China food scare snags McDonald’s, Yum!

by Eric Schroeder
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OAK BROOK, Ill. — Shares of McDonald’s Corp. dipped as low as $93.52 on Aug. 4 on the New York Stock Exchange after the fast-food chain issued a filing with the Securities and Exchange Commission detailing that a food scare in China had hurt its business. At $93.52, the company’s share price was near the 52-week low of $92.22 in mid-February and compared with a price above $100 less than three weeks ago.

McDonald's said a food scare hurt the company's businesses in China, Japan and other markets.

“In the company’s Form 8-K dated July 22, 2014, we indicated that full-year 2014 global comparable sales were expected to be relatively similar to year-to-date June performance [i.e. relatively flat] given a stagnant IEO category, sustained competitive activity, consumer price sensitivity and cost pressures,” McDonald’s said in the Aug. 4 filing with the SEC. “As a result of the China supplier issue, the company’s global comparable sales forecast for 2014 is now at risk. With our current sales outlook, expected currency volatility in Russia and Ukraine, and labor and other cost pressures, we expect continued pressure on company-operated margins for the remainder of the year.”

In mid-July, food quality and safety issues were discovered at Shanghai Husi, a division of the OSI Group LLC, a supplier to certain food companies in China, including McDonald’s. As a result, McDonald’s said its businesses in China, Japan and certain other markets are experiencing a significant negative impact to results.

“The affected markets represent approximately 10 percent of consolidated revenues,” the company said. “While this matter will negatively impact results in the near term, we cannot reasonably estimate the impact on full year 2014 earnings at this time.”

McDonald’s said it is undertaking recovery strategies “to restore the trust and confidence of our customers.”

“The segment will continue to pursue customer-focused initiatives to deliver menu variety, increased convenience and branded affordability,” the company said. “In addition, we are focused on restaurant expansion and ongoing restaurant reimaging.”

The food scare also prompted a response from Yum! Brands International, which operates approximately 640 restaurants in China. Yum! said it “immediately terminated” its relationship with OSI globally upon hearing of the food scare, with only “minimal disruption” to its menu offerings in China.

Even so, the events have shaken consumer confidence and affected brand usage at Yum!, the company said.

“The result has been a significant, negative impact to same-store sales at both KFC and Pizza Hut in China over the past 10 days,” the company noted in a July 30 filing with the SEC. “Yum! Brands is outraged by the alleged illegal activity by Shanghai Husi and its violations of our standards. We reserve the right to take full legal action for the impact this has had to our business once the Shanghai FDA investigation is complete.

“At this point, it is too early to know how quickly sales will rebound in China and the corresponding full-year financial impact to Yum! Brands. However, if the significant sales impact is sustained, it will have a material effect on full-year earnings per share. We will provide additional perspective on this matter during our third-quarter earnings call in October. Our brands have proven resilient over time, and we expect this to be the case with this situation as well.”
 
Shares of Yum! Brands fell as low as $68.09 on July 31 following the company’s SEC filing, its lowest point since early February and compared with a high of $83.58 as recently as July 15.

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