RETAIL: KFC Sues Rumor Mongers, Coffee Shows Stress Signs
Bottom line: Caffebene could become the first big victim of an unsustainable Chinese coffee explosion, while KFC’s new lawsuit against rumor mongers reflects one of the many challenges it will face as it tries to rebuild its China image.
A couple of new China fast-food headlines reflect the rapidly changing environment, as traditional players like KFC (NSYE: YUM) try to move upscale to attract consumers who now have many more choices than they did a decade ago. The upscale move has seen a massive explosion in premium coffee shops, which is behind one headline that has South Korean giant Caffebene showing signs of distress following its recent aggressive China expansion.
Meantime, the other more humorous headline has KFC suing 3 companies for spreading false rumors about its products on social media, including one saying it uses chickens that have 8 legs. On a more serious note, this story comes as KFC struggles to regain its skidding China momentum, and shows that Beijing isn’t the only one frustrated over the kind of rumor-mongering that regularly happens on popular services like Weibo (Nasdaq: WB) and Tencent’s (HKEx: 700) WeChat.
Let’s begin with the Caffebene story, which reflects the ridiculous explosion in coffee shops that has occurred in big cities like Shanghai over the last year. I have personally noticed at least a half dozen Caffebene shops recently open in areas that I frequently visit. The latest reports give the bigger picture, saying Korea’s leading coffee chain has opened more than 600 stores in China over the last 2 years as it plays catch-up with names like Starbucks (Nasdaq: SBUX), Costa and even Hong Kong’s own Pacific Coffee.
Now the latest reports say that Caffebene’s China president Qi Dong has disclosed on his microblog that he hasn’t been paid for the last 8 months, and that he formally quit on June 1. (Chinese article) The disclosure comes amid a flurry of other reports saying Caffebene and its partners are scrambling to terminate store leases, and that it is failing to pay many of its suppliers.
The report also cites Qi saying that Caffebene’s Chinese partner stopped paying its contributions to the venture 3 months ago. The newspaper making the report, China Business News, attempted to contact Qi for more direct comment, but was unsuccessful. But it cited extensively from his microblog post, and other industry sources that seemed to substantiate that the chain’s situation in China had indeed become dire.
That’s not too hard to believe, as the many Caffebene shops I’ve seen in Shanghai are usually empty, probably because the company expanded too quickly and didn’t properly market its brand the way the other chains did. Even if it had done that, it would have faced a difficult time due to a boom that has seen hundreds of chains and individual premium coffee shops open in big cities like Shanghai over the last year. I’m fully expecting a big shake-out that will see many of these shops close over the next 2 years, and this latest report indicates Caffebene could become one of the first and biggest victims.
Meantime there’s the story that pits 3 rumor mongers against KFC, which is also struggling in China due to a stale and downscale image that it’s trying to revitalize through moves like sprucing up stores and adding premium coffee to its menu. According to the latest reports, KFC has sued the 3 companies in Shanghai after they allegedly spread false rumors about the chain on social media. (English article)
I’ve never heard of any of these trio of companies, whose names are Shanxi Weilukuang Technology Co, Taiyuan Zero Point Technology Co and Yingchenanzhi Success and Culture Communication. In all likelihood these are self-style “public relations” firms that take money from clients in exchange for doing things like smearing their rivals on social media. KFC is seeking a relatively modest 1.5 million yuan ($250,000) in damages and apologies from the trio, which allegedly conducted their campaign on the popular WeChat mobile messaging service.
KFC disclosed the lawsuit on its own website, and included the most popular of the false rumors that the company uses genetically modified chickens that have 8 legs and 6 wings. Central authorities in Beijing have waged their own wars against this kind of rumor mongering, though their targets are more often rumors about politically sensitive issues. The country’s courts even introduced formal definitions of what constitutes rumor mongering in late 2012 in an attempt to control the phenomenon.
This latest KFC story is sure to bring a smile to many readers’ faces, as most will know that such 8-legged and 6-winged chickens are still the stuff of fantasy novels rather than a real thing. But the story does illustrate one of the many challenges that KFC and its other rivals like McDonald’s (NYSE: MCD) are facing, as they attempt to reinvigorate their images and bounce back from a recent series of food safety scandals.
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