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PUBLISHED : Tuesday, 07 May, 2013, 10:26am
UPDATED : Tuesday, 07 May, 2013, 4:24pm

Mutton scandal gives Yum new China headache

Yum's latest headache from a fake mutton scandal in China will deal a major blow to its Little Sheep chain, compounding its current woes in the market

BIO

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young’s China Business Blog (www.youngchinabiz.com), commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, “The Party Line: How the Media Dictates Public Opinion in Modern China.”
 

As if its problems weren't bad enough in China, global fast food giant Yum (NYSE: YUM) is getting a new round of indigestion in its most profitable market from a new food safety scandal that gets my personal award for "grossest" scandal of the year. China followers will know I'm talking about the latest revelations that some unscrupulous food processors illegally treated meat from dead foxes and minks to look like mutton, and then sold the product to unsuspecting restaurants.

Following revelations of the original scandal, some media cited food safety officials saying the fake mutton may have entered the supply chains of major restaurant operators, including Yum's own Little Sheep chain of hot pot restaurants. Yum quickly moved to diffuse this latest crisis for its China operations, saying that none of its 450 Little Sheep restaurants were affected by the scandal. A company spokesman said the chain buys all of its mutton from 2 suppliers, and that there is no evidence that any of the fake mutton entered its supply chain at any time.

Longtime readers will recall that Yum purchased Little Sheep back in 2011, in a move to diversify beyond its traditional fast food formats into more traditional restaurant fare in the fast-growing China market. Not much has been written about the chain since then, though presumably its performance has improved under Yum's more professional, world-class management systems.

Despite Yum's denial of any safety issues from the latest crisis, this new scandal is almost certain to take a big bite out of Little Sheep's business for at least the next month and possibly a bit longer. Details of the scandal were already quite graphic and gross, probably leading to a plunge in mutton consumption nationwide over the last week. Little Sheep was only one of several restaurant chains mentioned in the latest reports, but clearly media decided to focus on the company because of its high profile and ties to Yum.

This latest problem follows a much bigger headache for Yum in China over the last month at its much larger chain of KFC restaurants, which now number about 4,000 and account for a big chunk of the company's global profits. That headache saw sales plunge at KFC China stores in April, as consumers avoided the chain over concerns about a new strain of bird flu that is particularly virulent.

Yum has embarked on a campaign to educate consumers about the safety of its food, pointing out that properly cooked chicken kills all germs and is therefore safe to eat. But that hasn't helped its business much, and I can personally testify that the KFCs I've visited here in Shanghai over the last few weeks are all quite empty, with large sections of the stores often roped off and closed to try and cover up the lack of people inside.

When Yum finally reports on the magnitude of the bird flu impact to KFC, I suspect we'll hear that its China sales for the chain were down 40 per cent or more in April. The numbers will probably continue to be down by double digits through at least June, before memories of the crisis start to fade and people start to eat chicken again.

This double blow against Yum, first from bird flu and now from the mutton scandal, nicely highlight the many perils that both foreign and domestic restaurant and grocery store operators face in the vast but scandal-prone China food market. In both cases, Yum really didn't do anything wrong and its products were presumably safe to eat. But that didn't stop Chinese consumers from abandoning KFC in droves, and I suspect that Little Sheep restaurants are probably seeing an equally big drop in their business since the mutton scandal broke.

Bottom line: Yum's latest headache from a fake mutton scandal in China will deal a major blow to its Little Sheep chain, compounding its current woes in the market

To read more commentaries from Doug Young, visit youngchinabiz.com

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