China meat supplier probe hurting McDonald’s sales

Shares have also dropped about 5.4% amid scandal

Bloomberg

McDonald’s Corp., poised to resume selling beef and chicken in China this week after a supplier was accused of repackaging old meat, says the matter is hurting the chain’s results in Asia.

McDonald’s Holdings Co. (Japan) said its sales in July fell 17.4 percent from a year before on a same-store basis, marking the largest monthly drop since July 2002.

“McDonald’s businesses in China, Japan and certain other markets are experiencing a significant negative impact to results,” the Illinois-based company said in a filing Monday.

While McDonald’s said it can’t yet estimate the full effect on 2014 earnings, the areas at issue make up about 10 percent of consolidated revenue and the company’s global same-store sales forecast for the year is “at risk.”

The world’s largest restaurant chain has been working to stanch the damage to its sales and reputation since supplier Shanghai Husi, a division of OSI Group LLC, became the subject of a Chinese government probe into the altering of expiration dates on food last month.

While Yum Brands Inc. terminated its relationship with OSI globally after the probe, McDonald’s said it would source items from another Husi plant in Henan.

McDonald’s shares have dropped about 5.4 percent since news of the OSI probe became public.

The restaurant chain said Monday it will start selling beef and chicken burgers in Beijing and Guangzhou soon. It’s also increasing orders from other existing suppliers in China while exploring new ones.

“McDonald’s China full menu will come back gradually by cities,” the company said in an emailed statement. “We have been working to bring back the full menu across China, but it takes longer time for good reasons.

“For current suppliers, they must now increase their production capacity and reallocate nationwide supply distribution,” McDonald’s said. “For new potential suppliers, we have a full due diligence inspection process.”

OSI, also based in Illinois, has since pulled all products made by Shanghai Husi and replaced its management team in the country after coming under Chinese government investigation. Six employees of Shanghai Husi have been detained by the Shanghai branch of the Public Security Bureau, Alison Kovaleski, a spokeswoman for OSI, said Monday.

“We are also in the midst of conducting our own thorough reviews of all of our manufacturing facilities within China,” she said. “We look forward to sharing our findings in a responsible and transparent manner.”

Big Macs weren’t available for sale in Beijing, while limited choices of sandwiches were being sold in Shanghai, according to McDonald’s delivery services in the two cities.

In Hong Kong, McDonald’s restaurants are serving burgers such as the Big Mac and McChicken sandwiches “back to their original build,” after lettuce and onions were imported from the U.S. and Taiwan, the restaurant chain said on its website Monday. McDonald’s Hong Kong halted sales of products supplied by Shanghai Husi late last month.

Chicken McNuggets and items such as fresh corn cups, green salad and fresh lemon tea, made with ingredients formerly sourced from OSI’s Chinese units in Hebei and Guangzhou, are still unavailable, according to the Hong Kong chain.

McDonald’s is increasing orders from existing suppliers such as McKey Food Services Ltd., a Shenzhen unit of Philadelphia-based Keystone Foods, to handle the shortage of ingredients, the restaurant operator said Monday. It’s also exploring new Chinese suppliers for items such as fresh produce.

Burger King Worldwide Inc. also cut ties with OSI since the food scandal.

McDonald’s has 2.6 percent of China’s fast-food market with 2,000 outlets, the second-largest restaurant chain in the country by market share after Yum, according to research firm Euromonitor International Ltd.

Kentucky-based Yum, which owns KFC and Pizza Hut, has a 5 percent share and derives more than half of its revenue from China. McDonald’s, which doesn’t break out China sales publicly, received 23 percent of its revenue from the Asia-Pacific, Middle East and Africa regions last year.

The latest food-safety incident renews Chinese consumers’ concerns over unsafe products in the country, following abuses that included fox DNA found in donkey meat and baby formula laced with melamine, a toxic chemical.

China’s leaders have sought to ease those concerns with a new draft law that brings increased scrutiny over the industry, harsher penalties and more compensation for consumers.