Chinese Meat Scandal Impact On McDonald's

| About: McDonald's Corporation (MCD)
This article is now exclusive for PRO subscribers.

Summary

The company has pulled beef, pork and chicken products including the iconic Big Mac off the shelf due to “significant negative impact” in terms of reputation and sales.

An estimated 15% of McDonald's total operating profit comes from Africa (APMEA), the Middle East, and Asia/Pacific, specifically some key regions present in China and Japan.

McDonald's has already reported a1.1% rise in same store sales in APMEA regions in the quarter ending in June.

The war to capture the Chinese consumer is an ongoing one between major multinational companies around the world - one which McDonald's Corp (NYSE:MCD) seems to be losing. The fast food giant is currently on the ropes after a scandal revealing use of expired meat in its products was brought to the public's attention by an undercover Chinese TV reporter.

In light of these events the company has pulled beef, pork and chicken products including the iconic Big Mac off the shelf due to "significant negative impact" in terms of reputation and sales. Sales in China have taken a turn for the worse - a country that accounts for "10 percent of its total revenue" as stated by a representative from McDonald's.

An estimated 15% of McDonald's total operating profit comes from Africa (APMEA), the Middle East, and Asia/Pacific, specifically some key regions present in China and Japan. Speaking at the regulatory filing McDonald's Corp - which operates over 2000 restaurants in China - disclosed that "While this matter will negatively impact results in the near term, we cannot reasonably estimate the impact on full year 2014 earnings at this time."

Commenting on the incident is Mark Kalinowski, a Janney Capital Markets analyst,

"Risks have ticked up in the near-term regarding McDonald's business in China and Japan. The company's same-store sales in the region would fall 5 percent in the current quarter ending September, while overall profit would take a hit of 3 cents to be $1.55 per share."

According to Reuters, experts are anticipating a profit of $1.56 per share for the current quarter. The company has already reported a 1.1% rise in same store sales in APMEA regions in the quarter ending June.

The TV report which showed unsuitable handling of meat used in McDonald's products by supplier Shanghai Husi Food has significantly lowered current sales causing a 5% dip in stock value. The burger giant has severed ties with its meat supplier in an attempt to steer clear of future controversies and regain its market share. However, it remains to be seen if that move will restore the general public's opinion in McDonald's favor. Aaron Task - Yahoo's Finance Editor Chief - is of the view that "the customer isn't going to blame the supplier; they're going to blame McDonald's because that's who they gave their money to."

Labor Ruling and Potential Lawsuits

The meat controversy is not the only obstacle the company has to overcome. The National Labor Relations Board declared McDonald's a "joint employer" along with its franchises and could be sued in the labor court by its employees for labor violations. The corporation is being accused for forcing its employees to work overtime without providing additional compensation.

Heather Smedstad, Senior VP of Human Resources at McDonald's USA, discusses the labor violations and its impact,

"McDonald's will contest this allegation in the appropriate forum. McDonald's also believes that this decision changes the rules for thousands of small businesses, and goes against decades of established law regarding the franchise model in the United States."

Conclusion

With several fast food dining options available the controversy can prove to be a permanent chink in McDonald's armor. The ripple effect has left McDonald's trailing behind its competitors in the US as well with local consumers preferring to dine at alternate fast food joints. This particular change in consumer attitude is also evident by the fact that second quarter same store sales fell by 1.5% in the US contributing significantly to the overall 5.2% slump. For now it seems that no amount of promotions and discounts are compelling people to pick McProducts over other popular offerings by rival companies.

McDonald's has had its fair share of legal troubles over the past few decades but the company has remained popular with the masses primarily due to their quality food ingredients. With the recent meat scandal proving to be true in addition to employees revolting from within the corporation about unfair labor practices, the company has stepped into alien territory where careful planning and franchise rebranding has become crucial for survival. On top of that rivals like Burger King, Wendy's and several others are trying to use the company's current legal situation to entice McDonald's loyalists away from them for good.

Current CEO Don Thompson stated that the company is re-examining its current strategy and streamlining its menu to repair the damage. The company is slated to resume its full food menu in some Chinese cities which is a good sign. For now, however, analysts predict that the stock will continue to dip in the foreseeable future.

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.