Yum Profits Hit as China Renews Consumer Protection Push

Yum! Brands Inc., owner of the KFC and Pizza Hut dining chains, said the impact of a government probe into its former chicken suppliers in China is growing as a food safety scandal hurts demand.

Profit excluding certain items will decline this year, versus a previous estimate for growth of 10 percent, the Louisville, Kentucky-based company said in a statement yesterday. Yum, which got more than half its total sales from China last year, said negative publicity from the scandal will continue to weigh on sales in the first quarter.

Yum’s same-store sales fell in the world’s second-largest economy last quarter after Shanghai’s food safety commission said Dec. 20 that third-party tests found excessive levels of antibiotics in some of its chicken samples between 2010 and 2011. It joins foreign companies from Toyota Motor Corp. to Fonterra Cooperative Group Ltd. in being challenged by China’s renewed efforts to improve consumer protection.

“The past seven weeks of media attention have been intense and negative towards the KFC brand image,” the company said in yesterday’s statement. “Even though this is a very disappointing setback, we are more committed than ever to continue to strengthen our efforts, restore the confidence of our customers and win back their brand loyalty.”

Yum’s China same-store sales may fall 25 percent in the first two months of the year, and revenue at existing KFC outlets will improve as the year progresses and “be positive” in the fourth quarter of 2013, the company forecast.

Shares Drop

Shares of Yum slid 5.4 percent to $60.48 in late trading in New York yesterday. The stock gained 13 percent last year, while the Standard & Poor’s 500 Restaurants Index lost 2.6 percent.

China’s state broadcaster first reported on Dec. 18 that some of Yum’s former poultry suppliers were found to have sold chickens with excessive levels of antibiotics.

The incident prompted the vice-chairman for the U.S. fast food chain to apologize to Chinese consumers on KFC’s official China microblog. Even after the apology, the official Xinhua News Agency published an editorial criticizing Yum and other foreign companies for failing to ensure quality standards.

Yum said in yesterday’s statement it would start a brand reputation quality campaign, along with “aggressive marketing plans” to reassure consumers of the safety of its food. The restaurant operator will also proceed with plans to open at least 700 stores in the nation this year, it said.

Safety Risks

Reports of contaminated milk, faulty car components and overcharging by retailers have riled Chinese buyers, prompting the authorities to step up consumer protection. Incoming Premier Li Keqiang called for local governments to crack down on illegal food markets and prevent safety risks, according to a Jan. 24 radio broadcast.

Li, who is set to assume his new position next month, was in 2010 named head of a food safety commission dealing with errant producers after a tainted milk scandal resulted in the death of six babies in 2008.

Regulation and supervision in China’s food manufacturing and processing industry has lagged the industry’s significant growth in the past decade, market researcher Mintel Group said in a report last year. About 500,000 companies in the nation are engaged in food production and processing, versus 30,000 in the U.S., it said. Progress on combating food scares may be limited given the number of companies and scale of the task, according to the report.

This year, the General Administration of Quality, Supervision, Inspection and Quarantine, China’s quality watchdog, introduced laws holding manufacturers ranging from carmakers to dairy importers responsible for faulty products and contaminated food.

Windshield Wipers, Milk

The rules allow China to order investigations and impose fines should manufacturers fail to recall faulty vehicles in a timely manner. Toyota, the world’s largest automaker, voluntarily recalled 22,869 Lexus cars in the country on Jan. 31 because of defects with windshield wipers.

AQSIQ, as the watchdog is known, will also put in place tougher rules and penalties governing dairy imports and exports starting May, it said in a statement posted on its website on Feb. 1. This comes after New Zealand’s Fonterra, the world’s largest dairy exporter, said it found traces of an agricultural chemical in its milk products.

Dairy producers whose imports do not meet safety standards may be fined as much as 10 times the value of their goods, the agency said. Import licenses may be revoked in serious cases.

Chinese Liquor

“They obviously realized the consumer is concerned,” Paul French, Shanghai-based analyst at Mintel said in an interview. “Yet, law without enforcement is nothing.”

China has also dealt with pricing issues at 76 large errant retailers found overcharging consumers, the Ministry of Commerce also said in a statement on its website yesterday.

Domestic producers have also been affected. Jishou, Hunan-based liquor maker JiuGuiJiu Co. apologized in December when samples of its drinks were found to have more than three times the permitted level of dibutyl phthalate, a plasticizer used to flavor drinks and in plastic containers.

Shanghai’s food safety office pledged to crack down on the sale of fake Kobe beef after authorities found some Japanese restaurants were passing off Chinese and Australian meat as the delicacy, the China Daily reported today.