom line recovery, of course, to a great extent is because of the sales leverage.
Our sales is back. So the bottom line definitely looks better. But with that said, there are certainly few things that happen here to help us recover better. I don't know whether I would say COVID-nineteen give us opportunity or we just have been prepared in the last few years. And it just happened the timing is not too bad for us.
The innovation capability, the full improvement certainly help a lot because our team right now is so innovative and something that I mentioned in the last earnings release, we are able to use whatever ingredient in our store to come up with very cost effective and efficient food for the takeaway business. One example is the jusheng, the steak fries, which we use actually our pizza oven to cope. Just go through like use the pizza oven, go through a very efficient and efficient in terms of cost structure as well and it worked very well for the takeaway for the 1 set Yiren, 1 set new end and therefore it works. And that is not because COVID gave us the opportunity because we've been working on the innovation capability. And then the second is the delivery.
We have our own delivery rider when we really need it. As you can imagine, if we do not have our delivery rider, even if the business is there, So whether you have or you don't have the delivery rider, decide whether you have or don't have the sales, as simple as that, because everyone will be fighting for the delivery rider at some time such as COVID-nineteen big rain or snow whatever etcetera. And then the third is the digital effort. The digital capability infrastructure of Pizza Hut is slightly behind KFC, because the KFC revitalization happened much faster. It happened as early as 2015 and then Pizza has started later, so the infrastructure follows.
But once we get the infrastructure ready, the pre order, the mobile ordering, the digital payment, etcetera, etcetera, it just worked. Our takeaway business just happened and that it was less than 5% of our business last year, now it's double digit of our business and it's very strategic focused membership. Our long term very strategic focused membership. Pizza Hut itself has over 80,000,000 members now and the sale for member is more than 50% and that's big number. Just imagine 50% of our sales, we can reach out to the customer directly at very low cost efficiently and that help us drive the business.
Last but not least, our store environment is much better because of the hardware in the last few years. So when the store environment look much nicer, when the food is good and the price is good, it allow us to do some very effective promotion like Sichu Tang, all you can eat for steak and crayfish. And say in crayfish, we can put it in the all you can eat menu because our supply chain is very efficient. So it all just all the hard work come together, particularly during this difficult time to allow us to recover probably slightly better than the other casual dining restaurants. Last, last but not least is Pizza Hut does not have high proportion of sales from transportation and tourist sites.
And that is quite a almost mid single digit sales impact in same store sales for KFC. Pizza Hut, we don't have the challenge in this particular time. So you can see why it helped Pizza Hut revitalization even during this difficult time. And we certainly are hopeful. And right now we have the right team, right at the right product, right price.
We are hopeful for the ongoing revitalization of Pizza Hut business as well. Thank you so much, Xiaopo.
Thank you, Joe. Stay healthy, please.
Thank you. You too.
Okay. There are no further questions at this time. I'll now hand the conference back to your presenters for any closing remarks.
Thank you for joining the call today. We look forward to speaking with you on the next earnings call. And that concludes today's call. Have a great day. Thank you.
Ladies
and gentlemen, that will conclude today's conference call. Again, thank you all for participating. You may now all disconnect.