Yum cutting some supplier ties after China food scare

Mon Feb 25, 2013 5:59pm EST
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BEIJING (Reuters) - Yum Brands Inc (YUM.N: Quote) said on Monday it will stop using more than 1,000 slaughterhouses in China as it moves to tighten food safety and reverse a sharp drop in business at KFC restaurants in its top market after a scare over contaminated chicken.

Diners began avoiding Kentucky-based Yum's nearly 5,300, mostly KFC, restaurants in China in December after news reports and government investigations in the Asian country focused on chemical residue found in a small portion of its chicken supply.

Yum was not fined by Chinese food safety authorities, but its restaurant sales in the country dropped and have yet to recover. As a result, Yum warned this month that it expected 2013 earnings per share to contract, rather than grow.

Yum said it would end ties with smaller chicken suppliers that have not modernized their operations.

"This is a public problem. Even though China has rules on use of additive products, we very much regret that some people still operated while breaking those rules," Yum China Chairman and Chief Executive Sam Su told a news conference in Beijing.

Su declined to give specifics on other efforts to shore up the safety of the company's food supply in China or its plans to lure diners back.

Yum gets more than half of its overall sales from China, the world's fastest-growing major economy.

The scandal has been a blow to the company, which has a reputation for serving safe, high-quality meals in China, where food contamination is a chronic problem.

"This is going to be quite a management task for (Yum) in terms of their reputation," said David Mahon, managing director of Mahon China, an investment management company that advises multinational companies that operate in the Asian country.   Continued...

A woman walks out from a KFC restaurant as she speaks on her mobile phone in Wuhan, Hubei province, February 5, 2013. REUTERS/Stringer