China's restaurants race to the bottom in deflation-hit economy

BEIJING (Reuters) - In a dilapidated warehouse on the outskirts of the Chinese capital, businessman An Dawei inspected rows of giant fridges, industrial hobs and commercial bread ovens waiting to be resold to dining establishments.

"For the average person, opening a restaurant is almost a guaranteed failure," said the 38-year-old who sells used kitchen equipment.

Behind every appliance is the tale of a failed Beijing restaurant, set up by those who often bet their life savings on a V-shaped economic recovery after the COVID-19 pandemic, only to see consumers skimp on eating out as China's economy slowed.

That unleashed a price war in which food providers are offering coffees at 9.9 yuan ($1.40) and four-person set meals at 99 yuan ($14).

Expanding domestic demand is the top priority this year for China's rulers, looking to offset the impact of U.S. tariffs and a protracted property crisis.

But consumer inflation fell in February at the quickest pace since January 2024, setting off concerns about a deflationary spiral.

Last year, An and his team dismantled 200 restaurants each month, or 270% more than the prior year, as the number of dissolved catering companies touched a historic high of almost 3 million nationwide, data from companies registry Qichacha shows.

"In first-tier cities like Beijing, Shanghai, Guangzhou and Shenzhen, the monthly restaurant closure rate exceeds 10%, sometimes even surpassing 15%," said An.

At restaurants closing across the capital, his teams of workers stacked chairs, ovens, storage units and baking trolleys, using forklifts to load some on to vehicles to be taken away, while at one site a purchaser carried away tables.

The company's revenue fell by just over a fifth in 2024, An said, as more smaller, low-overhead stores opened, such as drink shops and bakeries, which need a smaller outlay on equipment.

In a deserted mall near Beijing's Olympic Park, the manager of a bakery franchise blamed high rents of 50,000 yuan ($6,900) per month and low foot traffic for its failure after 14 months.

"There are shops next door with similar products that don't taste as good, but are 10 yuan cheaper. Normal people will basically buy the cheaper product," said the manager, who spoke on condition of anonymity.

"People just have no money. Or if they do, they're unwilling to spend like before, because it's so hard to come by."

VICIOUS CYCLE

A restaurant in China has an average lifespan of just about 500 days, analysts say, falling to as low as a year in Beijing, where municipal data show net restaurant profits plunged 88% in the first half of 2024.

"Mid-range enterprises are more likely to go bankrupt ... because they are not cost-effective," said food industry analyst Zhu Danpeng, referring to restaurants that charge 100 yuan to 120 yuan ($13 to $16) a person.

Cut-throat competition on price and ever-changing menus to attract jaded customers have left many establishments struggling for survival, An said, adding that many had been forced to trim costs to about 70 yuan to 80 yuan ($9 to $11) a customer.

At a key legislative session this month Chinese officials vowed greater efforts to crack down on "involution", or excessive competition, but the restaurant industry is one of the areas in which the problem is most visible.

Many restaurants went out of business in 2024, slowing revenue growth in China's food and beverage industry to a paltry 5.3% from the 2023 figure of 20.4%. The survivors had to cut profit margins dramatically to stay in business.

An traced the price war back to 2023, after China lifted pandemic curbs, which he said drove an influx of newcomers into the restaurant industry following mass layoffs in industries such as real estate, education, finance and tech.

The vicious cycle of competition will ultimately cost consumers, An added.

"Once (restaurants) can't lose money anymore, they will find ways to make a profit, and they can only do that by reducing the quality of ingredients," he said.

(Reporting by Laurie Chen, Tingshu Wang and Xiaoyu Yin; Writing by Laurie Chen; Editing by Clarence Fernandez)