By Laurie Burkitt, Jacob Bunge and Julie Jargon
BEIJING--The U.S. owner of a meat supplier in Shanghai
apologized and promised a swift response Monday after McDonald's
Corp. and Yum Brands Inc. suspended purchases in China in the wake
of allegations it sold expired chicken and beef to restaurants.
McDonald's and Yum, parent of KFC and Pizza Hut, said they
halted orders from Shanghai Husi Food Co., owned by OSI Group Inc.
of Aurora Ill., after local Chinese media reported that Shanghai
Husi was selling meat products beyond their shelf life.
China's Food and Drug Administration announced it halted on
Sunday all business activities of Shanghai Husi and that it
launched a nationwide investigation of the company.
OSI, a longtime supplier to both fast-food companies, said its
executives were "appalled" by the report and apologized to its
customers and consumers. The company "has formed an investigation
team, is fully cooperating with inspections being conducted by
relevant, supervising government agencies, and is also conducting
its own internal review," it said.
OSI said it thinks the media report showcased an "isolated
event" but "takes full responsibility for the situation and will
take appropriate actions swiftly." A spokeswoman declined to
comment further.
In a statement on its official microblog account posted late
Monday, Starbucks Corp. said it pulled a chicken applesauce panini
available at some of its Chinese stores because its supplier used
chicken ingredients from Shanghai Husi. It also pledged to adhere
to its global quality standards as well as Chinese law. "We put
quality and safety first," it said.
The episode is the latest in a long series of food-industry
flaps in China that have prompted calls for improved safety
standards and oversight. Concerns about the conditions of domestic
hog farms and the use of antibiotics in poultry production have
spurred China's government to push modernization in the meat
sector--moves that often include Chinese industry turning to
Western companies for raw materials and expertise.
Closely held OSI, which had $6.1 billion in sales last year and
ranks among the largest U.S. meat processors, has been active in
China since 1991 and currently operates in eight cities there,
supplying meat as well as produce. OSI began supplying McDonald's
Chinese operations in 1992 and Yum in 2008, according to the meat
processor's website.
Meat-industry experts said that expired meat likely represented
a quality problem, rather than a food-safety threat. However, the
perception of lax quality control within a key supplier to major
restaurant chains was expected to resonate with Chinese consumers,
many of whom prize imported brands and foreign labels because these
are believed to maintain higher standards than their Chinese
rivals.
"It will raise questions about U.S. food processors in general,"
said Michael Doyle, professor and director of the Center for Food
Safety and Quality Enhancement at the University of Georgia.
"Perception is reality."
McDonald's spokeswoman Heidi Barker said Monday that if the
practices described in media reports were confirmed, they would be
"completely unacceptable to McDonald's."
The company said it has switched to other suppliers, and was
cooperating fully with authorities investigating the issue.
McDonald's, which has more than 2,000 outlets in China, has been
trying to solidify its standing with Chinese consumers. The company
faced tough times in the country last year, with sales at stores
open 12 months or more down 3.6% compared with 2012.
The development could be a bigger setback for Yum, which has
just begun to recover from food-safety issues that had dogged the
company for more than a year.
A Chinese media report in November 2012 alleged that two KFC
chicken suppliers had been using growth hormones and excessive
levels of antibiotics to help chickens grow faster. The claims,
which quickly spread online, tapped into widespread consumer fears
in China over food safety.
Government officials investigated, and recommended Yum
strengthen its poultry supply-chain practices, which Yum said it
had done. Still, Yum's sales in China struggled for much of last
year, further hurt by a bird-flu outbreak last spring. The company
has staged a recovery recently with new menu items and marketing
campaigns. Last week, Yum reported that in the second quarter of
this year, same-store sales in China rose 15%, driven by 21% growth
at KFC. Sales in China account for more than half of Yum's
revenue.
Yum said its decision to stop buying meat from Husi would cause
temporary supply shortages for two breakfast products at some KFC
restaurants and a beef product at Pizza Hut outlets. Yum said it
"will not tolerate any violations of government laws and
regulations from our suppliers."
Yum shares on Monday fell 3.3% and McDonald's shares fell
1.4%.
OSI, which traces its roots to a suburban Chicago meat market
founded in 1909, has built its business on processing huge volumes
of meat for restaurant chains that require a steady, consistent
supply around the world. In 1955, OSI struck what would become a
lasting alliance with McDonald's, agreeing to supply the
then-fledgling burger chain with beef patties.
China has been a major focus for OSI as it seeks to keep pace
with the demands of customers targeting the world's largest market
for chicken and pork. Along with McDonalds and Yum, OSI supplies
Chinese operations of Burger King Worldwide Inc., Subway, Papa
John's International Inc. and Starbucks Corp., according to
OSI.
OSI last year opened its ninth and 10th plants in China, part of
a $750 million investment to become one of China's biggest poultry
producers, capable of processing more than 300 million chickens per
year through complexes that include hatcheries, farms, feed mills
and slaughterhouses.
The same approach has been adopted by rivals such as Tyson Foods
Inc. of Springdale, Ark., the largest U.S. meat processor. However,
Tyson earlier this year said its expansion in China would slow as
consumers' demand for poultry in the country cooled following
recent outbreaks of avian influenza.
Write to Laurie Burkitt at laurie.burkitt@wsj.com, Jacob Bunge
at jacob.bunge@wsj.com and Julie Jargon at julie.jargon@wsj.com
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