The fast food giants McDonald’s (NYSE:MCD) and Yum! Brands (NYSE:YUM) again ran into controversies as reports about expired chicken and meat supplies got out to the street. This is not the first of such incidents, as these two giants have been dealing with such matters for some time now -- earlier in 2012 Yum had got entangled badly in a similar incident. However, both the companies acted promptly to suspend purchases from suspected suppliers, and also apologized to the customers. Does this mean all is well again, or are there issues that these two giants might need to counter? Let’s take a quick look.
What Went Wrong this Time?
A China-based local unit, Shanghai Husi Food Co Ltd, a unit of OSI Group had supplied meat and chicken that had crossed the expiry date to its list of clients that included McDonald’s and Yum. As soon as the companies came to note this, they immediately shunned the supplier. The incident brings back the memories of the 2012 scandal where Yum was accused of using chicken products that had inappropriate antibiotic level.
- Warning! GuruFocus has detected 4 Warning Signs with MCD. Click here to check it out.
- MCD 15-Year Financial Data
- The intrinsic value of MCD
- Peter Lynch Chart of MCD
OSI group is a renowned supplier of non-vegetarian products to some of the other major food chains also, such as Burger King (NYSE:BKW), Starbucks (NASDAQ:SBUX), Subway, and many others. It’s considered to be among the biggest U.S. meat processors with revenues more than $6 billion, and more than 50 manufacturing facilities across the globe. The company’s operations in China go back to 1990s, and its association with McDonald’s started in 1992 and with Yum in 2008. While there have been no complaints from any of the other clients, McDonald’s and Yum have been the unfortunate ones, once again.
The news about the unhealthy supplies broke out during a news show on China based Dragon TV. The incident had put OSI in a state of shock. However, the company accepted full responsibility for the mishap and has set an investigation team to look into the issue, and assist government investigations. After the news broke out, The Shanghai Municipal Food and Drug Administration shut down Husi Food, banning near about 100 tons of meat products.
Outlet in China, Source: Flickr
How is this Going to Impact the Fast Food Giants?
The word about the incident quickly spread across the city of Shanghai, scaring everyone and resulting in a poor lunch hour rush for the city’s diners. Customers started avoiding the stores and instead opted to eat out from local noodle-sellers. Footfall is expected to remain depressed until the whole issue gets settled and receives a green signal from the Chinese government. While its bad news for both the quick-service restaurant chains, analysts are of the opinion that the worst impact of this incident is more likely to be upon Yum.
The Louisville, Kentucky based company was in the process of recovering from the year long repercussions of ‘meat injected with hormones and antibiotics’ scandal. Since then the company’s sales kept dwindling, only to be hurt even more by last spring’s bird flu reports. The lion’s shares of Yum’s sales come from China -- making the company extremely vulnerable to the current incident. Though Yum has stopped all transactions with Husi, customers might take some more time before regaining confidence in the brand, causing some serious distress to the company.
While for McDonald’s, analyst feel the company will be able to recover from the setback soon. The company is making arrangements to meet the demand for meat from alternate suppliers. However, till then it might have to face shortage of supplies for some of the items on menu and may even have to stop selling a few of them.
Both the players are multi-billion dollar corporations with worldwide presence. So a mistake such as this is completely unacceptable. We feel it will be challenging for both the firms to bounce back quickly, particularly because losing customer’s faith time and again can cause long term damage to the consumer perception about the brands.
China is the world’s biggest fast-food market, worth $174 billion, with population crossing 1.3 billion. Fast food majors such as McDonald’s, Yum! Brands, Burger King and other are all highly depend upon this geography, and such occurrences can give a big blows to the companies. Safety over fast food is a huge concern in China, particularly because in the past also there have been several incidents of food adulteration and illness caused by sub-standard food quality.
Even the current incident highlights the lack of control in ensuring quality and safety of food products, reinstalling fears in consumers about unsafe food in China. Unless both McDonald’s and Yum find a permanent solution to the problem, functioning in China might get tough.