McDonald’s, Yum Cease Using Chinese Meat Supplier During Probe

Jul 21, 2014 5:25 pm ET

July 22 (Bloomberg) -- McDonald’s Corp. and Yum! Brands Inc. halted buying meat products from a Shanghai supplier while authorities investigate allegations that the company sold chicken and beef past their expiration date.

McDonald’s asked all its outlets to stop using products from Shanghai Husi Food Co., according to statements on the companies’ official Chinese microblog this week. Yum’s KFC and Pizza Hut restaurants did the same, the company said in a separate statement. Both restaurant chains said the move would result in shortages of some items and apologized to consumers for the inconvenience. Starbucks Corp., which also was affected, removed one product from its menu.

Shanghai authorities suspended operations at Shanghai Husi on the same day the local Dragon TV channel reported that Husi workers were repackaging and selling chicken and beef that had exceeded its sell-by date. The allegations renew concerns about unsafe food in China following abuses that have included fox DNA found in donkey meat and the lacing of baby formula with melamine, a compound used in plastics.

The meat had been sold to locations in China and Japan, Heidi Barker, a U.S. spokeswoman for McDonald’s, said in an e- mail. The facility only supplied the Shanghai market, not all of China, she said. In Japan, McNuggets were the only affected product.

‘Completely Unacceptable’

“If confirmed, the practices outlined in the report are completely unacceptable to McDonald’s,” Barker said. “This matter is being thoroughly investigated and we are cooperating fully with the authorities.”

Starbucks, the world’s largest coffee-shop chain, said it doesn’t work directly with Shanghai Husi, though one of its suppliers did. The affected item, a chicken apple panini, was only available in China and is no longer for sale, the Seattle- based company said in a statement.

Yum shares fell 4.2 percent to $74.13 at the close in New York, while McDonald’s dropped 1.5 percent to $97.55. Starbucks’ stock declined 0.4 percent to $77.61.

This is the second time in less than two years that McDonald’s and Yum have been hit by a food safety issue involving Chinese suppliers. In December 2012, Shanghai authorities said that tests conducted from 2010 to 2011 by a third-party agency found high antibiotics levels in eight batches of chicken supplied to Yum by Liuhe Group Co. The company also supplied McDonald’s in China at the time.

Taking Action

“This latest food-quality scandal will have a limited and transitory impact on KFC China,” analysts Mei He, Yaoxin Huang and Haiyan Guo of China International Capital Corp. said in a research report. After learning their lessons from the 2012 scare, local management “will take immediate and forceful measures to contain any adverse publicity and close the loopholes in any quality-assurance procedures,” the analysts said.

Shanghai Husi, owned by the Aurora, Illinois-based OSI Group, has a strict quality-control system and will cooperate with the investigation, said Yang Liqun, general manager for deep processing with OSI China, according to China’s official Xinhua News Agency. Two calls to the supplier’s main line by Bloomberg News weren’t answered.

Municipal food-and-drug authorities asked all companies sourcing from Shanghai Husi to remove its products from sale, according to the regulator. McDonald’s and Yum said they are investigating Shanghai Husi.

Past-Due Meat

Dragon TV said reporters who entered Shanghai Husi factories saw evidence that past-due chicken and beef were repackaged and given a shelf life of another year.

Yum, a Louisville, Kentucky-based company that gets about half of its revenue from China, has revamped its menu and offered deals to woo back diners over the past two years. Yum is China’s biggest fast-food chain by market share, with 5 percent last year, according to London-based research firm Euromonitor International Ltd. McDonald’s, based in Oak Brook, Illinois, is the second largest, with 2.6 percent of the market.

Foreign and domestic companies operating in China have been hurt by shoddy food suppliers in the past. Wal-Mart Stores Inc., the world’s largest retailer, promised to boost inspections of suppliers this year after authorities said that donkey meat sold at its Chinese stores contained fox DNA.

In 2008, at least six babies died after about 22 companies were found to have sold dairy products containing melamine, a toxic chemical that can make diluted milk appear to have a higher protein content.

Food and drug safety was voted the third-biggest concern for ordinary Chinese this year, up from seventh place in 2013, according to an annual online poll of 3.3 million people by the state-run People’s Daily in February.

China is seeking to strengthen food safety in the country by increasing penalties for violations, adding food-safety information scrutiny and raising compensation for consumers in a new draft law. The country is also tightening oversight of the infant formula industry.

--With assistance from Selina Wang in New York.