Yum! Brands, Inc.
) could once again encounter the dark days of China in 2012.
Both these quick-service restaurant chains spent millions over the
past two years on promotions, trying to boost sales and getting a
clean chit after the 2012 food safety scandal in China. Both
Yum! and McDonald's suppliers allegedly sold chicken fed with
unapproved and excessive levels of antibiotic drugs and growth
hormones during that time.
The local Chinese television media uncovered a new scandal blaming
workers at Shanghai Husi Food Co - unit of U.S.-based OSI Group LLC
- reusing meat that had fallen on the factory floor as well
as mixing fresh and expired meat. Before long, the food regulators
came roaring back.
Notably, Shanghai Husi Food Co was a supplier for both KFC - a
division of Yum! - and McDonald's in the Shanghai region.
As Chinese regulators investigate allegations of Husi selling
expired beef and chicken products, both the fast-food chains
reportedly apologized and announced a change in meat suppliers. The
Shanghai Food and Drug Administration reportedly closed down Husi's
operations, yesterday, according to a Forbes report. However, the
damage has already been done.
In fact, the scandal has spread beyond the shores of China, and
McDonald's Holdings Co (Japan) admitted that it had sourced about a
fifth of its Chicken McNuggets from Shanghai Husi and stopped
selling the product on Monday.
According to Reuters, other fast-food chains like
Burger King Worldwide, Inc.
) and Dicos, one of China's leading fast food chains owned by Ting
Hsin International, have also promised to remove Shanghai Husi food
products from their outlets.
Papa John's International Inc.
) has already removed products with Husi-supplied meat from its
menu and cut off its ties with the latter.
) however declared that it had no direct business relationship with
Shanghai Husi, but that some of its chicken acquired from another
supplier had originally come from Husi. This was used in some of
its products, which have already been sold. The company also
declared that it has disposed of the remaining products.
Regulators Cracking the Whip
Food safety is one of the top issues for Chinese consumers. In
2008, an alarm was raised on dairy products contaminated with the
industrial chemical melamine, which led to the deaths of six
infants and indisposition of thousands.
Other food scandals have also hit the meat and dairy industries in
recent years, like the sale of chicken injected with excessive
levels of antibiotic drugs. These incidents highlight the
difficulty in ensuring quality and safety along the supply chain in
a country as large and populated as China.
In the most recent case, Chinese regulators have ordered regional
offices to carry out spot checks on all firms which had used
Shanghai Husi products, and an inspection of all of OSI sites
around China to see if food safety standards are met.
The regulator's Shanghai branch has also reportedly demanded
production, quality control and sales report from OSI. The
regulator has also ordered McDonald's to seal around 4,500 boxes of
suspected meat products and Yum's Pizza Hut to seal more than 500
boxes of beef.
In our view, this latest scandal will spell trouble for both
McDonald's and Yum!'s sales in China. Yum! in fact derives half of
its worldwide sales from China and is looking to further expand
into this profitable market. If consumers shun these fast food
joints due to quality concerns, sales in the China will hit hard,
especially at a time when comparable sales at U.S. are suffering
due to declining consumer spending in a sluggishly recovering
Although, foreign food companies enjoy a better reputation among
Chinese consumers than domestic competitors, such media reports
might tarnish their popularity.
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