McDonald’s Japan sales drop after problems with Chinese supplier

McDonald’s Japan expects a 2014 loss of US$157m owing to a scandal at a Chinese chicken supplier. The company says that, this year, it will lose money for the first time in 11 years due to lost sales and higher expenses after the supplier was found to be using expired chicken meat.

The company now expects a net loss of ¥17 bn for the current fiscal year ending in December. In 2013, McDonald’s Japan made a net profit of ¥5.14bn. It had previously forecast a net profit of ¥6bn for the current year.

The company withdrew its financial guidance for 2014 in late July, citing uncertainty about the cost of responding to food-safety issues related to the supplier. The fast-food company booked a one-off loss of ¥9.3bn, which includes an impairment charge and a write-off for unsold food.

“We take this forecast and this result very seriously,” said Sarah Casanova, McDonald’s Japan chief executive, at a press conference, adding that the Chinese supplier problem had an “immediate and significant impact” on McDonald’s business.

McDonald’s Japan said the meat supplier scandal is expected to cause a ¥45bn decline in sales, slicing ¥11.6bn from its current profit.

The problems also increased costs, including financial support to franchise owners and measures to reinforce quality management and improve information disclosure, subtracting a total of ¥10.4bn from the profit figure.

Despite the poor earnings outlook, McDonald’s Japan plans to keep its dividend and shareholder incentives unchanged. It previously said it expects a year-end dividend of ¥30.

The company halted sales of all chicken products made in China shortly after its supplier, Shanghai Husi Food Co., part of US-based OSI Group Inc, was accused in Chinese media of intentionally selling expired meat to restaurant companies.

That move, however, did not stop sales from falling. Same-store sales sank 25.1%in August, the largest year-over-year decline since the company went public in July 2001. Sales in September fell 16.6 %.

To help restore customer trust, McDonald’s Japan now discloses on its website a list of countries where its foods are processed, as well as countries that supply the main ingredients.

McDonald’s Japan currently depends on chicken from Thailand but plans to diversify sources. The quality of meat from Brazil has been tested and this will be imported next year.

There are no plans to resume using meat from China.