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It would not be a surprise to see a short-term decline in a number of fast food brand stocks, especially following what happened today in China, which probably contributed to declines today for Yum Brands (NYSE-YUM) and McDonald’s (NYSE:MCD) share prices.
Several decades ago I was having a business dinner with a number of associates in Toronto at an upscale Vietnamese restaurant. The gentleman sitting to my immediate left was what some call “a meat and potatoes kind of guy.” In other words, he was really up to experimenting with what he considered to be “exotic” food. Having discovered his reluctance, every time our waiter brought another new dish to the table, he would explain to all of us what it was. Then, he would turn to my companion and say, “It’s really chicken.”
Well, I can almost assure you that my friend will not be eating at KFC or McDonald’s for awhile if he has heard the news out of China, as both brands may have a bad taste in their mouths by having unknowingly sold out-of-date beef and chicken. My friend won’t care where on the planet it happened. He will just assume that all chicken is out-of-date. Unfortunately, many investors may feel the same way. Yum Brands, the parent company of KFC, fell 4.25% to 74.13 today on the New York Exchange. McDonald’s declined by 1.45% to close at 97.55.
An Immediate Perspective
What we know so far is that the Shanghai FDA allegedly stopped production and sales of neat products at Shanghai Husi Food Company, the supplier of meat products to major global food chains with operations in China. Hard evidence indicates that Husi was combining out-of-date meats with fresh meat, then purveying it to the food chains, representing it as fresh. This was done to the extent that they actually opened out-of-date packages to mix in with the fresh. When McDonald’s sent their own inspectors to the plant, workers hid crates of expired beef from them. Adding insult to injury, Husi apparently had an operational procedure that indicated how much bad product to add to the fresh.
A Personal Perspective
Just in case you may think that this is an isolated incident, let me unsettle you with the news that it is not.
- First, it is not isolated to China. It happens in my country and in yours, in my city and yours.
- Second, it happens all the time on a smaller scale. Health inspectors can only do so much. While most restaurant operators are honest and work hard to operate their businesses on what has traditionally been thin margins, there are some individuals who lack the integrity to throw the bad away and take the loss. They prefer to mix the out-of-date with fresh and then serve it to unwitting customers. Let me warn you, from first-hand experience, that this practice is not limited to fast food. It is practiced in some upscale restaurants as well.
- Third, its practice is not limited to the food industry. I have seen it done in all kinds of manufacturing facilities where quality was just a word considered as good advertising by executive management – or as a necessary evil that created additional costs. It happens all the time.
A Broader Perspective
The publicity will inevitably do some damage to the stock of both brands. The stoppage of the supply chain will hurt at the cash register, because product is not available. When sales do down, so does the share price. Perhaps the most unfortunate part is that this problem was also not isolated to KFC and McDonald’s. Shanghai Husi is also the meat and poultry provider to Burger King (NYSE:BKW), Papa John’s (NASDAQ:PZZA), Pizza Hut and Subway.
This is the second time in the past 12 months that these food chains have had issues related to the quality of their food. KFC’s sales dropped 37% following the incident in December 2013.
A Final Perspective
It won’t be long before the public accepts the news that the problem has been resolved. The reality is that the immediate issue may be resolved and some heads may roll, but the problem will continue. It is too pervasive, those who are fleecing us are good at what they do, and there is no way to stop it.
