China's dining sector returns to ‘neutral’ as policy easing lifts demand

Restaurant sales growth was up 4.8% in the first two months of 2026.

China’s restaurant sector operating conditions improved to “neutral” in the first quarter of 2026, up from “unfavourable” in the previous quarter, according to Morningstar’s March 2026 industry report.

The relaxation of the anti-extravagance campaign—introduced in May 2025—has been a key driver of the improved outlook.

By late 2025, signals from state media and public dining by officials indicated a softer stance, helping demand recover. Personal gatherings are no longer treated as violations.

This policy shift, combined with a low comparison base, is expected to support year-on-year growth in 2026.

Restaurant sales growth, which averaged 4.4% in 2024–2025, showed early signs of stabilisation, with 4.8% growth recorded in the first two months of 2026.

Morningstar forecasts a gradual recovery through 2026, with quarterly growth estimates indicating a potential return to mid-single-digit levels.

However, macroeconomic headwinds persist. Consumer confidence remains weak, youth unemployment is elevated at around 16%, and households continue to prioritise savings over discretionary spending.

Margins are being supported by cost-side improvements, but these tailwinds are narrowing.

Rental costs—around 15% of operating expenses—have declined in nearly every half-year period since 2020 and are expected to continue falling through 2026, offering some relief to operators.

At the same time, labour costs have stabilised, with wage growth now broadly in line with revenue growth.

However, commodity cost deflation—a key margin driver in recent years—is reversing.

Prices for proteins such as beef and chicken have moved back into inflationary territory, leaving pork-heavy operators as the primary beneficiaries of remaining cost advantages in the near term.

If pork prices follow the same trend, the sector’s cost support could largely disappear by late 2026.

A notable structural shift is underway, with chain operators gaining share as new restaurant openings slow.

Total restaurant unit growth has decelerated to around 2%, significantly below pre-pandemic levels, easing competitive pressure.

At the same time, chains are expanding faster than independent operators, benefiting from scale, efficiency, and stronger balance sheets.

This shift is expected to continue, supporting same-store sales and profitability amongst larger operators.