Expired meat scandal consumes value of fast-food companies along supply chain

On 20 July 2014, a major food safety scandal in China broke in the local and international media. Following a television investigation, Chinese authorities accused Shanghai Husi Food Co. (owned by US-based OSI Group) of intentionally selling meat beyond its shelf life. The food manufacturer had been supplying fast-food chain restaurants in China and Japan, including Yum! Brands, McDonald’s and Starbucks.

In the aftermath of the news, buyers quickly cancelled their orders from the Shanghai supplier and in some cases the OSI Group as a whole. Within days the OSI Group had also withdrawn all implicated products from the marketplace. Despite this, the negative news coverage rapidly hit fast-food sales in China, prompting a decline in the full-year earnings of fast-food restaurants as well as a drop in share prices.

Referring to the Shanghai incident in its August quarterly report, McDonald’s issued a warning that “As a result of the China supplier issue, the Company’s global comparable sales forecast for 2014 is now at risk.”

In a financial report released just days after the incident broke, Yum! Brands stated that “The result has been a significant, negative impact to same-store sales at both KFC and Pizza Hut in China over the past 10 days… it is too early to know how quickly sales will rebound in China and the corresponding full-year financial impact to Yum! Brands. However, if the significant sales impact is sustained, it will have a material effect on full-year earnings per share.” In its October quarterly report, Yum! said that “since July 21st, China Division has experienced a significant, negative impact to sales and profits at both KFC and Pizza Hut. While sales are rebounding, same-store sales continue to be negative.”

Financial analysis for July to October shows that the fall in sales had a substantial impact on the company share prices of Yum! and McDonald’s.
The companies recorded a fall in share price of 8.29% and 7.4%, and a drop in equity of US$3.6 billion and US$7.2 billion, respectively, between 18th July and 20th October 2014.

By November 2014, the value of Yum! and McDonald’s share prices and equity had risen again, although they still remained lower than that recorded before the scandal broke. Comparably, Starbucks, who were less visibly associated with Shanghai Husi Food Co., reported a less significant drop in equity of US$2.4 billion between 18th July and 20th October 2014. Furthermore, by November 2014, Starbuck’s equity value had risen to levels almost matching that prior to the scandal breaking.