KFC has 4,000 outlets in China and derives 50% of its revenues from China. In December 2012, a food scandal hit the media. State-Owned CCTV alleged poultry farms supplying KFC used excessive among of antibiotics and growth hormones. The Government announced an investigation of two KFC poultry suppliers, Liuhe Group and Yingtai Food Group. Within the month, micro bloggers posted 3 million negative comments. January 2013 same store sales plummeted 37%. February continued to decline, with a two month average of a 25% loss of sales. In spite of subsequent findings by the Shanghai Food and Drug Administration that the levels of antibiotics and steroids in KFC food were safe; and KFC’s dismissal of the suppliers, the public trust in the Company was broken. KFC shares took a 7% hit. By March, there was a 2% increase and a long way ahead for recovery.
Despite an official apology; an online poetry competition to highlight food safety; and a declaration that KFC would not use small poultry suppliers that have not modernized their operations, KFC faces the scorn of an outraged customers. “I strictly won’t eat KFC, even though they apologized. Perhaps they were pressured to apologize and will keep breaking the rules anyway, posted Tiger on Weibo. Or another, “To choose the best chicken for us? KFC, you are such a liar! Have you ever really apologized to us, from Cherrybobo on Weibo. For a finale: Ninibababa denounces KFC, saying “We should get KFC out of China.”
According to David Mahon, Beijing based Managing Director of Mahon China investment management, “The response from YUM (KFC parent Company) has been somewhat restrained”. KFC has not announced specific actions to counter the continuing barrage of negative comments, though they are lessening.
One option is to let matters ride and depend on time and PR to restore sales. After all, KFC has a large base of loyal consumers, many of whom defended KFC on Weibo, and 3,000 operating locations. The problem is that some number of their customers will shift a share of their consumption to beef QSRs (Quick Service Restaurants). MacDonald’s and Burger King have good reputations, for the moment, and the Chinese are now consuming more beef than Americans. At a crowded Burger King outlet, Grace, age 25, said, “I think chicken is unsafe nowadays, so I prefer eating beef instead.”
How does a foreign QSR like KFC in China maintain or recover trust in a country with 200 million bloggers? China’s Government food safety regime has a long way to go before there is a general domestic trust in meet safety. The U.S. meat industry is consolidated and the U.S. Government has meat inspectors at operating plants.
China does not yet have a consolidated meat industry. Supply is fragmented. It is impossible for the Chinese government to place inspectors at every small point of production. Hence, the logical Chinese distrust of food safety. Their distrust is primarily structural, although a case of official bribery from dishonest producers adds to distrust. No amount of PR by KFC can offset this current ad near term administrative problem. At some point in the future, another allegation of unsafe chicken will be made and the bloggers will go to town and drive down sales and share value.
The solution to nullify this problem is not PR, which is can only mitigate, at best. KFC needs a corporate social responsibility program to become its own surrogate food safety inspector. It cannot wait for the Chinese Government to catch up to Western methods and public budgets for meat inspection. It can only gain and sustain trust if it assumes the corporate social responsibility for on-site inspection of its meat supply.
This approach is costly and has to be programmed into the KFC business model in China. It requires a publicly announced plan sand budget to identify its meat suppliers and hire and train onsite inspectors. With its massive revenues in China, it can probably figure out how to do this.
If KFC makes a business model change, not just PR, the Chinese public will respond positively. KFC could probably get Government support for such a step, since it shifts costs to the private sector; and also sends a message to other QSRs to do the same.
If KFC critically weighs the astonishing fact that 50% of its revenues come from China, they will realize that trust is not a PR problem, but a business model problem. In developing countries and emerging markets it is the corporate social responsibility of large foreign food companies to be Para-government food inspectors.
March 13, 2013