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 Yum said on Wednesday that the scare, triggered by a TV report
earlier this month showing improper meat handling by a supplier,
Shanghai Husi Food, caused "significant, negative" damage to sales
at KFC and Pizza Hut restaurants over the past 10 days. "If the
significant sales impact is sustained, it will have a material
effect on full-year earnings per share," Yum said in a regulatory
filing.
Shares in Yum, which counts China as its No. 1 market, tumbled more
than 6 percent in extended trading. The stock has dropped nearly 12
percent since Yum posted second-quarter earnings on July 17.
Officials from McDonald's in China and Hong Kong have not responded
to requests for information on the impact on sales from the scandal,
but McDonald's Holdings Co (Japan) Ltd on Tuesday scrapped its
full-year earnings guidance after the China scare forced it to
switch to alternative chicken supplies. A McDonald's Japan executive
said sales had dropped 15-20 percent on a daily basis due to the
scare.
 Both McDonald's and Yum are looking to China - where consumers see
foreign brands as offering better food quality - for long-term
growth given the size of its population, growing middle class and
rapid economic growth.
"Both of these stocks are banking heavily on China for their future
growth," said Richard Brubaker, an adjunct professor at the China
Europe International Business School and founder of the Collective
Responsibility consultancy. "For Yum, this is a problem because it
has a history of problems in China. For McDonald's, it's the sheer
size of the problem and the inability to get product."
CONSUMER CAUTION
Yum, which has nearly 6,400 restaurants in China, had just begun to
see its restaurant sales there recovering from a slide last year due
to an avian food outbreak and a previous food safety scare. Yum has
cut its global ties with OSI Group LLC [OSIGP.UL], the U.S. parent
of Shanghai Husi Food. Yum said OSI was not a major supplier and the
move had "minimal disruption" to the availability of menu offerings
in China.
McDonald's, which has more than 2,000 restaurants in China, has had
a long relationship with OSI and was more dependent on the supplier
than Yum. Many McDonald's China outlets have been hit by meat
shortages since the company ended its relationship with OSI there.
Around two-thirds of the more than five dozen consumers Reuters
reporters spoke to in Shanghai, Beijing and Hong Kong on Thursday
said they would scale back their visits to McDonald's, at least for
now.
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"For people like us, McDonald's and KFC are places to meet friends,"
said Yao Nanfang, a 16-year-old student in a shopping mall in
central Shanghai. "We'll still go to McDonald's, but we'll order
fewer meat products." Diners in Hong Kong also said they were
likely to eat less frequently at McDonald's, but noted that the
chain's low prices made it hard to give up.
"I come to McDonald's less often now, but I won't completely stop
coming because it's so much cheaper than other restaurants," said
Nan Tang, who says he eats at McDonald's twice a week.
In Hong Kong, McDonald's has ended a promotion of its chicken
McSpicy burger and shifted a membership program away from offering
discounts on McNuggets, which it is not currently selling.
Following the TV report that alleged workers at Shanghai Husi Food
used expired meat and doctored food production dates, regulators
closed the plant on July 20. Police have detained five people
including Shanghai Husi's head and quality manager.
Food safety has been a big concern for Chinese consumers after dairy
products tainted with the industrial chemical melamine sickened many
thousands and led to the deaths of six infants in 2008.
(Additional reporting by Sruthi Ramakrishnan in Bangalore, James
Zhang, Emily Chung, Nikki Sun, Donny Kwok and Clare Baldwin in Hong
Kong, and Shanghai and Beijing newsrooms; Editing by Lisa Shumaker
and Ian Geoghegan)
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