South China Fast Food Restaurants Quelling Fears

UNCLAS SECTION 01 OF 04 GUANGZHOU 005380

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/CM
STATE PLEASE PASS NIH
USDOC FOR 4420/ITA/MAC/MCQUEEN, CELICO, DAS LEVINE
STATE PASS USTR
USPACOM FOR FPA

E.O. 12958: N/A
TAGS: KFLU TBIO EAGR PGOV CH
SUBJECT: South China Fast Food Restaurants Quelling Fears
of Avian McFlu


(U) THIS DOCUMENT IS SENSITIVE BUT UNCLASSIFIED. PLEASE
PROTECT ACCORDINGLY. NOT FOR RELEASE OUTSIDE U.S.
GOVERNMENT CHANNELS. NOT FOR INTERNET PUBLICATION.


1. (SBU) SUMMARY: A recent look at how KFC and McDonald's
are responding to concerns about avian influenza (AI) -- in
a region of China particularly obsessed with food -- found
unbridled optimism on the part of these companies about
their efforts to inform the Chinese public about the safety
of their products. KFC reports that while sales initially
dipped for reasons not entirely clear, they are back to
normal. McDonald's contends that sales have not suffered at
all because of AI, and are even up. Both companies have
undertaken slick multimedia marketing campaigns to
demonstrate that it is still safe to consume poultry, and
consumers appear to be satisfied that their products are
indeed safe. We still do not have a handle on the full
extent of concern about AI in the region because of the
tight government control over reporting on this topic, but
our contacts appear to range from not-very to moderately
concerned. This could all change quickly, however, if
further outbreaks occur and if they hit close to home. END
SUMMARY.


2. (SBU) Guangzhou is arguably the most food-obsessed city
in China. The Cantonese have developed a strong attachment
to food, especially to the local cuisine, which they will
passionately argue is among the most refined in the world.
Indeed, a study published by Xinhua in November 2005 found
that while the average Chinese spends $71 on food and drinks
annually, residents in Guangzhou spend $512 per capita on
dining out a year -- over seven times the national average.
Shanghai residents ranked a distant second, spending $187
per capita annually. The study also noted that more and
more urban Chinese prefer to dine out rather than to eat at
home, a trend clearly evident in Guangzhou's packed
eateries. One would thus expect the appearance of AI in
China to provoke a degree of concern about food safety,
reflected perhaps in a decline in poultry consumption.


3. (SBU) Given the huge popularity of American fast food
chains in Guangzhou, Econoff contacted officials at KFC and
McDonald's to learn how each has addressed the issue of AI
as it relates to its consumers. Econoff became curious
about this issue after spotting, during a recent visit to a
local McDonald's, a prominently displayed stand up tabletop
advertisement detailing the steps McDonald's has taken to
ensure its chicken products are safe.

The Big Boy on the Fast Food Block
--------------


4. (U) KFC is the dominant player in the fast food market in
China, and thus would have a lot to lose if AI concerns
began to affect business. KFC, which began operating in
China in 1987, is owned in China by Yum! Restaurants China
(Yum China) -- a subsidiary of U.S.-based Yum Brands Inc.
Yum China also owns Pizza Hut, but the bulk of its sales in
China come from its KFC stores, according to press reports.
KFC opened its 1,500th restaurant in China in late 2005 and
the company reportedly expects to open roughly 400 new
restaurants in China in 2006. Headquartered in Shanghai,
Yum China posted more than USD 200 million in operating
profit in 2004, surpassing Yum Brands Inc. earnings that
year for its entire U.S. KFC chain, according to Western
press reports.

Sales Are Disappointing, But Why?
--------------


5. (U) In November 2005, Yum publicly reported that its
October 2005 sales in China rose just 8%. In January 2006,
Yum reported a 1% drop in November 2005 sales in China,
saying sales were being hurt by consumer concerns about AI,

GUANGZHOU 00005380 002 OF 004


according to press reports. (Note: After conversion to
U.S. dollars, the unit posted a 1% sales increase. The
company maintains a long-term goal of posting roughly 20%
annual sales increases in China. End Note.) In February
2006, the press reported financial analysts' concerns about
declining sales and margins in China, and other industry
analysts have commented that news about AI has weighed on
overall consumer sentiment towards chicken in China. Some
analysts speculate that the sales slump, however, could be
attributed in part to a KFC food safety scare in March 2005
in which it became know that a banned food dye was being
used in some KFC dishes, and/or to the unpopularity of a
fried chicken steak item that did not resonate with
consumers.

KFC On the Offensive, While Planning for the Worst
-------------- --------------


6. (U) Then, in early February 2006, David Novak, the
chairman and chief executive of Yum Brands Inc., said
publicly that KFC's business in China had returned to
"previous strong levels" and that consumers in China appear
to be less concerned about AI. Novak explained that
customers seemed to be getting used to news about AI and
were becoming less concerned about eating fully cooked
chicken, which KFC has been aggressively communicating is
safe to eat. In an apparent effort to be prepared for the
worst, however, Western press reports from November 2005
note that Yum was working on television ads that could be
rolled out globally if an AI epidemic emerges among humans.
The ads will reportedly simply state that eating fully-
cooked chicken is safe.

The KFC Food Safety Story
--------------


7. (SBU) The local KFC office put Econoff in touch with Lily
Long, a public affairs manager in Shanghai, to learn more
about KFC's strategy to manage AI concerns. Long explained
that, although customers were concerned about eating chicken
after AI outbreaks in October 2005, the Chinese government
and the World Health Organization (WHO) have both since
conducted a great deal of public education on AI and its
prevention. For its part, KFC intensified education on
chicken safety through its website, TV commercials, and in-
store posters and placemats. In fact, a colorful placemat
put on each tray features cartoon drawings of a happy test
tube wielding scientist and KFC employees. It also details
the quality-control measures undertaken by KFC to ensure
food safety during every step of the process, from the
selection of chicken suppliers to the final cooking of the
chicken. Long opined that these measures have restored
customers' confidence in eating chicken, noting that while
KFC sales decreased slightly in some provinces and cities,
they have recovered; Long did not provide actual figures.
When asked if KFC has considered adding more non-chicken
products to its line, Long simply noted that KFC has always
offered non-chicken products.


8. (U) Long then explained how KFC ensures the quality of
its roughly 30 chicken suppliers, noting that they all have
good reputations, modern facilities, sophisticated
management systems, and conform to Hazard Analysis and
Critical Control Points (HACCP) and Chinese quality and
safety standards. She pointed out that each batch of KFC
chicken must have a certificate from local quarantine
authorities certifying that the chicken is AI-free. (Note:
A KFC executive said publicly in November 2005 that the
poultry KFC buys in China and the U.S. is raised in
shelters, protecting the flock from migratory birds that
might carry AI. End note.) Long also explained that all
KFC chicken is cooked to above 170 degrees Celsius for
between 2.5 minutes to 14.5 minutes during an electronically
programmed process in accordance with Chinese Health

GUANGZHOU 00005380 003 OF 004


Ministry hygiene standards. Long also said that KFC cleans
and sterilizes its facilities and equipment several times a
day and has implemented the highest food safety standards in
regard to the handling of raw chicken.

The Arches Are Not As Golden in China
--------------


9. (U) While McDonald's obviously has a huge stake in the
China market and thus in educating Chinese consumers on its
food safety practices, its influence in China is dwarfed by
KFC. McDonald's opened its first restaurant in China in
Shenzhen in 1990, three years after KFC, and today there are
more than 700 McDonald's restaurants across China, as
compared to KFC's 1,500. In early 2005 a McDonald's
executive said publicly that the company views China as its
fastest developing area, after the U.S., over the next few
years. The company aims to have roughly 1,000 stores
throughout China by 2008, and plans to achieve this goal by
opening 200 stores per year for the next two years.
McDonald's chose Guangdong's Dongguan City as the location
for its first drive-thru restaurant in China, opened in
December 2005.

So Will The New Drive-Thru Drive Away AI Concerns?
-------------- --------------


10. (SBU) Econoff spoke with Greg Gilligan, McDonald's head
of government relations, and with Gary Rosen, chief of
marketing and corporate affairs for McDonald's China, about
McDonald's response to AI concerns in its customers. Rosen
said that McDonald's chicken sales in China have not
suffered because of AI; in fact, they "have been up." He
speculated that this is because people trust the food
quality at McDonalds, perhaps more than at other
restaurants. Both officials repeatedly emphasized the
quality of the supply chain that provides all McDonald's
ingredients, and Rosen expanded on this by saying that
McDonald's chickens come from a dedicated supplier who sells
only to McDonald's and whose chickens are vaccinated and
quarantined. As for food handling, Gillian explained that
McDonald's has always had specialized training for handling
raw meat products (including color coded gloves for raw and
cooked foods to prevent cross contamination) and that this
training was sufficient in the face of AI. Rosen said that
McDonald's has not introduced any new products as a result
of AI, explaining that if customers continue to want
chicken, McDonald's will continue to provide it.


11. (SBU) To make their case to the public, Rosen said that
McDonald's has aired TV ads throughout China to address AI
concerns. These ads offered facts about McDonald's cooking
procedures and invited consumer questions, pledging to try
to provide answers to reassure consumers. Rosen said that
in his experience, Chinese customers want to receive a lot
of details, e.g. they want to know the exact temperature at
which chicken is cooked. He said that Chinese mothers, in
particular, want as much information as possible so they
will know exactly what their children are eating.
McDonald's also uses tabletop ads and placemats in its
stores to pass on the message that McDonald's chicken must
pass multiple quality-control and health checks; they also
explain breeding conditions and food-safety measures. When
asked if McDonald's had taken a different approach to AI
concerns in South China, given that this area is
traditionally a brewing ground for new diseases, Rosen noted
that the company has a national strategy that does not
differ in the South. Despite this optimism, however,
Western press reports note that McDonald's, much like KFC,
is developing contingency AI plans at its Oak Brook,
Illinois headquarters.

Comment: But What Do the Locals Really Think?
-------------- -

GUANGZHOU 00005380 004 OF 004




12. (SBU) It is difficult to assess the overall level of AI
concerns locally given the authorities' tight control over
reporting on this issue. Econoffs have noted varying
degrees of concern about AI among our contacts throughout
the district. On a recent roadtrip through Guangdong and
Guangxi, for example, Congenoffs found that contacts in
northern Guangxi opined, when asked, that they were not
concerned about AI because all chickens had been vaccinated.
Their actions are perhaps more telling, however; our hosts
never served chicken -- even when the town specialty was a
chicken dish. In contrast, in southern Guangxi our contacts
also said they were not concerned about AI, but they
actually served (and ate) chicken at every meal. An
unofficial polling of local residents who purchase chicken
at area wet markets revealed that there has been no notable
change in the price of chicken, probably an indication that
local demand has not changed markedly. We expect to see the
level of concern rise considerably, however, if more AI
cases appear closer to home. In the meantime, local
gourmands are likely to continue to enjoy their fast food
chicken with a newfound appreciation for food safety
measures.

DONG