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Yum China overhauls supply chain, marketing

Yum China announced a new marketing campaign to highlight several of its planned changes for sourcing chicken.

Yum! Restaurants China, the 5,400-plus-unit division of Louisville, Ky.-based Yum! Brands Inc., began a campaign to reassure Chinese consumers of its food safety standards with an announcement on Monday that it has dropped more than 1,000 small producers of poultry from its supply chain.

Yum China also announced a new marketing campaign to highlight several of its planned changes for sourcing chicken for its KFC, Pizza Hut and Taco Bell restaurants.

Stating in a translated press release that “it is better to be safe than sorry,” Yum China chairman and chief executive Sam Su said the company’s purging of smaller chicken farmers, along with further investment in quality assurance, reporting and communications protocols, would speed up changes to the supply chain needed to turn sales around.

“The poultry industry is actually fairly advanced in its development when compared to other agribusiness segments in China,” Su said. “However, in comparison to more advanced economies, the poultry industry has not yet reached the same level of maturity and sophistication, and therefore we need to accelerate its evolution. Even though these 1,000 smaller chicken houses are only a tiny percentage of China’s total poultry farms, they can tarnish the image of the entire industry.”

Yum China has been the fastest-growing division for Yum Brands for several years, and last year it contributed more than 40 percent of the company’s annual operating profit. But a mid-December report by China’s state-run television network, CCTV, exposed a common misuse of antibiotics and other drugs among Chinese poultry farmers, and the report linked two KFC suppliers to such producers.

Yum swiftly announced that it had ended the partnership with the two suppliers, but negative publicity attached to the controversy has pummeled sales. In its fourth-quarter earnings announcement earlier this month, Yum Brands reported a 6-percent decrease in same-store sales in China for the period.

Chief financial officer Patrick Grismer disclosed that January same-store sales plummeted an estimated 41 percent at KFC and 15 percent Pizza Hut and are projected to drop 25 percent in the first quarter. He added that Yum would release monthly figures of that metric to investors and the public until same-store sales recover in China.

Focusing on progress

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For 2013, KFC China has adjusted its review process to rate supplier performance with a greater emphasis on food safety. The brand already had tested its poultry supplies voluntarily for years, but the protocol will be altered further to be more scientific and variable, Su said.

He added that Yum China would encourage new capital investments from local poultry suppliers and a growing presence in China from international powerhouse suppliers by favoring purchasing from those companies.

The company’s marketing campaign would encompass everything from TV commercials and tray liners to social media and special websites, including one in which the public could check and evaluate Yum China’s progress against the campaign’s food safety goals, he noted.

“We want to reassure our customers that our food is high-quality and perfectly safe to eat,” Su said. “Nothing is more important to us than food safety.”

Yum Brands chief executive David Novak said during the fourth-quarter earnings conference call that the company would stay the course in China and build another 900 restaurants in the country in 2013.

He added that, while Yum would need “the gift of time” to weather the current controversy, the company has bounced back from previous panics in China. In 2005, he noted, sales fell as much as 40 percent due to public fears over avian flu and a few menu items’ inclusion of a red dye that turned out to be carcinogenic. Yum reformed its sourcing, did damage control through public relations and built new restaurants through that crisis, and sales rebounded 28 percent the next year.

In addition to more than 4,250 KFC units and more than 825 Pizza Hut Casual Dining restaurants, Yum China also operates several hundred combined locations of Pizza Hut Home Service, East Dawning and Little Sheep.

Yum Brands operates or franchises more than 39,000 restaurants in more than 120 countries and territories.

Contact Mark Brandau at [email protected]
Follow him on Twitter: @Mark_from_NRN

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