Why The McDumpster Meat Scandal In China May Be A Bigger Deal Than You Think

Jul.24.14 | About: McDonald's Corporation (MCD)


McDonald's meat scandal in China may reach well beyond those borders when it comes to publicity.

Times like this make Chipotle Mexican Grill look that much better.

McDonald's may see further pressure on domestic sales from all this.

You've probably heard by now about McDonald's (NYSE:MCD) meat supply scandal in China that is flooding the media. Apparently one of OSI Group's Shanghai plants was caught taking old, expired beef and chicken and mixing it with more fresh versions of each then slapping on a new expiration date. When it comes to food, the court of public opinion tends to punish swiftly, and in this case, it may be beyond China.

Sometimes bad publicity can be a good thing, but not when it comes to food, especially fast food, which already has many people skeptical about quality in the first place. Yum! Brands (NYSE:YUM) learned that the hard way when a chicken supply scandal hit the Chinese media a few quarters back which resulted in same-store sales throughout China plummeting by double digits.

McDonald's has around 2,000 units in China out of more than 35,000 worldwide. That's only 6%, so you might think it's not a big deal, because the other 94% shouldn't be affected. I disagree. McDonald's has already been struggling with domestic same-store sales for several quarters and just reported 1.5% decline this past fiscal and calendar second quarter.

Part of the reason for McDonald's domestic weakness is attributed to the influx of competition, including from fast-casual chains such as Chipotle Mexican Grill (NYSE:CMG), ironically a chain that McDonald's once owned and sold. To almost add insult to injury, on the same day the meat scandal began to flood the press on July 21, coincidentally, Chipotle Mexican Grill released its second quarter earnings.

Chipotle Mexican Grill absolutely killed it. Sales exploded 28.6%, same-store sales exploded 17.3%, and net income exploded 25.5%. Here is a chain that is known by its motto "Food with Integrity" and having stampedes of customers come in the doors, while at the same time, McDonald's food is coming under fire due to questions concerning its integrity. The public doesn't care whose fault it is, but it probably has trouble imagining something similar happening with Chipotle Mexican Grill. Chipotle keeps a close eye on its food chain. And just about everybody who knows Chipotle Mexican Grill knows it.

The problem for McDonald's is that an already partially distrusting public here in the United States sees these headlines and press, and even though the trouble is in China, it has to make at least a few people here a bit concerned. Chipotle Mexican Grill and others leave you with more peace of mind.

Problems in one area of the world could very well radiate across borders and across oceans. You and I are probably confident in McDonald's domestic meat supply, but the whole situation being echoed in the media leaves a bad taste in my mouth, pun intended. I doubt I'm alone. Suddenly the next time I want food in a hurry, I'm now thinking Burger King (BKW) or even a burrito from Chipotle Mexican Grill and skipping the Big Mac.

Expect to see Chipotle Mexican Grill get another positive tailwind from all this and McDonald's to be faced with another headwind both here and abroad.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.