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Chinese Meat Scandal Tests Tycoon’s Ties With McDonald’s

July 29 (Bloomberg) -- McDonald’s pulled beef, pork and chicken items from its restaurants in China as a supplier recalled products made in the country, threatening to further damage Chinese consumers’ trust in fast-food chains’ safety. Bloomberg’s Yang Yang reports on “In The Loop.” (Source: Bloomberg)

In the early 1980s, Sheldon Lavin, a banker-turned-burger tycoon, returned from a trip to China with big plans for his food-processing company OSI Group.

“I don’t care if we sell the erasers off pencils, we are going to China,” he told his staff, according to a 2012 story in National Provisioner, an industry publication.

Now, the 82-year-old Lavin is discovering just how difficult operating in China can be.

On July 20, a Chinese television station showed plant workers at an OSI subsidiary in Shanghai repackaging and selling chicken and beef past their sell-by dates. It was just the latest food scandal in a nation already reeling from abuses that included fox DNA found in donkey meat and antibiotics-laced chicken.

Within days, Starbucks Corp. (SBUX) and Yum! Brands Inc. (YUM), which owns KFC and Pizza Hut, had cut ties with OSI. More recently, Burger King Worldwide Inc., said this week it would stop using the supplier in China. McDonald’s Corp., a longtime OSI partner, pulled beef, pork and chicken items from its Chinese restaurants, though it stuck with OSI.

Over the past 30 years, Lavin parlayed OSI into a global food-processing giant that makes everything from Big Mac patties to the pork used in KFC’s breakfast burgers. Closely held OSI won a reputation for quality and safety in an industry that has spawned plenty of unsavory headlines over the years.

Photographer: ChinaFotoPress via Getty Images

Sheldon Lavin, CEO of the OSI Group, attends a press conference in Shanghai, China, on July 28, 2014. Close

Sheldon Lavin, CEO of the OSI Group, attends a press conference in Shanghai, China, on July 28, 2014.

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Photographer: ChinaFotoPress via Getty Images

Sheldon Lavin, CEO of the OSI Group, attends a press conference in Shanghai, China, on July 28, 2014.

Hall of Fame

In November, Lavin was inducted into the Meat Industry Hall of Fame, a rare public honor for a man who guards his privacy. Now the scandal in Shanghai has pushed Lavin into the spotlight.

“I will not try and defend it or explain it,” he said in a statement on the OSI website. “It was terribly wrong, and I am appalled that it ever happened in the company that I own.”

Lavin declined to comment for this story.

OSI is hustling to fix what went wrong in China, where it has invested over $500 million in the past five years. The company has put in place a new management team for the country, including executives with more than 20 years experience. OSI will rotate in global experts to survey operations and implement audit steps. The foodmaker, based in nondescript, three-story headquarters in Aurora, Illinois, is conducting an internal investigation into current and former senior management.

OSI said it was folding its China operations into its global company after an investigation showed its subsidiary, Shanghai Husi, had failed to maintain standards. OSI also recalled all products manufactured by Shanghai Husi.

Unique Challenges

OSI readily admitted in recent years that China presented a unique set of challenges and is now trying to assure customers that such an episode won’t happen again.

Lavin didn’t set out to become a burger tycoon.

In 1970, he was a banker who arranged financing for Otto & Sons, OSI’s predecessor. The company wanted to build a meat-processing facility and become the Midwest supplier of hamburgers to McDonald’s, according to an October 2013 article in Independent Processor.

Lavin agreed to act as a consultant to Otto & Sons so the bank would provide the financing. His involvement deepened when he partnered with the two sons after their father retired and in the late 1970s he began working full-time for OSI, at the request of McDonald’s.

Controlling Stake

In the 1980s, Lavin gained half of the controlling interest in the company just as it was expanding into South America and Taiwan. Lavin would soon lock his eyes on China.

“When I really took control in the ’80s, I decided there was no reason for me to stay if I didn’t build OSI into something big,” he told Independent Processor in 2013.

OSI opened its first plant in Beijing in 1991 –- right on the heels of McDonald’s expansion into the country. For all its potential, operating in China required special measures. OSI flew in technical consultants from the U.S. to show the couple of dozen Chinese workers how to operate the forming machines and spiral freezers and how to achieve the right grinding size and fat content, according to the National Provisioner story.

For the first 16 years, Husi Food, as the company is called in China, had one customer: McDonald’s. Over the past six years, though, it has begun supplying foods for the likes of Yum and Starbucks, along with Chinese national restaurant chains, according to OSI’s website.

Cutting Corners

Middle-class Chinese began eating more poultry and beef. With chicken production skyrocketing, some factory workers have probably come up with ways to cut corners, said Shefali Sharma, director of agricultural commodities and globalization for the Institute for Agriculture and Trade Policy.

“There’s so much competition between these meatpackers, these massively large meatpackers that are Chinese firms and then foreign ones,” Sharma said. “They’re all competing for fastest times and lowest prices.”

OSI acknowledged the stiff competition and other challenges of operating in China in the 2012 National Provisioner story celebrating its 20th anniversary in China.

“As we look into the next three to five years, finding the right people is going to be the hard part of the business, and it’s not so much labor, it’s managers and above,” Bill Weimer, OSI Group executive vice president and chief financial officer, said in the article. “The skill sets we’re looking for are very different from what they’ve historically had here. And it’s not that they’re not educated -- it’s breaking old habits and building the trust that this actually will work.”

Toughest Test

OSI’s success in China was a big reason Lavin was inducted into the Meat Industry Hall of Fame last year, joining such luminaries as Wendy’s founder Dave Thomas and Kentucky Fried Chicken founder Col. Harland Sanders. The ceremony was held at Chicago’s Drake Hotel, where Lavin was lauded for turning a small family business into “a respected, international organization supplying top quality food products to some of the best restaurant chains in the world.”

Now a year later, he was facing perhaps the sternest test of his career.

“Obviously something like this affects someone as dedicated as he is,” said Donald Lubin, a partner at Dentons US LLP, who serves with Lavin on the board of the Ronald McDonald House charity. “He’s doing a good job in trying to deal with the problem.”

To contact the reporter on this story: Tim Loh in New York at tloh16@bloomberg.net

To contact the editors responsible for this story: Simon Casey at scasey4@bloomberg.net; Nick Turner at nturner7@bloomberg.net Robin Ajello

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