This is just not Yum Group's (NYSE:YUM) year, at least when it comes to China. First came the bird flu scare, which frightened many customers away from Yum's KFC restaurants. Now Yum's Little Sheep hot-pot restaurants have been accused of buying "mutton" that's actually made from fox, mink and rat meat—and Yum is having a hard time making its denials stick.
"There is no evidence, none whatsoever, of any adulterated product anywhere in our system," a Yum spokesman told Reuters, adding that "out of an abundance of caution," the chain was verifying with its two meat suppliers that no fake mutton has entered its supply chain.
The problem: If a government website is to be believed, there is such evidence. Yum's statement to Reuters came after food safety inspectors in Shanghai raided a wholesale market last Friday (May 3) and at one supplier found packages labeled "New Zealand mutton" that had no date or list of ingredients. A report of the raid on the website of the Shanghai Municipal Food Safety Committee said invoices indicated that some of the meat had been sold to Little Sheep outlets. Yum says that supplier doesn't provide any of its meat.
Who's right? Food supply chains are notoriously hard to police, as Ikea learned with its horse-tainted meatball problem. Then again, restaurant names—especially for chains—are also hard to police, so an invoice for "Little Sheep" could be for a restaurant that Yum has nothing to do with but is just piggybacking on the brand's reputation.
Then there's something a little more subtle: Government officials know that Yum is a U.S.-based company, and that Yum gets more than half its worldwide sales from China. That makes Yum an easy target for "mistakes" that make it look bad. If the food inspectors discover that invoice wasn't for a Yum outlet after all, it's no skin off their collective noses, and they know Yum would pull out of China and walk away from all that profit.
Whether it's an honest mistake, an intentional slap or an actual problem with Little Sheep's supply chain, the damage to Yum's reputation in China will still be there. Meanwhile, many KFCs are still largely empty due to ongoing bird-flu worries—and 2013 isn't even half over.
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