Ladies and gentlemen, thank you for standing by, and welcome to the Yum China 2019 first quarter earnings conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session. At which time, if you wish to ask a question, you will need to press star one on your telephone. I must advise you that this conference is being recorded today, Tuesday the 30th of April, 2019. I would now like to hand the conference over to your first speaker today, Ms. Florence Lip. Thank you. Please go ahead.
Thank you, Rachel. Hello, everyone, and thank you for joining Yum China's first quarter 2019 earnings conference call. Joining us on today's call are Ms. Joey Wat, CEO of Yum China, and Mr. Jacky Lo, CFO of the company. Before we get started, I'd like to remind you that our earnings call and investor presentation contain forward-looking statements, which are subject to future events and uncertainties. Our actual results may differ materially from these forward-looking statements. All forward-looking statements should be considered in conjunction with the cautionary statement in our earnings release and the risk factors included in our filings with the SEC. This call also includes certain non-GAAP financial measures. You should carefully consider the comparable GAAP measures and reconciliation thereto. Today's call includes three sections. First, Joey will cover Yum China's first quarter 2019 highlights, and Jacky will cover the financial results.
We will then open the call to questions. The webcast of this call will be available on our IR website. Our PowerPoint presentation, which contains operational and financial information for the quarter, is available for download as well. At this time, I would like to turn the call over to Ms. Joey Wat, CEO of Yum China.
Thank you, Florence. Hello, everyone, and thank you for joining us today. First, I would give an overview of the quarter before providing more detail on our operational initiatives for each of our core brands. I'm pleased to report that we delivered our 10th consecutive quarter of system sales growth since we spun off from Yum! Brands . Strong system sales growth on 9% was driven by accelerated new store openings, robust performance at KFC, and a meaningful improvement at Pizza Hut. In the first quarter of 2019, we continued to aggressively expand our market-leading footprint, opening 237 stores compared to 203 stores in the same period last year. Our new store openings continue to be dominated by KFC, given the attractive cash pay-back period and strong growth opportunities.
With excellent execution over the critical Chinese New Year period, KFC delivered an 11% increase in system sales and a 5% increase in same-store sales, successfully lapping three very strong first quarters with healthy growth across all city tiers. We are also pleased to see the ongoing improvements at Pizza Hut, which achieved positive 1% same-store sales growth, strong increase in traffic, and significant margin improvement. Excluding the Wuxi remeasurement gain in the first quarter of 2018, we successfully achieved operating profit growth in the first quarter, despite the margin pressure from rising poultry prices and wages. This reflects the benefit of sales leverage and our effective cost management initiatives. We were also very pleased to unveil our strategic partnerships with Sinopec Sales Company and CNPC at our Investor Day.
Through these partnerships, we will jointly develop the gas station retail business, which is an exciting example of the many untapped opportunities to grow our presence in China. Now, I will provide more color on the performance and strategy of our key brands, starting with KFC. KFC is the leading QSR brand in China, and it continued to demonstrate its resilient business model. In the first quarter, KFC built on three years of strong growth, with system sales up 11%, resulting in a four-year CAGR of 9%, both excluding foreign exchange. Menu innovation, smart value, delivery, and excellent execution drove strong same-store sales, which was complemented by a substantial contribution from accelerated new store openings in 2018 and early 2019. KFC opened 191 new stores in the first quarter, compared to 144 in the same period last year.
Expansion will continue to be a key priority as we pursue additional opportunities for growth in attractive, underserved markets across China. Now, let me talk about our special offers and menu innovation during the quarter. Based on the popularity of the crayfish burger during the 2018 LTO window, we successfully relaunched the burger ahead of the Chinese New Year holiday. The crayfish burger has become one of our unique signature products. Other innovative products launched include the shrimp burger and lotus leaf rice. We call it He Ye Fan in Chinese.
Turning to Chinese New Year, we meticulously planned for this crucial sales window for months in advance, and I'm very pleased to report we achieved very strong results on the back of innovative menu items, vibrant multilayered promotional campaigns, and excellent execution. We created sharing-oriented specials that are well-suited to friends and family celebrating Chinese New Year together, such as our Spring Festival Golden Bucket and Wing Bucket. We also implemented local marketing initiatives and decorated selected stores with Chinese cultural treasures by partnering with the National Museum of China. In addition to Chinese New Year, we also catered to other Chinese festivals and regional specialties. For example, we served a green rice dumpling called qingtuan, which is an eastern Chinese specialty for the Tomb Sweeping Holiday.
We have found that customers are very receptive to regional specialties from all around China, and the rice dumpling proved to be a very popular product in many regions across the country. We also maintain our focus on smart value. Given the success of our Crazy Thursday promotion in the second half of last year, we are continuing to utilize this as our signature promotion. With an integrated approach to campaign planning and execution, this promotion has succeeded in driving strong incremental sales and profits. In digital, we continue to focus on enhancing customer engagement by further integrating online platforms with offline stores. Our members grew to over 175 million by the end of the quarter, up 50 million year-over-year and up 50 million since the end of 2018. Members accounted for 49% of our sales already, up 11 percentage points on third quarter 2018.
As we showed in our Investor Day presentation, our digital membership is driving significant increase in average spending per active user. Digital payments account for about 87% of KFC sales in the first quarter, 13 percentage point up on first quarter 2018. In March, we also partnered with UnionPay to launch YUMC Pay [Foreign language], which creates another convenient payment option for our customers. We ran a successful promotion, which generated strong social media buzz, app downloads, and most importantly, sales and member uptake. Digital orders accounted for 55% of sales during the first quarter. One of our exciting new developments during the quarter was the national rollout of our AI-enabled personalized menus and recommendations for all mobile pre-orders. We saw a meaningful acceptance of trade-up recommendations.
We will continue to refine this tool, and I believe it represents a huge opportunity to improve customer experience and satisfaction while also improving ticket average. We continue to offer our privilege subscription programs to build loyalty, consumer frequency, and average spend. We sold over 1 million privilege program subscriptions in the first quarter of 2019. One of our popular options is our super privilege, which combines delivery, breakfast, and coffee privilege programs. This generates significant cross-selling opportunities. Delivery similarly remains a key sales growth driver that caters to the evolving dining habits of Chinese consumers. We have begun rolling out our improved dispatch system, which we call Delivery 3.0. We expect the improved efficiencies and delivery quality enabled by ongoing enhancements to our delivery capabilities will support the ongoing growth of this key sales driver.
In the third quarter, delivery represented 18% of sales, up four percentage points year-over-year. As a result of our digital initiative, the sales growth of delivery orders through owned channels continued to exceed growth rates via aggregators. KFC's commitment to a smart value, continuous innovation in menu and day part, and leadership in digital and delivery have created defensible profitable growth. We will pursue an aggressive store opening program for the remainder of 2019. Looking ahead, we remain very excited about KFC's long runway for growth in China. Next, I will provide some color on Pizza Hut's performance. As we shared in our Investor Day, we are continuing to implement the Pizza Hut Revitalization Program in 2019 with a focus on rolling out transformative initiatives at scale.
We are pleased to see positive same-store sales and strong traffic during the quarter, as well as the notable improvement in operating profit. I will provide some more detail on Pizza Hut's performance in each of the four pillars that we have mentioned many times in the past, and they are fixing the fundamentals, driving digital, optimizing delivery, and enhancing asset portfolio. First, let's look at the fundamentals. A key component of our revitalization program is to improve our food taste and value for money perception. We launched our updated and streamlined new permanent menu in March. We have been systematically launching new limited time offers, or LTO, to trial new and improved menu options and adding the most popular items to the permanent menu. Products such as Australian beef pizza, steak platter, and volcano cake, in Chinese, we call it 爆 浆 蛋 糕 , were notable additions.
We enhanced key categories such as appetizers, pasta, and drinks. Our key Chinese New Year special was the enormous thin crust four-in-one pizza, 巨 大 的 pizza, to cater to holiday sharing occasions. This generated excellent buzz on social media. We also offered customers great value for money with combo meals targeted at small and large groups. We are very focused on improving our value for money perception, introducing new value items, and implementing a series of value-based promotions. Following the pilot in December last year, we launched our signature value promotion, Scream Wednesday, or 尖 叫 星 期 三 , nationally in January. Selected items were offered at RMB 19.29 or RMB 39 every Wednesday. We have seen positive results, with the campaign generating excitement and driving new customers and incremental sales. We will continue building the Scream Wednesday platform in 2019, introducing new products with disruptive value.
Our consumer feedback scores for both value for money and most preferred Western casual dining restaurant continued to improve during the quarter. We are also making progress with a number of efficiency initiatives enabled by disruptive technology, our large digital membership, and our scale. During the quarter, we significantly improved labor productivity and lowered our cost of sales while maintaining and improving our service and food quality. This led to an improvement in margin, which Jacky will elaborate on further in a moment. Next, let's look at digital. Pizza Hut continues to make rapid progress by implementing learnings from KFC, which is a digital pioneer in the restaurant industry in China. We launched our digital membership nationally only back to 2017 for Pizza Hut.
By the end of the first quarter this year, we have over 55 million members, up 15 million year-over-year and five million since the end of 2018. Our family privilege program, launched late last year, has proved very popular as well, with over one million members. We have observed a meaningful increase in frequency and sales from members. We plan to build on this success in the rest of the year with new co-branding partnerships and new offers. Pizza Hut also ran promotions in conjunction with UnionPay to promote the YUMC Pay as well. This campaign was also very successful in driving new member acquisition, new app downloads, as well as sales in both dine-in and delivery. Turning to delivery, we continue to see double-digit growth, and it accounts for 24% of Pizza Hut sales already, up two percentage points year-over-year.
Growth in delivery orders through our own channels significantly outpaced growth via aggregators. During the quarter, we completed the installation of dedicated delivery areas in about 75% of our dine-in restaurants. These areas help to provide faster service to our delivery customers without disrupting our dine-in customers. As we previously highlighted in the fourth quarter earnings call, we have taken back control of last-mile delivery, with all of our orders now being fulfilled by our own team of dedicated riders. Pizza Hut has also begun rolling out our latest delivery dispatch system, Delivery 3.0. Combined, these two initiatives are driving significant improvement in KPIs such as on-time delivery, complaint rate, and customer satisfaction. Lastly, we continue to enhance our asset portfolio through accelerated remodels and multiple store formats.
To provide a more comfortable and stylish dining environment, we target to do 500 remodels in 2019 and to complete the refresh of our entire portfolio by 2021. We refurbished 28 stores in the first quarter and will accelerate the pace in the rest of the year. We have further optimized the cost of refurbishment, and we are seeing a positive response from customers with a post-refurbishment sales uplift. We built 34 new stores in the first quarter of 2019 compared to 41 in the same period of 2018. Together, these revitalization initiatives are having a positive impact on the brand in the short term and long term. It's encouraging to see the same-store sales growth in the first quarter. Yet, more work needs to be done to sustain the positive trend given the scale of the business and the competitive environment.
Lastly, turning to our new standalone coffee concept, COFFii & JOY. The concept at five stores in four new cities in the first quarter, taking us to 18 stores and doubling the number of cities we are in. We also entered into an agreement with WeWork, one of the leading co-working office space providers in China, to provide coffee in 15 offices in Shanghai and Beijing. As we outlined in our investor day, the coffee market is a large and attractive segment in China, and we will leverage our strengths in our supply chain, new store development, and digital capabilities to capture this new opportunity. We are continuing to test different formats and remain excited about the potential of this category. With that, I'll hand over the call to our CFO, Jacky, who will cover our financial performance in more detail.
Thank you, Joey. Good day, everyone. Thank you for joining us. Let me quickly go over our first quarter 2019 financial results. Total revenues reached $2.3 billion in the quarter, up 10% year-over-year, excluding foreign exchange translation. Total system sales grew 9% year-over-year ex FX, primarily due to strong same-store sales growth and accelerated new store openings at KFC, as well as improving sales at Pizza Hut. We opened 237 new stores during the quarter, an average of well over two stores per day, and the majority were KFC stores. Our portfolio is now 8,653 restaurants as of the end of March 2019. Looking at our current pipeline, we are confident that our gross new openings will exceed the top end of our original target of 600 to 650, and we'll provide additional detail as we get greater visibility on our second half pipeline.
During the quarter, KFC year-over-year system sales grew 11%, while Pizza Hut system sales increased 3%, both excluding foreign exchange translation. Yum China same store sales increased 4%, with KFC same store sales grew 5%, despite lapping three consecutive years of positive same store sales growth. Pizza Hut achieved same store sales growth of 1%, the first time since 2017 and a significant improvement compared to 2018. During the quarter, KFC traffic increased 3% year-over-year, while ticket average increased 2% year-over-year due to pricing offset by increased promotion. Pizza Hut traffic increased 8% year-over-year and was positive for both dine-in and delivery businesses as a result of successful value promotions and digital initiatives. Ticket average decreased 7% year-over-year as a result of our focus on driving value perception and the growing share of delivery.
KFC restaurant margin was under pressure at 20% versus 20.9% in the first quarter of 2018. Positive sales leverage and labor productivity improvement partially offset commodity inflation, including the previously flagged pressure from higher poultry prices, as well as wage inflation and value promotion. Pizza Hut restaurant margin improved to 14.3% in the first quarter, up 3.8 percentage points year-over-year. Significant efforts to improve labor efficiency and reduce restaurant operating costs in areas such as utilities more than offset the impact of value promotions and wage inflation. Overall, Yum China restaurant margin was 18.5%, up 0.6 percentage points compared to the 17.9% report during the same period last year. Wage inflation was up 6%, while commodity inflation was up 3% compared to the same period last year, with poultry inflation being the major driver of commodity inflation.
While we are actively working to manage the significant poultry price increase, we expect the impact will remain over the rest of 2019. G&A expense was up 5% year-over-year ex FX, or 3% when excluding one-off benefits in both periods. Our long-term goal remains to maintain a G&A expense growth rate lower than the revenue growth rate. As a result of implementing the new lease accounting standard, ASC 842, effective January 1st, 2019, we conduct an additional impairment review in the first quarter, resulting in an impairment charge of $12 million. Operating profit for the first quarter of 2019 decreased 23% year-over-year, or $66 million.
When excluding the gain of $98 million from the remeasurement of our previously held equity interest at Wuxi KFC in the first quarter of 2018 and the negative impact of foreign exchange translation due to the depreciation of renminbi against the US dollar, adjusted operating profit increased 9% year-over-year. For the first quarter of 2019, KFC operating profit increased 3% year-over-year, and Pizza Hut operating profit improved 57%, both ex FX. Based on the release of final regulations related to the transition tax under the US Tax Cuts and Jobs Act, we record a tax charge of $8 million in the quarter. Our effective tax rate during the first quarter, when excluding this transition tax charge, would be 26.5%. Our best estimate of the effective tax rate in 2019 continues to be below 28%.
Finally, diluted EPS was $0.57 in the first quarter of 2019, compared to $0.72 in the same period last year. Adjusted diluted EPS was $0.59, compared to $0.53 in the same period last year. The current quarter adjusted diluted EPS includes a mark-to-market gain of $0.02 per share from our equity investment in Meituan. Let me cover our capital allocation strategy. In the first quarter of 2019, we generate net cash from operations of $344 million, and free cash flow of $234 million after subtracting $110 million in capital expenditures. Our balance sheet remains strong with over $1.5 billion in cash and short-term investments. With our healthy cash position, we returned $111 million to our shareholders in the first quarter, including a cash dividend of $46 million and share repurchases of $65 million.
There is approximately $900 million remaining under the share repurchase authorization as of the end of March 2019. Based on our current quarterly dividend and existing share repurchase authorization, we have the capacity to return at least $1.5 billion to shareholders over the next three years, reflecting our confidence in our business model and our ability to generate cash. Given our attractive growth opportunities and continued strong returns from new builds, our first priority will continue to be reinvesting in the core business with CapEx for the full year expected to be in the range of $450 million-$500 million. Looking forward, we remain very excited about the long-term opportunities in the China market. We'll drive same-store sales growth and leverage our leading development capabilities to expand our store network.
Please note that KFC's exceptional same-store sales performance in the first quarter was primarily due to very strong execution during the Chinese New Year period, and it may be difficult to replicate that level of growth through the remainder of the year. As I previously discussed, pressure on margins from higher poultry prices is expected to remain over the rest of the year. Of course, we'll look to mitigate this impact as much as possible by leveraging technology, our scale, and our efficiency initiatives. At Pizza Hut, we are very encouraged by the progress of our brand revitalization program. Do note that there may be quarterly fluctuations as we continue to roll out the initiatives at scale, and the revitalization takes hold.
In the first quarter, better matching of labor to demand during the Chinese New Year period led to an improvement in restaurant margins that may not be repeated in subsequent quarters. In addition, the aggressive program of 500 remodels during the year will put pressure on sales and operating profit in the short term. This is an important component of the long-term revitalization of the brand. With that, let me turn it back to Joey briefly before we open up the call to questions.
Thank you, Jacky. To sum up, 2019 got off to a good start with strong execution during our critical Chinese New Year sales period. I want to take this opportunity to thank our operations team, who are at the front line of our business, as well as all the supporting functions for their hard work. KFC continues to perform strongly. It is a very resilient and defensibly profitable business model, and is well-positioned to manage market uncertainties. We see a long runway for growth for KFC as we continue to add new units across the country and drive same-store sales growth through day-part expansion and delivery. We are seeing multiple positive signals in our revitalization of Pizza Hut, with positive same-store sales, significantly improved traffic, and improved profitability, as well as positive trends in customer feedback.
We know there is more work to do, but we remain confident in the revitalization plan for Pizza Hut. At our investor day in March, we outlined our commitment to our vision of becoming the world's most innovative restaurant company and demonstrated the powerful impact that innovation has on driving growth. By adapting to our customers' needs and utilizing new technologies, Yum China is focused on relentlessly driving defensible, profitable growth. For those of you who were not able to join us back in March, I encourage you to review the presentations and webcasts available on our web page. With that, I will pass you back to Florence to start the Q&A. Thank you.
Thanks, Joey. We will now open the call for questions. In order to give as many people as possible the chance to ask questions, please limit your questions to one at a time. Rachel, please start the Q&A.
If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Your first question comes from the line of Sara Senatore from Bernstein. Please ask your question.
Thank you. I just wanted to follow up on a comment you said on the demand environment. We've heard from another Western QSR saying that it also has seen intensified competition around value, but that
It's also seeing a stabilization or improvement in its own trends. I'm just trying to reconcile what I think we're hearing about the environment with a couple of data points that say that companies themselves are doing better. Do you think you're seeing something where sales players are taking a lot of share from smaller independents? Is it local concepts that are losing some of that traffic? Is the distinction a better value proposition that you're offering? Is it the digital piece? Just trying to understand how it is that the environment is getting more competitive, but your businesses are improving.
Thank you, Sara. It's very difficult to comment on the environment. The good news is we definitely have seen KFC continue to be a very resilient business model in a range of demand environment. From competitor side, or from the customer demand, we certainly see the customer demand for good value products. That's not enough. In what we have learned the last few decades is a combination of fantastic products and great value. It's a combination that gives great value for money for the customers. Then at the store, it's the execution, it's the day-to-day operation.
For us, we just continue to focus on what we are good at and what we see customer want is great product, great value, really good operation, exciting marketing campaign, and then, of course, supported by the digital innovation, which comes in both marketing and operations. It's a combination of the key value proposition that customer want. It's very hard to sort of single out one particular reason, really. I hope that gives you a feel of the competition that we are in and what we do to please our customer, really.
Thanks.
Your next question.
Next question, please.
Yes, your next question comes from the line of Michelle Cheng from Goldman Sachs. Please ask your question.
Hi, management. Congrats for the good result. My question is about the cost equation, especially for KFC. We noticed that in the first quarter, the food cost increased significantly. As you have been mentioned that chicken price will continue to be the pressure, also understanding from third quarter last year, we launched this Crazy Thursday event. Is it possible to help us separate the impact between these value for money promotion versus the chicken price impact? Also, I think earlier we guided full year low single digit commodity inflation. Are we still maintaining these expectations? Thank you.
I think, Jacky.
You want to?
Yeah. Well, Michelle, maybe I'll just give you some additional colors in terms of the KFC restaurant margin in this quarter. I can go through line by line. Overall, if you look at KFC restaurant margin, it was down about one percentage point year-over-year. We've mentioned both on the Q4 earnings call as well as the investor day, poultry inflation will put some pressure on the restaurant margin. Initially, we said at least in the first half of 2019. Right now, based on the current trend, we expect it will be continued for the remainder of the year. Overall, obviously KFC has self-leveraged from the 5% same store sales growth in Q1. That was offset by inflation and promotions, for example, like Crazy Thursday. Let me give some additional colors line by line. First on food and paper cost.
Since the Crazy Thursday promotion was so well received by customers, we continued the promotional activities in Q1. That actually put some pressure on the margin on the food cost. Commodity inflation was also mid-single-digit this quarter due to the increased poultry prices, which is higher than the typical low single-digit we saw in prior quarters. On labor cost, there was obviously labor inflation. It was high single-digit, and we have worked very diligently on the labor productivity and also in-store efficiency to offset that impact. I mean, looking forward, in terms of chicken price, the market price were up about 30% year-over-year. For KFC, we managed to keep the price increase at low double-digit in Q1.
With our long-term relationship with our suppliers, we were able to negotiate lower than market price increase during times of very high poultry inflation. We also benefit a bit from a lag effect due to the inventories from the chicken we procure in the fourth quarter of 2018. As I just mentioned, the commodity inflation was about 5% this quarter, which is higher than normal, and we expect this to continue for the rest of the year. Keep in mind, poultry is only one of many commodities in KFC, and we will continue to optimize our product mix and look for alternative cuts of chicken or alternative protein. And look, we face inflation every year, and price volatility is nothing new to us. We have managed it very well for the last 30 plus years.
In terms of your question on inflation, in this quarter, wage inflation was about 6%. High single digit for KFC and mid-single digit for Pizza Hut, and commodity was 3%. As I just mentioned, it was 5% for KFC and a slight deflation for Pizza Hut. Looking forward, we maintain the guidance that we provided. For the full year, we still expect low single digit commodity inflation and high single digit labor inflation.
Thank you, Jacky. Michelle, maybe provide a little bit of color on this one. For our Crazy Thursday promotion, since last year, we have been able to find products with very good cost economics. Therefore, we are able to maintain the margin despite the challenge of the poultry price increase. As Jacky mentioned, we will continue to find alternative products to promote during the Crazy Thursday. Of course, the Crazy Thursday, the sales leverage helps the margin as well. Net, it worked out, and we'll continue to manage that for the rest of the year. Thank you, Michelle. Thank you very much.
Your next question comes from the line of Brian Bittner from Oppenheimer. Please ask your question.
Hi, thanks. This is Mike Tamas for Brian. Just wanted to talk about the Pizza Hut margins a little more. You had great margins in the first quarter, I'm just wondering how much of that can actually continue throughout the year, were there some very specific things that are siloed to the first quarter, that aren't going to repeat for the rest of the year? Thanks.
Sure, Mike. If you look at Pizza Hut restaurant margin, it was up almost four percentage point year-over-year. Again, let me go through line by line. In terms of food and paper cost, our investment in promotional activities and value campaign such as Scream Wednesday, has been a very critical component of our strategy to drive traffic and offer value for money to customers. With the step up in value promotion in this quarter, we are very pleased to see that Pizza Hut restore positive same-store sales growth and continue to see significant traffic growth. Albeit, that puts some pressure on our restaurant margin for the short term. The sales leverage and commodity deflation have to offset the impact of the value promotion.
On labor cost, labor inflation was mid-single digit year-over-year, we have significant improvement in labor productivity during the quarter. Some of this is ongoing. A significant portion is related to better matching of labor and sales during the critical Chinese New Year period, which I talked about earlier during the prepared remarks. On occupancy and other costs, there are a few components in this line item, the improvement mainly came from a combination of savings in utility, from lower utility price and efficiency management, also less depreciation expense from all the stores impairment we took in prior years. In addition, I want to point out one point.
Before we took back control of the last mile delivery in the later part of 2018, the rider costs were amounts we paid to aggregators, they were recorded under occupancy and other costs, for example, in Q1 last year. With the delivery being handled by our own dedicated riders now, the rider costs have been included under cost of labor, for example, in this quarter. Looking forward and for the remainder of the year, overall at a high level, we'll just continue to drive labor productivity and improve in-store efficiency, reduce restaurant operating costs, and manage and tighten cost of sales to offset all the value promotions that we'll take and also wage inflation. Due to the one-off items I just talked about, for example, the labor productivity. Keep in mind, we have a very low base last year.
The year-over-year improvement is expected to taper off. Also, the utility savings that we talk about, we expect that impact to reduce in the second half of the year. Also, we are adjusting the business model, and we have a very clear and deliberate strategy in the short term to drive traffic through investment in promotions. I just want to reiterate at this point, our strategy is to restore traffic and sales, followed by profit. In the longer term, as the revitalization takes hold, we are very confident in restoring the margin back to the pre-revitalization levels.
Thank you, Mike.
Your next question comes from the line of Chen Luo from Bank of America Merrill Lynch. Please ask your question.
Thank you. Congratulations on the solid Q1 results. Just now, we commented that KFC's very strong same-store sales growth in Q1 could not be an indicator for the full year same-store sales growth. In fact, heading to the coming two quarters, we are actually facing a very easy lap. What actually makes us give a pretty cautious guidance of same-store sales growth for the rest of the year? Is there anything that we have seen, i.e., competition or other factors that actually makes us a bit cautious? Also, related to that question, given the rising pressure of the chicken cost, are we actually going to reduce the promotional intensity, especially in view of the easy lap, to keep up a better balance between same-store sales growth and margins for KFC? Thank you.
Thank you, Luo Chen. For the lapping, for management, there's no such thing called easy lap, to be honest. If we look at the three-year CAGR, Q1 for KFC, the last three-year was 5%, and Q2 actually, for three-year CAGR actually was 4%. If we look at last year number, last year, we had very exceptional Q1, Q2 was relatively flat as well. We are quite cautious. Over three years' time, the lapping is still not so easy. It's still a challenge. We just sort of have a bit of caution about the simple extrapolation of the trend for Q1. Particularly for KFC, the momentum is good. The business is doing well, and it has proven to be very resilient. We must always be prepared to respond to unexpected conditions rapidly.
Of course, our business is structured and agile to do that. We still have to be cautious. Regarding your question about less promotion, given the high poultry price. As Jacky mentioned earlier, as I mentioned earlier, the way that we support the Crazy Thursday, basically, there are two ways to support it. One is, we look for products that have very good cost economics, so that it's a win-win-win situation. It's a win situation for us, it's a win situation for our supplier, it's a win situation for customers. Alternatively, we will look for some sort of ingredient that probably has not been used before, like Huang Ji Huang, which we tried in the last quarter. We are looking for exciting product with good cost economics that please the customers.
Driving traffic is very important, as I mentioned at the very beginning of first question, responding to Sara, smart value is still very important to our customer, as we have seen from last year and the Q1 this year. We'll manage the balance of the sales and margin. I just want to emphasize, smart value with exciting products is still incredibly important to our customers. Thank you, Joey.
Thank you, Joey.
Your next question comes from the line of Xiaopo Wei from Citigroup. Please ask your question.
Joey, Jackie, morning. Congratulations on strong result. My question is focused on the restaurant margin. If we look at the restaurant margin of both KFC and Pizza Hut, we are seeing that the occupancy and other operating expenses to sales ratio actually was down year-over-year in each of the division. My understanding, it is the benefit from the strong delivery and also your better efficiency, maybe some smaller size of a new store which opened last year. I'm seeing this component was offsetting a negative impact of the higher poultry cost pressure looking forward. Shall we see this kind of trend will continue in the next few quarters, mitigating the impact of the commodity cost and also accelerate openings in the rest of the year? Thank you.
Yes, Xiaopo. First of all, let me just give some additional colors on the occupancy and other costs. This line item actually include a few components. Advertising and marketing expenses, utility expenses, rental expense, depreciation expense, the license fee we pay to Yum! Brands, and all the other miscellaneous restaurant-related costs. The improvement in this particular quarter was mainly due to obviously sales leverage. Also, I talked about earlier, the utility savings from lower utility price and efficiency management, which we started last year. Also, there's less depreciation expense after the stores impairment we took in five years. Also for KFC, there was savings in advertising and marketing expenses because we are shifting from the traditional mass media to digital and targeted marketing. I touched on this briefly earlier also for Pizza Hut, you see a significant improvement.
It's because we took back the last mile of the delivery. There was a classification difference quarter to quarter. In last year's Q1, all these delivery riders costs were in occupancy and other costs. But in this quarter, it's in cost of labor. Looking forward, we expect some savings in occupancy and other costs in the first half of 2019. They will gradually reduce, due to the lapping year-over-year. In terms of poultry, initially, we expect the inflation to be high in the first half, and then it will gradually tail off in the second half. Right now, looking at the current trend, we expect maybe there will be some continuous pressure throughout the rest of the year. Occupancy and others, I already talked about, the impact will taper off. It may not necessarily offset each other.
Xiaopo, I think I sense your assumption behind the question is whether the smaller store has some correlation with all these savings. I think generally, we can have that assumption, because for the new stores that we are opening in both KFC and Pizza Hut, we certainly are going to a direction of smaller, faster, and more delivery-friendly stores. As you can imagine, with smaller stores or faster stores, basically smaller stores, and management has done a lot to reduce the investment per store. The combined effect is lower depreciation, lower rent, lower utility, just because we are more strategic about the type of the new stores that we are opening. I think if my sense of your assumption behind your question, I would say yes, generally, there's such correlation. I hope we answered your question or my assumed question of your question.
Yeah. Joey, I just want to clarify. Why I ask the question is because last year we have accelerated opening, and Jackie also mentioned-
Yes
in the presentation that we will accelerate opening this year as well. If we look at the fourth quarter-
Sure
result for the margin, actually, we didn't see a lot of impact on the restaurant margin due to new opening, as we've seen other global retailers in the same scenario. That's why I asked the question.
Xiaopo, maybe I can answer this and then Joey can elaborate as well. We continue to accelerate new builds for KFC. The main reason is to capture market share. That helps to drive the strong system sales and operating profit you see in this quarter, the significant growth. All these new units, especially in China, because of our first-mover advantage, but also they will be diluted due to the time it takes to nurture these stores and until maturity. There will be some short-term pressure on the restaurant margin for sure from this accelerated new unit development strategy. For Pizza Hut, I want to also talk about the remodel, because we're going to aggressively remodel about 500 stores this year.
Right.
In the first quarter, we only remodel about 28 stores. There's still over 470-plus stores that we have not remodeled. Right now, we are looking at maybe way towards Q2 and Q4. We will actually ramp up the remodel, because Q3 is the summer rush period. We want to maybe scale towards Q2 and Q4. Obviously, over the years, we have improved the speed and the cost of the remodel. Nonetheless, it's going to put some pressure on sales and operating profit. Because there will be lost sales for a period of time.
During the time we close the store for remodeling.
Overall, the accelerated new builds, the accelerated remodels, all these initiatives will put pressure on the margin.
In the short term.
Yeah, in short term. Right.
Yeah. Thank you, Xiaopo.
Thank you.
Your next question comes from the line of Lillian Lou from Morgan Stanley. Please ask your question.
Hey, thanks management, because most of the questions were answered. I have a bit follow-up on coffee, because I think Joey, since March, the corporate day, I think the company formally put coffee as one pillar for growth in the long term. I know that you share a little bit more information about the progress. Could you give us a little bit more idea of in terms of cups of coffee sold year to date compared to last year? Also, you start to do office delivery type of coffee. Is this under COFFii & JOY or it's under KCOFFEE, or actually we are doing both? Thank you.
Lillian, hi. Good morning. For the Q1, the cups sold, the index was 126. That's very nice for KFC. This is for KFC. For COFFii & JOY, we have not started to count it that way yet, because it's still early days. We looked at how many stores we opened. We have opened five more stores for Q1. Right now, we are at 18 stores altogether. For delivery, we have been doing delivery for COFFii & JOY and KCOFFEE, but mainly KCOFFEE, really. Lillian, just for your question about delivery, just want to make sure I answer your question. Are you more curious on the C&J part or the KCOFFEE bit?
I think both.
Okay. KCOFFEE, we've been building KCOFFEE since 2015, and we are very pleased to see the scale of the business and the growth rate. The proposition is mainly, "Yibeihao" cafe is a cup of good coffee with good price. We'll continue to drive it in KFC, and we'll strengthen the branding bit because we can see the potential in it. Delivery has been part of the business because we deliver KCOFFEE together with breakfast and other food. For C&J, the coffee delivery business is still early days, really. We are figuring out the business model as we speak. It's a bit early, but we do delivery. We also mentioned in my presentation earlier that we work with WeWork. The coffee in WeWork is not delivery.
We actually have our lovely coffee machine with the beans that produce coffee in the WeWork offices in Shanghai, and later on will be Beijing. As you can see, because C&J is such a new concept in terms of store model, business model, delivery model, or even B2B model, we're still exploring. We will pop that when we have more concrete conclusion, and then we'll roll it out if we are convinced that I hope I answered your question on that. For further more detailed questions, our IR team can follow up with you afterwards.
Okay. Thanks a lot.
I can simply ask about Pizza Hut.
Your next question comes from the line of Anne Ling from Deutsche Bank. Please ask your question.
Hey. Hi, management team. Just want to check on, in the call, and also during the Investor Day, you mentioned a couple of times, regarding the use of alternative protein. Is that a new category that you're going to come out? Would you elaborate a little bit more on what is that will help ease some of these chicken price increase? Thank you.
Sure. Well, Anne, in Investor Day, we mentioned about, let's say, [Foreign language], which is a part of chicken that we somehow have not used in the last 30 some years, which is always amusing to ourselves. That is the piece of chicken between the chicken wing and the chicken breast. We will continue to explore, with the introduction of new technology, can we find another way to cut our chicken and introduce a very good cost economic product to our customer? I'll give you another example. For example, shrimp and crayfish. Because traditionally, these are pretty expensive protein, but relative to chicken price right now, suddenly they look fine, and the economics work out again. I'll give you another example. It's coming soon, so I am happy to do the advertisement here.
We're going to possibly have some stock in our product, probably the wraps. Other than our famous chicken wrap, we are going to introduce a duck wrap. It just seems logical with the flavor that we already established and explore with customer. These are some of the examples that we can share at this point, we, of course, continue to search for other alternative protein alternatives, such as seafood or duck, et cetera, to make our customers happy.
Okay.
I hope that makes sense.
On Pizza Hut, on the same-store sales trend, now that we have a positive for this quarter, do you think that we should be seeing a continuous improvement, that we're more stabilized, that same-store sales is more sustainable? We might still see some volatility throughout the quarter?
Thank you for entertaining me by asking me a question about Pizza Hut. Of course, we are quite happy to see the positive sales term finally happen. It's a very clear sign of a good momentum of the business turnaround. What I want to comment is, when we embark on the revitalization journey back to May 2017, we have focused on four areas, which we are all familiar with right now. Four areas that we work on, they are all what I would call short-term painful but long-term beneficial to our business. Back to 2017, one of the four pillars is the delivery. It's really delivering very good same-store sales that lifts the entire business. By 2018, the improvement, the delivery is no longer enough to support the decline in dine-in.
We continue to focus on the other three pillars, such as digital, such as asset, and the fundamental such as menu. All four area in terms of the painful changes have bear fruit. What I want to say is the 2019 Q1, the momentum is the aggregated result of some fundamental changes in all four areas. Delivery-wise, it's not only just promotion. We integrate, we prepared the last mile delivery, and we integrated Pizza Hut Home Service and Pizza Dine-in, and we went all the effort to put dedicated delivery areas in 75% of our dining assets. These are all very big and fundamental change. Fundamentals such as in the menu. The menu, originally, we have 120 items on the menu. For the new menu we introduced March 18, there are only 77 items.
Among the 77 items, only about a quarter of them are from the previous menu. The rest of the products on the 77 items, either new product that we launch over last two years through LTO and proven to be good product or upgrade product. Again, huge effort to reduce the menu and to upgrade and to improve the three quarters of the menu. We come to the digital side. We start the super app. We launched the membership program. Now we are at 55 million. We launch a privilege program, significantly improve the digital capability of Pizza Hut. Last, fundamentally, the assets. We look at alternative design. We start to modernize the store. We have many innovations in our store business models, store models as well. All these are fundamental changes.
I mean, for your question about whether the positive change can sustain or not, it is very hard to predict the market uncertainties. What we can control is the fundamental aspect of the business that we can change. I would like to believe that we have such fundamental change of the business will help in the short term and long term. Our business, the seasonality is a factor in our business. The quarterly fluctuation might happen, but in the long term, we are confident in our business for Pizza Hut. Thank you, Anne.
Thank you.
One last question? Yep.
Your last question comes from the line of Christine Peng from UBS. Please ask your question.
Hi, Management. Congratulate on a great result. I have two questions regarding the store opening strategies of KFC and Pizza Hut. Regarding KFC, Joey, in your earliest presentation, you mentioned about the gas station plan with one of the oil companies in China. Can you elaborate on the details in terms of the number of stores, in terms of the store revenue contribution, profitability, et cetera, and what's difference between these stores and the traditional stores KFC has? I think that's the first question I have. The second question is regarding Pizza Hut. Basically, first quarter is very strong quarter, and I think also it's better than Management previous guidance. Given this situation, would you consider opening more Pizza Hut stores going forward? I think you mentioned about hub-and-spoke model on Investor Day.
What is the new thought behind this? Thank you, Management.
Okay. Thank you, Christine. For the strategic partnership, just a little bit update since our last meeting at the Investor Day. As you recall, we have entered into exclusive right in franchisee business with CNPC, but we also get the right of first refusal for both Sinopec and CNPC for about 20 years. We also share about a prudent approach that we want to figure out the business model first, before we become specific on the economics and the details. Right now, the update is we are testing one store, and then we are identifying more suitable locations. The aim is to open 100 store in the next three years. I understand this is a modest goal, given the fact that both great companies have 50,000 gas stations all over China.
We believe once we figure out the gas station, we do have the credibility and ability to scale up pretty quickly. What's the difference between old and new? The first difference I can imagine is, it's likely to be slightly smaller than our sort of normal store. At the same time, within our store business model, we have eight or nine business model, and we do have the small store model already. The size-wise, it probably will be sort of smaller, and then it will be very focused on the convenience, as you can imagine, speed is important in this kind of location. For the detail specific, we are testing it right now. For the Pizza Hut, you're right to point out that the store opening plan or number is related to business performance.
As you can see historically in KFC number, we opened 191 store this quarter. We opened 144 store last year, Q1, and we opened 85 store Q1 the year before, if I remember my numbers correctly. You can see as the business improve, we do ramp up the new store opening. Pizza Hut, for this year, we have modest target for the new store opening. If the business improve, obviously, according to our own internal new store opening target, and more pipeline can pass the requirement, then might have more stores. More store might be open. I mean, Jacky had mentioned in various occasion, usually we will have more visibility of the new store opening numbers after Q2, during the second half of the year. For your question about hub and spoke, we are excited about innovations in store models.
That's important part of the business, it is one of our innovations this year. So far, I can report that we have about 15 hub and spoke stores open already. All of these stores have only been open for less than three months, there's still a lot to learn and a lot to tweak. The initial observation, it's positive. As you can imagine, the smaller store, lower investment, give us more flexibility to open stores in different trade zone, and that flexibility is always good for business with our scale. I think that's what I can report for the time being. By next earning release, when we have more visibility, hopefully we can share more. Thank you so much, Christine.
Thank you, everyone.
Thank you .
Thank you, Christine. Thank you, everyone. 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. Thanks, everyone .
Thank you, guys. Thank you all.
Ladies and gentlemen, that concludes our call for today. Thank you for your participation. You may now disconnect.