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.
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