Thank you for standing by, and welcome to the Yum China Q2 2022 earnings conference call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. If you wish to ask a question, you will need to press the star key followed by the number 1 on your telephone keypad. I would now like to hand the conference over to Michelle Shen. Please go ahead.
Thank you, Melanie. Hello, everyone and thank you for joining Yum China's Q2 2022 earnings conference call. Joining us on today's call are our CEO, Ms. Joey Wat, and our CFO, Mr. Andy Yeung. We are dialing in from different locations today. If we experience a technical difficulty during the call, please remain on the line as we reconnect. Before we get started, I'd like to remind you that our earnings call and investor presentations contain forward-looking statements, which are subject to future events and uncertainties. Our actual results may differ materially from these forward-looking statements. All forward-looking statements should be considered in conjunction with the cautionary statement in our earnings release and the risk factors included in our filings with the SEC. This call also includes certain non-GAAP financial measures. You should carefully consider the comparable GAAP measures.
Reconciliation of non-GAAP and GAAP measures is included in our earnings release. Today's call includes three sections. Joey Wat will provide an update regarding our performance in the second quarter. Andy Yeung will then cover the financial performance and outlook in greater detail. Finally, we will open the call to questions. You can find a webcast and a PowerPoint presentation which contain operational and financial information for the quarter on our IR website. Now, I would like to turn the call over to Ms. Joey Wat, CEO of Yum China. Joey?
Thank you, Michelle. Hello, everyone, and thank you for joining us today. Second quarter was the most difficult quarter in the past two and a half years. With our main focus always on keeping our employees and customers safe, we also want to bring joy to our customers. We kept our morale high and came together to deliver better than expected results. I'm both glad and honored to fight the battle alongside the wonderful Yum China teams. We operated with our Shanghai headquarters under lockdown for over two months, and still managed to execute with extraordinary agility, quickly forming cross-functional and cross-brand crisis management teams. We developed flexible toolkits to tackle each problem as it arose. Through it all, we have stood firm and built the business stronger in so many ways.
We've innovated new menu offerings, delivery, and digital solutions, as well as cost auto-optimization initiatives. These solve not just the imminent problems, but can serve as our learning base to make us more agile and resilient for the longer term. During this trying time, we continued to execute our RGM strategic framework, that is resiliency, growth, and moat. Let's start with resiliency. Our resiliency shines brightest in tough situations. Let me share with you some of the measures we implemented to overcome considerable operational difficulties. During the city lockdown in Shanghai with very limited restaurant staff and riders, our goal was to sustain minimum level of restaurant operations and serve desired food to customers. With simplified menus, we reduced complexity of operations and inventory management. At the extreme, we just have one bucket of fried chicken on the menu. One item on the menu, and that's it.
Fried chicken was perhaps one of the most desired food items in Shanghai during lockdown and brought our customers great happiness. We launched community purchasing, Tuangou, as early as mid-March, including packaged food products, not just for KFC and Pizza Hut, but also for our emerging brands, Lavazza, Taco Bell, and Little Sheep. In the Q1 earnings call, I shared that with 10%-15% of the stores open in April, Shanghai achieved 40%-50% of pre-lockdown sales. In May, with less than half of our stores open, we reached pre-lockdown sales level. This was a remarkable achievement. We were able to continue serving our customers thanks to our in-house and agile supply chain management system, as well as dedicated last-mile delivery riders. We obtained the necessary permits and managed to the majority of Shanghai under severe mobility restrictions. Digitization also played a very critical role.
In just a day's time, our stellar IT team launched an AI-enabled delivery route planning tool for community purchasing in Shanghai. The tool optimized full-day delivery routes covering a wide geography well beyond our usual store-based vicinity radius. Across the country where we face a challenging operating environment. We've dialed down advertising and promotions to save costs. Some of you may remember the Psyduck, Koduck, and other Pokémon meal companion toys we launched around Children's Day on June first. The Psyduck toy instantly went viral, becoming a smash hit with children and adults alike. The sensational buzz from this campaign drove almost 20% of sales in the first two days of the promotion. Who would have thought that we chose Psyduck just to accommodate our reduced advertising budget? The results were phenomenal.
We were thrilled to bring joy to our customers' lives during an exceptionally hard time, and to see their social media posts. We also focused on driving off-premise sales. Delivery grew 7% year-over-year and reached a record sales mix of 38% in the second quarter. Combined with takeaway, off-premise dining contribute to almost two-thirds of sales. Also, excitingly, our new retail packaged food sales reached CNY 200 million in the second quarter. This more than doubled the sales compared to last year. These initiatives partially offset the reduced dine-in services. Let's move on to growth. Even in conditions like this, we don't stop delighting our customers with innovative food and value campaigns. Our ability to innovate is an important pillar to capture growth opportunities. KFC diversified into adjacent categories to drive additional growth.
With Wagyu and Angus beef burgers as premium options, we launched entry price choices at only around half of the price, which is CNY 18 versus CNY 33. On the weekends, we are now offering juicy whole chicken at CNY 29.9 to drive sales. This juicy whole chicken is one of my personal favorite now, and it's absolutely delicious. These two new categories have proven popular, accounting for mid-single digits of menu mix combined in June. Our food innovation team let their creativity fly when designing new products. At KFC, we launched a super abundant chicken bucket, Duoduo Tong, in selected cities. This bucket features chicken feet, chicken wing tips, necks, and other parts traditionally favored by Chinese people. For some of the analysts who asked me before when will we start to sell chicken feet, we are officially selling chicken feet right now after 35 years.
This follows on the heels of KFC's launch last year of its super popular late-night snack, chicken bone nibblers, Jijia. In addition, the usage of all parts of chicken provides an intriguing variety to our customers at very good cost. Pizza Hut's new menu received amazing customer feedback and generated a boost in sales. We launched the campaign on social media and sponsored TV shows instead of using celebrities. With just one-third of the advertising cost, the menu achieved the same customer awareness as last year's menu. The new menu included 35 brand-new or upgraded items such as stuffed crust pizza with sausage and meat floss, Rousong, Wagyu Supreme Pizza, and deep-fried cereal prawn. Yes, we put the cereal around the prawns and it tastes wonderful. Taco Bell launched a crisp burrito, Shouwojuan, with a lighter sauce and more vegetables tailored for Chinese customers.
It gained great popularity and appeal to our more health-conscious customers. Value for money resonates well with customers under the current circumstances. As part of the thirty-fifth anniversary celebration in China, KFC offered its signature product at amazing prices. Original recipe chicken at its 1987 price, and a family bucket at almost 60% off a la carte price. This campaign brought back fond memories and became a hit with customers. We rotate the offers weekly to have the flexibility to adjust according to the market conditions in different regions and customer response. Our iconic Crazy Thursday value campaigns have won the hearts of our customers. Since we first launched it back to 2018, we have been constantly spoiling our customers with very attractive offers. The campaign now inspires scores of creative social media posts.
Thursdays also generate significant sales uplift compared to regular weekdays and sometimes even weekends. At Pizza Hut, we brought back a signature buffet and sold all 400,000 buffet sets in a pre-order promotion in just 15 days. We also launched a buy more, save more combo, offering more abundant options. The new combo successfully lift the ticket average and lowered our costs. Let's move on to moat. Digital initiatives and supply chain infrastructure are the key enablers in our strategic moat. Leveraging our dynamic digital ecosystem, we generated around $4 billion in digital sales in the first half of 2022. This represents 88% of our sales. Our loyalty program exceeds 385 million members as of the end of the second quarter. We share the latest launches and engage with members through our super app, mini program, and social media groups.
We also constantly upgrade these tools to improve our customer service. KFC super app now features a senior-friendly interface option with simpler graphics, less promotion information, bigger forms for mature eyes, and streamlined ordering functions. We tailored it to the needs of our older customers. Pizza Hut also upgraded their mobile ordering menu for more flexible buy more, save more combos and customized product displays. Our digital capabilities were crucial to streamline restaurant efficiency. Tools like our restaurant sales forecasting system and pocket manager gave us full visibility of the situation in each store. With these, we can rapidly adapt to changing scenarios. Our real-time inventory visibility from logistics center to stores help enable us to dispatch raw materials with greater precision. Restaurants could adjust orders daily based on their operating environment and share inventories across the stores when fulfilling community purchasing or other large orders.
As an ongoing effort of Delivery 3.0, which allows rider sharing across trade zones, we now offer the same flexibility to our restaurant staff. Staff now can schedule shifts across stores and even across cities. We continue to invest in building a world-class intelligent and digitized supply chain to improve operating resiliency and support business growth. Our first two greenfield logistics center in Chengdu and Huai'an in Jiangsu are now complete and operational. A week ago, we announced construction starting on our new Jiading Supply Chain Management Center in Shanghai. This project is our largest greenfield project yet, and will serve as the headquarters for our 33 logistics centers across China. It will integrate the latest state-of-the-art digital technologies and support restaurants in Eastern China. 2022 has indeed been extremely challenging.
We learned many lessons and now emerge as a stronger and more resilient organization. I'm not saying this just for KFC and Pizza Hut. Some of our emerging brands have also demonstrated great agility and potential during lockdowns. I'm convinced that by executing our RGM framework, we are well positioned for sustainable long-term growth. True to our Home Run DNA of resiliency, we are taking every action to quickly drive returning traffic to our stores by providing good food, great value, and good customer experience. Going forward, we will continue to delight our customers and seize new opportunities to grow our business in China. With that, I'll turn the call over to Andy. Andy?
Thank you, Joey, and hello, everyone. Let me share some color of our second quarter performance. The COVID situation has significantly impacted our second quarter results. In April and May, same-store sales declined by more than 20% year-over-year. On average, more than 2,500 stores were temporarily closed or provided only limited services. The situation gradually improved in June. We were able to capitalize on that improvement, with same-store sales decline narrowed to high single digits year-over-year, and the number of temporary store closure also reduced. We achieved operating profit of $81 million and restaurant margin of 12% in the second quarter. We were able to generate meaningful profit in the quarter, which exceeded our expectations, not only by capturing sales when the COVID situation improved in June, but also by taking swift and decisive actions.
We adjusted offers and promotions, spent tremendous efforts in driving productivity gains, secure one-time release, and rebased our cost structure. Let me go through the financials and our cost control initiatives. Unless noted otherwise, all percentage changes are before the effect of foreign exchange. Foreign exchange has a negative impact of approximately 3% in the quarter. Second quarter total revenue decreased 13% year-over-year. In reported currency to $2.1 billion due to the same-store sales decline and temporary store closures. This was partially offset by the contribution of new units and the consolidation of Hangzhou KFC. System sales were down 16%. Same-store sales were 84% of prior year's level. By brand, KFC same-store sales were 84% of prior year's level, with same-store traffic at 75%.
Ticket average grew 12%, mainly due to the increase in delivery mix and higher ticket average of community purchasing orders. Pizza Hut same-store sales were 85% of prior year's level. Same-store traffic was at 80%, while ticket average increased by 6%. This was driven by the higher ticket average of community purchasing. Restaurant margin was 12.1%, down 370 basis points compared to last year. This was mainly due to significant sales deleveraging impact, cost inflation, and high delivery costs. We have taken actions to mitigate the impact. Let me next go through each expense line and the actions we have taken. Cost of sales was 30.9%, almost flat year-over-year.
We took firm actions to reduce promotional activities and discounts, to keep commodity price increase to low single digits, and to optimize the distribution frequency from warehouse to store, in order to reduce logistics costs. Cost of labor was 27.1%, 290 basis points higher than last year, mainly due to sales deleveraging, wage inflation of 5%, and more delivery rider costs resulting from higher delivery mix. This was partially offset by improved labor productivity as we simplify promotions and menu items, reduce operating hours as necessary, reduce hiring, and prioritize scheduling of full-time employees. Utilities and other was 29.9%, 60 basis points higher than last year. The modest increase was mainly attributable to sales deleveraging and rise in utility prices, which was partially offset by our cost initiatives.
Over the past few years, we spent considerable efforts to reduce the fixed component of our rental expenses, shifting them more to variable components. This effort continued to improve the flexibility of our operations. In addition, we negotiated meaningful rent relief from landlords. Apart from that, we pulled back on marketing and advertising and took on more energy-saving initiatives. G&A expenses increased 6% year-over-year, mainly due to increased compensation and benefit expenses, as well as the consolidation of Hangzhou KFC. This was partially offset by lower share-based compensation expenses. Operating profit was $81 million. The net contribution from Hangzhou KFC consolidation was roughly 3% of operating profit in the quarter. It includes the amortizations of intangible assets acquired, which is roughly $60 million per quarter, and that would run through the end of this year.
Below the operating profit line, we incur a $60 million mark-to-market net gain on our equity investment this quarter. It was $9 million more than the same period last year. The effective tax rate was 26.5%, 170 basis points higher than last year, mainly due to Hangzhou KFC consolidation and lower pre-tax income. Prior to consolidations, the equity income from JVs was not subject to tax, resulting in lower tax rate. The effective tax rate in the first half of this year was 30.4%. We expect full year effective tax rate to be around low 30s. Net income was $83 million. Diluted EPS was $0.20. The mark-to-market gain in Meituan positively impacted our EPS by $0.04.
Despite the challenges in the second quarter, we returned $218 million to shareholders in cash dividends and share repurchases. In total, we returned $ half a billion to shareholders in the first half of this year. We will continue to execute on our discipline and balanced capital allocation strategy. As always, our priorities are to have sufficient cash for daily operations, to deal with contingencies, and to invest in capital expenditures to drive organic growth. Now, let us take a look at the third quarter outlook. We saw some gradual improvement in restaurant traffic in June. Still, we remain cautious on same-store sales. The external environment remains very challenging given the reoccurrence of COVID outbreaks, weakening consumer sentiment, downward economic pressures, and commodity price inflation. In July, the more infectious Omicron subvariants appeared in Shanghai, Beijing, and other cities.
Nationwide, the number of cases has increased again after two months of sequential decline. Many cities, including Xi'an, Chengdu, and Lanzhou, have experienced some kind of lockdown conditions following the dynamic zero-COVID policy. Therefore, we expect sales recovery to take time to be nonlinear and uneven and potentially volatile. Our focus is to drive sales recovery. We have planned a variety of new product launches and marketing promotions. We are also working to ensure great value for money to attract consumer spending. In addition, our teams employ extensive scenario planning with regional focus to stay agile in this ever-changing environment. We're delighted with the better-than-planned cost savings in the second quarter. As we look into the third quarter, we are dialing back some of these austerity measures to sustain long-term growth and operational excellence.
For example, reduced promotions, simplified menus, shortened store operating hours and rent relief are temporary. In addition, self-deleveraging impact is real and will continue to impact our margins. Also, we continue to face headwinds from the inflationary environment. Prices of commodities, such as cooking oil and beef, as well as utilities, have risen significantly this year. On the labor side, we expect labor inflation to soften given the downward economic pressure. However, the increased mix in delivery sales will likely increase rider costs.
Sorry, I'm not sure about that.
Despite challenges we face, our expansion strategy positions us well for long-term growth. In the second quarter, we slowed store openings in response to the COVID outbreaks. Yet, we remain committed to open good offline stores that will grow for years to come. Over the past few years, we have been innovating store models to cater to different business needs, like delivery and takeaway services, to enhance store densities in high-tier cities, and to expand into lower-tier cities. This year, we expect more than half of our new stores to be in smaller formats. We lower upfront investment and streamline restaurant operations to be more efficient. The smaller format, together with our reputation as a reliable tenant, opens up more potential sites for new store openings. Our new stores remain healthy.
The latest batch of new stores yield store payback of 2 years at KFC and 3 years at Pizza Hut. The majority of stores opened in the first quarter this year were able to achieve breakeven in 3 months. The healthy payback period reflects our disciplined approach to store openings. Reassured by a strong pipeline and healthy new store performance, we maintain the target of 1,000 to 1,200 net new stores for this year. In the near term, we continue to expect volatility in our business due to the resurgence of COVID outbreaks, softened economic conditions, and their impact on consumer sentiment. Nevertheless, we continue to focus on the elements of business that we can control.
As demonstrated in the past two and a half years, we are confident that our people, our execution, and our strategy position us well to deal with this very challenging environment, perhaps better than others. Also, our investment in new stores, supply chain, and digital will bring global growth, opportunity, and make us even more resilient. With that, I will pass you back to Michelle to start the Q&A. Michelle?
Thank you, Andy. We'll now open the call for questions. In order to give more people the chance to ask questions, please limit your question to one at a time. Melanie, please start the Q&A.
Thank you. 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 star two. If you're on a speakerphone, please pick up your handset to ask your question. Your first question comes from Lillian Lou with Morgan Stanley. Please go ahead.
Thank you. Thanks a lot, Joey and Andy, and also congratulations to the very solid results. My question is mainly on the margin side, because obviously I think every cost line was controlled much better than expectation. Just wanna understand, with business gradually reopen, especially more stores are reopen and running at the normal hours, how do we see these cost line gonna trend. Whether some of the. 'Cause I think Andy and Joey mentioned some of relatively temporary measures for cost savings. So wanna understand, will same-store sales growth continue to be negative?
How are we gonna project this, I would say, cost changes, especially on the margin side, on the year-on-year basis? Thank you.
Thank you, Lillian. Let me, you know, answer your question. I think, first of all, you know, as we mentioned, you know, the second quarter margins and profit were exceeded our expectations. You know, and I think it was made possible. First of all is that, you know, it's all thanks to the very incredible effort and resilience and dedication of, you know, our team, especially, you know, our restaurant employee who, you know, did everything humanly possible and endure, you know, a lot of hardships during the, you know, the lockdown and the pandemic, you know, to continue to serve customers in need and keeping our store open, running, as normal as possible.
I think those efforts, the current effort, I don't think is possible on a sustainable basis. In terms of, and obviously the outperformance was also benefited from the improvement in June in terms of the COVID situation and our ability to actually capitalize on that improvement. As we mentioned, same store sales declined high single digit in June. In terms of the cost front, we mentioned already some of these initiatives are temporary. For example, like, we have sort of cut back quite significantly on marketing and promotional activities.
You know, I think as you know, we try to drive sales. I think we stop that. We also mentioned that, you know, in terms of managing the inflation, cost inflation in food costs in the first quarter phenomenal. I think, you know, if you look at the commodity price, are still you know at a very elevated level. You know, we expect that to continue to creep up. In terms of labor, I think, you know, obviously we have simplified menu items. We have shortened some operating hours during the second quarter, and then we also reduced hiring.
You know, some of this is gonna have to be pared back, you know, especially, you know, as we sort of try to return to a more normal operations. We will have more normal menus and normal operating hours. In terms of, you know, again, like going back to O&O, the reduced advertising spending will be pared back. I think we return to more, you know, proactive advertising to drive spending. We, as we mentioned also too, you know, there was some one-off, you know, in terms of, you know, rent relief and government relief. You know, some is directly related to COVID, some of this is not.
We have about roughly close to $20 million of that in the quarter. You know, we're not uncertain, we're quite uncertain about you know if we can receive you know the amounts in the third quarter. I think you know when we look into the third quarter, as mentioned, the key thing obviously is sales, right? Sales de-leveraging is real. You know, as we see you know COVID remains you know one of the biggest uncertainty going forward. We see some you know resurgence in cases in July nationwide. You know, we see you know some cities, for example, Chengdu, Lanzhou, and also Xi'an were under some you know lockdown measures.
That's why we say, you know, the recovery of that would remain, take time, will be nonlinear and potentially volatile. Now, obviously, you know, we will continue to, sort of like, you know, focus on cost control, you know, try to have scenario planning, and try to stay nimble. I think, you know, we need to be realistic about, you know, the uncertainty that we face, and then, you know, the sales de-leveraging and also globally, the inflationary pressure there. Thank you, Lillian.
Lillian, I just want to get some color about these numbers behind these numbers. Let's say take COL. Some of the saving will not continue, some of it will continue. For those who continue, such as the sharing of staff across the store, some of it will not continue, such as the extreme situation during April and a bit of May. These stores are run by very few number of employees. You know, typically they stay in the store for 1 week. They literally live in the store for 1 week and work nonstop. Then a week after, second shift of staff move in. However, for some smaller brands, the most extreme case is one of my staff stayed there for 33 days, the other one stayed there for 44 days.
You know, I have the fortune to invite some of them to have lunch with me recently to thank them. It's you know, it's truly heartwarming behind these numbers and to really grateful that we have such amazing operation team. They work this hard so that they can protect their job, and they can serve the customer, and thus they can protect the company. This kind of extreme arrangement, of course, cannot be sustainable. If we have gone this far, other innovation and creative arrangement, our team become even more open-minded to embrace any sort of innovation in terms of rebasing the cost structure. Thank you, Lillian Lou.
Thank you. Your next question comes from Michelle Cheng with Goldman Sachs. Please go ahead.
Hi, Joey, Andy. Thanks for taking my question. My question is about the incremental opportunity we observe during the tough time. You mentioned that there is some new business we are driving, like community group purchase. On top of that, retail products are selling pretty well during the tough time. Are we going to be more aggressive exploring these new business line? In addition to that, from the way we do the business, Joey, earlier you mentioned that we have this AI-enabled route to improve the delivery efficiency, et cetera.
Just wondering, like, those opportunity we observed during the tough time, how we should think about the sustainability and how we are going to grow this opportunity even further in the future. Thank you.
Thank you, Michelle. Let me take a step back and then I'll comment on your question about the incremental opportunities. Overall, quarter two, we delivered substantial operating profit versus expected loss. The absolute number is not the highest quarter, $80-some million, but my God, the quality, the amount of effort going to it and the resiliency our team has demonstrated is phenomenal. We can see the result. You know, April is tough, May improved a little bit, June came back quite a bit. The core of the core are the questions that you just asked. What did we do? How did we manage to do it?
Well, I mean, if we go back to our strategic framework, which hopefully make it much easier for our key stakeholder to understand the management team, it's going back to our RGM, the resiliency, the growth and the moat. In terms of resiliency, the two example that you mentioned, Michelle, the new retail, the community purchasing and the AI is a great example about our resiliency. We react very, very quickly. We are talking about putting together the community purchase program, starting with a hotline and later on with the mini program, xiaochengxu, within a week across the brand. We got the entire process, team, program done by middle of March. We roll it out and wait for two or three days and then the demand came in.
That's the kind of speed, agility and determination, ability to execute innovative solutions that earn us the resiliency and that's the result. The Tuangou, the community purchase happened. When that happened, of course, we are selling what we can sell at that time, which is fried chicken, but that's not enough. Because of all kinds of limitations, and also at home consumption, you can imagine, increased dramatically. We put in the new retail, the packaged food. At the height of the new retail, Pizza Hut, I believe it's May, 50% of the Pizza Hut sales in Shanghai is from the new retail. Now time has moved on. Later on by June, it became 20%, and then now the percentage is smaller.
To go back to your question, Michelle, we doubled the new retail business during Q2 compared to last year year-on-year. For first half of the year, we delivered RMB. This is our main number, CNY 450 million sales for new retail. Now you can do the math. It starts to be some decent number. For the entire year of this year, 2022, we are looking at reaching RMB CNY 1 billion sales for new retail alone. In China, if you compare that sales to many other new retail business, this is not small. I mean, it's relatively small percentage compared to Yum China business, but as the new retail business alone, it's not.
It's a wonderful complement to our business because you can imagine that we have our scale in terms of supply chain. We have our network of distribution, which is our stores, 12,000 stores, and our online network channels that our little brand, Shaofaner, has started 2018. We have our own rider to deliver these new retail to customers directly without incremental delivery cost charged to the customer. This will continue, a very good complement to our business. Even emerging brands achieve breakthrough with the new retail, Lavazza, Taco Bell, Little Sheep. I mean, during May, again, sales exceed pre-lockdown level because of the packaged product that they have been trying to put together within very short time.
The next thing you talk about, mention is the AI, the digital, the supply chain, et cetera. Absolutely. That's the absolute right thing for us to do, and we have been doing it for 35 years. We are one of the few, if not the only one. At our scale, we have dedicated supply chain tailor-made, so that we can continue and keep the supply chain logistics going even during quarter two, such difficult time. Now we are building our greenfield logistics center with digitized and AI-enabled supply chain to provide us the visual image and the visibility of the supply chain process and the traceability of upstream, so that we can move things around, and we can be very efficient in terms of cost of doing business.
These incremental opportunity will certainly continue. Therefore, despite such difficult quarter, the morale is best ever, because as a 450,000 people company, we work so well together. The execution ability, agility is second to none. The team is very proud that we protect the business, protect their jobs. We look at every single cost opportunity possible, except the promise and the sense of security that we are not doing any layoff for staff for 2022. Our staff know that their jobs are protected, and they're all in it, doing everything we could possibly to protect the customer and to protect the shareholder. I'll pause here, Michelle.
Thank you, Joey Wat. That's very clear. Thank you.
Thank you. Your next question comes from Brian Wang with CMS. Please go ahead.
Hi. Basically, actually, I have one question. I would like to understand your number of-
Brian, would you mind speaking up a little bit? We have a very difficult time hearing you, Brian. Hello?
Well, sure. Thank you. Yeah. Can you hear me now?
Yes.
Yeah, sure. Thank you. Basically, I would like to understand, you know, your number of stores and the increase. You know, how do you plan to increase your number of stores in the second half? Say, for example, how to break them down by different brands. Say, for example, you know, like, your plan of increasing your store counts in KFC and also Pizza Hut. Will there be a breakdown by tier of cities? That's my question. Thank you so much.
Hi, Brian. About, you know, our new store opening. I think, as you mentioned, we, as always, deploy a very disciplined process and different methodologies to evaluate store opening. Usually, you know, some, you know, sort of bottom-up from the market, where they propose, you know, appropriate sites, we'll run through the financial models, run through the committees to think about, you know, the financial return, the strategic implications, you know, and overall market conditions, to approve those sites. So I think we'll, you know, I don't think there's any change to that process.
In terms of like by brand, because KFC continues to be obviously the largest brand within our portfolio, and will continue likely to account for the majority of the new store opening. Pizza Hut, as you can see, new store performance are also very good, especially with satellite store. You have seen the store opening accelerated last year and this year as well. I think you can also expect that. In terms of our other brands, I think we can expect coffee, for example, Lavazza , will continue to.
Also Taco Bell too will continue to expand in you know second half although they are still you know a smaller portfolio of store. But in terms of percentage-wise it will be big but you know in absolute number it will be smaller. In terms of Chinese cuisine business you know there are some similarity to you know store opening there. They are opened by franchisee so you know genuinely there will be more store opening before the Chinese New Year for example. That's potentially more. Again like this year you know because the COVID situations you know it's a little bit more challenging for restaurant operator and you know so franchisees.
We will continue to have to monitor the situations in the market, you know, especially given, you know, our Chinese cuisine business, hotpot and store product business, you know, concentrated in, you know, northern part or northwestern part of, you know, China. We'll have to see, you know, how the COVID situation evolves in second half. That's like by brand. In terms of by tier, you know, as we, you know, have seen over the past couple years, you know, we have beginning to see, you know, more opportunities in lower tier cities and, you know, the concentrations or the number of new store openings in lower tier cities, you know, have now account for the majority of the store openings.
Now, obviously, we continue to see opportunity to increase the densities of our store network in, you know, the Tier 1, Tier 2 cities. I think that's the general trend. I think that trend will continue. That's how we generally look at the store opening. Again, like, you know, this year we have the target of about, you know, 1,000-1,200 net new store.
You know, as we mentioned, given you know, the strong pipeline that we have and also given the strong economics that we have seen, you know, in our new stores that have opened over the past, you know, couple years and also recently, we're pretty confident that, you know, we will have good opportunity to open more good possible stores that can help us grow our performance in the long term. Thank you, Brian.
Oh, sure. Thank you so much. Yeah, sure. Thank you, Andy. I think this is very clear. Actually I have one more question. On the competitive landscape, because I heard that, you know, in tier two and tier three cities, and then there are some kind of low price peers, you know, they are similar to KFC, so they are kind of like the Chinese version, you know, a cheap version, say some like
Sure.
How do you think, you know, your strengths compare to them? It's because I have seen their menu, you know, and then their menu is actually quite cheap. How do you plan to compete with them in these lower tier cities?
Right. I think, you know, we have seen, you know, we always see competitions, you know, both in low-tier cities and higher-tier cities. We think, you know, the best thing that we can do is not to be just being cheap, but you know, we're focusing on having great value for consumer. Great value does not mean, you know, being cheap or lower price, what it means is give the food, you know, at great value, great price to consumer, and so that they can enjoy it. We have a fantastic brand. Our customers are very loyal to our brand. We have great quality of products, delicious food, you know, a very comfortable, fun environment that you know epitomize our brand identity.
As we mentioned, you know, if you look at, you know, during the pandemic and the lockdown in Shanghai, for example, you know, I think by some indications, KFC fried chicken was the most popular fried food, you know, during that period of time. You know, I think, you know, our brand resonate very well with consumer, you know, our food and continue to innovate. You can see, as Joey mentioned, each brand continue to innovate with new product, with, you know, great fun food for consumer. We continue to deliver great values. As mentioned, one of the reason why we focus so much on cost and controlling cost is that in order to, you know, compete, you know, in value propositions, most important thing is to have a, you know, cost structure advantage.
That's what we try and do you know deliver great value to consumer.
To be-
Thanks.
To be more specific.
Oh, sure. Thank you so much.
To be more specific, at least in three ways, we do it slightly differently in lower tier city compared to tier one city. One, we have slightly different menu. The fried chicken we sell there, we could have like Yanjiu Ji, something like that, which is targeting for lower tier city to start with. We might sell in other tier, top tier city later on, but we do have different, slightly different menu. The pricing is differential. So we incorporate that. Then also promotion. We give our store manager flexibility to run certain promotions. That's first. Secondly, the different model. So Andy mentioned it, investment. Yes.
The cost of building up these stores in lower tier city could be slightly lower, and we have a slightly different way of doing it. The operating model, the kitchen, blah, blah, will be slightly different. Third is we are very focusing on children in lower tier city, which is something very unique to us in the last 35 years. To give you example, in northern part of China, which is the most difficult part of a business, even in the last, you know, two or three years, despite the impact of the pandemic in eastern part of China. Northern part of China, the business is still the more challenging one. For this summer alone, we have run more than 10,000 children's summer event.
The store manager will organize these events for kids during the summer. You can see we do have a different, slightly different model. Of course, you know, if I can take this opportunity to remind our analysts that other than lower tier city, we have so many different business models of catering, and customized for slightly different customer groups in different region, in different consumption occasions, like the transportation hub, the highway station, and university these days, you name it. Okay, I'll pause here. Let's move on to next question.
Thank you. A reminder to please limit your questions to one per person. Your next question comes from Xiaopo Wei with Citi. Please go ahead.
Good morning, Joey and Andy. Congratulations for another resilient quarter result. I think in the past few years, Yum China have showed great agility of being defensive. Being defensive, being agile in operation also means that you can switch back to offensive mode when opportunity arises.
If China reopening continues, which I presume you share the same view, how could you be offensive again in operation? Joey had touched base on the new brand, new retail opportunity, et cetera. If we only talk about the operations of KFC, Pizza Hut in the reopening scenario, how could you do differently versus a pre-COVID kind of operation with what you learned, either bad lesson or good lesson in the past two years? Thank you.
Thank you, Xiaopo Wei. Let me share my thoughts here. Indeed, the business has become more agile. We just look at the number for quarter two. Our same-store sales is 84% and system sales, so 16% down. However, we still deliver 4% profit. Technically, you know, we reduced the break-even point to about 80%. Roughly in our business is, I guess, pretty normal to have the break-even point at about mid-eighties. Our ability to reduce to sort of the eighties is phenomenal. It gave us this agility to do things.
Going forward, I think even for quarter two, you can see when our fundamentals are intact and when things are a bit more stable, even the COVID situation is relatively more stable, we are able to bounce back rather quickly. That's what we can see even for quarter two. We hope. Although for quarter three, as Andy mentioned, there's still a lot of uncertainties, even as of right now, still Guangzhou, Xi'an is still in challenging situation. In the long term, we are optimistic, and we are still very committed to this market, and thus we're still growing the store. When things become better, how can we grow faster? If that's your question. The strategy is there.
It's not gonna be any different from what we have shared since 2019. It's the RGM. It's the resiliency, the growth and the strategic mode. We might do it slightly faster, but the strategy is the same. You know, it might be a bit difficult to say that in the last few years, but right now I think we can see that sometimes, just sometimes resiliency is even more important than growth. We have the resiliency, and we'll continue that with our digital capability, with our innovative product, with our great value for money, with our ability to control cost. We'll grow more stores. The growth here come from KFC, Pizza Hut and other emerging brands.
We'll continue to do what we are very good at for opening the stores and also increasing the sales from off-premise. You can see our number right now. Our off-premise sales is what? About 65% for KFC and 65% for Pizza Hut. All these numbers moved quite a bit in the last few years. That gave us both the growth and agility, because without this high percentage of off-premise sales, we won't be able to deliver the number that we delivered in the last quarter, in the last 2.5 years. The growth will continue, and then we'll continue to build strategic moat on a daily basis, firm and steady. The supply chain will continue. We have 33 logistics centers right now. We'll continue to build more greenfield logistics centers.
We'll continue to invest in our automation from the front all the way to the back. We'll continue to work on our sustainability commitment, the science-based target that we have committed to. I hope that give you a sense that the directions are clear. We might pick up the speed a bit faster whenever we could, but nice and steady. Thank you.
Thank you. Your next question comes from Sijie Lin with CICC. Please go ahead.
Thank you, Joey and Andy. Congrats again for such a strong and resilient performance. I have one follow-up question on the margin side. We achieved a very resilient restaurant margin in Q2 through the extraordinary efforts with some adjustments and some one-time relief. Meanwhile, Andy mentioned that in the future we are getting back to some strict cost control measures to sustain long-term growth. How should we expect our restaurant margin in the long term under the new normal? Would this still be like around 17% target? Thank you.
Thank you, Sijie Lin. Obviously, as we talked a bit about short term and long term, and as you mentioned in the second quarter, you know, some of these cost saving initiatives or efforts like some of these, you know, more temporary in nature. In the short term, the biggest driver for restaurant margin right now is sales leverage and deleveraging, you know, that to a great extent depend on COVID situations.
In terms of longer term, I think, you know, our goal is obviously K-Coffee continues to drive a growth on the top line and also, you know, return, you know, profit into a more normal level. As we have mentioned in, you know, our last year's Investor Day, you know, our longer term goal is we need to drive, you know, sales growth by, you know, high single digits and to drive our profit growth by, you know, high single digits too. I think those in parallel is what we were trying to achieve in the long term.
One thing I think, you know, it appears the question was saying, you know, in the new normal or when things return to normal, you know, are we confident in start capturing that opportunity both in sales and also potentially in margin? You know, I always say, like, you know, although history is not, you know, always, you know, the predictor of future, but it's probably the best predictor of future and show us some lessons. If you take a look, you know, at, you know, the period, the full year period between third quarter 2020 and the second quarter 2021, when, you know, COVID situation was markedly more stable, you would see that, you know, we were able to, you know, drive our sales growth.
You know, we were able to, you know, see significant margin improvement. That's going back to, you know, what Joey have, you know, a lot of time emphasized on resiliency and also, you know, and in terms of our excellent executions. Our scenario planning help us to decide, you know, our operations, you know, in case, you know, things get worse, but also in case things get better, how we can capitalize on the opportunity, and drive sales growth and then also drive, you know, sales, and margin recovery. You know, hopefully that give you some perspective in terms of how we look at, you know, the shorter term and also the longer term, margin perspective.
Thank you. Your next question-
Thank you.
comes from Anne Ling with Jefferies. Please go ahead.
Hey, thank you. Hi, management team. Thank you for taking my call. My question is on the coffee business. I know it's still very small at this stage, at the same time, I understand that, you know, this will be one of our potential, you know, growth driver moving forward, more like, you know, mid to long term. If I look at like, you know, your store opening plan versus like, you know, the peer, you know, it seems that it's still a little bit slower. Maybe like, you know, would you share with us like, you know, your pace of your coffee like, you know, net roll out?
Like, are we still in the process of testing our model or we already like, you know, find the right model to roll it out? Once we roll it out, normally this is the type of business that we need scale and with backend support. Meaning that, you know, if we have like, you know, 200, 300 stores, we possibly might have to bear like, you know, some investment initially. I don't think like, you know, any of us, you know, as an analyst, you know, factor in any investment in our model.
Just want to check like, you know, if management can share with us like, you know, some of your initial plan or what will be the investment, you know, for the coffee business, that would be great. Thanks.
Anne, thank you for your question. I think, you know, first of all, I think we are very pleased to see, you know, the progress. The progress may not be seen as how they measured by, you know, other company. Other company may measure by, you know, X or hundreds of store open in a quarter or whatnot. As we have mentioned, you know, with all investment, including our store network expansions, as with any other investment, the fact it's in process. Although, you know, like for the newer brand, like coffee, you know, building a brand, don't expect them to be profitable immediately in short term.
You know, there's, you know, we generally expect that, you know, they will figure out, you know, the right business model before they scale up. Because otherwise you're gonna scale up a big problem, right? We're very pleased so far with, you know, the progress so far. You know, the store network right now, you know, has expanded quite significantly, you know, from last year. You know, we have, you know, 74 stores right now in 4 tier-one cities and plus, you know, a number of second-tier cities as well. In terms of sales, you know, we have more than double year-over-year.
You know, even in very challenging time, as Joey mentioned, the team have done, you know, a very tremendous job in sort of like putting together package products to sell in retail channels and able to sustain, you know, almost better than last year in terms of sales. Obviously, last year we only have very small number of store mainly in Shanghai. In term of our customer base right now, and we continue to see growing customer loyalty. If you look at member now, member for Lavazza have grown 4 times year-over-year. You know, its member contributions continue to grow very significant number now.
Obviously, you know, the coffee business, you know, this new brand has also been impacted quite significantly by COVID. As you probably know, a large number of their stores on top of that is in Shanghai. We have to lock down and it was impacted. But as I mentioned, you know, they were able to very quickly pivot into community purchasing, you know, packaged coffee, retail, you know, products like pastry and whatnot. And, you know, those products really help, I think, you know, sort of like us reach to, you know, a bigger audience, new audience that maybe historically have not taste our product able to do it through community purchasing, and then some of the new retail initiative.
Now, obviously, you know, we cannot say, you know, we have everything all figured out and a perfect model. I think it still would take some work to sort of streamline the restaurant operation there to strengthen some of the fundamental, you know. It take, you know, a while for, you know, Pizza Hut café to figure out the right store format and some of these product menus and then also improve efficiency. I think, you know, we should still need to be a little bit more patient with that. I think, we're happy with the progress so far, but still a lot more work to do.
Nevertheless, we're very confident, and we think it's very important, vertical for us, and we have a big, you know, sort of partnership with, Lavazza to do that, in the coming years. Thank you.
Okay, thank you. Thank you. Your next question comes from Christine Peng with UBS. Please go ahead.
Hi. Hi, management. Thank you for taking my call, taking my question. I actually have a similar question, which I'm sure some of the analysts like Xiaopo Wei and Anne Ling have asked previously. I just want to, you know, ask management providing some updates about the new initiatives that you previously mentioned, as we are looking for a post-COVID full recovery in China, possibly in 2023. I think the two key initiatives management previously mentioned, one is the integration of Huang Ji Huang and Little Sheep. Can you provide us, you know, more updates as regards to this initiative?
In relation to that, maybe can you provide us more updates in terms of your, you know, maybe 2023 plan, in terms of the extent of the Chinese cuisine business? I know that business has been struggling with COVID in the past three years. When we think about 2023, what are your initial thinking behind the store expansion plan, et cetera? I think that's the first initiative I want to check on. The second initiative is regarding you know, introducing more you know, franchise you know, stores. Is this something you know, management is thinking right now, given that you know, management is, you know...
I remember previously you mentioned about your initiative to emphasize the supply chain resiliency to provide more possibility of, you know, franchising. I just want to check out, you know, what are the latest thinking behind those long-term initiatives when we are going into 2023. Thank you.
Hi, Christine.
Oh.
Let me try to.
Go ahead.
Joey, do you wanna go ahead?
Yes. Go ahead.
Okay.
No, go ahead.
Yeah, for Huang Ji Huang and Little Sheep, as you mentioned, you know, obviously, you have been impacted, you know, by the outbreak, because it's dine-in nature, and a lot of locations are in northern, northeastern, or northwestern part of China. I think obviously the number one priority for them is really to, you know, try to drive sales recovery, and then also have the franchisees to strengthen the operations, particularly, you know, in the delivery business. In a sense, you know, they historically have not been, you know, a big part of the business in delivery.
I think this is something that we can help you know the franchisee to do given you know our overall comfortability. Little Sheep also you know during the pandemic also being you know quite creative and innovative and make pretty good progress in improving you know goods and services and then also you know their overall cost management. Especially in Shanghai you know during the lockdown they were able to you know sell like you know capture a lot of opportunities in both you know delivery and also community purchasing and retail business.
I think, you know, the priority for the Chinese cuisine business next year is really to try to drive sales recovery, help, you know, franchisees to run their business, and then also continue to work on the fundamentals and integrations. Joey, do you want to comment on the franchise questions?
Christine, Pizza Hut will continue to be the driving force for our business going forward. However, we do have the targeted franchise strategy. So right now, you know, in markets that are a bit long and thin, like Tibet, Qinghai, and these are very good franchise markets. Then also for some emerging new business models such as the stores along the highway stations, we have established strategic partnerships already to build stores. So the franchising strategy, it's not going to be general. It will have its own strategic purpose. You know, given the time today, I think I'll just pause here. We could have more detailed exchange of thoughts later on. Okay. Thank you.
Thank you. Your next question comes from Lucy Yu with Bank of America. Please go ahead.
Hi, Joey. Hi, Andy. Thank you for taking my question. My question is more on the GP margin side. How should we think about the promotion and discounting plan in the second half? Especially we are fighting against commodity headwinds and COVID uncertainty, while at the same time we're trying to stimulate the sales. How should we think about the promotion and discounting in second half? Thank you.
Thank you, Lucy. Yeah, as we mentioned, you know, in the second quarter, obviously we sort of cut back on marketing and also in promotional activities. As we move into, you know, the second half and the third quarter, you know, with the COVID situation improved, a bit, you know, even though there's some volatility, I think the key focus for us is really driving, you know, sales recovery. We likely gonna see, quicker marketing and promotional activities, there. You know, and then also, you know, have more value campaigns, value for money campaign, because, you know, as you mentioned, consumer sentiment is, you know, relatively weak because, you know, of the prolonged COVID situations, and then the, some of these, you know, macroeconomic pressure.
Value for money is very important. That's how we see, you know, in the second half this year. As always, you know, like, we're always trying to, you know, be very cautious about, you know, using price increase to sort of like, you know, to offset inflationary pressure. You know, we always try to first ask, you know, it's a way for us to run our business better and, you know, lower the cost, before we, you know, say like, you know, we have to increase prices. We do, you know, increase price annually, by a small amount that usually is below the inflation rate. Thank you, Lucy.
Thank you, Andy.
Thank you. Our final question today is from Walter Wu with CMB International. Please go ahead.
Hi. Hello, Andy and Joey. Congratulations for your highly resilient results. My question was asked by another analyst previously, so perhaps I can ask about your member sales. While the number of members continue to grow very healthily, but it seems the member sales as percentage of total system sales has declined year on year. Do you mind explaining the reason behind? Is that a concern for you guys? How do you see the growth potential and your strategy over the members and the member sales going forward? Thank you.
Really quick, Walter Wu. The member sales is around 60%. It's not a concern for us because the total member size is still growing, which is very nicely actually. I mean, our member sales is $355 million roughly for KFC, and then $150 million for Pizza Hut. When it comes to member and non-member sales, the member sales, 60% is already high enough. The next target for us is, other than quantity, to work on the quality, the stickiness of the member, the overall experience of the member, et cetera, et cetera. You know, I guess, you know, we cannot just increase the member sales forever. It does not make much strategic sense.
For us is quantity first, then quality. It's a very, very important part of our business and there's still so much that we can do to improve and to get something out of it. Just to give example, what about the cross-brand sales, KFC and Pizza Hut? How can we do better and how can we serve the same customer better with KFC, Pizza Hut, Little Sheep and et cetera? A lot to do here, but the focus is more on the quality and overall experience for now. Thank you, Walter.
Thank you, Joey. Just a little bit follow-up. If the members growth is still very healthy and the member sales mix has declined, does that mean we have more new customers being affected in the second quarter or in the past few months. Do you see that trend we have more new customers or new clients? Yeah.
I mean.
Walter.
The China-
Yeah, Walter
population. Oh, go on, Andy. Yeah.
Yeah, yeah. Walter, I think as Joey mentioned, you know, like we have a very large member base. We already have like 280 million new members, and it's a very large population in urban areas already. The other part of this is that, you know, this always, you know, it's not always higher the member sales percentage the better, right? If I have 100% member sales, that means I have no new customers. There's always, you know, a balance between, you know, a mix of, you know, member sales and the new members. There will be some fluctuations, you know, from time to time, depending on the marketing campaigns and depending on, you know, the market conditions.
I think, you know, at 60-some% is a really healthy level. In terms of, you know, for us, you know, as Joey mentioned, we try to drive that, you know, quality of member sales, you know, driving core sales among our customers, and then continue to increase their stickiness and frequency over the long term so that the payback for our marketing and new customer recruitment continue to improve. Those are, you know, a number of metrics. You know, I think, you know, member sales is, you know, one of them, and it's not always the higher the better.
Thank you. Yeah. To that end, that's it. Thank you.
Thank you.
Thank you.
Thank you. That concludes the call today, and we look forward to speaking with you on the next earnings call. Have a great day.
Thank you.