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Two other analysts covering Yum, David Tarantino of Robert W. Baird & Co. and Sara Senatore of Bernstein Research, wrote that Yum China ultimately could withstand the short-term decrease in sales if the chicken controversy blows over and the company gets to clarify its role in it.

“While negative media coverage of the chicken supply issues clouds the short-term outlook, particularly around high-volume Chinese New Year periods,” Tarantino wrote, “we are optimistic that KFC China will not see a long-lasting impact given the brand’s strong positioning with Chinese consumers and given Yum’s track record of successfully navigating through similar issues in the past.”

Tarantino was referring to a similar case of negative publicity for KFC China in 2005, when the chain was implicated in the Chinese food industry’s illegal use of a carcinogenic red dye.

Senatore wrote that the precedent from the controversy surrounding the red dye — which had existed in trace amounts in seasoning for two “New Orleans”-style chicken products — suggests that KFC China’s sales could similarly recover from a sharp negative turn as they did eight years ago.

“We view the current negative publicity as a near-term headwind that will ultimately subside,” she wrote. “We remain confident in Yum’s long-term growth trajectory. … The issue is negative publicity, not the integrity of Yum’s actual supply chain.”

But Bryan Elliott of Raymond James & Associates pointed out in another research note that the red dye situation in 2005, combined with an avian-flu scare soon after, contributed to four consecutive quarters of same-store sales declines. So far, authorities have held Yum back from a more vigorous defense of its supply chain practices, meaning the company could be running out of time to manage its public-relations problems, Elliott noted.

“We believe the company is awaiting clearance from the government before it is able to tell its story to the Chinese public,” he wrote. “We also suspect this clearance could be on hold until the closure of the government’s own investigation. If so, it could be some time before the company is able to meaningfully respond to the negative publicity.”

Including the more than 5,400 restaurants it has in China, Yum operates or franchises more than 38,000 outlets of KFC, Pizza Hut and Taco Bell in more than 120 countries and territories.

Contact Mark Brandau at mark.brandau@penton.com
Follow him on Twitter: @Mark_from_NRN