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Necessity Forces McDonald's to Stand by China Meat Supplier

Stocks in this article: YUM MCD

NEW YORK (TheStreet) -- Yum! Brands (YUM) and McDonald's (MCD) have taken different approaches to this week's tainted meat scandal in China that hit this week. McDonald's is standing by the company while Yum! Brands has severed ties.

Yum! shares are down 2.3% for the year to date as of the Thursday close of $73.84 while McDonald's, which reported earnings earlier this week, is down 2.3% and closed at $95.35.

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On Monday Chinese authorities shut down OSI Group's Shanghai Husi food plant for wide ranging food safety violations. A Chinese TV report showed workers in the food plant picking up meat from the floor as well as mixing expired meat with fresh meat. The report also captured workers saying that if the their clients knew what they were doing the company would lose its contracts. OSI operates 50 manufacturing facilities around the globe and have been a supplying McDonald's since 1992. Yum! has been a client since 2008.

This is the second major food safety scandal to hit fast-food companies in China, the last one occurring in 2012 when it was reported that KFC chicken was being pumped with excessive amounts of antibiotics. That scandal hit Yum! Brands' KFC particularly hard. This second scandal is likely a large reason the company severed ties so quickly.

So why the different strategies for Yum!! and McDonald's?

Yum! is the largest fast-food operator in China with over 4,400 KFC restaurants alone. Yum! is expecting China to be the driver of its future revenue growth and can ill-afford a set-back in the growing market. China food companies do not have a good reputation in China, thus giving foreign food purveyors a foot-hold. That is quickly dissipating with increased local media coverage of issues at foreign food suppliers.

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In a press release Yum! stated, "It is difficult to believe and completely unacceptable that the management of Shanghai Husi, a division of OSI, would oversee and organize illegal and dishonest operations, "Yum! China unequivocally condemns these actions." In the same release Yum! detailed how OSI is not a major supplier of meats to the company in China, saying, "This supplier is not a major supplier of Yum! China. KFC and Pizza Hut have arranged alternative suppliers and we do not anticipate disruption to KFC restaurants."

Yum! is also severing ties with OSI in Australia and in the United States where it says a few items were supplied to it.

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