China food safety

KFC owner admits China rotten food scandal causing ‘significant’ damage to sales

China’s biggest restaurant operator Yum, also owner of Pizza Hut, reports that annual profits could suffer due to Husi controversy

PUBLISHED : Thursday, 31 July, 2014, 12:04pm
UPDATED : Thursday, 31 July, 2014, 5:28pm

The owner of the KFC and Pizza Hut restaurant chains said on Thursday that a food safety scandal in China has hurt sales and might be severe enough to cut into the company’s global profit.

Yum Brands, in a filing with the US securities regulator, gave no financial details and said it was too early to know when sales might rebound. But it said if the “significant sales impact” continues, it might hurt this year’s profit.

The scandal erupted last week when a Shanghai television station reported that Husi, owned by the US-owned OSI Group, repackaged old beef and chicken and sold it to KFC and McDonald’s restaurants in China. KFC and McDonald’s stopped using products supplied by Shanghai Husi and Yum said its restaurants severed all ties with OSI in China, the United States and Australia.

Chinese authorities have detained five Husi employees but have yet to confirm whether the company sold expired meat.

“The result has been a significant, negative impact to same-store sales at both KFC and Pizza Hut in China over the past 10 days,” Yum said in the filing with the Securities and Exchange Commission.

“If the significant sales impact is sustained, it will have a material effect on full-year earnings per share,” the filing said.

Yum is China’s biggest restaurant operator, with more than 4,600 KFC outlets and 1,200 Pizza Huts.

China's government has struggled to restore confidence in its US$1 trillion food processing industry since six infants died in 2008 after drinking adulterated milk. The head of its Food and Drug Administration told China Daily this week that the food safety situation "remains severe" and the existing oversight system "is not effective".

China's food testing industry is expected to top 8 billion yuan (HK$10 billion) by next year, with more than 5,000 companies offering food inspection services. Regulators overseeing the industry are thinly stretched, company executives say.

Laws on food safety were incomplete and responsibility in enforcing them was unclear, making it difficult for regulators to do their jobs, said Gao Guan, deputy secretary general of the China Meat Association.

"In developed countries people obey the traffic rules. You wait when the light is red and you walk when the light is green. But this is not the case in China. People walk when other people walk and no one cares about the light. So in this particular environment things like Husi are very hard to avoid," Gao said.

OSI, ranked 62nd by Forbes on its list of US private companies with annual revenue of close to US$6 billion, said this week it had suspended operations at Shanghai Husi Food and would review all its China plants, which would now come under direct control of its headquarters. It said it would "assign a vigilant rotation of global experts to continuously survey these operations and implement exhaustive audit steps", including constant visual surveillance of production measures and document compliance.

Additional reporting by Reuters