China Consumer, Talking Point

Off the menu

Husi food scandal in Shanghai creates havoc for McDonald’s and KFC

A sign at a McDonald's branch alerts costumers that there is only a limited menu available after a tainted food scandal involving Chinese supplier Husi Food Co Ltd, in Shanghai

A note informs McDonald’s customers there’s no meat available

Processed meat products are, by their very nature, deceptive beasts. Butchers may have began crafting sausages as far back as Neolithic times, and in more recent centuries they have often been made with the bits of meat or offal that might otherwise be shunned.

That sense of uncertainty lives on today in terms like “mystery bags” – Australian slang for sausages. But occasionally the protein-based trickery goes too far.

The latest example comes from Shanghai, where Husi, a meat processor plant owned by Illinois-based food giant OSI was accused of incorporating out-of-date ingredients into chicken nuggets and beef patties bound for fast food giants like McDonald’s and KFC, as well as other firms.

The revelations came to light via hidden cameras at Shanghai’s Dragon TV, which broadcast the scandal on July 20. The 20-minute exposé showed staff handling meat that was obviously rotten. There were also emails from Husi management asking office staff to extend the expiry period of beef already eight months past its use-by date.

“This is not normal, it is green and it smells,” a worker complains, as he tips chicken meat into a grinder. Another worker is heard explaining to the undercover reporter that every batch of product has at least 5% expired or recycled meat – the latter taken from products sent back by the original clients.

The footage ends with Shanghai’s food and drug authorities raiding Husi after Dragon’s tip-off, later impounding its meat and closing the factory.

And the reaction in China?

The story has dominated both the traditional and the social media over the past two weeks.

Yum Brands, which owns the KFC and Pizza Hut restaurant chains, has announced it will no longer buy produce from Husi’s parent company OSI in China (or just as damagingly, in Australia and the US). And on July 29 Burger King followed suit, saying it would stop purchasing OSI products in China.

McDonald’s has said it will continue to source from OSI and Husi on the basis that Husi’s seven other plants have been given a clean bill of health.

However McDonald’s, KFC and Burger King have all found themselves short of stock as a result of Shanghai Husi’s closure and the recall of its products. At the time of writing, McDonald’s had no hamburgers or chicken available on its menus in northern and central China. “A hamburger restaurant without hamburgers! It’s a joke!” a woman at one of the chain’s Beijing outlets scoffed to WiC earlier this week.

Shanghai Husi also supplied chicken to Starbucks in China, as well as chicken nuggets to McDonald’s in Japan. It is also alleged that it was a supplier to Papa John’s and 7-Eleven.

So how and why did this happen?

So far there is no evidence to suggest that the scandal extends beyond Husi Shanghai to the rest of the Husi’s operations in China or further afield to OSI’s headquarters in the US. The emails ordering the doctoring of expiry dates were written in Chinese and appear to have been sent by a member of the Shanghai plant’s management team. The only people arrested in connection with the scandal thus far are five employees of that branch.

OSI’s owner and CEO Sheldon Lavin responded to the PR disaster with a contrite press conference this week, telling media that what happened at Husi Shanghai was “completely unacceptable.”

In remarks that went down reasonably well in the local press Lavin went on to say:  “I will not try and defend it or explain it. It was terribly wrong and I am appalled that it ever happened in the company that I own.” OSI has sent investigators and a new team of managers to Shanghai to find out what went wrong.

The Dragon TV reports offered little explanation as to why Husi Shanghai might have felt the need to mix rotten meat into its product range. The company was not, it appears, buying meat that was already ‘off’. Rather it was allowing beef and chicken to pass its expiry dates in its own freezers.

An interview with the former employee who alerted Dragon to the plant’s stomach-churning behaviour suggested that the practice was designed to save money but he didn’t elaborate how. One theory mentioned by the Financial Times is that the firm bought in bulk when prices were low to keep costs down but then held surplus meat that it couldn’t sell on to customers within legally-acceptable deadlines.

The whistleblower’s allegations chime with those made by Wang Donglai, a former staffer of Husi Shanghai, who took the company to court in June for damaging his own health. Wang claimed he had fallen ill after being exposed to chlorine during meat-cleaning and that he had been required to do “unethical work” by changing the use-by dates on various packets of meat. Somewhat perversely, Wang lost his case when it was heard a couple of months ago. It is not clear if he then became Dragon’s insider source.

Chinese newspapers say part of the reason that Husi’s practices took so long to uncover is that China’s own Food and Drugs Administration (FDA) carries out too few checks. Those that do take place aren’t rigorous enough. “The FDA’s method of checking is questionable. Their pre-warnings [that they will show up] turn the checks into a formality,” Guangming Daily complains. Sina Finance agreed, suggesting that “a stronger, independent FDA” was required.

Corruption was also a worry for Dragon TV when it set out to expose Husi’s practices in the first place. “Launching an undercover investigation was a tough decision. We had to make sure this story was in the public interest and this truly was the last resort. We also needed to confirm that [a rival] company wasn’t trying to pay off our reporters,” an executive with the Shanghai Media Group, parent company of Dragon TV, told the Shanghai Observer.

Media outlets have been using Dragon’s story to illustrate the role that journalists play in safeguarding the public’s interests. The current case might even be likened to a modern day version of Upton Sinclair’s novel The Jungle, which exposed similarly grim practices in the US a century ago.

“If there was no media attention I don’t know when these hidden issues would have been uncovered or how much public health and safety would have continued to be violated,” a commentator from Xinhua warned.

So who are the winners and who are the losers?

It is clear that OSI and its clients, both current and former, will have to work to win back their customers’ trust. As the only restaurant chain not to have jettisoned OSI completely, McDonald’s is the most likely to find that a challenge. But despite calls from some netizens for the fast food group to have its Chinese licences revoked, its restaurants seemed pretty busy this week. One woman who turned up at Beijing’s Chaoyangmen Wai outlet told WiC that she was aware of the scandal but that she felt it was now being dealt with. “Arguably, McDonald’s will be one of the safer places to eat after this,” she theorised.

Another customer said the chain’s low prices and speedy service times would always appeal to him.

However, the Wall Street Journal reports that Yum has announced it experienced a “significant, negative impact” on same-store sales at KFC and Pizza Hut in the last 10 days with the “extensive news coverage” having “shaken consumer confidence’. The company added it was “too early to know how quickly sales will rebound in China”.

McDonald’s and KFC have come through scandals in China in the past: in 2005 KFC was found to be using a banned carcinogenic colorant called Sudan 1. In 2012 chicken products at both KFC and McDonald’s were found to have been pumped up with antibiotics and growth hormones.

But if Husi’s practices do drive customers away from the Western brands, analysts say that fast food rivals such as Zhen Kong and Yong He Dawang, which provide Chinese-style fare, could benefit most.

Of course, cynics might well ask what could be happening elsewhere in the industry if a firm like OSI – previously a supplier with a long history and good reputation – is reported to engaging in such unprofessional behaviour.

The biggest losers are almost certainly going to include Husi and its employees in Shanghai, especially anyone found guilty of ordering the food safety violations. A report from Xinhua cited a local official working in the city’s food safety watchdog who claimed Shanghai Husi’s “illegal behaviour” was “an organised arrangement by the company”, rather than down to individuals. But the fines imposed on those companies that have broken food safety rules in the past have been laughably low. Individuals have received heavier penalties. A man who laced frozen dumplings bound for Japan with pesticide was sentenced to life in prison earlier this year, for example.

Calls for Husi and its American parent to face huge fines – even if it is individuals who are found at fault – have been widespread in the media and online.

“Food safety is a major issue that concerns everyone. To ensure food quality, we have to give Husi the most severe punishment as a warning to all. Only in this way can we deter other potential offenders,” Legal Daily suggested.

Part of the problem is that fines for malpractice are currently capped at 10 times the value of the products deemed to be unsafe. New legislation is planned that would raise the limit to 20 times (although many question if that is enough).

Another response to the Husi scandal is that it is part of a recent wave of exposés about foreign companies. Certainly, the news plays into growing resentment that foreign companies are treating their Chinese customers less well than those in other countries. “There is the McDonald’s that exists in the rest of the world and the McDonald’s that exists in China,” one contributor to Sina Weibo complained.

But another netizen compared the focus on McDonald’s to the treatment meted out to Apple, Nikon and Volkswagen – each a foreign brand accused of wronging Chinese consumers by state broadcaster CCTV.

Many newspapers, especially those close to the government, were happy to maintain the focus on foreign involvement, perhaps to take the focus off the FDA’s failure to prevent the wrongdoing. “When we’re punishing Husi, we can’t let McDonald’s go. It’s every company’s responsibility to guarantee its products. Husi was using expired food for a long time, which shows that Husi and the foreign fast food companies were either in the same team or that they don’t pay enough attention to their suppliers,” stated a commentary in the Economic Times.

Poor timing for WH Group?

The revelations emerged just as meat producer WH Group brought its IPO back to market, having pulled the firm’s first listing attempt in late April.

But the food safety scares surrounding Husi failed to dent interest in the pork producer’s share offering. In fact, the Hong Kong deal went so well the retail tranche of the $2.05 billion IPO was oversubscribed by 55 times.

If you trust the wisdom of markets, that would tend to suggest that this latest Chinese food scandal might blow over faster than many might anticipate…

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