McDonald’s sales hindered by Chinese supplier investigation

Global fast-food chain McDonald’s, which is working this week to resume sales of beef and chicken in China after a supplier was accused of repackaging old meat, said the situation is hurting its results in Asia.

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

While McDonald’s said it can’t yet estimate the full effect on 2014 earnings, the areas at issue make up about 10 per cent 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 government probe into the altering of expiration dates on food last month.

Yum! Brands Inc. terminated its relationship with OSI globally after the probe.

McDonald's China and Hong Kong aren't getting products from any OSI Group or affiliate facilities in China, Becca Hary, a company spokeswoman, said in an e-mail yesterday.

McDonald’s Japan is now buying items from Thailand, she said. Previously, the chain was sourcing food from Husi’s Hebei plant while transitioning to a new OSI facility in Henan.

McDonald’s shares were little changed at $94.31 in New York yesterday. The stock has dropped about 4.7 per cent since news of the OSI probe became public. New Suppliers The fast-food chain’s Japanese outlets will sell chicken burgers and chicken muffin again after resuming a full menu at all its stores starting next week, Kokoro Toyama, a spokeswoman at McDonald’s Japan business, said today. The restaurant chain said yesterday that 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 e-mailed 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 re-allocate nationwide supply distribution,” McDonald’s said. “For new potential suppliers, we have a full due diligence inspection process.”

OSI, based in Aurora, 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 in an e-mail yesterday.

“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.”

The Big Mac wasn’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 onion were imported from the U.S. and Taiwan, the restaurant chain said on its website yesterday.

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, a Shenzhen unit of Philadelphia-based Keystone Foods, to handle the shortage of ingredients, the restaurant operator said yesterday. It’s also exploring new Chinese suppliers for items such as fresh produce. Burger King Worldwide Ialso cut ties with OSI since the food scandal.

McDonald's has 2.6 per cent 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. Louisville, Kentucky-based Yum, which owns KFC and Pizza Hut, has a 5 per cent share and derives more than half of its revenue from China.

McDonald’s, which doesn’t break out China sales publicly, received 23 per cent of its revenue from the Asia Pacific, Middle East and Africa region 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.

Bloomberg