Americans are well aware of scandals involving unsafe product making their way from China, but few would have expected an American company operating in China to be accused of similar unsafe practices. That is, however, what happened to KFC in recent weeks, and the reason for its parent company Yum! Brands, Inc. (NYSE:YUM) loss of almost 5% of its value today after an earnings report release.
Last December, Chinese Government Food Safety agencies began an investigation into the chicken used by the fast food chain. The investigation was triggered by a China Central Television report which revealed that some farmers the company buys chicken from use excessive levels of antibiotics. The news has endured on the internet and the company expects the backlash to continue as it tries to disarm the crisis.
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On the back of the food safety concerns, Yum! Brands, Inc. (NYSE:YUM) revealed that it expected same store sales in China to fall by 25% year on year for the first quarter of 2013. The fall in sales is crippling to a brand that has built its recent fortune on its Chinese success. KFC has been more successful than most Western fast food outlets in China. 40% of Yum! Brands sales come from the Chinese market.
Yum! Brands has more than 5,000 fast food outlets in China. Most of those locations operate under the KFC brand. That makes the huge slackening of sales particularly painful for the company. The company’s guidance, released along with the earnings report, expect negative earnings growth in China for the first three quarters of 2013.
Cultural perceptions, when divided by a world, can be interesting. Although Americans may think of China as a land of lead paint and smog from alarmist news reports, Chinese citizen have come to think of KFC, and possibly other American food by extension, as too dirty for them to eat. Repeated viewings of RoboCop will be unlikely to shift this perception.
The alleged high levels of antibiotics in its foods has been a PR disaster for KFC, and for Yum! Brands. The Chinese Lunar New Year begins on February 10. The firm has a marketing campaign set to begin after the holiday, which will highlight the safety of its food, whether or not it works. The company responsible for the 2008 chinese milk scandal was buried under lawsuits and declared bankruptcy.
Lead milk isn’t the same as heightened levels of antibiotics, however. The Chinese food safety authorities have yet to take steps against Yum! Brands, Inc. (NYSE:YUM), and high levels of antibiotics are only rarely dangerous to a person, they are, however, dangerous to humanity in general. That battle will not be fought in a Chinese court.
Yum! Brands, Inc. (NYSE:YUM) will have to do a great deal of work to bring its brands back from the edge in the wake of this scandal, and other American companies had better stand up and take note. China is an emerging economy, but that doesn’t mean corporations can get away with anything. The backlash from a relatively minor infraction, like KFC’s, should be a lesson to everyone looking to do business in the country.