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Yum Counters Allegations in China

YUM MCD

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According to Reuters, Kentucky-based Yum! Brands Inc.’s (YUM - Analyst Report) operating unit KFC recently cleared allegations regarding its chicken quality in China. Food safety regulators in Shanghai assured that the antibiotics and steroids used in KFC chicken is within the restricted levels.

However, Shanghai Food and Drug Administration (SFDA) said that eight out of 19 chicken samples that were sent for examination in 2010 and 2011 contained a very high amount of antibiotic named amantadine. Amantadine is mainly considered as a medicine for Parkinson's disease.

On December 18, China’s state television CCTV reported that two poultry farms in the Shandong province of China that supplied chickens to KFC and competitor McDonald’s Corp. (MCD - Analyst Report) had fed chicken with unapproved levels of antibiotics. The SFDA investigation followed soon after. Yum! Brands’ share price took a beating after the announcement of the news.

In a recent SEC filing, the company has stated that it is always highly concerned regarding the safety of its food products and it will be assisting the Chinese government in its investigation to resolve this problem. The company believes that this issue will not affect its product supply as these suppliers provide a very small percentage of products to KFC. Although the company did admit that, the negative publicity hurt its sales in the past few days. As of now, management expects that the China division’s same store sales may decline 4% in the fourth quarter.

This is not the first time that the company has faced such an accusation. Earlier in February 2011, the company’s subsidiary Taco Bell was charged that its “seasoned ground beef” violated the beef standards of the U.S. Department of Agriculture (USDA). The company was alleged of not having enough beef in its product as promised by the "taco meat filling" commercial and instead the company was mostly using fillers.

However, the company countered the accusation saying that they used 100% USDA-inspected beef, which was then cooked in its proprietary blend of seasonings and spices. Taco Bell also added in its defense that its product contained 88% beef as opposed to allegations of only 35%.

Yum! Brands currently carries a Zacks #3 Rank (short-term Hold rating).

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