February 25, 2013 4:28 pm

Yum Brands tightens Chinese supply chain

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Yum Brands is fighting to restore its battered image in China, vowing to tighten monitoring of its mainland supply chain after a chicken safety scare dealt a big blow to its sales in the country.

Earlier this month, Yum Brands, owner of the KFC fast-food chain, forecast a drop in 2013 earnings due to the fallout from food safety concerns surrounding its Chinese business. Allegations in December that the company’s suppliers had injected growth hormones and antiviral drugs into chicken beyond food safety limits hit confidence in the brand, which had previously traded on its reputation for food that is safer than domestic fast-food competitors.

On Monday, Yum, the biggest foreign restaurateur in China by sales, went on the offensive to try to limit damage from the scandal, announcing that it would strengthen oversight of its suppliers and expand drug testing, and added that more than 1,000 small producers used by the company’s 25 poultry suppliers had been eliminated from its network.

Yum blamed the problem on “ineffective management” at some individual farms, adding that its goal would be to “work on the survival of the fittest of the chicken suppliers”. The company will move closer to a vertically integrated model where chicken is sourced from its own farms in China, but that “will require a big investment and it is also not easy to acquire land as breeding farm in China”, the company said.

Yan Qiang, consumer analyst at Hejun Consulting, said the announcement was a good start, “but consumers will judge by the results rather than how loud you make your voice”.

Yum sales are likely to continue to feel the impact of the scandal for at least three to six more months, says Shaun Rein of China Market Research in Shanghai, noting that the scare had hit the entire fast-food sector in the country, not just KFC. “Chinese consumers trusted western fast-food brands because they thought they had better control of the supply chain,” but KFC’s statement today outlining problems with the sector “make it sound like it is impossible to control the supply chain”.

Yum, which operates Pizza Hut as well as KFC in China, dominates even the burger chain McDonald’s in the mainland fast-food market. It arrived in the country earlier than other fast-food brands, and has long been seen as a model of how to localise a foreign brand while marketing its food as safer than that of local restaurants. Yum said last month that fourth-quarter same-store sales in China, which account for 44 per cent of its total profits and about half of revenues, had fallen 6 per cent.

Bian Jiang of the China Cuisine Association said at a press conference with Yum in Beijing: “The chicken incident has had an impact on the whole catering industry [in China]. Many consumers do not dare to eat chicken, and this is definitely not a good sign: in Chinese cuisine, chicken is inevitable.”

H.J. Heinz, the ketchup maker that agreed to be acquired in a $23bn buyout this month, will sell its China packaged food business to Zhengzhou Sanquan Foods.

Additional reporting by Yan Zhang in Shanghai

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