It’s been a season of scandal for Yum Brands Inc., parent of KFC, which has been forced to apologize in response to a government investigation that found it was using pumped up and drugged out chicken from a local supplier. This has led to ticked off customers, decreasing sales and now a fallen stock price. From Reuters:
Yum shares fell 5.6 percent in after-hours trading, as Wall Street analysts and investors digested the disappointing news from the company that is widely seen as a model for how to do business in the complex Chinese market.
“This is going to take all the experts they have in public relations to stem the tide. I don’t think anyone saw this coming,” Edward Jones analyst Jack Russo said.
Yum reported a 6 percent drop in fourth-quarter sales at established restaurants in China due to “adverse publicity” regarding chemical residue found in some of its chicken supply.
One would think an international conglomerate like Yum would have the know-how to skillfully handle such a PR nightmare, especially in a country where food safety problems are an everyday concern.
Maybe not. Via Forbes:
At YUM’s analyst day on December 6, 2012, we asked CEO David C. Novak what his “defense” was to media exposes that one of KFC China’s suppliers had pumped its chicken full of chemicals to expedite their growth. The story prompted a furious social media reaction. His answer was “No worries. It will blow over.” When asked how, he shrugged: “It always has.”
This time it hasn’t blown over, and KFC is paying the price. As Bloomberg noted last month:
KFC sales in China in the last two weeks of December had a “significant impact” from “adverse publicity associated with a government review of China poultry supply,” the company said in a filing with the U.S. Securities and Exchange Commission Monday. China same-store sales fell 6 percent in the fourth quarter, compared with a previous estimate for a decline of 4 percent, according to the filing.
It wasn’t long ago that KFC was being touted as one of the relatively few foreign companies that had figured out the Chinese market.
When I first heard about this little trouble, I admit I wanted to side with KFC. At least the company is subject to some regulations, which are more stringent because it’s a foreign company. Compared to gutter oil, KFC still looks pretty good.
But after some further thought (and a chat with my girlfriend), I’ve concluded that Yum actually deserves every bit of grief it’s getting. As a foreign company, KFC is automatically held in greater esteem by Chinese consumers, who trust its safety procedures. And it’s this trust that allows KFC to get away with charging higher prices.
In other words, a kind of social contract is in place where people will happily hand over more money in exchange for the guarantee of greater quality and safety. If Chinese regulators seemingly hold KFC to a higher double standard, good.
And when it messes up, it hurts all of us.
Sales are dropping. Stock is tanking. It’s gonna take a bit more than simply waiting for this situation to “blow over.” Maybe a PR campaign is in order? Remember KFC’s “handsome delivery boy” service reported a year ago? Now’s the time for it.