Food scandal hurting McDonald's Asia earnings

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McDonald's Corp, working to resume sales of beef and chicken in China this week after a supplier was accused of repackaging old meat, said the situation is hurting its sales in Asia.

"McDonald's businesses in China, Japan and certain other markets are experiencing a significant negative impact to results," the US fast-food company said in a filing on Monday. While McDonald's said it cannot yet estimate the full effect on 2014 earnings, the areas affected make up about 10 percent of consolidated revenue and the company's global same-store sales forecast for the year is "at risk".

McDonald's Japan business posted a 17.4 percent drop in same-store sales in July from a year earlier partly due to the China supplier scandal, according to the company's statement to the Tokyo Stock Exchange on Tuesday, a week after withdrawing its profit forecast because of the case.

The world's largest restaurant chain has been working to limit the damage to its sales and reputation since supplier Shanghai Husi, a division of US-based OSI Group LLC, became the subject of a government investigation into the altering of expiration dates on food last month. Yum Brands Inc has terminated its relationship with OSI globally.

McDonald's Japan is now buying items from Thailand. Previously, the chain was sourcing food from Husi's Hebei plant while transitioning to a new OSI facility in Henan.

McDonald's shares were little changed at $94.31 in New York on Monday.

The stock has dropped about 4.7 percent since news of the OSI investigation became public.

The fast-food chain's Japanese outlets will sell chicken sandwiches again after resuming a full menu at all its stores starting next week, Kokoro Toyama, a spokeswoman at McDonald's Japan business, said on Tuesday.

The global restaurant chain said that it will start selling beef and chicken burgers in Beijing and Guangzhou soon. It is also increasing orders from other existing suppliers in China while exploring new ones.

"McDonald's China full menu will come back gradually by cities," the company said in an e-mailed statement. "We have been working to bring back the full menu across China, but it takes a longer time for good reasons."

"Suppliers must now increase their production capacity and re-allocate nationwide supply distribution," McDonald's said. "For new potential suppliers, we have a full due diligence inspection process."

OSI has since pulled all products made by Shanghai Husi and replaced its management team in the country after coming under Chinese government investigation. Six employees of Shanghai Husi have been detained by the Shanghai branch of the Public Security Bureau, Alison Kovaleski, a spokeswoman for OSI, said.

"We are also in the midst of conducting our own thorough reviews of all of our manufacturing facilities within China," she said. "We look forward to sharing our findings in a responsible and transparent manner."

In Hong Kong, McDonald's restaurants are serving burgers such as the Big Mac and McChicken sandwiches "back to their original build", after lettuce and onion were imported from the US and Taiwan, the restaurant chain said on its website. McDonald's Hong Kong halted sales of products supplied by Shanghai Husi late last month.

Chicken McNuggets and items such as fresh corn cups, green salad and fresh lemon tea, made with ingredients formerly sourced from OSI's Chinese units in Hebei and Guangzhou, are still unavailable, according to the Hong Kong chain.

McDonald's China outlets started handing out vouchers for free hash browns and french fries as a compensation to customers who buy its burgers made without fresh vegetables, the restaurant chain said on Tuesday.

It is increasing orders from existing suppliers such as McKey Food Services Ltd, a Shenzhen unit of US-based Keystone Foods, to handle the shortage of ingredients, while exploring new Chinese suppliers for items such as fresh produce, according to the company.

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