China restaurants: input-cost inflation and El Niño exposure Report Interpretation

Overview

This China restaurant-sector note reassesses input-cost and margin risks after the rebound in oil prices and expectations for a Super El Niño in 2026/27. Goldman Sachs concludes that sugar and oil-linked packaging are the principal inputs to monitor, but argues that procurement practices, product mix, pricing and franchise policies make margin outcomes materially company-specific.

Core views

Goldman Sachs revisits restaurant cost inflation as Brent and WTI oil prices recovered nearly 50% from July lows to approximately US$105 and US$100, respectively, while a Super El Niño is expected in 2026/27. The report identifies global sugar and oil-linked PET/PP as the inputs with the largest increase versus their 2026 year-to-date averages. It argues that global sugar is particularly exposed because about 70% of global sugar exports come from Brazil, India and Thailand, which face El Niño-related drought and flood risks. Global sugar prices had already risen nearly 30% in the prior two months; greater diversion of sugarcane to ethanol and precautionary export restrictions could further reduce exportable supply. China sugar pricing nevertheless remains less volatile and locally low, with about 80% self-sufficiency in 2025/26. Past Super El Niño and 2023/24 sugar increases also reflected domestic planting area and supply conditions rather than global inflation alone. Coffee beans are another weather-sensitive input because Brazil and Vietnam account for 35% and 18% of production, respectively, according to USDA data cited by the report. However, historical El Niño cycles did not generate a meaningful coffee-price increase: average prices changed -25% and +2% year on year in 2015 and 2016. The major 2024-25 coffee-price surge instead reflected continuing weather headwinds in production areas. Prices corrected in 2026, and Brazil's output is expected to rebound to a record level, according to CONAB. Protein prices in China have historically been less El Niño-sensitive because local supply and demand dominate. Goldman Sachs expects pork prices to rebound from 2H26 and rise 20% year on year in 2027, although the price remains favorable versus history despite recovering more than 10% from its trough. Chicken remains favorable, while beef has recovered year to date amid reduced supply but without a significant rebound; the report notes that China beef prices have shown little correlation with global cattle prices despite China having a 74% beef self-sufficiency ratio in 2025, below the above-95% ratios for pork and chicken. Raw milk has bottomed as supply-demand conditions improve, while pulp remains favorable. PET and PP, in contrast, rose again after June-July correction alongside oil and remain meaningfully above the start of the year. The report constructs company cost indices from raw-material exposure and finds limited correlation between those indices and margins for most covered companies. Goldman Sachs attributes this to diversified ingredients and menus, flexibility to change product mix, several months of commodity price lock-ups or inventory, and the importance of operating decisions such as cost control, promotions and franchisee support. Its margin sensitivity analysis considers increases in oil byproducts, sugar and coffee beans while holding other variables unchanged, but the broader conclusion is that direct commodity sensitivity alone does not determine reported margins. Yum China is presented as especially resilient. The company managed chicken-inflation cycles in 2018-19 and 2021-22, uses a diversified and flexible cost structure, and locked PET pricing for the full year. Beef and PET inflation in 1H26 had limited impact, while low sugar and PET exposure and cost control should contain potential upside risk even as existing raw-material tailwinds narrow. Goldman Sachs remains Buy rated, with 12-month SOTP-based targets of US$59 for the ADR and HK$459 for the H-share, using 11x 2026E EV/EBITDA for KFC China and 7x for Pizza Hut China. For other covered companies, the margin drivers differ. Haidilao sources roughly half of raw-material procurement from beef and lamb, and its gross and operating margins have historically moved negatively with costs; yet its pricing strategy can outweigh input effects, as shown by a 3 percentage-point year-on-year gross-margin contraction in 2025 despite favorable input prices. Luckin's gross margin expanded through the 2024-25 coffee-price rise, helped by product diversification, lower promotions, scale advantages and a higher-margin delivery mix. Its roughly six-month coffee inventory should create an input-cost tailwind in 2H26 following the coffee-price peak at end-2025; Goldman Sachs expects a margin turnaround from 2H26, while emphasizing competition, pricing, delivery mix and store-opening pace as the larger variables. Guming's diversified raw-material and product mix, active new-product launches and relatively small sugar/PET exposure have historically prevented a clear negative cost-margin relationship. Goldman Sachs expects stable gross margin, with healthier store unit economics reducing the need for additional franchisee support and scale adding operating leverage. Mixue has a more concentrated product mix and lower average selling price than Guming, and showed slight historical negative margin-cost correlation, notably in 2021-23. However, Goldman Sachs expects its 2026E margin to decline as it shares efficiency gains with franchisees and customers, may need to support weak year-to-date same-store sales growth, and upgrades ingredients while retaining affordability; improvement is expected in 2027E but below prior levels. Chagee is primarily exposed to tea and milk, with sugar and PET only a small low-single-digit share of the estimated cost mix. The report highlights jasmine-tea prices and same-store sales growth as important determinants of gross margin, store economics and potential company support for franchisees.

Analysis framework

Goldman Sachs first reviews historical El Niño and commodity-price relationships, then compares current spot prices with 2026 year-to-date averages. It builds company-specific input-cost indices and tests them against historical margin outcomes, supplementing this with sensitivity analysis for oil byproducts, sugar and coffee. The report then assesses each company's procurement protection, cost mix, menu flexibility, operating strategy and valuation framework.

Methodology notes

• Industry AnalysisSupply-demand framework

  Commodity supply-demand analysis

  The report links weather exposure, production concentration, domestic self-sufficiency, planting conditions and export availability to prospective sugar, coffee, protein and dairy pricing.

• Industry AnalysisUpstream-Midstream-Downstream Transmission

  Commodity-cost transmission to restaurant margins

  The analysis traces oil, sugar, coffee, protein, dairy and packaging costs through procurement and product mix into restaurant gross and operating margins.

• Other

  Company raw-material cost index and margin sensitivity analysis

  Goldman Sachs creates cost indices based on each company's input exposure and models margin effects from price increases in oil byproducts, sugar and coffee beans while holding other factors unchanged.

• Valuation methodsSOTP (Sum-of-the-Parts) Valuation

  Yum China sum-of-the-parts valuation

  The US$59 ADR and HK$459 H-share targets value KFC China at 11x and Pizza Hut China at 7x 2026E EV/EBITDA.

• Valuation methodsP/E and PEG Valuation

  Forward P/E target-price valuation

  Guming, Mixue, Luckin and Chagee target prices are based on stated 2026E P/E multiples.

• Valuation methodsEV/EBITDA valuation

  Forward EV/EBITDA valuation

  Haidilao's target price is based on 9x 2026-27E EV/EBITDA.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Yum China Holdings (ADR) (YUMC) / Yum China Holdings (H)

  Preferred covered restaurant operator with comparatively manageable sugar and PET exposure.

  Strengths

  Diversified cost structure, full-year PET price lock-up, historical cost-control resilience and flexible expense management.

  Weaknesses

  Existing raw-material cost tailwinds are expected to narrow as commodity prices remain low.

  Comparison

  The report views Yum China as less exposed to sugar and PET than some peers.

  Risks

  Weaker-than-expected same-store sales growth, higher commodity costs, stronger competition and lower execution efficiency.

• Guming Holdings Ltd. (1364.HK)

  Preferred covered freshly made tea operator.

  Strengths

  Diversified input and product mix, flexible product launches, relatively small sugar/PET exposure, improving store economics and expected operating leverage.

  Weaknesses

  Large network and geographic expansion can reduce operating efficiency.

  Comparison

  Its cost mix is described as more diversified than Mixue's.

  Risks

  Store-network management, weaker expansion or productivity, competition and price wars, higher store costs, franchisee subsidies, lower scale economies and food-safety issues.

• Luckin Coffee (LKNCY)

  Preferred covered coffee operator expected to benefit from lower coffee-bean costs in 2H26.

  Strengths

  Diversified products, higher-margin fruit-based coffee and tea offerings, scale benefits, lower promotions and expected margin turnaround.

  Weaknesses

  Margin is highly dependent on competitive pricing, delivery mix and store-opening pace.

  Comparison

  Unlike a simple cost-exposure case, Luckin expanded gross margin during the 2024-25 coffee-price increase.

  Risks

  Data privacy, competition, weaker pricing, raw-material inflation, delivery-mix effects, same-store sales dilution from expansion and food safety.

• Mixue Group

  Covered tea-and-beverage operator facing forecast near-term margin pressure.

  Strengths

  Diversified cost mix and potential later recovery as operating conditions normalize.

  Weaknesses

  More concentrated product mix and lower average selling price than Guming; efficiency gains are being shared while ingredient upgrades preserve affordability.

  Comparison

  The report sees less input and product diversification than at Guming.

  Risks

  Store-network management, competition, food and operating-cost inflation, food safety and overseas expansion.

• Chagee Holdings (CHA)

  Covered premium tea operator whose margins are more sensitive to same-store sales and franchise-store economics than to sugar or PET.

  Strengths

  Tea and milk are the main inputs, while sugar and PET are estimated to be a small share of cost mix.

  Weaknesses

  Jasmine-tea pricing and same-store sales growth can affect franchisee economics and required support.

  Comparison

  The report benchmarks its 10x 2026E P/E target multiple against Jiumaojiu and Helens, which experienced earnings downcycles after brand upcycles moderated.

  Risks

  Product-cycle and innovation outcomes, China and overseas store expansion, delivery subsidies, margin and profitability, brand reputation and food safety.

• Haidilao International Holding (6862.HK)

  Covered hotpot operator with material beef and lamb exposure.

  Strengths

  Can adjust product mix to mitigate modest beef and lamb cost increases.

  Weaknesses

  Beef and lamb represent approximately half of raw-material procurement, and margins have historically had a negative relationship with costs.

  Comparison

  Its protein exposure is structurally greater than beverage-focused peers' sugar or PET exposure.

  Risks

  Table-turn recovery, expansion pace, development of new restaurant brands and franchise-model businesses, cost savings or inflation, and food safety.

Key data

• Brent and WTI oil pricesApproximately US$105/US$100Rebounded nearly 50% from July lows, raising concern over oil-linked packaging costs.
• Global sugar price changeNearly +30% in the past two monthsThe report identifies sugar as historically the raw material most sensitive to El Niño.
• China sugar self-sufficiencyApproximately 80% in 2025/26Cited as a mitigating factor for domestic sugar-price exposure.
• Brazil and Vietnam coffee production share35% / 18%USDA figures cited to show weather exposure of key producing countries.
• Expected pork-price change+20% year on year in 2027Goldman Sachs expects a rebound from 2H26 as supply response accelerates.
• China beef self-sufficiency74% in 2025Below pork and chicken at above 95%, though historical China-global cattle-price correlation was low.
• Haidilao beef and lamb procurement shareApproximately halfExplains its comparatively greater protein-cost exposure.
• Haidilao 2025 gross-margin change-3 percentage points year on yearOccurred despite favorable input prices, illustrating the importance of pricing strategy.
• Luckin coffee inventoryApproximately six monthsSupports an expected input-cost tailwind in 2H26 after coffee prices peaked at end-2025.
• Mixue 2024 gross margin32%The report expects 2026E margin decline before some 2027E improvement.

Impact & implications

The report's central implication is that a rising commodity-cost backdrop should not be treated as a uniform margin shock for China restaurants. Exposure to sugar, PET/PP and coffee varies, while procurement lock-ups, inventory, menu changes, promotion intensity, same-store sales and franchisee support can be more decisive. Goldman Sachs consequently retains differentiated preferences for Yum China, Guming and Luckin rather than making a sector-wide margin call.

Risks

• A Super El Niño could create drought and flood risks in major sugar-exporting countries, raising global sugar prices.
• Higher oil prices could sustain elevated PET and PP packaging costs.
• China pork prices are expected to rise from 2H26, with Goldman Sachs forecasting a 20% year-on-year increase in 2027.
• Company-specific downside risks include weaker same-store sales, greater competition, inadequate cost control, operational execution issues, franchisee-support requirements and food-safety events.

What to watch

• Global and domestic sugar prices, including weather conditions in Brazil, India and Thailand and China supply conditions.
• Oil-price movements and resulting PET/PP packaging costs.
• Coffee-bean production in Brazil, coffee-price trends and the timing of Luckin's inventory-cost benefit.
• Pork, beef, dairy and jasmine-tea price trends.
• Same-store sales, promotional intensity, delivery mix, store expansion and franchisee-support needs across covered companies.