Yum, McDonald's 'Sorry' as New China Food Scandal Unfolds

STR/AFP/Getty ImagesWorkers producing food at the Shanghai Husi Food Co., a factory of U.S. food supplier OSI Group, in Shanghai.
By Adam Jourdan and Lisa Baertlein

SHANGHAI and LOS ANGELES -- Yum Brands (YUM) and McDonald's (MCD) are facing a new food safety scare in China, denting the fast-food companies' efforts to shore up reputations and businesses that were hurt by a 2012 safety scandal in one of their biggest markets.

McDonald's and KFC parent Yum apologized to customers on Monday after Chinese regulators shut a local meat supplier following a TV report that showed workers picking up meat from a factory floor, as well as mixing meat beyond its expiration date with fresh meat.

The companies said they immediately stopped using the supplier, Shanghai Husi Food Co., a unit of Aurora, Illinois-based OSI Group, and had switched to alternates. They added that the factory served restaurants in the Shanghai area.

The report on China's Dragon TV brought Yum and McDonald's back into the firing line following the sales-battering 2012 scandal that involved chicken pumped with excessive amounts of antibiotics.

"We will not tolerate any violations of government laws and regulations from our suppliers," said Yum China, which required all of its KFC and Pizza Hut restaurants to seal up and stop using all meat materials supplied by the Husi factory.

The division, Yum's No. 1 business unit, had just seen its KFC restaurants bounce back from the double whammy of the food safety scare and a bird flu outbreak.

"If proven, the practices outlined in the reports are completely unacceptable to McDonald's anywhere in the world," a China-based spokeswoman for McDonald's told Reuters.

Husi provided McDonald's with chicken, beef and lettuce, a McDonald's U.S. spokeswoman said.

China is McDonald's third-biggest market as measured in number of restaurants.

"I think this is going to be really challenging for both these firms," said Benjamin Cavender, Shanghai-based principal at China Market Research Group.

"I don't know that this is something an apology can fix so easily, because at this point people don't have a whole lot of trust that they have good systems in place," he added.

Yum shares were down 3.5 percent at $74.72 and McDonald's shares were down 0.9 percent at $98.13 Monday afternoon on the New York Stock Exchange.

The Shanghai Municipal Food and Drug Administration shut Husi down Sunday after the local Chinese TV broadcast aired. In addition to the meat safety violations, the program showed workers saying that if clients knew what they were doing, the firm would lose its contracts.

OSI said on its Chinese website that management was "appalled by the report." The company has formed its own investigation team, is fully cooperating with government inspectors and will take all necessary actions based on results of the investigation.

"Management believes this to be an isolated event, but takes full responsibility for the situation," OSI said.

OSI, which has close to 60 manufacturing facilities worldwide and had revenue of more than $5 billion in 2012, has been supplying McDonald's in China since 1992 and KFC and Pizza Hut parent Yum since 2008, according to its website.

Supply Chain Issues

McDonald's and Yum are the top two brands by sales in China's $174 billion fast-food market, according to Euromonitor, but face a challenge as local firms try to tempt cost-conscious diners with healthy, home-grown fare.

Both companies said they are investigating the issues highlighted in the report and said that switching suppliers will cause some temporary product shortages.

News of the scare spread quickly to diners negotiating Shanghai's lunch-hour rush on Monday.

"For now I won't go to eat at McDonald's or KFC, at least until this whole thing settles down," said Xu Xinyu, 24, a financial services worker, eating at a noodle shop near a McDonald's outlet in downtown Shanghai.

Yet Chinese consumers may already have developed a comparatively thick skin when it comes to food scandals. "Isn't everywhere like this?" asked student Li Xiaoye, 20, eating a beef burger in a Shanghai McDonald's outlet. "I'll keep going because wherever I eat, the issues are all the same."

The incident highlights the difficulty in ensuring quality and safety along the supply chain in China. Walmart Stores (WMT) came under the spotlight this year after a supplier's donkey meat product was found to contain fox meat. It also came under fire for selling expired duck meat in 2011.

OSI is one of McDonald's key meat suppliers and has a good reputation, according to an industry insider speaking on condition of anonymity. He added the incident highlighted the issue firms faced enforcing strict processes with local staff.

As well as Yum and McDonald's, OSI listed Starbucks (SBUX), Japan's Saizeriya, Papa John's International (PZZA), Burger King Worldwide (BKW) and Doctor's Associates' Subway brand as clients in China, according to a 2012 press release.

A Starbucks spokesman told Reuters that the company doesn't now have any direct business dealings with Husi Food.

Burger King, Subway, Papa John's and Saizeriya did not immediately respond to requests for comment.

-Additional reporting by Engen Tham and the Shanghai newsroom.

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Why do we screw with China so much

July 22 2014 at 4:59 PM Report abuse rate up rate down Reply

And China is where Hershey makes its milk chocolate for its candy bars sold here in the U.S. Now, tell me why I no longer eat any candy owned or made by Hershey...

July 22 2014 at 7:30 AM Report abuse -1 rate up rate down Reply

China recently declined tons of rice from U.S. cause they were contaminated.

July 21 2014 at 11:46 PM Report abuse -1 rate up rate down Reply

McDonalds is the last thing I would eat if I am in China. with all the delicious Chinese food and tea of China, are you kidding?

July 21 2014 at 11:42 PM Report abuse rate up rate down Reply
KC Clark

get it out of CHINA....

July 21 2014 at 4:45 PM Report abuse rate up rate down Reply

Another good reason to not go to McD's & KFC....why are they using Chinese suppliers anyway? What's wrong with using American suppliers?

July 21 2014 at 3:52 PM Report abuse -1 rate up rate down Reply
2 replies to ajabull's comment

Everyone must avoid food from China being sent back to USA. If you knew how it was processed over there you would be screaming mad. Our country needs to stop this and stop poisoning people with China food that is bad and dirty. We are sick of this. Avoid mcDonads and KFC and demand to know where those small roasting chickens are coming from you see at Krogers and Costco.

July 21 2014 at 10:53 PM Report abuse -1 rate up rate down Reply
1 reply to Linda's comment

americans have been eating transfat garbage that killed millions.

July 21 2014 at 11:45 PM Report abuse -1 rate up rate down

You did read that the restaurants are in Shanghai?
(As in... China!)

July 22 2014 at 12:28 AM Report abuse -1 rate up rate down Reply

Stop eating this processed hi-fat trash food. America is overwhelmed with cancer & obesity. Eat healthier.

July 21 2014 at 1:16 PM Report abuse rate up rate down Reply
2 replies to Alex's comment

Why do you care what Americans want to eat ? Maybe obese people choose to be that way because they love to eat. By now, they already know the risks, apparently they choose to try and beat the odds. Eating healthy requires time consumption as well as the added cost to do so. This is still America, food Nazis have no business telling anyone what to do.

July 21 2014 at 1:42 PM Report abuse -1 rate up rate down Reply

Not to mention Alex, that the article is about the Chinese people being sold outdated food by fast food restaurants there. Maybe you should go over there and become and advocate for eating healthy. Don't forget your passport.

July 21 2014 at 1:50 PM Report abuse -2 rate up rate down Reply

Let's thank all the US food suppliers, such as Smithfield Farms and others that are selling out to the Chinese. The Chinese companies process the meats and then send it back tainted. Nothing new, the Chinese have been selling America poisoned products for decades. America sold out, enjoy your Poo-Poo platter.

July 21 2014 at 12:38 PM Report abuse +1 rate up rate down Reply

If they can not serve the crap here in US then they have to serve to other country's in order to make money.

July 21 2014 at 12:15 PM Report abuse -2 rate up rate down Reply

Oh please, The same thing goes on here in the US, I know for sure at Albertson's because I used to work in the meat dept. and even in restaurants, the meat falls off the plate, the server picks it up and serves it. Nothing new.

July 21 2014 at 12:08 PM Report abuse rate up rate down Reply