Warren Liu recalls that he lost count of the number of chicken farms he visited in China. As a vice-president for KFC it was the part of the job he hated most: “I dreaded the sight, the sound and the smell of chickens being raised and slaughtered.”
Liu, who later wrote the business book KFC in China: Secret Recipe for Success, says one of the key decisions taken at KFC in the late 1990s was to stop its regional franchises in China purchasing their own chicken meat.
Instead the poultry was bought centrally by headquarters, a move designed to improve quality control. This would mean that instead of relationships with local managers driving buying decisions, an objective measure would be used called STAR (supplier tracking assessment and recognition). Liu said this led to fewer suppliers, but better ones. It was also a strategy that fitted with KFC’s reputation for “demanding the highest quality at a competitive cost from all suppliers”.
But that quality control regime has taken a bit of a knock in recent weeks with KFC and its parent Yum Brands forced to apologise. An investigation by the Chinese authorities has found that two of KFC’s suppliers were feeding their poultry higher-than-permitted levels of antibiotics. The practice was designed to help the chickens grow faster (reaching a weight of 2.5kg in 40 days) as well as giving them a better chance of avoiding disease in their crowded cages.
News reports about KFC’s supplier challenges had been circulating since November, but it was only this month that the company acknowledged that it hadn’t addressed the issue quickly enough. “We feel regretful for all the problems,” said Sam Su, chairman and CEO of Yum’s China operations. “I sincerely apologise to the public on behalf of the company.”
On December 20 the Shanghai Food and Drug Administration announced it had tested 19 batches of chicken received from Yum in 2011 and that eight had failed the antibiotic test. However, the regulator later added that samples taken from eight KFC outlets last month had proved fine.
While that suggests KFC has already weeded out the problem suppliers, Ben Cavender of China Market Research Group says the situation has been badly handled. “Yum said it dropped the suppliers in question,” Cavender told the Wall Street Journal, “but it wasn’t clear to consumers when it happened.” A lack of communication then bred uncertainty, with the antibiotic news going viral online and, in turn, hurting consumers’ confidence in KFC. That explains why at the end of November Yum announced a rare drop in Chinese sales (the latest estimate is that revenues will decline 6% in the fourth quarter), and last week it said the decline in the current quarter could be worse.
The problem has been made worse for Yum by its foreign status: consumers hold it to higher standards than local food firms. That means it faces much less margin for error on quality issues. Nor does it help that CCTV and other domestic media have picked up on the scandal, describing it as the “mutant chicken incident”. They have also questioned other fast food chains such as McDonald’s about their supply chains, while CCTV has also focused on a huge chicken supplier in Shandong, whose poultry is overdosed on antibiotics. The fear is that a lot of poultry firms are putting profit before quality. As the China Times reports, China has 30,000 poultry suppliers, which makes monitoring a fraught task.
Meanwhile the bad publicity for the industry shows little sign of abating. This week the Shanghai Daily reported on a fresh probe by food authorities in Henan province into a major supplier. The allegation this time: that the poultry firm was buying sick and dead chickens from farms, reselling the sick ones to fast food chains and processing the dead ones into animal feed.
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