Coke stumbles, KFC bounces back
A new scandal involving Coke and a previous food safety scandal involving KFC are likely to pass quickly, having little long-term effect on the companies' China operations
New reports on global food and beverage giants Coca-Cola (NYSE: KO) and Yum Brands (NYSE: YUM) are highlighting some of the unique challenges of doing business in China, while also showing that Chinese are quite willing to forgive these global giants' missteps if they show proper contrition. In fact, most of these so-called missteps are due to uniquely Chinese circumstances that most major multinationals would never have to worry about in more developed western markets.
As such, these problems are rarely the result of intentional actions, which is perhaps why Chinese consumers and officials are so willing to quickly forgive the transgressions. A good dose of contrition is also important, with the big western food and beverage giants all becoming quite skilled at offering numerous apologies and other public announcements to show they are working to solve the problems each time a new scandal occurs.
Most of the recent scandals are related to food safety, but the latest crisis confronting Coke comes on the completely unrelated area of national security. In this case, the world's biggest beverage company is being investigated for potentially violating some of China's national security laws by mapping parts of southwestern Yunnan province.
The allegations are coming from a local provincial body, which is alleging that Coke may have used handheld GPS equipment to illegally gather classified information. Coke, which is now quite experienced at handling this kind of crisis, responded by saying it is fully cooperating with the investigation. It added that it has used commercially available GPS services at many of its bottling operations to help improve customer service and fuel efficiency.
This move against Coke comes just months after a unit of Chinese construction equipment giant Sany Heavy (Shanghai: 600031) was blocked from investing in a US-based wind farm also on national security grounds that weren't ever explained. (previous post) It's unclear if this case is related to that veto.
But regardless of the reasons, the case does underscore the fact that something as seemingly innocuous as mapping using commercially available products can be considered a national security issue in China. Google (Nasdaq: GOOG) made a similar discovery when it clashed with Beijing last year over its popular mapping service in China. I'm relatively sure that Coke will quickly settle this case and the negative headlines will subside, as it's unlikely the company deliberately engaged in any illegal action.
Meantime, Yum is saying separately that same-store sales for its flagship KFC brand in China fell 20 per cent in the first quarter of this year. While that kind of drop would normally look catastrophic for a company like Yum, which counts China as its biggest market outside the US, the figure is actually a bit better than the 25 per cent drop that many company watchers were expecting.
KFC has been in the headlines for much of the last few months due to a food safety scandal after media reported that chickens from one of its smaller suppliers contained excessive antibiotics. The scandal caused KFC's China sales to slump at the end of last year, and also took a big bite out of Yum's stock price.
The relatively quick bounce-back in Yum's business doesn't surprise me at all, as similar scandals at other major multinationals ranging from McDonalds (NYSE: MCD) to Carrefour (Paris: CA) are often forgotten within a few months by Chinese consumers and officials who generally trust the big foreign names more than local Chinese rivals. At the end of the day, Yum can probably expect its KFC business to return to a growth track by the third quarter of this year, while Coke can expect its Yunnan tussle to quickly pass with little or no negative impact on its China operations.
Bottom line: A new scandal involving Coke and a previous food safety scandal involving KFC are likely to pass quickly, having little long-term effect on the companies' China operations.
To read more commentaries from Doug Young, visit youngchinabiz.com