Teen found a chicken organ in his KFC order

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Victor Luckerson/Time

This post is in partnership with Time. The article below was originally published at Time.com.

A California teenager thought he found a chicken brain in his KFC order—and all he wants is his money back.

Manuel Cobarubies of Stockton was digging into an order of chicken and corn when he says he found the unusual organ earlier this month, the local Fox affiliate reports. He sent messages to KFC’s Twitter account requesting a refund.

Cobarubies says he eventually heard from a KFC official, who said that the organ was probably a gizzard or kidney and was completely edible. Still, the episode may deter the teen from visiting KFC again soon. “I’m probably just going to have to start packing my own meals, making my own sandwiches,” he said.

KFC reduce suministradores en China por pollos alimentados con antibióticos

Este escándalo, que estalló en diciembre, provocó una baja de ventas del 6% en el cuarto trimestre de 2012 de Yum! Brands, la casa matriz de la empresa

El gigante estadounidense de comida rápida KFC anunció haber eliminado mas de 1.000 criaderos de su red de suministradores en China, tras un escándalo de pollos alimentados con antibióticos que afectó sus ventas en este país.

Este escándalo, que estalló en diciembre, provocó una baja de ventas del 6% en el cuarto trimestre de 2012 de Yum! Brands, la casa matriz de KFC, mas importante que los 4% de baja inicialmente estimados. 

KFC, que tiene más de 4.000 restaurantes en China, mejorará la vigilancia de los suministradores y reforzará las inspecciones, según un comunicado divulgado el lunes por la noche. 

La empresa quiere también informar mejor en el futuro al público y al gobierno chino, tras haber admitido el pasado mes no haber advertido a las autoridades sobre los resultados de pruebas que revelaban concentraciones elevadas de antibióticos en ciertos pollos. 

Los escándalos vinculados a la industria alimenticia son muy numerosos en China. En 2008, el de la masiva utilización en los productos lácteos de melamina, una sustancia que imita la presencia de proteínas, provocó la muerte de al menos seis bebés y enfermedades crónicas a 300.000 más.

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KFC's Midlife Crisis in China

“Next time I get sick, I’m going to KFC.  Get my antibiotic fix from their chicken – save me a trip to the hospital!”
This joke has been circulating on China’s Weibo blogging network recently since CCTV – the leading national broadcaster – criticized its chain for overdosing its chickens with toxic chemicals.

After publishing the story “Too Fast Food: Behind the Scene of YUM! Brand China Slump,” on 12/6/12, further research has been conducted to verify concerns raised in that article.  It seems that the chicken safety issue is merely the tip of the iceberg that is KFC China’s slump. Economic slow down, rising competition in fast food, an unusually harsh winter, and most importantly, a change in consumer behavior, collectively are causing a sharp decline in same store sales growth for KFC in China.

YUM! Brands Inc. (NYSE:YUM) is an American quick service restaurant chain operating 37,000 restaurants in 110 countries. Its most famous brands include KFC, Pizza Hut, and Taco Bell.

Its crown jewel is, of course, KFC China. With approximately 4,500 stores, KFC China generates 50% of YUM’s operating profits.  For this reason, the stock has attracted the interest of investors seeking a proxy for China’s booming middle-class consumption growth.

Based on fact-finding, it is clear now that KFC China’s organic growth has unfortunately come to an end.  By shifting its China strategy from saturated coastal cities to much less populated inner provinces with significantly lower average disposable income levels, KFC China is signaling that its prime period is over.

A Secular Shift to Online Shopping Hurts KFC Store Traffic
With approximately 90% of its store locations in or around shopping malls and business centers, KFC China’s traffic depends heavily on overall traffic at commercial centers.  The growing popularity and convenience of online shopping not only competes with brick and mortar shopping, but also with the ancillary industries, such as fast food, which depend on foot traffic in commercial areas.

Today, the shopping behavior of many of the 530 million Chinese internet users is changing gradually, but clearly towards online markets. The largest B2C online shopping site, Taobao, has reached a record high gross merchandise volume (GMV) of 1,000 billion RMB year-to-date.  Shopping trips and outings to KFC stores have been further deterred by an unusually cold winter and a sluggish economy.

To compensate for the declining store traffic, KFC responded with new offerings of value combos to go, free delivery services and no tipping from October to December 2012.  However, as most of KFC’s customers seek the dine-in American fast food experience, these new product offerings are much less attractive compared to the local restaurants with cheaper menus.  This phenomenon is most noticeable in lower-tier cities.

While the world speculates that urbanization will continue to drive China to become the world’s largest economy by 2020, urbanization is an outcome of economic growth rather than its cause.  Until the re-balancing between domestic consumption and government-led investments improves, industrialization will decelerate as overcapacity is already prevalent in many sectors.

Therefore, it is unclear whether the hundreds of millions of rural residents are poised to benefit from the urbanization trend.  A more detailed demographic profiling of the rural provinces is needed to accurately assess the consumption potential of those to be urbanized.

Despite consensus readings of the latest PMI data as signaling a revival of demand, we believe stronger-than-expected numbers are driven by capital restocking, not consumer spending. This is grim news for KFC China, given that restaurants and retailers tend to lag in overall economic recovery.

Competition
Since its first store opening in Beijing in 1987, KFC China has achieved consistent success in branding itself to appeal to the swelling ranks of middle-class Chinese consumers, playing off this group’s fascination with the concept of American fast food coupled with a localized menu.

However, the “new” factor has long since faded and other international fast foods and local knock-offs offer similar products at lower price points. Therefore, the competition – mostly local vendors offering the same menu for 30% cheaper or more – has finally become a material headwind to KFC China. In fact, we have observed that Chinese consumers tend to return to local food fare after trying American fast food.  Ultimately, local fast food is regaining market share.

What’s more, rising rental expenses reflected in the Company’s lease renewals highlight the fast food leader’s diminishing appeal and thus its bargaining power with landlords.  KFC was once highly desirable in shopping malls because it drove traffic. Commercial landlords offered KFC a discounted rent and 5- to 15-year rental lock-up contracts. As newer and trendier dining concepts have emerged, competition for prime casual dining locations has driven rent increase as high as 300% on renewed leases.

For KFC, rental expense is approximately 8% of revenue with 25% of leases expiring in the next 5 years. KFC China’s profit margin is around 20% today.  An increase in rental expense will squeeze the margin by approximately 50-100bps per year for the next 5 years.
More Food Safety Risks in the Fragmented Supply Chain
 

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