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KFC’s Recovery in China is Going to Take Some Time

China’s food safety investigation into antibiotics found in chickens served by Yum Brands didn’t result in any fines or other enforcement action.

That’s the good news. The bad news for Yum Brands is that recovery is going to take longer than the company predicted and it’s going to put a longer squeeze on profits than it originally thought.

Yum Brands announced Tuesday that it now expects weak sales at its KFC units in China to continue into 2013’s first quarter with same store sales off 25 percent during the first two months of the year.

KFC stores in China open at least one year were said to be off about six percent in the final period of 2012.

Some chicken producers supplying KFC restaurants in China were targets of an investigation by the Shanghai Food and Drug Administration (FDA) into the misuse of antibiotics. Shanghai FDA called upon Yum Brands to strengthen its oversight of poultry supply chain practices.

The Wall Street Journal Tuesday reported that Yum Brands, publicly traded on the New York Stock Exchange, has followed up on an earlier prediction that its per-share growth would be up by 10 percent in 2013 with acknowledgement it now expects earnings per share to actually be off for the year because of its poultry problems in China.

Yum Brands has a huge presence in China with 5,000 restaurants in 800 cities, most KFCs.

While Shanghai FDA investigated, KFC’s came in for heavy criticism on China’s social media. In a telephone conference call with financial analysts Tuesday, Yum Chief Executive Officer David Novak promised that the restaurant company would eventually win back consumer confidence in China.

“We are applying our learnings and findings from the Shanghai FDA to further strengthen our QA processes,” he said. “Our customers expect high quality safe food and they feel that we have let them down. To restore consumer confidence in KFC, we will launch an enhanced product quality assurance program along with an aggressive marketing campaign shortly after the Chinese New Year.”

KFC’s problems began when state-run television (CCTV) on Dec. 18 aired a 60 Minutes-like expose on the Chinese poultry industry. “The report showed that a few poultry farmers were ignoring laws and regulations by using excessive levels of antibiotics in chicken,” Novak said. “Regrettably, some of this product was purchased by two poultry suppliers of KFC China.”

Then he said social media kept the issue stirred up.

“This onslaught of negative media coverage has been longer lasting and more impactful then we ever imagined, lasting over six weeks,” Novak explained.

After its announcements on Tuesday, Yum shares were off 4 percent, or about $2.50 per share, with the last posted trade coming in at $61.39 per share.

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