PUBLISHED : Monday, 11 August, 2014, 6:21pm
UPDATED : Monday, 11 August, 2014, 8:44pm

It’s a shame to let a China food scandal go to waste


Jeffrey Towson is Managing Partner of Towson Capital, advisory private equity firm. Jonathan Woetzel is a Director in McKinsey & Company’s Shanghai office, and the Director of the McKinsey Global Institute in Asia. They are Professors at Peking University’s Guanghua School of Management, and are the authors of The One Hour China Book, now available on

Every month there’s another food scandal in China. Sewer oil. Lamb seasoned with rat. Exploding melons. And now tainted Western hamburgers and fast food is the latest. In our view, this is all to be expected. If you are in the food or restaurant business in China, you are almost certainly going to have a scandal. It’s practically inevitable. And it’s an opportunity you shouldn’t miss.

Food scandals are a major concern of Chinese consumers. In 2013, McKinsey research found Chinese residents are more concerned about food safety than healthcare, unemployment and even crime. For businesses, this means a food scandal can move market share quickly. If it is your company, that is a problem. If it is someone else, that is an opportunity. In both cases, the key is management that is fast and smart. A few key points on this:

Food scandals are inevitable

China has approximately 500,000 food production and processing companies, and approximately 70 percent of them have fewer than 10 employees. That compares to only 30,000 companies in the United States. Basically, the food supply chain in China is highly fragmented and bad products can easily be introduced by bad actors almost anywhere along it.

New regulations aren’t going to help

There are in China, paradoxically, a sea of regulations and laws about food standards. On paper, at least, the standards are often stricter than in the West. And there are at least ten departments in charge of monitoring food quality. The problem is that the market is too fragmented, the oversight is too complicated, the companies are too numerous, and selling fake or bad food is just too profitable. So food scandals keep happening. New regulations are not going to change this much.

Scandals that move market share are opportunities

When customers don’t trust the quality of food, they focus on trusting brands. That is the long-term opportunity. For example, smart restaurants in China have gone on the offensive on food safety in recent years. They are actively building safety into their brands. And it’s not just about having marketing with nice pictures. It’s about having clean dining areas. It’s about having professionally trained staff. It’s about showing spotless kitchens. All of this promotes the entire company as a place for wholesome, clean and hygienic food and behaviour.

Acquisitions are increasingly happening with a “safe food” focus. In 2013, we saw some major acquisitions in the food and dairy space as companies sought to burnish their safety qualifications by vertically integrating to control suppliers. They have also made overseas acquisitions, in part to acquire technology for food processing.

Food scandals also require you to be fast on defence

If you are going to actively promote your food as safe and healthy, you do open yourself up to greater attacks when you have a food scandal. Some journalists in particular love to take down the pious. So if you’re playing offence on food safety, you better be prepared to play defence as well. And speed matters here.

While most companies react to scandals by being evasive or generally disorganised, well-run companies issue apologies immediately. They get on the micro-blog within hours, if not minutes. They conduct their own inspections. And shut down facilities promptly, often the same day. They are the fastest party in investigating and correcting the problem.

Not only is this good defence, but it is also good offence. The transparency and swiftness of the response reinforces the image of being a responsible and safe company. It’s almost like a judo-throw where you turn the attack against itself. Chinese customers and regulators notice and appreciate this. A company that rapidly responds to customers’ concerns is a powerful contrast to the Chinese public’s feeling of helplessness in these situations. A scandal can actually strengthen your brand overall.

In restaurants and food companies in China, food scandals can shift market share quickly. So food safety represents both a big opportunity and a big threat. Your best offense and defense is to play fast and smart.

Read more about the fight for Chinese consumers in Jonathan and Jeffrey's bestseller the One Hour China Book.