Ladies and gentlemen, thank you for standing by, and welcome to the Yum China 2020 second quarter earnings conference call. At this time, all participants are in a listen-only mode. Following the presentation, there will be a question-and-answer session. To ask a question today, you will just need to press star one on your telephone. 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 second quarter 2020 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 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 three sections.
Joey 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. We will open the call to questions. You can find the webcast of this call and a point 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. 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 first quarter. KFC launched Buy One, Get One weekends 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 focused our resources on engaging with our members, targeting specific offers and promotions. Our privilege programs drive frequency, spend, and cross-sales. However, we are still experiencing significant headwinds. The recovery path is non-linear and uneven. April and 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 three important achievements. First, 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. Second, 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. We saw 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 taste 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 third quarter, I look forward to continuing our innovation journey. We are cautiously optimistic. The recent regional outbreaks highlight that the recovery is nonlinear 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. 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 million 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 second quarter. While overall sales declined during the outbreak, our year-on-year member sales grew by double digits. We acquire 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 an entirely new group of customers 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 program. We have sold close to 10 million privileged 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 brand. 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 bookstore on our KFC app.
Whether through short-term promotions or long-term member engagement, our digital strategy extends across brands and channels, from dine-in 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 36% year-on-year growth.
Our delivery business is top of mind with our consumers. It's consistently rated 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. With redesigned menu and packaging suitable for takeaway, we used our digital channels to communicate the value and convenience of our one-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. 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 Air series, thin crust pizzas that appeal to smaller appetites. We extend our leadership in the steak category with thick-cut Angus steak, and importantly, make steak available for delivery. Our Monet afternoon tea set 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. I hope you will try it soon. KFC brought back favorites Beef Wrap and Taco Jr. during the quarter, with crayfish in the taco to showcase abundance and premium.
We extended drink, dessert, and late-night delivery lines. Our breakfast tofu pudding, which is quickly became a crowd favorite, and we showcase festival innovations with exciting products such as Scallop Salty Egg Yolk Rice Dumpling. In Chinese, that's [Non-English content]. To drive traffic, KFC also launched value campaigns throughout the quarter. Our plant-based protein pilot was successful. Introduced across KFC, Pizza Hut, and Taco Bell, they sold out quickly.
Once the domestic production may be scaled, this has great potential to bring our brand to new and discerning consumers. Now, let me wrap up with a few brand-specific observations. First, KFC. KFC continued to demonstrate its resilience and operational excellence. Second-quarter transactions substantially improved compared to the first quarter. 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 million views and comments on social media, driving long queues in our stores. We have seen encouraging signs of transaction recovery. 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. Third, Taco Bell has now expanded beyond Shanghai. We opened our first 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. Integration of our Chinese dining unit is on track. Our Little Sheep and Huang Ji Huang store sales are recovering, and we are leveraging the Yum China network in areas of delivery, retail, and logistics to further Huang Ji Huang's capabilities. With that, I will hand over call to our CFO, Andy Yeung. Andy, please.
Thank you, Joey, and hello, everyone. I will first address financials and developments in the second quarter, then provide some color on our outlook. Unless noted otherwise, figures mentioned refer to the second quarter of 2020. All percentage changes are before the effect of foreign exchange. Now, let me start with the second quarter results. With over 99% of stores open, total Q2 revenues recovered to 93% of the prior years.
In the first quarter, revenues were 79% of the prior year level. Both of our core brands have quarter-over-quarter improvement in transaction volume. However, traffic is still below pre-COVID levels. KFC's same-store sales recover to 90% of prior year, compared to 89% in the first quarter. We saw sequential increases in average unit volumes in April and May, but a weaker June. While weekday and dine-in recovery benefited from our promotional campaign, regional differences persist.
Our transportation and tourist hub sales, which accounted for high single-digit sales mix, were still significantly and negatively impacted. The high mix of younger school-age customers meant that the delayed and shortened school holidays had a bigger impact on KFC than Pizza Hut. Lingering effects of the outbreak on consumer behavior remain a headwind. Pizza Hut same-store sales recover to 88% of prior years.
This is a significant improvement from the first fiscal quarter when sales were 69% of prior year. While a hit to KFC, Pizza Hut has a significantly lower exposure to transportation hub locations. Our store in lower tier cities continued to perform better than stores in the higher tier cities, partly driven by a higher concentration of transportation hubs and tourist locations in higher tier cities. Our strong brand equity also helped market performance in the lower tier cities. The sales recovery is non-linear and uneven.
As Joey mentioned, growth momentum was slowed by the resurgence of regional infections, delayed and shortened summer holidays, and continued anemic sales at major transportation and tourist locations. We opened 169 stores, mostly at KFC. Construction activities have mostly normalized, and the pace of the new builds is on track. Operating margins were 13.7% 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 second quarter, our contracts are generally signed three to six months in advance. Commodity inflation for the quarter was 3%. Value promotions are key to drive traffic into our stores, which will also impact our margins. Cost of labor was 22.7%, a 0.7% year-over-year decrease.
Productivity improvements and temporary relief more than offset the impact of sales leveraging and wage inflation. Within this figure, wage inflation was 3%. This was diffused in many of our markets as government-mandated increases in minimum wage were deferred. 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 monitoring, which drive improvements in productivity. Lastly, reductions in social insurance payments were roughly $30 million. We negotiated approximately $10 million in rental relief in this quarter. We implement cost realignment measures and benefited from reduced social insurance payments. Due to timing of government incentive receipt, G&A costs increased by 8% year-over-year. Excluding the impact of timing shift of government and other one-time expenses, G&A would have decreased slightly year-over-year. We recorded impairment charges of $24 million.
We achieved operating profit of $128 million, bolstered by cost realignment and one-time relief. Looking below the line, our gain from equity investment in Meituan was $45 million, which is before $14 million in U.S. income tax, were two gains recognized during the second quarter and prior periods. Our effective tax rate was 25.2%. Net income was $132 million. Diluted EPS was $0.34 and adjusted diluted EPS was $0.35.
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. One, transportation and tourist volumes continue to be anemic. Two, the delay and shortened school holidays will impact sales momentum. Three, the COVID-19 situation is unpredictable with its lingering effects and regional outbreaks. We expect the recovery to remain non-linear and uneven.
Four, sales deleveraging will continue to pressure margins, especially as one-time government and rental relief are phased out. In response to this reality, we need to be patient and vigilant in rebuilding our sales momentum, focusing on our strength in menu and digital innovation. Successfully leveraging our member base and digital ecosystem to drive frequency and spend will be key.
Our promotions are adaptable, and we have seen some successes in building weekend recovery through greater value offerings. Lastly, we are taking decisive actions to realign our cost structure. As we look ahead, we continue to target 800-850 new stores for this year. Investment in digital technology and supply chain continues. Our 2020 CapEx plan is unchanged in the range of CNY 500 million-CNY 550 million. 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 digits. Risks to the global supply chain remain, which may have potential implications to our domestically sourced products. 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 are contained. The lingering effect of COVID-19 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&A. Debbie?
Thanks, Andy. We'll now open the call for Q questions. In order to give as many people as possible the chance to ask questions, please limit your question to one at a time. Operator, please start the Q&A.
Thank you. Ladies and gentlemen, again, we will begin that Q&A session. If you did wish to ask a question, again, you can just press star one on your telephone keypad and just wait for your name to be announced. Your first question comes from Chen Luo from Bank of America. Please ask your question, Chen.
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 challenges may continue to impact 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? Just now, Joey also mentioned that the summer season is likely to be challenging. Do we have any rough idea as to the trends in Q3 versus Q2? Thank you.
Hi, Chen Luo. Let me take this question first and then maybe Joey can add a little bit more color later. In term of the sequential improvement in July compared to June, as we mentioned before on our prepared remarks, right now, there's a couple of happenings that we see. We have seen the transportation hubs as well as the tourist locations which account for high single digit of our sales mix are being impacted quite significantly by the COVID effect, down 50%-60%.
I think unless there's significant changes in the situation, I think that will continue to be a headwind for us. We also mentioned that shortened and delayed school holiday which should have a large impact on KFC compared to, say, Pizza Hut. As you know, normally in China, school holiday started in January, it would be in June.
This year because of COVID-19 situation, it has been delayed until mid-to-late July, depending on what location, the provinces, and whatnot. I think we will still have some impact in July. For the fourth quarter, this year, we have a holiday shift for the Mid-Autumn Festival. Which last year was in September. This year it is going to be in October 1st, I think. There's also a holiday shift impact. That will probably impact a couple of points, if you look at that kind of shift. Those are some of these. Of course, in June, we have this mini outbreak in Beijing, that also impacted sales in, not just in Beijing, but the surrounding provinces. The situation has improved quite significantly in Beijing. However, we do see other regional outbreaks, for example, in Liaoning, Dalian, and also in Xinjiang.
We do expect that kind of potential regional outbreak to persist until either the COVID-19 have a vaccine or effective treatment. I think we'll still continue to see potentially, mini outbreak regional impact. Obviously, this summer, we got a lot of rain here in China eastern part. 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. We do expect that that would have some impact on our eastern part of operation, which is our strong base. In Guangdong district. I think we still see pretty strong headwinds, some of these difficulties in the third quarter. However, as we mentioned, we have a very strong digital platform.
We have very strong execution, including our logistic operation, which continue to work well even in the midst of the flooding situation in some of the regions. We would make our efforts to, one, obviously to drive sales recovery, and then also continue to be vigilant on our cost front as well. We have made some cost alignment as we have mentioned on our prepared remarks and also our earnings release. That is showing up quite well. If you look at our labor productivity for the quarter, it has improved. If you look at our G&A, so excluding all those one times and timing issues, we actually see G&A decline year-over-year. Which is quite significant given the fact that we normally would have merit increase, wage increase and new hire. That's my comment. Hopefully, I addressed your question.
Thank you, Andy. I guess, Luo, in the last earning release, we mentioned the challenge in transportation hub and tourist location, and the summer holiday delayed and shortened. The delay shortened two weeks in June, two weeks in July. For this earning release, Andy just also mentioned the regional resurgence of the COVID-19 and the lots of little flooding challenges in different parts of China. I think we are ready for next question. Thank you.
Thank you.
Certainly. Your next question comes from Lillian Lou 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 second quarter. Well, I think Joey also mentioned in the opening remark that KFC was more affected. Just wanted to understand a little bit more in detail in terms of the impact to these two major banners' recovery pace. Why it's a little bit different right now under the headwinds. Relate to that is more the outlook. How are we going to picture KFC and the Pizza Hut same-store sales growth recovery pace in second quarter or the fourth quarter? Thank you.
Thank you, Lillian. For KFC and Pizza Hut, as I mentioned it in my presentation earlier, I'm proud of both of the progress. Q2 has been difficult, both brands did well in their own different way. Let me make a few comment one at a time. KFC reached to 89% same-store sale within quarter one, which is very quick, supported by a few weeks of strong sales before Chinese New Year, and also very few new restaurant opened during the pandemic time.
KFC rebound very quickly. In Pizza Hut, because of the closure of dine-in business in many of our store during Q1, so sales was more impacted. Now, once the dine-in business was allowed during Q2, the dine-in business for Pizza Hut bounced back quite quickly. As I can share with you that the Pizza Hut dine-in business recover from 40% to 55% during the Q2.
That helps. In terms of the recovery path and outlook, for both brands, that really come down to the theme that we talk about, the resilience, adaptability, and innovations. To be specific, I'm going to talk about short-term and long-term. For the short-term initiative, which something that we have been doing from the very beginning of Q1 and as well Q2, is value. A lot of value promotions, because we see that as a challenge and also opportunity. 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 results. Second short-term initiative, which is something that we have been doing quite well, is menu and innovations. I'm talking about the product innovations.
For KFC, we have the exciting [Non-English content ] Dragon Boat Festival, [Non-English content ]. We have the [Non-English content ], which is a very popular item. For Pizza Hut, we have something exciting, the roast steak rice and crayfish pasta. For people in Wuhan, we even launch [Non-English content ] with crayfish, with pasta. It was sold out very well in Wuhan. These are the short-term initiatives that we've been pushing. 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 our innovations here. Let me give you some example. For KFC, we have been working very hard to extend our business to B2B2C, which is the corporation delivery members.
We have been preparing for it. The COVID-19 gave us perfect opportunity to give a push. By now, we have signed up more than 10,000 companies in our corporate delivery membership. You can see the impact of our number in TA increase in both Q1 and Q2. In quarter one, KFC TA increase is 27%. For Q2, it's 12%. 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, [Non-English content ], on top of our own app. That is a short-term and long-term. Of course, the contactless delivery that is very popular throughout the world right now. For Pizza Hut, our hard work in many fundamental capabilities comes through. We've been working very hard on digital upgrade. Guess what?
We get our mobile ordering before Chinese New Year. We did not know that COVID-19 was coming. Then COVID-19 came. It became a very good platform for takeaway and mobile order. Our mobile order or digital order just increased significantly. Pizza Hut alone, the digital order for Q2 is 61%. That compared to last year's 29%, it almost double. Again, the business model transform. For Pizza Hut, when we add the takeaway business, which is very driven, it's very much incremental because it's for one person. Together with delivery, the non-dine-in business become more than 40% of our business. We become less reliant on dine-in business. That is an example of both short-term and long-term transformation. Then I would like to mention the members.
We have reached 268 million members, and the members are our digital asset to allow us cross-sell between the brands and between the business within the brand. To increase frequency and cross-sell. As I mentioned in my presentation earlier, we saw the doubling of average revenue per active user, and that's very exciting in the past years and for the coming few years.
Last but not least, as Andy mentioned earlier, we are accelerating our digitization to help cost realignment as well. All these are very long term, but also short term. Last but not least, is our new builds and store refresh. 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.
We have our next question from Michelle Cheng from Goldman Sachs. Please ask your question, Michelle.
Hi, Joey and Andy. A question about Pizza Hut. The second quarter improvement is quite encouraging. As you mentioned, we are pushing this takeaway one person send menu, et cetera. Can you share with us what are we going to focus in second half? Given this kind of sales mix change, are we going to see 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 never so bad that need a turnaround. It has always been a very profitable business. For the revitalization of Pizza Hut, we always have a very clear step-by-step progress, and 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. 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. By last year, we managed to upgrade more than 70% of the menu. By this year, when we launched the 30th Anniversary Platinum menu, we further upgrade the menu.
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. What are the other things that we have done? We have take our time to rebuild our delivery infrastructure. That's the hard work 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. We did the hard work, and you can see the impact of the delivery business growth in 2019. In the last two, three 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.
Now we have seen the increase of the pre-order, digital order. That all help save our labor cost, but also to build a business on takeaway. That comes through, but it does take time. With this infrastructure in place, not to mention, we have also upgrade our team. There are a lot of people movement here in the brand 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. What else are we doing to build the business in the short and long term? As you mentioned, Michelle, the new build and store refresh. We have focused on store refresh in the last two quarters instead of building new store.
If we look at the last three years, we have been very conservative with building the new store until we get to the right business model. We have not been slow to upgrade our stores. Since 2017, we have refreshed about half of the 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, the component within the portfolio will change from sort of bigger store to sort of smaller store.
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. These are the few things that we are working on. Last but not least, the cost realignment. This is not short-term. I mean, anyone can do the short-term cost cut.
What we are looking for is the long-term cost realignment so that we are learning enough from this challenge, and also taking advantage of the open mind situation or open mind 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, Joey.
Your next question comes from the line of Kevin Yin from JPMorgan. Please ask your question, Kevin.
Thank you, Joey and Andy. I have two questions. The first one, a technical question for Andy. Can you help us to understand why the operating leverage impact on Pizza Hut is not that bad as a KFC? If you look at the first quarter, second quarter, their margin, restaurant margin, pretty stable versus KFC has continued declining. That's just 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 a negative impact, I mean, in some specific region which we had some very bad flood. How bad is the store sales decline? Thank you.
Thank you, Kevin. Let me take your first questions regarding obviously the impact on KFC and Pizza Hut and how they different. I think there's a couple of questions about the performance of the two brand. I think as we have mentioned on the call, the SSG, which is Same Store Growth, was 10% declined in KFC and about 12% in Pizza. Which is a quite improvement, right? For KFC case is improved by 1%, and then more pronounced improvement at Pizza Hut, which in the last quarter was down about 31%. That's quite a lot improvement there. That's still mask the actual improvement, right? If you look at the both brand, because the SSG calculation actually exclude temporary store closure, right?
If you look at the store reopening in the second quarter, the system sales recovery actually improved quite a bit at both brands. On a year-over-year basis, it improved from -20% in Q1 to about 7% in Q2. That's important. Obviously, we also see April and May improvement, sequential improvement, in both SSG and also overall system sales improvement. As we mentioned, we did get impacted by some events in June and early part of July. One is that there's regional outbreak, northern China, and then there's a delayed summer holiday. Then, of course, as you mentioned, this flooding in June and July in a large part of China. I think that's very question again. As you mentioned, obviously, KFC have a very strong recovery right after the pit of the outbreak.
Pizza Hut, in the first quarter, more impacted and therefore see a relatively better recovery. Both brands actually have recovered quite well in terms of operation, in terms of the margins as well. I think if you look at the margin on both brands, it has improved. I think this is, hopefully, will continue to be the case as sales deleveraging are beginning to ease as we move forward in the coming quarter. Obviously, KFC have been very profitable before, right? The usage margin was about 17%, almost 18%.
Then the sales margin would impact a little bit more on that. Particularly, the reason is because if you look at transportation hub, which is not only account for the high single digit of our sales, but also account for low double digit of our profitability. That impacting that sales trend over in transportation hub and tourist location would have a disproportionate impact on KFC compared to Pizza Hut. I think, if you look at both brands, labor productivity, cost control, will help us to see sequential margin improvement.
Thank you, Andy. Let me make a comment about the flooding. This year, we do have a lot of water. I mean, the water volume is comparable to 1998. The impact is nothing like 1998. Let me give you a big picture. Then I'll go through why. The big picture is lower tier cities sales actually recovered better than that of the top tier cities. That include the regions that were more impacted by flooding. That's namely like Jiangxi and Guangdong area. Mainly in the lower tier cities. Why the sales in lower tier cities still hold up slightly better despite the flooding? 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.
When some stores are impacted, that is not at the scale of Tier 1 city, so we can handle that kind of challenge. Also due to the second reason is our store tend to recover much faster than our competitor. One example is that one little time, the gas got turned off by the city government, the entire time. Actually that means more business to our store because our store use electricity, not gas. When the 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 then free clean water if needed. Third reason is the lack of transportation and tourist hubs in the small town city.
In the small town, the transportation hub and the tourist hub, as Andy mentioned, is almost aggregate a high single digit, almost double digit of our sales. When it's severely impacted, it does impact our overall number. The small town, usually the stores are less impacted by that. Fourth reason is we are one of the few trust brands in the lower tier cities. 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 city. I hope that give you a better color of the dynamic of the lower tier cities despite the struggling challenges. Thank you, Kevin.
Thank you.
Your next question comes from Anne Ling from Jefferies. Please ask your question, Anne.
Hey. Hello, management team. Thank you very much for taking my call, my questions. I have a question regarding some of this one-off benefit. Andy, you mentioned about the $30 million in second quarter on the social insurance payment and also $10 million rental relief. If we look at yesterday's Starbucks results, they also mentioned about some VAT exemption, which we saw the announcement back in February that all the catering business and lodging business will have this tax reduction.
That helped their same store sales as well as their profitability. I just wonder whether for this quarter, are you enjoying any sort of this kind of VAT exemption benefit? 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? 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. Thank you for the questions. VAT and its impact a little bit more complicated. Obviously, we are aware and have looked into the VAT reductions, temporary suspension of that by the government at the beginning of the year. Generally, VAT that we collect from our sales, is generally less than our VAT credit for our company services, for the input cost. There's offsetting factors, right? You have your sales to consumer, and we have also used product and services, and that's offsetting. 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 issues.
In regard to VAT, we would have very limited impact on our sales or our profitability. In terms of other one times, we obviously received the social insurance payment reductions in both the first quarter and the second quarter. 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 first quarter. 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 first quarter after negotiating with the landlord. Demand is less in the second quarter compared to the first quarter. We do expect that as the recovery continues, that would also be phased out this year. I think some of these one-time impact may be lessened in the third quarter and then eventually also in the fourth quarter.
Okay. Andy, when will we know that the government might extend the social insurance payment exemption?
Yeah, when they announce it, then we'll know.
There's no timeline on that part?
No. I think it's government policy, so it's really up to the government to announce the program.
Okay. Got it. Thanks.
Your next question comes from the line of Christine Peng from UBS. Please ask your question, Christine.
Thank you, Andy. I just have a question regarding the cost alignment that you mentioned earlier in your presentation. Can you elaborate, as regards to, number one, what measures have been taken to do this cost alignment? Secondly, what's going to be the margin implication, for example, in 2021, once the revenue normalize to the pre-COVID-19 level, especially for Pizza Hut? Thank you.
Okay. Christine, thank you for your question. Yeah. Obviously, as we look into the cost structure and realign that, there's two sort of drive and goal for us. One, obviously, is to continue to make our cost structure more flexible to handle contingency, such as we have seen in COVID-19. The other part is that we'll continue to try to drive our overall cost structure more efficiently, so that, as Joey mentioned, taking advantage of the current situation where folks are more aware of the need for better cost control, and better cost realignment to push through some of the initiatives that would help us to make our cost structure a competitive advantage for us in the longer term. With that in mind, so we go through sort of like each major category of our cost component now.
If you look at our, for example, COGS, it's obviously almost all variable. We're also focusing on using technologies, using product innovations, to sort of improve wastage in the restaurant level, to manage inventory turn better. That can handle fluctuations in demand shift, for example. In labor, for example, as we mentioned before, over time, we have shift some of the labor components into more variable portion with more flexible crew scheduling, et cetera. Again, give us some resiliency in terms of handling the flux in sales changes. Also, if you look at, obviously we benefit, but in the longer term is the labor productivity improvement that we use technology to drive that will really help us in the long run to maintain that labor productivity improvement that we have seen over the past two quarters, right?
We'll continue to focus on that, invest in digital technologies, both, in the store front as well as in the back of the kitchens, as well as our offices to make sure that labor productivity to continue to improve. If we turn to, for example, occupancy and other expenses, we have a level component part of that, royalty fees, advertising, marketing, that's somewhat tied to sales.
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 from a per store basis, depreciation have decreased even though it is fixed. Okay? Per store basis. If you look at rent, for example, we have 80% of our lease have a variable components to it. If you look at the rental cost, about only 60% of that is fixed.
We have given 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. If you look at G&A, as we mentioned, we have done a very large initiative looking into G&A, and that have been ongoing for the last couple years now. We will continue to see our effort there. If you call it, for example, as we mentioned, you look excluding some one-time and timing shift, you actually see G&A expenses declining year-over-year. That will continue to be our focus, which is basically we align the overall cost structure, make us more flexible, more competitive in the long run.
Thank you, Andy.
Thanks.
Thank you.
Thank you, Andy. Can I just ask?
Sure.
Sorry, we have one last question, from Xiaopo Wei from Citigroup. Please ask your question, Xiaopo.
Hi. Thank you for taking my question. I have a very quick question on Pizza Hut. 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 other factors. I think it will be short term, let's recall what Joey has been talking about in the revitalization effort of Pizza Hut for two 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? We're seeing other casual dining player actually recover much slower than Pizza Hut, in my observation. Could Joey give us other 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. The bottom line recovery, of course, to a great extent, is because of the sales leverage. Our sales is back, the bottom line definitely look better. With that said, there are certainly few things that happened here to help us recover better. I don't know whether I would say COVID-19 gave us opportunity or we just have been prepared in the last few years, it just happened that the timing is not too bad for us.
The innovation capability, the food improvements certainly help a lot because our team right now is so innovative, it's something that I mentioned in the last earning 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 ju fan, the steak rice, which we use actually our pizza oven to cook.
Just go through like a use the oven, right? Use the pizza oven to go through. Very efficient, and efficient in terms of cost structure as well, and it worked very well for the takeaway for the one set unit. Therefore, it worked. That is not because COVID-19 gave us the opportunity, because we've been working on the innovation capability. Secondly, the delivery. We have our own delivery rider when we really need it. As you can imagine, if we did not have our delivery rider, even if the business is there, whether you have or you don't have the delivery rider decide whether you have or you don't have the sale. As simple as that. Everyone will be fighting for the delivery rider at certain times, such as COVID-19 or big rain or snow, whatever, et cetera.
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 Hut started a bit later, so the infrastructure follows. Once we get the infrastructure ready, the pre-order, the mobile ordering, the digital payment, et cetera, it just worked. Our takeaway business just happened, and thus, it was less than 5% of our business last year. Now it's double digit of our business and it's quite substantial. Not to mention, last but not least, our long-term, very strategic-focused membership. Pizza Hut itself has over 80 million members now, and the sales per 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. 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 business time , all you can eat for steak and crayfish. Steak and crayfish, we can put it in the all you can eat menu because our supply chain is very efficient. All the hard work come together, particularly during this difficult time, to allow us to recover probably slightly better than the other casual dining restaurant.
Last, but not least, Pizza Hut does not have high proportion of sales from transportation and tourist sites. That is almost mid-single digit sales impact in same store sales for KFC. Pizza Hut, we don't have the challenge in this particular time. You can see why it help Pizza Hut revitalization even during this difficult time. We certainly are hopeful, and right now we have the right team, right asset, 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. That concludes today's call. Have a great day. Thank you.
Thank you, everyone.
Thank you. Thank you.
Yes, ladies and gentlemen, that will conclude today's conference call. Again, thank you all for participating. You may now all disconnect.