Europe’s horse meat problem got more coverage in China than China’s fake mutton problem got in China, according to Adam Minter, Bloomberg’s Shanghai-based correspondent. Although not exactly exhaustive, his findings clarify yet another major issue for foreign companies to deal with while operating in that country.
Fake Mutton vs Horse Meat
There is a scandal in China in which duck has supposedly been treated with hazardous chemicals and mutton grease so it could be sold as more expensive mutton. There is also a major scandal in Europe in which perfectly edible horse meat has made its way into the food system.
Minter found that: “…as of the afternoon of Feb. 19 in China, a search for ‘horse meat’ on [China Central Television’s] official website produced 313 video results, with only a handful predating Feb. 11.” and “Despite poisonous fake mutton being a far more disgusting, dangerous and — at the moment, at least — Chinese problem than European horse meat disguised as beef, CCTV has run only one story (on Feb. 17) about the domestic mutton scandal.” Though not as biased, other stations had similarly skewed coverage.
Bias
It isn’t new for media outlets to take sides. Indeed, both the political left and the right in the United States have networks and newspapers that clearly associate more with one or the other. And the Internet has made finding content that is highly partisan even easier. So it isn’t surprising that a news outlet in China that is effectively controlled by the government would try to be as positive as possible about China. However, this presents major problems for companies operating in that nation.
How big a problem? Try asking Yum! Brands, Inc. (NYSE:YUM).
The Chicken Fiasco
Yum! Brands, Inc. (NYSE:YUM)’s problems relate to substandard chicken from suppliers that KFC had been using. An investigation by a local television station sparked a government review. Although Yum! Brands, Inc. (NYSE:YUM) hasn’t been accused of wrongdoing, the damage to the company’s image has been notable.
January sales were down over 40% at KFC in China. As if that weren’t bad enough, sales were also down 15% at Pizza Hut, even though the company isn’t a chicken themed restaurant. That decline shows how quickly the problem in one brand is flowing into the other.
While there were clear problems in the Yum! situation, was it Yum! Brands, Inc. (NYSE:YUM) or the suppliers that should have felt the brunt of it? In fact, it seems like China might be purposely using Yum! as a whipping boy to take the brunt of the public’s outcry.
Why Care About This?
There is a real risk of being portrayed in an unflattering light by the media for any company that has to work directly with the Chinese public.
For example, McDonald’s Corporation (NYSE:MCD) has around 5,000 restaurants in China and hopes to grow that to 20,000 over time. It intends to open hundreds of restaurants over just the next year alone. However, in addition to burgers, the company also sells chicken nuggets.
While the company doesn’t break China out to the same degree as Yum! Brands, there’s no question that the spillover from KFC has ensnared McDonald’s. In early January it noted a small drop in sales in the fourth quarter, but highlighted that the decline was lingering into the new year.
In fact, McDonald’s Corporation (NYSE:MCD) found itself a target of a Chinese television show last year. That very public exposure resulted in an embarrassing apology by the company. This year, in what management calls a coincidence, it is giving away food just as that same show airs its annual expose on corporate malpractice. Giving away food is an expensive way to offset negative press.
Wal-Mart Stores, Inc. (NYSE:WMT) is also making a push into China, a country in which it has operated for years. The recent drive is to expand more aggressively in the Internet retailing space. Disproportionate negative coverage of a the company could scuttle those efforts.
For example, Wal-Mart Stores, Inc. (NYSE:WMT) found itself accused of food safety violations last year. While not started by a television program, the Beijing Food Safety Administration’s accusations obviously made it into the press. Unfortunately for Wal-Mart Stores, Inc. (NYSE:WMT), its China CEO voluntarily stepped down in 2011 over another food quality dust up. That’s a bad trend.
Any more negative press for Wal-Mart Stores, Inc. (NYSE:WMT) could be a notable drag on performance. For its part, it’s got an adopt-a-tree promotion going just in time for the annual expose that may or may not have led McDonald’s to give away free food.
A Free Press
One of the greatest things the United States has is a free press. This allows the media to call out problems where they exist without fear of reprisal. China operates with different rules–and a free press isn’t one of the rules we have in common. This can make a problem turn into a disaster. It can also make coming back from a problem that much harder. Remember this when reviewing companies investing in China.
The article China’s Smoke And Mirror Game originally appeared on Fool.com and is written by Reuben Gregg Brewer.
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