Fitch Ratings issued a warning on April 16 that some of the largest restaurant chains and meat processors may be at risk due to an outbreak of H7N9 avian influenza in China. Among the companies most exposed, according to Fitch, are Yum! Brands, Inc., McDonald’s Corp., Tyson Foods, Inc. and JBS S.A.
“We believe rising consumer fears around avian influenza in China could cause a meaningful pullback in chicken consumption with fewer restaurant visits, lower retail chicken sales, and reduced export activity,” Fitch said. “Respiratory pandemics such as the 2003 SARS epidemic and past outbreaks of animal disease or foodborne illnesses negatively affected the operating earnings and cash flow of U.S. protein processors and restaurant companies. Past outbreaks include the H1N1 swine flu virus in the U.S. during 2009 and the spread of the H5N1 bird flu through Asia during the 2003-2006 period.”
As of April 15, the Centers for Disease Control and Prevention, Atlanta, had reported 13 deaths and 60 confirmed illnesses from H7N9, up from 3 human cases recorded on April 1. In addition, Chinese news reports on April 11 indicated the Shanghai municipal government ordered a halt of live poultry trading and exports and required poultry culling. While there has been no reported human-to-human spread of the H7N9 virus, which would signal the potential for an international pandemic, the C.D.C. reported that limited human-to-human spread of the virus is possible.
Yum! Brands said that the March same-store sales for its China division declined 13%. Fitch noted the decline is an improvement for Yum! from the 20% decline in same-store sales in China for the months of January and February combined. In the announcement of its same-store sales results for March, Yum! said sales at KFC China are being negatively affected by publicity associated with the H7N9 virus.
“We believe consumer perception around chicken consumption and the H7N9 virus could delay the firm’s recovery from negative publicity that began in late 2012 surrounding the use of excessive antibiotics by certain of its Chinese chicken suppliers,” Fitch said.
U.S. Chicken exports to mainland China, Taiwan and Hong Kong totaled 699 million lbs, or 10% of U.S. chicken exports, during 2012, according to the U.S. Department of Agriculture. Year-to-date through February, U.S. broiler exports have declined 3% with exports to the countries being down 16% in the aggregate.
“The U.S. chicken industry is currently benefiting from increased pricing due mainly to lower supply and strong U.S. demand as consumers show signs of shifting from higher priced beef and pork,” Fitch said. “A backup in chicken supply due to significantly lower export activity to key markets in Asia could dampen pricing in the U.S. and hurt profitability for the U.S. chicken industry. However, given that pork is China’s most consumed protein, any substitution towards pork as Chinese consumers reduce chicken consumption could benefit pork exporters such as Smithfield Foods, Inc., while providing a partial offset to diversified processors like Tyson and JBS.”
