McDonald's (NYSE:MCD) just cannot catch a break. According to various news sources, a piece of blue vinyl several centimeters in size was found in a chicken nugget sold at a McDonald's Japan outlet in Aomori prefecture, which is in the northern part of Honshu. In addition, a clear vinyl piece may have been found in a nugget sold at a Tokyo location.
In response, the company has halted sales of McNuggets made on the same day at the overseas plants in Thailand owned by a unit of Cargill Meats. McDonald's Japan is expected to hold a news conference regarding this matter on Wednesday.
McDonald's Japan had just recently switch suppliers to Thailand after China based Shanghai Husi Food Co was accused in the Chinese media of deliberately mixing fresh chicken with rotten meat. This meat was then shipped and sold to various fast food outlets throughout Asia, including McDonald's Japan, Starbucks (SBUX), Yum Brand owned KFC (YUM), and many others.
Furthermore, the company is just coming off a severe shortage of french fries in that country due to a labor dispute caused work stoppage at US West Coast ports. According to the most recent data, same store sales at McDonald's Japan have declined for 10 straight months and are expected to decline double-digits for 2014. The unit is now predicting a 17 billion yen net loss for the year.
Given that McDonald's Japan is owned 50% by McDonald's itself, this new scandal is a major blow. There is no telling what the impact will be from this. Was this a one-time quality control lapse from the new supplier or something more serious?
Whatever the answer, this scandal will likely once again crush consumer confidence and worsen McDonald's reputation in the Asia region, which in turn will put serious pressure on McDonald's global same-store sales. Consumers in the region were already wary of the quality of foreign foods. Japan and China represent 10% of global revenues for the company.
After the first chicken meat scandal, McDonald's Japan saw sales decline over 25% in August, leading to a massive 3.7% drop in Global same-store sales for the whole company. As of Q3 2014, this event has impacted EPS by at least $0.15 per share. This new scandal would only add more fuel to an already burning fire.
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