Yum! Brands, Inc. (NYSE:YUM), the quick-service restaurant chain, has warned of a decline in profits in 2013 as the company is experiencing the backlash of a controversy with respect to its chicken suppliers in China. The Kentucky-based company gave a grim outlook for the current year given the issue it is facing in China. The fast food chain has about 5,300 outlets in the mainland, most of which are KFCs. The success of its China division is extremely critical to the company’s growth as it accounts for over half its revenue and around 40% of its operating profits. What is the issue that Yum! is facing in this emerging nation?
Yum!’s difficulty began when the government food safety agencies of China started investigating about the company’s supply chain. They discovered that poultry suppliers of both Yum! and McDonald’s Corporation (NYSE:MCD) supplied chicken which had high levels of antibiotics. McDonald’s says that customer safety is its priority and it ensures through sample testing of the raw material that it receives. Both the fast food giants are co-coordinating with their suppliers to ensure the safety of their food and have stopped purchasing chicken from these problematic units.
Yum! and McDonald’s are not the only companies that experienced supply chain issues, recently fellow rival Burger King Worldwide Inc (NYSE:BKW) also faced raw material concern. Silvercrest Foods, the company’s UK beef supplier had mixed horsemeat with the beef supply. The company too, like its fellow rivals, boycotted the supplier as a ‘precautionary measure’.
The Food safety authorities in China did not fine Yum! however the negative publicity by the media has defamed the fast food restaurant chain. The company apologized to its Chinese customers and is presently undertaking various steps to re-build its reputation in its biggest market. It has planned to hold an aggressive marketing campaign in order to regain consumer confidence and restore their brand perception regarding KFC. This had an impact on the fourth quarter results of the company’s China division.
What do the numbers say?
The owner of KFC, Pizza Hut and Taco Bell witnessed a 5% decline in profits to $337 million for the fourth quarter. This is majorly attributable to the negative impact of its poultry supplies in China. The total revenue for the quarter saw a marginal rise of 1% to $4,153 million while the total revenue for the entire year increased 8% to $13,633 million.