Tuesday, September 2, 2014

Food scare driving away Yum, McDonald's diners in China

1 of 3. A burger set is displayed at a McDonald's restaurant in Hong Kong in this photo illustration taken July 31, 2014.

Credit: Reuters/Bobby Yip

Related Topics Health » China »

(Reuters) - A food safety scare in China is testing local consumers' loyalty to foreign fast-food brands, including McDonald's Corp and Yum Brands Inc, which owns the KFC and Pizza Hut chains.

Yum said on Wednesday that the scare, triggered by a TV report earlier this month showing improper meat handling by a supplier, Shanghai Husi Food, caused "significant, negative" damage to sales at KFC and Pizza Hut restaurants over the past 10 days. "If the significant sales impact is sustained, it will have a material effect on full-year earnings per share," Yum said in a regulatory filing.

Shares in Yum, which counts China as its No. 1 market, tumbled nearly 7 percent on Thursday.

At least three brokerages cut their profit estimates for Yum for 2014 and 2015.

RBC analysts said Yum's China sales could be hurt 10-15 percent for 6-8 weeks, and cut their price target to $85 from $94.

UBS analysts said the initial consumer response was worse than feared, and the company should reinstate reporting monthly figures to reduce uncertainty. Officials from McDonald's in China and Hong Kong have not responded to requests for information on the impact on sales from the scandal, but McDonald's Holdings Co (Japan) Ltd on Tuesday scrapped its full-year earnings guidance after the China scare forced it to switch to alternative chicken supplies.

A McDonald's Japan executive said sales had dropped 15-20 percent on a daily basis due to the scare. Both McDonald's and Yum are looking to China - where consumers see foreign brands as offering better food quality - for long-term growth given the size of its population, growing middle class and rapid economic growth. "Both of these stocks are banking heavily on China for their future growth," said Richard Brubaker, an adjunct professor at the China Europe International Business School and founder of the Collective Responsibility consultancy.

"For Yum, this is a problem because it has a history of problems in China. For McDonald's, it's the sheer size of the problem and the inability to get product."

CONSUMER CAUTION Yum, which has nearly 6,400 restaurants in China, had just begun to see its restaurant sales there recovering from a slide last year due to an avian food outbreak and a previous food safety scare. Yum has cut its global ties with OSI Group LLC

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