Humans have developed adaptive mechanisms to efficiently process letters, not symbols or shapes, in crowded conditions. Fluent readers exhibit the highest accuracy for the first, most leftward letter in briefly presented letter strings, known as the first-letter advantage, which aids in word decoding and typically emerges by Grade 1 for most children. Dyslexic individuals display a first-letter advantage, but their accuracy across serial positions is lower than non-dyslexics. Research on how and when this phenomenon emerges, particularly in children with minimal reading skills and varying levels of reading risk, is limited. Numerous studies have used target-in-string tasks with varying string lengths to measure the first-letter advantage. The current study employed a two-alternative forced choice task using two-item strings to examine how 50 children (22 not at risk, 28 at risk) develop the first-letter advantage from kindergarten to Grade 1. In kindergarten, at-risk children showed similar accuracy in identifying letter and shape targets flanked by identical items, indicating a lack of letter-specific specialization. Not-at-risk children showed an advantage in identifying letter targets over shapes, achieving the highest accuracy when the letter target with a rightward flanker was on the left side of the screen—a first-letter advantage. In Grade 1, not-at-risk children maintained this advantage, while at-risk children still showed similar accuracy for letter and shape targets. Both groups improved in the first-letter advantage condition from kindergarten to Grade 1, but at-risk children remained less accurate overall. These findings suggest that children at risk for reading difficulties may not develop the same level of letter specialization as their peers, limiting the benefits of early reading experiences and highlighting the need for early identification and intervention.