There is a scandal regarding sanitation issues at one of Country Style Cooking’s (CCSC) stores in Chengdu City, Sichuan province. In this store, the workers recycled cooking oil from the remaining cooked food, did not wash vegetables after touching them with bare hands, continued to use vegetables after cutting the rotted parts, and found a dead mouse under the raw materials food shelf. This scandal has been well distributed in China within last 48 hours, but as far as we can tell has not been extensively discussed on U.S. shores. At least, we have not yet located a reference in the U.S. press.

On Nov. 22, 2011, CCSC acknowledged the issues mentioned in this scandal and issued a press release in the PRC, in Chinese. (http://news.chengdu.cn/content/2011-11/23/content_814749.htm?node=1760) The Food and Sanitation Bureau of Chengdu City is reviewing around 50 CCSC stores. (http://cd.qq.com/a/20111123/000110_1.htm).

Country Style Cooking ( CCSC) needs to maintain a high quality of service to customers

As a Chinese restaurant chain, the sanitation issue is a key one, as it is very important to maintain a high quality of service to customers. Generally, CCSC’s store does not keep open kitchens. The customers can not watch the operations in the kitchen. Following the fast expansion in the last two years, the ability of internal management to enforce high sanitation standards may become a difficult task to implement. Eventually, a potentially loose internal management structure and combined undetermined sanitation issues may adversely influence the business of CCSC. Even though this scandal has only been identified at one location, we believe that it is possible that, on the whole, a near term negative fallout could occur for the company as potential customers wait to be reassured by government inspections of around 50 stores that this is an isolated event.

Furthermore, CCSC recently issued its Q4 2011revenue guidance which was below analyst estimates (http://www.reuters.com/finance/stocks/CCSC.K/key-developments/article/2436454). We regard that this sanitation scandal may also adversely influence the updated 4th quarter revenue guidance of CCSC.

We believe that current share price weakness may be due to the market slowly acknowledging the existence of developments surrounding this food safety issue.

A reporter in China was working there for around a month and shot video. The following on-the-ground video surveying activity at the location in question is available to view on the web:

http://video.sina.com.cn/v/b/65805912-1655039853.html

  1. Recycled cooking oil from remaining cooked food. 00:25
  2. Touched raw vegetables without gloves and did not wash the food after it was de-frosted 01:14
  3. Continued to use the vegetables after cutting the rotted parts 2:11
  4. Dead mouse under the raw materials shelf 2:23
  5. The raw materials of the oil is refined from transgenic plants 2:42

Disclosure: Short CCSC