Yum says dropped China chicken suppliers before review announced

Tue Jan 8, 2013 3:35pm EST
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By Lisa Baertlein

LOS ANGELES (Reuters) - KFC parent Yum Brands Inc (YUM.N: Quote) said it had stopped using chicken from suppliers in China that are now under a government investigation before the review was even announced, and analysts said they expect the company to recover from the business hit in its biggest market.

Yum, which gets more than half of its overall revenue and operating profit from China, on Monday warned that bad publicity from a Chinese government food safety review of chicken suppliers hit its sales in China harder than expected in the latest quarter.

While consumer backlash sent sales at established China restaurants down sharply at the end of December, Wall Street analysts expect that Yum's business will rebound as negative media coverage wanes.

"Precedent suggests Yum can weather this type of incident," Bernstein Research analyst Sara Senatore said.

In 2005, Yum pulled some products from its KFC restaurants in China because they contained "Sudan Red" dye, which was banned from use in food due to concerns it could lead to an increased risk of cancer.

Yum's China sales took a similar hit from that incident, but rebounded in the subsequent months, Senatore said.

Yum says it is cooperating with the Chinese government's review of two poultry suppliers - Liuhe Group Co. and Yingtai Food Group Co - that provided chicken with unapproved levels of antibiotics to KFC. Those suppliers "represent an extremely small percentage of product to KFC", according to Yum.

The company had stopped sourcing from Liuhe in August and has halted purchases from a problematic Yingtai plant, Yum spokesman Jonathan Blum told Reuters on Tuesday.   Continued...

A woman walks past a KFC restaurant in Wuhan, Hubei province in this December 18, 2012 file photograph. REUTERS/Stringer/Files