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KFC scandal takes on a life of its own

McDonald's in front of the Xi'an Drum Tower (background) in Xi'an, PRC.
McDonald's in front of the Xi'an Drum Tower (background) in Xi'an, PRC.

Owners of KFC and Pizza Hut told Thursday evening the food safety scandal in China could not only hurt sales, but could be severe enough to effect global profits.

Yum Brands, Inc. immediately cut any ties with the supplier in question, Shanghai Husi food plant, a subsidiary of the Illinois-based OSI Group, even though McDonald's Corporation has opted to stay with OSI. The company did say they planned on shifting their meat sources to a Husi plant in Hebei before finally transitioning over to a newly-built plant in Henan.

In the meantime, McDonald's shares (NYSE MCD) have fallen 3.7 percent this week. OSI chief executive and owner Sheldon Lavin said in a statement: "OSI has been a McDonald's supplier in China since 1992, and the company has extensive operations in the country. I will not try and defend it or explain it. It was terribly wrong, and I am appalled that it ever happened in the company that I own."

In a filing with the Securities and Exchange Comission, Yum said "The result has been a significant, negative impact to same-store sales at both KFC and Pizza Hut in China over the past 10 days." This has occurred even with the immediate dissolution of ties with OSI, not only in China, but the U.S. and Australia.

Consumer confidence in China was abruptly damaged when a Shanghai TV station reported about 10 days ago that McDonald's outlets in China were using beef and chicken that was out-dated and repackaged from HUSI, owned by OSI Group, Inc. of Aurora, Illinois.

Yum is China's biggest restaurant owner, with over 4,600 KFC outlets and 1,200 Pizza Hut businesses.