News Column

Fitch: China Food Scare Threatens US Restaurant Sales Recovery

July 24, 2014



NEW YORK--(BUSINESS WIRE)-- Slower relative sales growth in developed markets has kept China a priority for US fast-food restaurants and the latest food scare could threaten sales recovery in the sector, according to Fitch Ratings.

Chains that were negatively impacted by consumer fears surrounding excessive use of antibiotics by chicken suppliers and an outbreak of the H7N9 strain of avian influenza in 2013 recently reported a recovery in sales trends. However, heightened sales volatility should be expected due to an increasing number of highly publicized food safety incidences and in some cases supply chain weakness.

Fitch views supply chain reliability and reputational risk as the biggest threats to US restaurant companies expanding in emerging markets due their use of local suppliers and the fact that food scares, particularly in China, are becoming more common.

The country's latest food scare involves a Chinese meat processor supplying multi-national restaurants with expired beef and chicken. Shanghai Husi Food Co., a unit of US-based OSI Group, allegedly repacked and sold beef and chicken that was past its sell-by date. McDonald's, Yum Brands Inc. and Starbucks sold products containing chicken bought from Shanghai Husi.

McDonald's China same store sales (SSS) rose 8.8% during the quarter ended June 30, after declining 6.1% in the same quarter last year, but management indicated that China's economy remains challenged, causing consumer sentiment to be volatile. In response to issues surrounding expired meat, McDonald's reassured investors about the quality of its suppliers and the firm's commitment to food safety, stating that it was no longer serving product from the facility accused of distributing the expired meat. McDonald's had nearly 2,000 units in China at the end of 2013 and plans to open about 300 additional units in the country in 2014.

YUM's SSS increased 15% in China during the quarter ended June 14, prior to the latest food scare, after declining 20% during the same period last year. Management expects full year SSS to be at the low end of guidance or in the high single-digit range admitting that sales remain difficult to predict. YUM had over 6,200 units in China at the end of 2013 and expects to open at least 700 in 2014. China has historically represented over 40% of YUM's operating profit, excluding unallocated expenses.

YUM's efforts to strengthen its local supply chain following consumer backlash around excessive antibiotic use by certain suppliers included working with Chinese suppliers to eliminate sourcing from over 1,000 small and less modern chicken farms. In response to the latest food safety issue, YUM stated that Shanghai Husi was not a major supplier and that it has immediately terminated all procurement from the company.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Carla Norfleet Taylor, CFA, +1 312-368-3195

Director, Corporates

Fitch, Inc.

70 W. Madison Street

Chicago, IL 60602

or

Kellie Geressy-Nilsen, +1 212-908-9123

Senior Director

FitchWire

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Media Relations:

Brian Bertsch, +1 212-908-0549

brian.bertsch@fitchratings.com

Source: Fitch Ratings


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