Yum! Brands Inc, owner of the KFC fast-food chain, said fourth-quarter same-store sales fell more than projected in China as demand was hit by a government investigation into one of its former chicken suppliers.
Industry experts had predicted the negative impact of the probe, which is expected to be felt in the long term.
KFC sales in China in the last two weeks of December were affected by the adverse publicity associated with the probe into Chinese poultry suppliers, the US company said in a filing with the United States Securities and Exchange Commission on Monday.
China same-store sales fell by 6 percent year-on-year in the fourth quarter, compared with a previous estimate for a decline of 4 percent, the filing said.
Shanghai's food regulators said that tests conducted by a third-party agency from 2010 to 2011 found that eight batches of chicken supplied to the company by Liuhe Group Co had excessive levels of antibiotics. Yum said it stopped all supplies from Liuhe in August 2012.
The revelation sparked heated debate among Chinese consumers. The negative impact will linger for a long time for KFC, which relies heavily on domestic chicken suppliers, said Gao Jianfeng, general manager of the Shanghai-based Bogo Consultants.
With a huge number of restaurants demanding large quantities of chicken ― the main ingredient on their menus ― KFC won't be able rebuild its supply chain in the short term, Gao said.
He added that food safety issues in the Chinese supply chain, from chicken to fodder, are widespread.
“No single company can preserve its reputation in such an industrial chain,” he said.
An increasing number of fast-food consumers have started to go to other Western chains such as McDonald's or Burger King, he said.
Zhao Ping, a researcher at the Academy of International Trade and Economic Cooperation, said that due to their rising income levels, an increasing number of Chinese people are paying more attention to healthy eating, bringing new perceptions toward foreign fast-food brands and reducing their trust and appreciation of those chains.
David Novak, Yum! Brands' chairman and CEO, said in November that the company was on track to deliver at least 13 percent growth in 2012.
He said that 2013 would be another strong year for the company's China division, given the record development of at least 800 new outlets.
The company operates more than 5,000 restaurants in more than 800 cities in China, and plans to open hundreds more.
Among the existing restaurants, 4,000 are KFC stores, and around 750 are Pizza Hut restaurants.
Foreign quick-service brands have stepped up their development plans in China.
In May 2012, McDonald's said it had increased investment in the country by 50 percent and had opened 225 to 250 new restaurants. McDonald's has 1,400 restaurants so far in China and will exceed 2,000 by the end of 2013.