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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 
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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