MISSION INTANGIBLE

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MISSION:INTANGIBLE, the blog of the Intangible Asset Finance Society, offers critical comments on intangible asset, corporate reputation, and finance; supplemented by quantitative reputation metrics. Intangible assets include business processes, patents, trademarks; reputations for ethics and integrity; quality, safety, sustainability, security, and resilience; and comprise 70% of the average company's value. MISSION:INTANGIBLE is a registered trademark of the Intangible Asset Finance Society.

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McDonald's and Yum: Deserving a break today

C. HUYGENS - Thursday, August 14, 2014
On Sunday, 20 July, Dragon TV of Shanghai, China, precipitated a reputation crisis at two global companies. The TV station reported that food supplier Husi, owned by OSI Group of Aurora, Ill., repackaged stale beef and chicken, updated the expiration dates, and sold the adulterated meat to McDonald's, KFC and Pizza Hut restaurants.

A reputation crisis begins when a company fails properly to set expectations or fails to meet them, and then stakeholders turn on a company and lower their expectations. The going-forward economic consequences result from how customers thereafter respond to prices, how effectively employees work, creditors set borrowing rates, suppliers set terms, and how severely regulators impose penalties.

For Yum Brands and McDonald’s, the changes in stakeholder expectations are  reflected in customers’ reduced demand--or at least some analysts expectations of  future customer behavior. Royal Bank of Canada analysts projected that Yum’s China sales at KFC and Pizza Hut could drop off 10-15% for at least 6-8 weeks after the July event. An executive at McDonald’s Japan reported a 15-20% drop-off in daily sales. Forward-looking equity investors are seeing more sustained losses. Between July 15 and August 14, Yum! Brands equity lost 15% of its value; McDonald’s shed around 7%, and the benchmark S&P500 composite equity index lost about 1.2%.

[Added Saturday 16 Aug] A more encompassing view of expected stakeholder behavior shown below, according to analysis published by Consensiv, the reputation controls company, based on reputation value metrics we use at Steel City Re, affirms that all-things-reputationally at McDonald's are not as bleak as equity investors might be signaling. The company's reputation premium is near the top (and heading upward), and its value risk is in the lowest quartile of its peer group.


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