Editor’s note: the following article was translated and edited from a report published on gemag.com.cn. The report discusses KFC’s recent "instant chicken" scandal and the parent company, Yum! Brand’s increasing troubles competing in the Chinese market.

Although Chinese consumers are typically a patient bunch, it seems that they draw the line when it comes to matters of food safety. The 2008 Chinese Milk Scandal—when milk and infant formula companies were exposed for intentionally adding the dangerous melamine base to their products to artificially increase the protein content, leading to six recorded infant deaths and a reported 300,000 victims—left an indelible impression on the minds of Chinese consumers. Several years later, in 2011, after the Ajisen Ramen chain was exposed for using concentrates and flavoring powders instead of pork bone stock to make its soup bases, sales dropped 35-40% in a two-month period. This time around, the target of public wrath is none other than U.S.-based international fast food purveyor, Yum! Brands, the owner of such fine dining establishments as KFC and Pizza Hut.

KFC's "instant chicken" scandal

Last December, CCTV reported that excessive amounts of an antibiotic medication had been added to the chicken feed used at the Shandong Liuhe Group, a supplier of raw chickens to KFC restaurants in China. On December 20, the Shanghai Food Safety Office confirmed that although tests for antibacterial and glucocorticoid drugs were in line with government regulations, eight batches of raw chicken samples taken from the supplier between 2010-2011 had tested positive for the antiviral medication Amantadine. (The medication was likely added to reduce the death rate and shorten the growing period of the chickens). Yum! Brands remained silent on this issue until January 11, when it formally apologized for what has since been labeled the "instant chicken" scandal, admitting that it had known about the issue but had not reported it to the authorities, instead opting to keep their findings secret and terminate Liuhe Group's contract in 2012 after they'd failed to rectify the situation. 

KFC's performance in China not so "finger lickin' good" anymore

Even without the recent scandal to tarnish its reputation, Yum! China (the regional branch of Yum! Brands) was already facing difficulties maintaining its break-neck performance over the next decade in the country’s increasingly crowded fast-food industry. According to its 2012 Q3 earnings report, Yum! China is responsible for 55% of the company's total sales. On November 29, 2012, Yum! Brands warned its investors that Yum! China's Q4 earnings had fallen 4%. And in the weeks that followed, Yum! Brands’ stock price fell by 11%. Clearly something other than food scandals is amiss with the company.

In years past, Yum! Brands has been praised for their strong "rebranding" of products to cater to local tastes. It was the first to add basic items like youtiao, congee and rice dishes to the menus at its Chinese KFC and Pizza Hut locations, and it was also the first to add more experimental items as well (think of all the weird creations posing as pizza at Chinese Pizza Hut locations)—both of which Chinese customers have loved. But will this "innovative" business model lead to another decade of success?

The declining of brand image is a serious problem facing KFC today. Last year, its competitor McDonald's, despite lacking any market research to suggest that the strategy would be successful, began renovating its restaurants and heavily promoting new in-store "McCafés". The strategy turned out to be hugely successful, no doubt increasing the company's brand image with Chinese consumers. At the same time, the addition of coffee beverages and desserts to the set menu provided the company with new ways to increase the profit margins at Chinese locations.

Conversely, KFC has continued to emphasize its "Chinese-style" menu, while also focusing on opening franchises in fourth and fifth tier cities. Consequently, any future increases to profit margins for the brand will be solely based on the cheap labor costs of low tier cities and favorable rental rates given by local governments, not on attracting new customers to existing locations.

Problems trying to establish a successful Chinese cuisine competitor

Under Su Jingshi, the chairman and chief executive of Yum! China, the company has also tried to create a successful fast food restaurant model for strictly Chinese cuisine. "East Dawning" (东方既白), a fusion of the KFC "innovative" business model with Chinese cuisine in a cafeteria-style restaurant setting (bearing some resemblance to a typical Chinese home), has been the company's biggest experiment with Chinese fast food to date. But seven years and 29 restaurants later, the experimental brand has been deemed a major failure, with the restaurant in the Beijing Capital International Airport shutting down in August 2012. According to Zhao Tianliang, the founder of the Tianliang Restaurant Consulting Agency, the biggest problem with East Dawning was that it’d never found a way to leave any sort of lasting impression with consumers.

In light of that failed experiment, the performance of Yum! China's newly acquired hot pot fast food chain, Little Sheep (小肥羊), has, for industry insiders, turned into a major indicator of whether Yum! Brands can truly succeed in China’s incredibly competitive Chinese fast food market.

But from how things are currently looking, Haidilao (海底捞) hot pot restaurants are thus far greatly outperforming Little Sheep restaurants. And at the same time, Chinese-owned "Western" restaurant chains are constantly learning and innovating themselves. For example, "Grandma's Kitchen" (外婆家) restaurants have seen strong profit margins in recent years and are often packed with satisfied patrons. Yum! Brands would do well to learn from its competitors.
 

Source: gemag.com.cn

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Keywords: Yum! China problems fast food industry in China KFC instant chicken scandal