China Meat Supplier Probe Hurting McDonald’s Asia Sales

McDonald’s Corp. (MCD), working to resume sales of beef and chicken in China this week after a supplier was accused of repackaging old meat, said the situation is hurting its results in Asia.

“McDonald’s businesses in China, Japan and certain other markets are experiencing a significant negative impact to results,” the Oak Brook, Illinois-based company said in a filing yesterday. While McDonald’s said it can’t yet estimate the full effect on 2014 earnings, the areas at issue make up about 10 percent of consolidated revenue and the company’s global same-store sales forecast for the year is “at risk.”

Separately, McDonald’s Japan business posted a 17.4 percent drop in same-store sales in July from a year earlier partly due to the China supplier scandal, according to the company’s statement to the Tokyo Stock Exchange today, a week after withdrawing its profit forecast because of the case.

The world’s largest restaurant chain has been working to stanch the damage to its sales and reputation since supplier Shanghai Husi, a division of OSI Group LLC, became the subject of a government probe into the altering of expiration dates on food last month. Yum! Brands Inc. (YUM) terminated its relationship with OSI globally after the probe.

Photographer: Brent Lewin/Bloomberg

A man reads a food safety information sign displayed outside a McDonald's Corp. restaurant in Hong Kong, on July 28, 2014. Close

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Photographer: Brent Lewin/Bloomberg

A man reads a food safety information sign displayed outside a McDonald's Corp. restaurant in Hong Kong, on July 28, 2014.

New Suppliers

McDonald’s China and Hong Kong aren’t getting products from any OSI Group or affiliate facilities in China, Becca Hary, a company spokeswoman, said in an e-mail yesterday. McDonald’s Japan (2702) is now buying items from Thailand, she said. Previously, the chain was sourcing food from Husi’s Hebei plant while transitioning to a new OSI facility in Henan.

McDonald’s shares were little changed at $94.31 in New York yesterday. The stock has dropped about 4.7 percent since news of the OSI probe became public.

The fast-food chain’s Japanese outlets will sell chicken burgers and chicken muffins again after resuming a full menu at all its stores starting next week, Kokoro Toyama, a spokeswoman at McDonald’s Japan business, said today.

The restaurant chain said yesterday that it will start selling beef and chicken burgers in Beijing and Guangzhou soon. It’s also increasing orders from other existing suppliers in China while exploring new ones.

Full Menu

“McDonald’s China full menu will come back gradually by cities,” the company said in an e-mailed statement. “We have been working to bring back the full menu across China, but it takes longer time for good reasons.”

“For current suppliers, they must now increase their production capacity and re-allocate nationwide supply distribution,” McDonald’s said. “For new potential suppliers, we have a full due diligence inspection process.”

OSI, based in Aurora, Illinois, has since pulled all products made by Shanghai Husi and replaced its management team in the country after coming under Chinese government investigation. Six employees of Shanghai Husi have been detained by the Shanghai branch of the Public Security Bureau, Alison Kovaleski, a spokeswoman for OSI, said in an e-mail yesterday.

“We are also in the midst of conducting our own thorough reviews of all of our manufacturing facilities within China,” she said. “We look forward to sharing our findings in a responsible and transparent manner.”

“Original Build”

In Hong Kong, McDonald’s restaurants are serving burgers such as the Big Mac and McChicken sandwiches “back to their original build,” after lettuce and onion were imported from the U.S. and Taiwan, the restaurant chain said on its website yesterday. McDonald’s Hong Kong halted sales of products supplied by Shanghai Husi late last month.

Chicken McNuggets and items such as fresh corn cups, green salad and fresh lemon tea, made with ingredients formerly sourced from OSI’s Chinese units in Hebei and Guangzhou, are still unavailable, according to the Hong Kong chain.

McDonald’s China outlets started handing out vouchers for free hash browns and French fries as a compensation to customers who buy its burgers made without fresh vegetables, the restaurant chain said today.

It’s increasing orders from existing suppliers such as McKey Food Services Ltd., a Shenzhen unit of Philadelphia-based Keystone Foods, to handle the shortage of ingredients, while exploring new Chinese suppliers for items such as fresh produce, according to the company.

Burger King Worldwide Inc. also cut ties with OSI since the food scandal.

Second-Biggest

McDonald’s has 2.6 percent of China’s fast food market with 2,000 outlets, the second-largest restaurant chain in the country by market share after Yum, according to research firm Euromonitor International Ltd.

Louisville, Kentucky-based Yum, which owns KFC and Pizza Hut, has a 5 percent share and derives more than half of its revenue from China. McDonald’s, which doesn’t break out China sales publicly, received 23 percent of its revenue from the Asia Pacific, Middle East and Africa region last year.

The latest food-safety incident renews Chinese consumers’ concerns over unsafe products in the country, following abuses that included fox DNA found in donkey meat and baby formula laced with melamine, a toxic chemical.

China’s leaders have sought to ease those concerns with a new draft law that brings increased scrutiny over the industry, harsher penalties, and more compensation for consumers.

To contact the reporters on this story: Leslie Patton in Chicago at lpatton5@bloomberg.net; Liza Lin in Shanghai at llin15@bloomberg.net

To contact the editors responsible for this story: Stephanie Wong at swong139@bloomberg.net Daryl Loo, Subramaniam Sharma

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