Recruiting in China

US company considers regaining Chinese consumers as top priority after food supply scandal last year

Yum! Brands Inc, operator of big-name fast-food chains like KFC and Pizza Hut, has recorded a drop in its China unit sales in the fourth quarter ending December 27, 2014 due to a food supply scandal, which analysts Thursday said will continue to weaken Chinese consumers' confidence in the following year.

The same-store sales in China, the US fast-food company's No.1 market for profit, slid 16 percent year-on-year in the quarter, according to a full-year earning report released by Yum! on Wednesday US time.

The fall in the China division, however, was less severe when compared with the 19.4 percent dip projected by analysts surveyed by Consensus Metrix.

As for the whole year, the company posted a 8 percent drop in the operating profit of its China unit, in comparison with a 1 percent increase globally.

The losses for Yum! stood at $0.20 per share in the fourth quarter, or $86 million in total.

The company put down the underperformance to a food supply scandal erupted in 2014.

"Overall results in 2014 were disappointing as the Chinese supplier incident in July offset our strong first half of the year," Greg Creed, Yum! Brands Inc's CEO, was quoted in the report as saying.

After media reported on July 20 that one of Yum!'s suppliers, Shanghai Husi, was using expired meat, sales in China's KFC and Pizza Hut chain restaurants suffered a massive blow.

The company, which quickly cut ties with the supplier as well as its parent OSI Group LLC, still saw same-store sales in China fall 14 percent year-on-year in the third quarter ending September 6. By contrast, the quarter ending roughly one month before the scandal tidings recorded a robust growth of 15 percent.

Greed said the company's top priority now is to restore Chinese consumers' confidence, anticipating "a strong second half of 2015" due to "the turnaround gains momentum, led by menu innovation across the year."

New offerings would include premium coffee and revamped children's dishes, according to media reports, citing Joey Wat, president of KFC China.

In late January, Beijing Morning Post reported that over 300 KFC stores in Beijing had started to sell coffee products.

Its major rival McDonald's Corp is also reportedly trying to win back Chinese consumers via menu adjustment. McDonald's on January 23 reported a 4.8 percent drop in fourth-quarter sales for the region including China and Japan amid the fallout from the Shanghai Husi scandal.

Despite the efforts, analysts holds a pessimistic attitude toward the recovery of Yum! as well as that of McDonald's in the Chinese market.

"The food supply scandal severely dampened the faith for the US fast-food chain brand in China, where consumers are paying increasing attention to food quality along with the rising standard of life," Yan Qiang, a partner and industry analyst with Beijing-based Hejun Consulting, told the Global Times Thursday.

Yan noted that a full recovery needs at least one more year.

It is not the first food scandal to have occurred to Yum! in China. Chinese media allegations that KFC used tainted chicken in 2012 already caused a national scare and some damage to Yum!'s reputation in the country.

Regardless of those food scandals, US fast-food chains are also confronting fierce competition from domestic fast-growing counterparts, Tian Guangli, an expert at Beijing-based consultancy Longce Think Tank, told the Global Times Thursday.

"Many new rising stars such as pancake brand Huang Tai Ji have a better understanding of how to draw and maintain consumers' attention in this modern Internet era than traditional fast-food chain operators including Yum!," said Tian.