KFC Hit By Double-Whammy In China: First Additives, Then Bird Flu

First Yum Brands' (NYSE:YUM) KFC was accused of lacing its chicken with excessive chemicals in China. As soon as it was cleared of wrongdoing on that, nine deaths from a new strain of bird flu knocked sales down again, according to a Reuters report on Thursday (April 11).

None of the bird flu deaths were connected with KFC stores, and some of the chain's outlets now display World Health Organization signs saying that cooked chicken is safe to eat. But fears about poultry are taking their toll on restaurants across much of China. In Shanghai, some restaurants and schools have taken chicken completely off the menu, and even if the flu scare is over soon, it could take a year or more for consumer confidence in poultry's safety to recover.

In a filing on Wednesday (April 10), Yum said KFC's same-store sales for March fell 16 percent from the year before. (Sales at KFC's Yum stablemate Pizza Hut, on the other hand, rose 4 percent.)

For KFC, the problem isn't just bird flu, said retail analysts in Shanghai. When KFC was accused of over-using food additives, the state-run Xinhua news agency accused the chain of "arrogance," and local quick-service restaurant (QSR) chains are also beginning to compete effectively with Yum, which is the biggest foreign QSR operator in China. In turn, China generates more than half of Yum's global sales.

In Wednesday's filing, Yum said it plans to educate consumers that properly cooked chicken is safe to eat, as it has during past flu scares. But it may be time for something a little more radical. That "arrogance" accusation, even when KFC was actually innocent, suggests that there's more than a little local resentment against the fast-food foreigner. That may be the underlying problem KFC needs to address.

For example, it turns out that product standards for KFC vary significantly in different markets around the world. The tight standards in U.S. stores, which specify exactly how the chicken is cooked, how it should look and how long it can sit under heat lamps, aren't maintained in other parts of the chain worldwide. Would the kind of promotional videos that KFC once used in the U.S. to make clear how long chicken is cooked, and that quality and safety are high priorities, help improve the product's reputation in China?

That's hard to say unless KFC tries it. But showing customers videos of pressure-cooking chicken to the right shade won't be enough unless those techniques are consistently used in the restaurants. That's likely to cost the chain more, both in training and in product preparation time. But that may be the price for KFC to stay ahead of its competitors.

For more:

-See this Reuters story

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