Opinion | Mutton scandal gives Yum new China headache

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.

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.