You couldn’t escape the news in February that KFC suffered an unprecedented chicken crisis.
The American fast food chain was forced to temporarily close most of its 900 UK restaurants after widespread distribution problems developed with its new delivery partners, DHL and Quick Serve Logistics (“QSL”), leaving them without the famous finger-lickin chicken. In this article, we consider some of the matters that are likely to be addressed by the forensic accountants who will no doubt be drafted in to assess the financial damage.
KFC’s UK distribution contract was put out for tender in 2017. DHL and QSL partnered up to win the contract. In theory, such a partnership looked like an ideal choice. QSL has first-hand experience supplying KFC across Europe since 2011 and DHL being the world’s leading logistics company. However, in practice…
The chicken crisis
At the start, KFC posted a brief statement saying that there were “a few hiccups with the delivery today”. However, as the crisis spread throughout the UK, KFC was quick to blame DHL and QSL for the problems, stating; “we’ve brought a new delivery partner on board, but they’ve had a couple of teething problems”.
KFC worked hard with DHL and QSL and even brought its previous logistics partner, Bidvest Logistics (“Bidvest”), back on board to help rectify the problems. Within a few days around 800 of its 900 restaurants reopened, albeit some with reduced opening hours or limited menus. Three weeks on, and the majority of KFC’s restaurants were back to business as usual.
It may still be too early to assess the financial impact of the chicken crisis. However, it could be significant for all involved.
First, who may have suffered a loss?
The obvious party is KFC, which is part of the American conglomerate, Yum! Brands Inc (“Yum!”). In the UK, KFC is 95% franchised with restaurants owned and operated by a small number of franchisees. We don’t have any details of the franchise agreements, but if franchise payments to Yum! are fixed then it is the individual franchisees who may have suffered a loss. On the other hand, if franchise payments are variable, perhaps representing a percentage of the franchisee’s income or profits, Yum! may also have suffered a loss. Regardless of who may have suffered the loss, it may only be Yum! that has sufficient scale and financial resources to bring a claim against the likes of DHL and QSL.
It is possible that KFC’s claim against DHL and QSL could include losses it may suffer in the future. Part of KFC’s solution to mitigate the crisis has been to renew part of its logistics contract with Bidvest to ease the pressure on KFC and QSL. The new Bidvest contract must have been drawn up very quickly and the terms may be far less favourable than those of the DHL/QSL contract, or even the previous Bidvest contract. As such, KFC may find that it incurs higher supply and distribution costs in the future than it would have done under the DHL/QSL contract. However, given that it was a management decision to bring Bidvest back on board, and DHL and QSL may have been able to sort out their “teething problems” given a bit more time, it may be difficult for KFC to pin any future losses it may suffer onto DHL and QSL.
It is also possible that DHL and QSL have suffered losses or may do so in the future. Although it’s reported that DHL and QSL agreed to KFC’s switch back (in part) to Bidvest, the loss represents more than a third of the overall contract value. If DHL and QSL have incurred costs to gear themselves up for the full contract, they may now find themselves unable to recover these additional costs and out of pocket. Whether or not a counterclaim may be brought against KFC will depend on any early termination clauses included in the contract. It is likely that either party is able to terminate the contract early in the event of a significant breach of contract by the other party.
Next, the period of loss
On the basis that most restaurants had re-opened within three weeks, it may seem that the period of loss is limited to those three weeks. However, the effects may be longer lasting. It was reported that Burger King made the most of KFC’s situation by offering discounts on its chicken meals – KFC’s customers may now have found a new favourite source of chicken.
On the other hand, KFC may see an upside to the crisis in the long-run. With all the media coverage reminding people of KFC’s existence, now that it’s restaurants have re-opened, they may experience a sudden surge of customers seeking a fix of finger lickin chicken.
It is therefore important to wait a sufficiently long period of time before attempting to assess KFC’s overall losses.
Lastly, let’s not forget about the chicken
Fresh chicken is highly perishable and there are strict guidelines in force governing its supply, distribution and storage. The delivery problems are likely to have resulted in a stock-pile of chicken that KFC is unable to use. Whether KFC was successful in its reported attempts to offload the delayed chicken supplies is unknown. KFC may find that they simply have to write off the un-saleable stock and take an immediate loss. In addition, the cost of disposing of tonnes of out of date chicken may not be insignificant.