Yum, McDonald's apologize as new China food scandal brews

McDonald's Corp and Yum Brands Inc are facing a new food safety scare in China, denting the fast food giants' efforts to shore up reputations and businesses that were hurt by a 2012 safety scandal in one of their biggest markets.

McDonald's and KFC-parent Yum apologized to customers on Monday after Chinese regulators shut a local meat supplier following a TV report that showed workers picking up meat from a factory floor, as well as mixing meat beyond its expiration date with fresh meat. The firms said they'll stop using the supplier.

The report, which focused on McDonald's and Yum, brings the pair back into the firing line following the 2012 scandal that involved chicken pumped with excessive amounts of antibiotics. It's unclear whether the meat supplier, a local unit of U.S.-based food provider OSI Group LLC, may have sold goods to other clients too.

Yum has just begun to bounce back from the 2012 scare in its No. 1 market, while McDonald's said on its China site it may now face a product shortfall in its third-biggest market by store numbers. The pair are the top two by sales in China's $174 billion fast food market, according to Euromonitor, but face a challenge as local firms try to tempt cost-conscious diners with healthy, homegrown fare.

"I think this is going to be really challenging for both these firms," said Benjamin Cavender, Shanghai-based principal at China Market Research Group.

"I don't know that this is something an apology can fix so easily, because at this point people don't have a whole lot of trust that they have good systems in place," he added.

The Shanghai Municipal Food and Drug Administration shut Shanghai Husi Food Co Ltd, a unit of Aurora, Illinois-based OSI, down on Sunday after the local Chinese TV broadcast aired. As well as footage of the meat safety violations, the program showed workers saying that if clients knew what they were doing, the firm would lose its contracts.

A China-based official of OSI said the firm was working with the local government to investigate the matter, but declined to comment further. OSI, which has close to 60 manufacturing facilities worldwide and had revenue of over $5 billion in 2012, has been supplying McDonald's in China since 1992 and Yum since 2008, according to its website.

"If proven, the practices outlined in the reports are completely unacceptable to McDonald's anywhere in the world," a China-based spokeswoman for McDonald's told Reuters. She said the firm used a "few protein suppliers" in China.

Yum officials in China did not respond to requests for further comment.

SUPPLY CHAIN ISSUES

The topic was the fourth most popular topic on China's influential Twitter-like Weibo social media platform on Monday, with most users aiming their anger at McDonald's and Yum. Both said they were investigating the matter, according to statements on their Weibo sites on Monday.

News of the scare had already spread to Shanghai diners negotiating the city's lunch hour rush.

"For now I won't go to eat at McDonald's or KFC, at least until this whole thing settles down," said Xu Xinyu, 24, a financial services worker, eating at a noodle shop near a McDonald's outlet in downtown Shanghai.

Yet Chinese consumers may already have developed a comparatively thick skin when it comes to food scandals. "Isn't everywhere like this?" asked student Li Xiaoye, 20, eating a beef burger in a Shanghai McDonald's outlet. "I'll keep going because wherever I eat, the issues are all the same."

The incident highlights the difficulty in ensuring quality and safety along the supply chain in China. Wal-Mart Stores Inc came under the spotlight this year after a supplier's donkey meat product was found to contain fox meat. It also came under fire for selling expired duck meat in 2011.

OSI is one of McDonald's key meat suppliers and has a good reputation, according to an industry insider speaking on condition of anonymity. He added the incident highlighted the issue firms faced enforcing strict processes with local staff.

As well as Yum and McDonald's, OSI listed Starbucks Corp, Japan's Saizeriya Co Ltd, Papa John's International Inc, Burger King Worldwide Inc and Doctor's Associates Inc's Subway brand as clients in China, according to a 2012 press release.

A Starbucks spokesman told Reuters that the firm does not now have any direct business dealings with Husi Food.

Burger King, Subway, Papa John's and Saizeriya did not immediately respond to requests for comment.