Fast Food Ambitions in China Hurt by Safety Scares
BEIJING — Already China's biggest restaurant operator with 4,600 outlets, KFC is pursuing Chinese consumers so avidly it opens two more every day.
That dramatic growth comes with a big catch: KFC's quality control is struggling to keep up.
The Louisville, Ky.-based chain is reeling after a Chinese supplier was accused of selling expired beef and chicken to it, McDonald's and possibly other restaurant chains. Just 18 months earlier, KFC's sales plunged in China after a supplier violated rules on drug use in chickens.
Global fast food chains are rushing to expand in China but even experienced operators face costly pitfalls in a fast-changing food supply industry plagued by repeated safety scandals.
The Louisville, Ky.-based chain is reeling after a Chinese supplier was accused of selling expired beef and chicken to it, McDonald's and possibly other restaurant chains. Just 18 months earlier, KFC's sales plunged in China after a supplier violated rules on drug use in chickens.
Global fast food chains are rushing to expand in China but even experienced operators face costly pitfalls in a fast-changing food supply industry plagued by repeated safety scandals.
SCANDAL: McDonald's, Yum can't ignore food scare reaction in U.S.
Breakneck growth has strained the ability of companies to monitor thousands of farmers and meat processors, many of them small and remote, with incentives to cut corners, according to people who follow the industry. They say regulation and government enforcement are lagging.
"We are going to see more issues like this," said analyst Ben Cavender of the China Market Research Group.
"On the supplier side, people are not well-trained, or there is not good oversight," he said. "On the restaurant side, they have people checking the products but they probably don't have enough people who are spending enough time at the supplier sites."
In the latest scandal, authorities are investigating whether Shanghai Husi Food Co., owned by OSI Group of Aurora, Ill., repackaged and sold old beef and chicken to KFC and McDonald's. Police detained five Husi employees but authorities have yet to confirm whether the report by a Shanghai TV station that they sold expired meat was accurate.
KFC owner Yum Brands and McDonald's said they immediately stopped using products from Husi, but the scare is already taking a financial toll.
Yum, which also owns Pizza Hut, said sales are down and if the effect persists it might be severe enough to cut into the company's global profit.
McDonald's, headquartered in Oak Brook, Ill., said about 500 of its 2,000 restaurants in China were affected. Its sales could suffer for several quarters, according to a restaurant industry analyst. Some of its stores had only fish sandwiches and fries for sale this week.
At one McDonald's in Beijing on Thursday, students used the tables to study. One ate a takeout meal from 7-11.
Other brands also were affected. Burger King, Starbucks, pizza chain Papa John's International and a Dicos, a chain of sandwich shops, withdrew products with ingredients from suppliers that dealt with Husi.
At a news conference in Shanghai, OSI chairman Sheldon Lavin apologized to Chinese consumers and said individual employees were to blame though the company is ultimately responsible.
A food safety official was quoted last week by the official Xinhua News Agency as saying unspecified illegal behavior at Husi was an "arrangement organized by the company." Xinhua said the manager of Husi's quality department told investigators use of such meat went on for years with "tacit approval" from senior managers.
"It seems that it was not an accident but a hidden practice, which is really bad," said Sebastien Breteau, CEO of AsiaInspection, a company that conducts quality control inspections for the food, clothing and other industries in China.
"It means that in management, they had not put in place what they had to," said Breteau. "It was not properly audited."
The scandal hit at a time when global fast food brands face rising pressure from Chinese competitors such as Yonghe King, which serves noodles and steamed buns at more than 300 outlets.
KFC pioneered Western fast food in China, opening its first two outlets in 1987. Brightly lighted chain restaurants became an appealing alternative to drab state-owned restaurants or ramshackle street stalls. But today, consumers with higher incomes and more choices are starting to see traditional Chinese dishes as healthier.
"As everybody says, fast food is junk food, unhealthy," said a customer at a KFC in Beijing who would give only his surname, Liu, and said he was there only because he was in the neighborhood on a work errand. "I will eat at fast food restaurants even less in the future."
China's food industry has suffered repeated safety scandals despite government promises to tighten enforcement.
In the most devastating, Beijing reorganized its dairy industry after milk tainted with melamine killed six babies and sickened thousands in 2007-08. Suppliers added the chemical to watered-down milk to fool quality tests. Critics said Beijing opened the way to such violations by encouraging dairies to use milk from vast networks of anonymous suppliers who worked without oversight.
Beijing's ability to enforce safety is strained by the demands of overseeing a fragmented industry with more than 500,000 food processors, according to Breteau. By contrast, he said, the United States has fewer than 50,000.
China also lacks regulations for companies that move food from processors to restaurants and doesn't have regulations that require producers to destroy expired food, said Breteau. He said that allows expired food to be sold as animal feed but can also permit it to move back into the supply chain for human consumption.
The president of OSI, David G. McDonald, said the company will end Husi's independent status by folding it into the parent corporation's management and will create a quality control center in Shanghai.
Spokespeople for Yum Brands, which depends on China for more than half its global revenue, and McDonald's declined to say what changes the companies might make in operations.
Following last year's scandal, KFC tightened control over its suppliers and dropped 1,000 small poultry producers.
The current scandal is "shocking" given what happened last year with Yum, said Howard Penney, a restaurant industry analyst with Hedgeye Risk Management in Stamford, Conn.
As for McDonald's, the sales impact stands to be substantial and could persist for several quarters, Penney said.
"They've got to get control of the situation with the McDonald's marketing machine," he said.
McDonald's is known for rigorous oversight of suppliers but might have grown confident about OSI because of its long history as a supplier, said John Gordon, a restaurant industry analyst. McDonald's has bought meat from OSI in the United States since the 1950s.
Yum Brands responded by saying it will cut all ties with OSI in China, the United States and Australia.
McDonald's CEO Don Thompson said the company felt "a bit deceived."
Still, McDonald's is sticking with OSI, possibly because China's emerging industry of food processors such as state-owned Cofco Corp., which supplies beef patties and chicken to restaurants, cannot match OSI's scale, technology or experience.
"Likely they have no choice but to keep working with them," said Breteau. "They may now move business away from them significantly. But short term, they can't. It's a
That dramatic growth comes with a big catch: KFC's quality control is struggling to keep up.
The Louisville, Ky.-based chain is reeling after a Chinese supplier was accused of selling expired beef and chicken to it, McDonald's and possibly other restaurant chains. Just 18 months earlier, KFC's sales plunged in China after a supplier violated rules on drug use in chickens.
Global fast food chains are rushing to expand in China but even experienced operators face costly pitfalls in a fast-changing food supply industry plagued by repeated safety scandals.
The Louisville, Ky.-based chain is reeling after a Chinese supplier was accused of selling expired beef and chicken to it, McDonald's and possibly other restaurant chains. Just 18 months earlier, KFC's sales plunged in China after a supplier violated rules on drug use in chickens.
Global fast food chains are rushing to expand in China but even experienced operators face costly pitfalls in a fast-changing food supply industry plagued by repeated safety scandals.
SCANDAL: McDonald's, Yum can't ignore food scare reaction in U.S.
Breakneck growth has strained the ability of companies to monitor thousands of farmers and meat processors, many of them small and remote, with incentives to cut corners, according to people who follow the industry. They say regulation and government enforcement are lagging.
"We are going to see more issues like this," said analyst Ben Cavender of the China Market Research Group.
"On the supplier side, people are not well-trained, or there is not good oversight," he said. "On the restaurant side, they have people checking the products but they probably don't have enough people who are spending enough time at the supplier sites."
In the latest scandal, authorities are investigating whether Shanghai Husi Food Co., owned by OSI Group of Aurora, Ill., repackaged and sold old beef and chicken to KFC and McDonald's. Police detained five Husi employees but authorities have yet to confirm whether the report by a Shanghai TV station that they sold expired meat was accurate.
KFC owner Yum Brands and McDonald's said they immediately stopped using products from Husi, but the scare is already taking a financial toll.
Yum, which also owns Pizza Hut, said sales are down and if the effect persists it might be severe enough to cut into the company's global profit.
McDonald's, headquartered in Oak Brook, Ill., said about 500 of its 2,000 restaurants in China were affected. Its sales could suffer for several quarters, according to a restaurant industry analyst. Some of its stores had only fish sandwiches and fries for sale this week.
At one McDonald's in Beijing on Thursday, students used the tables to study. One ate a takeout meal from 7-11.
Other brands also were affected. Burger King, Starbucks, pizza chain Papa John's International and a Dicos, a chain of sandwich shops, withdrew products with ingredients from suppliers that dealt with Husi.
At a news conference in Shanghai, OSI chairman Sheldon Lavin apologized to Chinese consumers and said individual employees were to blame though the company is ultimately responsible.
A food safety official was quoted last week by the official Xinhua News Agency as saying unspecified illegal behavior at Husi was an "arrangement organized by the company." Xinhua said the manager of Husi's quality department told investigators use of such meat went on for years with "tacit approval" from senior managers.
"It seems that it was not an accident but a hidden practice, which is really bad," said Sebastien Breteau, CEO of AsiaInspection, a company that conducts quality control inspections for the food, clothing and other industries in China.
"It means that in management, they had not put in place what they had to," said Breteau. "It was not properly audited."
The scandal hit at a time when global fast food brands face rising pressure from Chinese competitors such as Yonghe King, which serves noodles and steamed buns at more than 300 outlets.
KFC pioneered Western fast food in China, opening its first two outlets in 1987. Brightly lighted chain restaurants became an appealing alternative to drab state-owned restaurants or ramshackle street stalls. But today, consumers with higher incomes and more choices are starting to see traditional Chinese dishes as healthier.
"As everybody says, fast food is junk food, unhealthy," said a customer at a KFC in Beijing who would give only his surname, Liu, and said he was there only because he was in the neighborhood on a work errand. "I will eat at fast food restaurants even less in the future."
China's food industry has suffered repeated safety scandals despite government promises to tighten enforcement.
In the most devastating, Beijing reorganized its dairy industry after milk tainted with melamine killed six babies and sickened thousands in 2007-08. Suppliers added the chemical to watered-down milk to fool quality tests. Critics said Beijing opened the way to such violations by encouraging dairies to use milk from vast networks of anonymous suppliers who worked without oversight.
Beijing's ability to enforce safety is strained by the demands of overseeing a fragmented industry with more than 500,000 food processors, according to Breteau. By contrast, he said, the United States has fewer than 50,000.
China also lacks regulations for companies that move food from processors to restaurants and doesn't have regulations that require producers to destroy expired food, said Breteau. He said that allows expired food to be sold as animal feed but can also permit it to move back into the supply chain for human consumption.
The president of OSI, David G. McDonald, said the company will end Husi's independent status by folding it into the parent corporation's management and will create a quality control center in Shanghai.
Spokespeople for Yum Brands, which depends on China for more than half its global revenue, and McDonald's declined to say what changes the companies might make in operations.
Following last year's scandal, KFC tightened control over its suppliers and dropped 1,000 small poultry producers.
The current scandal is "shocking" given what happened last year with Yum, said Howard Penney, a restaurant industry analyst with Hedgeye Risk Management in Stamford, Conn.
As for McDonald's, the sales impact stands to be substantial and could persist for several quarters, Penney said.
"They've got to get control of the situation with the McDonald's marketing machine," he said.
McDonald's is known for rigorous oversight of suppliers but might have grown confident about OSI because of its long history as a supplier, said John Gordon, a restaurant industry analyst. McDonald's has bought meat from OSI in the United States since the 1950s.
Yum Brands responded by saying it will cut all ties with OSI in China, the United States and Australia.
McDonald's CEO Don Thompson said the company felt "a bit deceived."
Still, McDonald's is sticking with OSI, possibly because China's emerging industry of food processors such as state-owned Cofco Corp., which supplies beef patties and chicken to restaurants, cannot match OSI's scale, technology or experience.
"Likely they have no choice but to keep working with them," said Breteau. "They may now move business away from them significantly. But short term, they can't. It's a
Local Tastes Tempt China Diners Away From Golden Arches
(Reuters) - Bearing rice burgers and lotus roots, an army of Chinese fast
food firms is cooking up a challenge to McDonald's
Corp and Yum Brands Inc, tempting cost-conscious diners with healthy,
homegrown fare and causing a drag on growth for the U.S.
chains in the country's $174 billion fast food market.
McDonald's said last week it was thinking of slowing expansion in China as diners are tempted by local rivals. KFC-parent Yum warned this month economic weakness in China would drag on a recovery in sales dented by a food safety scare at the end of last year.
Meanwhile, local firms such as chicken chain Dicos, Country Style Cooking, and Kung Fu Catering have been nibbling away at the dominance of their U.S. rivals.
"I'm a bit sick of Western fast food. There's too much oil, and you hear things like chickens having six legs," said student Tang Mei, 25, as she dined at Taiwanese-owned fast food outlet Dicos. "Health concerns have really made people worried."
McDonald's and Yum are still the largest fast food chains in China but, despite heavy investment, McDonald's has seen its market share by value stagnate at 2.3 percent since 2007, according to data from market research firm Euro monitor.
Yum, which held 6.5 percent last year, is up slightly over the same period, but has seen same-store sales hit after a food scare last year and a local outbreak of avian flu. Yum has 5,600 KFC and Pizza Hut China stores; to McDonald's has 1,800 local outlets.
Brands like Ting Hsin International-owned Dicos, the third largest fast food brand in China, have taken note. The firm, which plans to triple its store count to around 3,700 by 2020, says it aims to "break the traditional Western fast food mould".
While conceived in the image of KFC - its name is a play on "Texas" in Chinese - Dicos now also pushes its Chinese roots. Its website displays an ornate blue ceramic bowl steaming with traditional herbal tea, while rice cake burgers and soybean milk flank the chain's more traditional nuggets and crispy wings.
"After all, since ancient times rice has been the key staple of the Chinese people," explained Zhuang Weitang, a spokesman for Ting Hsin International, adding the brand was planning to up its drive towards healthier, Chinese-style cooking.
"It's the mix (of traditional chicken) with new, health-focused Chinese specialties that has helped us create a niche in the fiercely-competitive Chinese fast-food market."
EATING THE COLONEL'S LUNCH
In a slowing economy, many consumers are trading down to cheaper alternatives or simply dining at home, said analysts, which has contributed to the growth rate in the wider fast food market halving over the last 5 years to 8 percent this year.
Lunch at Dicos costs less than 17 yuan ($2.80) compared with a similar offering from KFC, which costs 25 yuan ($4.11), according to Mintel.
"Local establishments generally also do a better job catering to local tastes," said Karla Wang, associate research director at market research firm TNS China. "These familiar 'comfort foods' often go a long way in soothing frazzled consumers during times of uncertainty."
Diners have even started to question international chains' quality, traditionally a strong point after scandals ranging from the use of recycled "gutter oil" for cooking to industrial chemical-laced milk made consumers wary of local products.
But a number of scares over the last year, including reports that some chicken purchased by KFC and McDonald's had been fed excess antibiotics, seems to have altered consumer views. Only one-in-four Chinese thought Western fast food was healthier and better quality than Chinese alternatives, said a recent report from research firm Mintel.
McDonald's and Yum have taken note.
"We address food quality and food safety in all aspects of our communication; most recently, we launched a Moms' Trust campaign... and we will be doing more in this area," said Jessica Lee, a Shanghai-based spokeswoman for McDonald's.
Yum officials were not immediately available for comment.
The company has trimmed its local supply chain and plans to launch a new China quality assurance campaign in November that will feature KFC employees, suppliers and poultry farmers.
"We still have worked to do, but we know we are doing the right things to regain consumer trust and we remain confident that our best days for KFC in China are yet to come," Chief Executive David Novak said in an analysts call on October 9.
HOME STYLE
As trust of domestic brands grows, diners are being increasingly drawn to local dishes, perceived as healthier due to a wider variety of ingredients, while there is mounting interest in traditional Chinese food and dining culture.
Last year a documentary called "A Bite of China" aired on local television drawing more than 100 million viewers, making it the most successful documentary in China since the 1990s.
Chinese heritage has become a key selling point.
Kung Fu Catering, which sports an emblem of martial artist Bruce Lee, underscores its local credentials by playing up the natural ingredients for its Chinese-style food against backgrounds of Chinese mountains, wispy clouds and bamboo.
Others such as Country Style Cooking, CNHLS and Gll Wonton, owned by Shanghai Shihao Catering, all offer fast food with a Chinese flavor. Though some way behind Yum and McDonald's in terms of size, all are taking market share from the huge independent sector of single shops and stalls.
Local brands also perform strongly in regions away from the saturated east coast market, catering to local tastes in areas seen as the China's next drivers for growth.
"Country Style Cooking is really strong in western China, while Kung Fu Catering is from Shenzhen and does well with more rice-based Chinese set meals, which fit the trend towards less oily and healthier food," said James Roy, Shanghai-based senior analyst at China Market Research Group.
China's influential netizens also suggest the U.S. firms are struggling to remain the flavor of the month. Chatter about the two brands on China's Twitter-like Weibo fell to an almost two-year low in September, according to analysis by Reuters.
McDonald's said last week it was thinking of slowing expansion in China as diners are tempted by local rivals. KFC-parent Yum warned this month economic weakness in China would drag on a recovery in sales dented by a food safety scare at the end of last year.
Meanwhile, local firms such as chicken chain Dicos, Country Style Cooking, and Kung Fu Catering have been nibbling away at the dominance of their U.S. rivals.
"I'm a bit sick of Western fast food. There's too much oil, and you hear things like chickens having six legs," said student Tang Mei, 25, as she dined at Taiwanese-owned fast food outlet Dicos. "Health concerns have really made people worried."
McDonald's and Yum are still the largest fast food chains in China but, despite heavy investment, McDonald's has seen its market share by value stagnate at 2.3 percent since 2007, according to data from market research firm Euro monitor.
Yum, which held 6.5 percent last year, is up slightly over the same period, but has seen same-store sales hit after a food scare last year and a local outbreak of avian flu. Yum has 5,600 KFC and Pizza Hut China stores; to McDonald's has 1,800 local outlets.
Brands like Ting Hsin International-owned Dicos, the third largest fast food brand in China, have taken note. The firm, which plans to triple its store count to around 3,700 by 2020, says it aims to "break the traditional Western fast food mould".
While conceived in the image of KFC - its name is a play on "Texas" in Chinese - Dicos now also pushes its Chinese roots. Its website displays an ornate blue ceramic bowl steaming with traditional herbal tea, while rice cake burgers and soybean milk flank the chain's more traditional nuggets and crispy wings.
"After all, since ancient times rice has been the key staple of the Chinese people," explained Zhuang Weitang, a spokesman for Ting Hsin International, adding the brand was planning to up its drive towards healthier, Chinese-style cooking.
"It's the mix (of traditional chicken) with new, health-focused Chinese specialties that has helped us create a niche in the fiercely-competitive Chinese fast-food market."
EATING THE COLONEL'S LUNCH
In a slowing economy, many consumers are trading down to cheaper alternatives or simply dining at home, said analysts, which has contributed to the growth rate in the wider fast food market halving over the last 5 years to 8 percent this year.
Lunch at Dicos costs less than 17 yuan ($2.80) compared with a similar offering from KFC, which costs 25 yuan ($4.11), according to Mintel.
"Local establishments generally also do a better job catering to local tastes," said Karla Wang, associate research director at market research firm TNS China. "These familiar 'comfort foods' often go a long way in soothing frazzled consumers during times of uncertainty."
Diners have even started to question international chains' quality, traditionally a strong point after scandals ranging from the use of recycled "gutter oil" for cooking to industrial chemical-laced milk made consumers wary of local products.
But a number of scares over the last year, including reports that some chicken purchased by KFC and McDonald's had been fed excess antibiotics, seems to have altered consumer views. Only one-in-four Chinese thought Western fast food was healthier and better quality than Chinese alternatives, said a recent report from research firm Mintel.
McDonald's and Yum have taken note.
"We address food quality and food safety in all aspects of our communication; most recently, we launched a Moms' Trust campaign... and we will be doing more in this area," said Jessica Lee, a Shanghai-based spokeswoman for McDonald's.
Yum officials were not immediately available for comment.
The company has trimmed its local supply chain and plans to launch a new China quality assurance campaign in November that will feature KFC employees, suppliers and poultry farmers.
"We still have worked to do, but we know we are doing the right things to regain consumer trust and we remain confident that our best days for KFC in China are yet to come," Chief Executive David Novak said in an analysts call on October 9.
HOME STYLE
As trust of domestic brands grows, diners are being increasingly drawn to local dishes, perceived as healthier due to a wider variety of ingredients, while there is mounting interest in traditional Chinese food and dining culture.
Last year a documentary called "A Bite of China" aired on local television drawing more than 100 million viewers, making it the most successful documentary in China since the 1990s.
Chinese heritage has become a key selling point.
Kung Fu Catering, which sports an emblem of martial artist Bruce Lee, underscores its local credentials by playing up the natural ingredients for its Chinese-style food against backgrounds of Chinese mountains, wispy clouds and bamboo.
Others such as Country Style Cooking, CNHLS and Gll Wonton, owned by Shanghai Shihao Catering, all offer fast food with a Chinese flavor. Though some way behind Yum and McDonald's in terms of size, all are taking market share from the huge independent sector of single shops and stalls.
Local brands also perform strongly in regions away from the saturated east coast market, catering to local tastes in areas seen as the China's next drivers for growth.
"Country Style Cooking is really strong in western China, while Kung Fu Catering is from Shenzhen and does well with more rice-based Chinese set meals, which fit the trend towards less oily and healthier food," said James Roy, Shanghai-based senior analyst at China Market Research Group.
China's influential netizens also suggest the U.S. firms are struggling to remain the flavor of the month. Chatter about the two brands on China's Twitter-like Weibo fell to an almost two-year low in September, according to analysis by Reuters.