(Adds analysts' comments, updates shares)
* Yum says China meat scare impact "significant, negative"
* Yum shares fall almost 7 pct on Thursday
* China, HK diners say likely to visit chains less
* ... But still attracted by low prices, a place to meet
By Lisa Baertlein
July 31 A food safety scare in China is testing
local consumers' loyalty to foreign fast-food brands, including
McDonald's Corp and Yum Brands Inc, which owns
the KFC and Pizza Hut chains.
Yum said on Wednesday that the scare, triggered by a TV
report earlier this month showing improper meat handling by a
supplier, Shanghai Husi Food, caused "significant, negative"
damage to sales at KFC and Pizza Hut restaurants over the past
10 days. "If the significant sales impact is sustained, it will
have a material effect on full-year earnings per share," Yum
said in a regulatory filing.
Shares in Yum, which counts China as its No. 1 market,
tumbled nearly 7 percent on Thursday.
At least three brokerages cut their profit estimates for Yum
for 2014 and 2015.
RBC analysts said Yum's China sales could be hurt 10-15
percent for 6-8 weeks, and cut their price target to $85 from
$94. UBS analysts said the initial consumer response was worse
than feared, and the company should reinstate reporting monthly
figures to reduce uncertainty.
Officials from McDonald's in China and Hong Kong have not
responded to requests for information on the impact on sales
from the scandal, but McDonald's Holdings Co (Japan) Ltd
on Tuesday scrapped its full-year earnings guidance
after the China scare forced it to switch to alternative chicken
supplies. A McDonald's Japan executive said sales had dropped
15-20 percent on a daily basis due to the scare.
Both McDonald's and Yum are looking to China - where
consumers see foreign brands as offering better food quality -
for long-term growth given the size of its population, growing
middle class and rapid economic growth.
"Both of these stocks are banking heavily on China for their
future growth," said Richard Brubaker, an adjunct professor at
the China Europe International Business School and founder of
the Collective Responsibility consultancy. "For Yum, this is a
problem because it has a history of problems in China. For
McDonald's, it's the sheer size of the problem and the inability
to get product."
Yum, which has nearly 6,400 restaurants in China, had just
begun to see its restaurant sales there recovering from a slide
last year due to an avian food outbreak and a previous food
safety scare. Yum has cut its global ties with OSI Group LLC
, the U.S. parent of Shanghai Husi Food. Yum said OSI
was not a major supplier and the move had "minimal disruption"
to the availability of menu offerings in China.
McDonald's, which has more than 2,000 restaurants in China,
has had a long relationship with OSI and was more dependent on
the supplier than Yum. Many McDonald's China outlets have been
hit by meat shortages since the company ended its relationship
with OSI there.
Around two-thirds of the more than five dozen consumers
Reuters reporters spoke to in Shanghai, Beijing and Hong Kong on
Thursday said they would scale back their visits to McDonald's,
at least for now.
"For people like us, McDonald's and KFC are places to meet
friends," said Yao Nanfang, a 16-year-old student in a shopping
mall in central Shanghai. "We'll still go to McDonald's, but
we'll order fewer meat products."
Diners in Hong Kong also said they were likely to eat less
frequently at McDonald's, but noted that the chain's low prices
made it hard to give up.
"I come to McDonald's less often now, but I won't completely
stop coming because it's so much cheaper than other
restaurants," said Nan Tang, who says he eats at McDonald's
twice a week.
In Hong Kong, McDonald's has ended a promotion of its
chicken McSpicy burger and shifted a membership program away
from offering discounts on McNuggets, which it is not currently
Following the TV report that alleged workers at Shanghai
Husi Food used expired meat and doctored food production dates,
regulators closed the plant on July 20. Police have detained
five people including Shanghai Husi's head and quality manager.
Food safety has been a big concern for Chinese consumers
after dairy products tainted with the industrial chemical
melamine sickened many thousands and led to the deaths of six
infants in 2008.
Yum shares were down 5 percent at $69.17 in afternoon trade
on the New York Stock Exchange.
McDonald's shares were down almost 1 percent at $95.08.
(Additional reporting by Sruthi Ramakrishnan in Bangalore,;
James Zhang, Emily Chung, Nikki Sun, Donny Kwok and Clare;
Baldwin in Hong Kong, and Shanghai and Beijing newsrooms;
Editing by Lisa Shumaker and Ian Geoghegan)