McDonald's is facing more brand damage in China after one of its suppliers was slapped by Beijing's largest environmental protection fine for violating water pollution regulations.
Beijing Simplot, a Chinese joint venture involving J.R. Simplot of the US, supplies French fries and hash browns to McDonald's in China, one of its biggest global markets.
McDonald's sales in China slumped last year after a meat supplier suspended operations following a media report alleging that workers doctored labels on expired meat supplied to the US company and to Yum Brands' KFC, China's biggest foreign fast-food chain.
The latest scandal involved not food quality but environmental regulations - another sensitive topic in China as public opposition is growing to air and water pollution.
State media reported that the chip supplier had allowed polluted water to flow into city pipes where it was processed by a waste water treatment plant. Beijing Simplot said it had accepted and paid the Rmb4m ($650,000) fine imposed by the Beijing city government, its highest environmental protection fine.
"As soon as we discovered that we had a waste water issue, we co-operated with the local environmental protection authority, shut down the waste water discharge and transported excess waste water to an approved facility for processing," the company said.
"McDonald's China takes this infraction by Simplot very seriously," McDonald's said, adding that "all McDonald's suppliers must comply with all relevant local laws and regulations".
Recent scandals have dented the reputation of foreign fast food brands, which have long traded on an image of providing better cleanliness and higher quality than local chains.
The negative headlines have exacerbated rising market pressures on foreign food brands also hit by escalating competition from local players, rising rents, labour shortages, and a fundamental change in the way urban Chinese prefer to dine.
McDonald's said last week that global sales dropped in the three months to the end of March, reflecting "negative guest traffic", including in China.
"I think this is going to have a negative impact on sales," said Benjamin Cavender of China Market Research in Shanghai, adding that the scandal was "going to make it that much harder for the company to restore consumer confidence in the brand".
A raft of local fast-food chains are building market share in the highly fragmented Chinese market, offering food that is closer to local tastes and marketing themselves as healthier.
A recent report from Mintel noted "a fundamental shift towards healthier Chinese-style cooking is redefining the fast-food industry, and consequently propelling domestic fast-food chains to challenge the foreign fast-food leaders".
Additional reporting by Jackie Cai
The Financial Times Limited 2017. All rights reserved.