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Yum cutting some supplier ties after China food scare

BEIJING (Reuters) - Yum Brands Inc said on Monday it will stop using more than 1,000 slaughterhouses in China as it moves to tighten food safety and reverse a sharp drop in business at KFC restaurants in its top market after a scare over contaminated chicken.

Diners began avoiding Kentucky-based Yum's nearly 5,300, mostly KFC, restaurants in China in December after news reports and government investigations in the Asian country focused on chemical residue found in a small portion of its chicken supply.

Yum was not fined by Chinese food safety authorities, but its restaurant sales in the country dropped and have yet to recover. As a result, Yum warned this month that it expected 2013 earnings per share to contract, rather than grow.

Yum said it would end ties with smaller chicken suppliers that have not modernized their operations.

"This is a public problem. Even though China has rules on use of additive products, we very much regret that some people still operated while breaking those rules," Yum China Chairman and Chief Executive Sam Su told a news conference in Beijing.

Su declined to give specifics on other efforts to shore up the safety of the company's food supply in China or its plans to lure diners back.

Yum gets more than half of its overall sales from China, the world's fastest-growing major economy.

The scandal has been a blow to the company, which has a reputation for serving safe, high-quality meals in China, where food contamination is a chronic problem.

"This is going to be quite a management task for (Yum) in terms of their reputation," said David Mahon, managing director of Mahon China, an investment management company that advises multinational companies that operate in the Asian country.

"I think they'll put a lot of effort into closing suspect suppliers and bringing better standards and proving to consumers that they're doing so," Mahon said.

Ultimately, the Chinese government is responsible for setting and enforcing better food safety standards, he said.

Yum Chief Executive David Novak said early this month that time, not money, is the cure for the company's China sales drop.

Based on the company's experience with prior sales-damaging crises related to Severe Acute Respiratory Syndrome (SARS), avian flu and "Sudan Red" dye, Yum said it does not expect restaurant sales there to turn higher until the fourth quarter.

Shares in Yum closed down 1.1 percent at $64.73 on the New York Stock Exchange on Monday.

(Reporting by Beijing newsroom and Lisa Baertlein in Los Angeles; Editing by Ryan Woo and Dale Hudson)

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