Yum! Brands, Inc. (YUM) Ends Ties With Chinese Suppliers to Regain Reputation

Yum! Brands, Inc. (NYSE:YUM), the owner and operator of KFC, Pizza Hut, and Taco Bell, announced that it would undertake steps to monitor its poultry suppliers in China to ensure food safety in its KFC outlets. The fast food giant recently got hit by a controversy involving its chicken suppliers using inappropriate levels of antibiotics. This made Yum!’s China KFC sales tumble drastically, though a company spokesperson said that they instantly removed the chicken from the outlets the moment they learned of the antibiotics concern. But Sam Su, Chief Executive of Yum!’s China division, isn’t surprised with the severe drop in the KFC sales. He understands that customers expect high quality service from foreign restaurant chains and news as this would adversely affect their consumption level.

Now the company is fighting to restore its reputation in its largest and most lucrative market. The quick service restaurant has undertaken steps to tighten its supply chain in order to drive away the chicken scare in its KFC restaurants.

Restoring reputation – “not something that Yum alone can do“
The company is checking the source of its chicken suppliers and severing ties with those who get chickens from small farms that are difficult to track. It has eliminated from its supply chain network over 1,000 small poultry farms from where 25 poultry suppliers source their chicken. However the root cause remains unaddressed. The consumer concern over the safety of chicken comes from China’s meat industry, which mostly depends on these small farms for their supply. So fixing the issue gets complicated unless the main source is dealt with. In fact, even McDonald’s Corporation (NYSE:MCD) suffered the food safety allegation and has been accused of using chicken containing high antibiotic levels. Similar to what Yum! did, McDonald’s ended ties with the problematic poultry suppliers.

Yum! has found a couple of ways to deal with the problem. First, Yum! Brands, Inc. (NYSE:YUM) will go for rigorous supplier testing and maintain ties with only those chicken house that are directly managed. Second, it will coordinate with international poultry suppliers to ensure quality. These foreign poultry suppliers could either directly invest and set up on their own or work with domestic suppliers to improve their quality. Mr. Su did not give further information on this matter.

Nonetheless, it is extremely critical for Yum! Brands, Inc. (NYSE:YUM) to win back the confidence of its KFC customers, given that about half of the company’s top line is earned from this emerging market. Yum! invited and held talks with industry representative groups like the China Cuisine Association, China Chain Store & Franchise Association, and the China Animal Agriculture Association. The company drew their attention towards the lack of investment in this sector, saying that unless investment is increased it would be difficult to provide food security and safety to consumers. It has to be a joint effort as rightly pointed by Mr. Su, “It’s not something that Yum alone can do.”

It is essential for Yum! to bring its KFC business on track as China is a crucial market for the company’s future growth.

China – a critical market
Yum! draws about half its revenue from China. It even dominates McDonald’s presence here. Though Yum’s fourth quarter comparable store sales fell 6% due to the chicken scare, China accounted for over 40% of the company’s profits. January sales for KFC outlets open for over 12 months plunged 41% with a gloomy current year outlook. The company runs over 4,000 KFC stores and about 700 Pizza Hut stores in China, and plans to open about 700 stores this year.