WRAPUP 2-Yum cuts ties to owner of China meat plant after scandal

Wed Jul 23, 2014 7:00pm EDT

* OSI Group: China authorities inspected all other factories; no more problems found

* McDonald's shifts OSI business to inspected plants; Yum ends OSI relationship

* Five detained Shanghai Husi staff include head and quality chief -police

* Food-safety violations at Husi were company-led, not individual acts -watchdog

* Over 1,000 tonnes of suspect meat products sealed from OSI in China (Adds statements from Yum, McDonald's and OSI Group)

By Brenda Goh and Paul Carsten

SHANGHAI/LANGFANG, China, July 23 (Reuters) - Yum Brands Inc severed ties with OSI Group after Shanghai police detained five people from the supplier's China meat-processing factory at the center of a food-safety scare that has ensnared several major Western brands.

Shanghai police said on Wednesday the five individuals being held included the head of Shanghai Husi Food Co Ltd as well as its quality manager.

"Yum China has decided to immediately terminate all procurement from OSI China," including Shanghai Husi, Yum said in a statement.

OSI China and its Shanghai Husi business are part of Aurora, Illinois-based OSI Group LLC, which said in a statement that local Chinese authorities have inspected all of its other facilities in China and found no issues.

Based on that statement, McDonald's Corp said it was maintaining its relationship with OSI Group.

The world's biggest hamburger chain, which has just over 2,000 restaurants in China, said it would transfer its business in affected markets to Husi's new plant in the eastern central province of Henan. And, until that process is completed, McDonald's said it would continue to buy food from Husi's factory in the northern province of Hebei.

OSI Group Chairman and Chief Executive Officer Sheldon Lavin apologized to its China customers in a statement on Wednesday and reiterated that he has teams on the ground to address the problems.

"What happened at Husi Shanghai is completely unacceptable," Lavin said. "We will bear the responsibility of these missteps, and will make sure that they never happen again."

KFC and Pizza Hut parent Yum, McDonald's and coffee chain Starbucks Corp are among the global brands that pulled products from their outlets after the news broke that Shanghai Husi supplied expired meat to clients in China as well as in Japan, in the latest in a series of food scandals in the country.

Earlier, the official Xinhua news agency cited the Shanghai food and drug watchdog as saying that food-safety violations at Shanghai Husi were company-led rather than the acts of individuals.

In its statement, Yum said: "It is difficult to believe and completely unacceptable that the management of Shanghai Husi ... would oversee and organize illegal and dishonest operations."

Yum, which has 6,400 restaurants in China, also terminated its relationship with OSI in Australia and the United States. Yum said that OSI is not a major supplier and that ending the partnerships with OSI should not disrupt its business.

DIFFERENT STANDARDS

A Chinese TV report on Sunday set off a storm of controversy after it showed staff at the Shanghai Husi facility using meat that had expired and had been lying on the floor.

Huang Denggang, 20, worked as a night cleaner at that Husi plant, a modern warehouse compound in a Shanghai suburb, for more than a year, but does not plan to return when it reopens because of lower-than-expected pay and a medical claim.

He told Reuters on Wednesday that he had seen workers pick up raw meat from the floor and put it back into processing containers.

"The leader didn't say anything when you throw it back," he said at a local job agency where he works during the day.

Huang, who showed Reuters his Husi payslip as verification of his employment there, also said he had seen some workers handling raw meat without wearing gloves.

"If you wear gloves," he said, "maybe it slows you down if you want to pick up the chicken pieces because they're slippery." He added, however, that he did not work in that part of the factory.

Another Husi worker, who gave only the surname Zhang, said by telephone that he had worked on the production line, breaking up chicken into pieces, but had quit because of the low pay.

"When (raw meat) drops, they usually don't see it, and even if they do, it was fine to pick it up and put it back," he said. "There was an attitude of 'it doesn't really matter.'"

The former employees' comments contrasted with what one worker at another of OSI's food-processing plants in Langfang in the northern Chinese province of Hebei told Reuters. He said that rules there were very strict, all workers needed to wear special clothes, and unannounced spot checks were often held.

"The inspections are done by everyone: our own company, the government and also clients like McDonald's," said the worker, surnamed Wei, as he took a break at a nearby supermarket. He said the Hebei factory, which according to its website processes meat, vegetables and flour products, was still open for business despite government inspections.

DOCTORED RECORDS

Xinhua also cited Gu Zhenhua, deputy head of the Shanghai Municipal Food and Drug Administration, as saying that Shanghai Husi's controls systems and records for suspected products violated Chinese regulations.

In the Dragon TV documentary on Sunday, staff at the Shanghai Husi facility said they kept two record books on food products, one of which was doctored to be shown to anyone who came to audit the facility. According to the report, which claimed to show an inspection of the facility by McDonald's, Shanghai Husi staff learned of the visit a day in advance and made sure that only compliant products were being processed on the day.

The Shanghai food watchdog also said it had sealed more than 1,000 tonnes of suspected meat products from OSI in China and another 100 tonnes of products from various customers.

(Additional reporting by Ran Kim, Shimizu Ritsuko and Olivier Fabre in Tokyo, Adam Jourdan in Shanghai, Lisa Baertlein in Los Angeles and Tom Polansek in Chicago; Editing by Ian Geoghegan, Jilian Mincer, Lisa Von Ahn and Jan Paschal)

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