Case 2 McDonalds Russia

McDonald’s Russia: A Jewel in the

McDonald’s Emerging Market Operations?

McDonald's Corporation is one of the oldest chains of quick service restaurants in the

world and the largest. It was started in the late 1930s by two brothers Richard and

Maurice McDonald in California, the US. Within a few years, the chain had become

quite popular and it started to grow in numbers. The founders started to franchise out

the stores to other partners at a premium price. In 1967, it started its international

expansion for the first time by entering Canada and subsequently ramped up its

presence in other international markets.

McDonald's opened its first outlet in Russia in 1990. It entered at a time when the

country was still struggling to gain political and economic stability after reforms had

been introduced.

It started by developing the food processing unit and training the local suppliers.

McDonald's became an instant hit in the country where the culture of fast food was as

new as the burger. The company experienced many obstacles along the way but it

continued its slow and steady growth in the country. As of 2010, Russia was one of its

key markets in Europe and some experts considered it as the jewel in McDonald's

system.

The case details the difficulties McDonald's had in entering the country and discusses

how it overcame various challenges to establish itself firmly in the market. It discusses

in detail some of the strategies adopted by McDonald's in Russia, including HR

strategies, procurement strategies, expansion strategies, etc. that helped it gain a

strong footing in the Russian market - so much so that the company accounted for

more than two-third of the fast food market in Russia.

327

McDonald’s Russia:

A Jewel in the McDonald’s Emerging Market

Operations?

“We are not afraid of competition. The market is still in the making and one who takes

right decisions at the right time will be the leader. We did it 20 years ago… When we

saw the first queues that were lining up to our first restaurant in Moscow every day

and night all year round, our success was predetermined and all we had to do was to

develop as fast as possible.”1

- Khamzat Khasbulatov2, McDonald’s Corporation, president for Russia

and Eastern Europe, in December 2009.

“Of the 118 countries where McDonald’s Corp. does business, none can boast more

activity than Russia. On average, each location serves about 850,000 diners annually

-- more than twice the store traffic in McDonald’s other markets. That has presented

the world’s largest restaurant chain with an unusual dilemma. Russia, with its

burgeoning middle-class and consumer appetites for all things American, is a jewel in

the McDonald’s system.”3

- - The Wall Street Journal, October 16, 2007.

Introduction

The year 2008 was considered a landmark year for the world‘s largest fast food chain,

McDonald‘s Corporation (McDonald‘s). While many companies, cutting across

industries, were caught in the grip of the global economic recession, the fast food

chain registered record performance. ―[…] 2008 was a banner year for McDonald‘s.

Revenues increased to a record $23.5 billion … global comparable sales increased 6.9

percent, and we marked our 68th consecutive monthly increase … operating income

and earnings per share rose 17 and 15 percent, respectively (excluding the 2007 Latin

America transaction) … and we returned $5.8 billion to shareholders through share

repurchases and dividends paid. These financial results are among the best in our

Company‘s history,‖4 said Jim Skinner, Vice Chairman and CEO, McDonald‘s.

The company‘s European operations accounted for 42% of McDonald‘s total

revenues. According to the company, McDonald‘s had registered sound growth in

Europe in 2008, and this growth was spurred by performance in countries such as

France, the UK, Russia, and Germany. The company also posed strong results in

2009, with these markets spurring the growth.5 McDonald‘s had started investing in

1 Maria Kiselyova and Maria Plis, ―McDonald‘s to Target Stay-at-home Russians,‖

www.reuters.com, December 17, 2009. 2 Khamzat Khasbulatov was one of the four managers for the first outlet of McDonald‘s in

Russia. He was named to McDonald‘s top Russia position in 1999 and later took on the responsibility for the company‘s Eastern European restaurants.

3 Janet Adamy, ―As Burgers Boom in Russia, McDonald‘s Touts Discipline,‖ http://online.wsj.com, October 16, 2007.

4 ―McDonald‘s Corporation, 2008 Annual Report,‖ www.mcdonalds.com 5 ―McDonald‘s Delivers Another Year of Strong Results in 2009,‖ www.chainleader.com,

January 25, 2010.

International Business

328

Russia (then Soviet Union6) in the late 1980s and had ramped up its presence through

the 1990s and early 2000s despite facing some serious challenges. Some experts felt

that Russia was the company‘s best performing market in Europe and one of its best

performing markets in the world in 2009.7 As of early 2010, McDonald‘s dominated

the Russian fast food market with a 70 percent market share.8 ―Out of 10 people who

enter a food court, six go to McDonald‘s,‖9 said Mikhail Goncharov (Goncharov),

general director of the Teremok fast food chain.

McDonald‘s came into being in the late 1930s as a hot dog stand set up by two

brothers Richard McDonald and Maurice McDonald in California, the US. It started

its international expansion in 1967. McDonald‘s opened its first outlet in Russia in

1990, more than a decade after it had planned to enter the country. The entry was led

by George Cohon (Cohon), founder of McDonald‘s Canada operations, who had been

striving to enter the country since 1976.

The company faced several challenges in the country, primarily due to the

bureaucratic set up, strict laws, inability to convert the Russian ruble10

into other

currencies, and economic instability. According to analysts, McDonald‘s faced the

challenges successfully and developed its own supply chain in Russia, bringing in

experts from other countries. In order to standardize its services, it gave importance to

the training and development of its work force. The number of stores kept on growing

at a slow and steady pace in the 1990s and early 2000s.

In 2005, McDonald‘s Russia emerged as the second largest among McDonald‘s

markets in terms of average number of consumers per restaurant.11

From 127 stores in

2004, the company had opened multiple numbers of outlets each year. In 2007 and

2008, it also invested in overhauling the existing stores, with investment worth US$

500,000 on each store.12

Khamzat Khasbulatov (Khasbulatov), McDonald‘s president

for Russia and Eastern Europe, said that the company was interested in expanding its

business in Russia. He said McDonald‘s was keen on growing convenient formats like

express windows and drive-thru windows in the country.

―Russia is one of the most successfully developing markets of the McDonald‘s

Corporation in Europe,‖13

said Khasbulatov. As of early 2010, it continued to be one

the leading revenue contributors to the parent company. With 245 outlets already in

Russia as of early 2010, McDonald‘s was gearing up to add another 45 outlets by the

end of 2012.14

6 Prior to 1991, Russia was the largest republic in the Soviet Union (or USSR). The troubled

economic conditions together with political turmoil led to the dissolution of the Soviet Union

in 1991 into fifteen separate countries. As a result, Russia together with Ukraine and Belarus

formed the Commonwealth of Independent States which was later joined by other Soviet republics.

7 Yuri Mumchur, ―Obama in Moscow: True Reset or Just Walking in Circles?‖ www.russiablog.org, July 8, 2008.

8 Maria Kiselyova and Maria Plis, ―McDonald‘s to Target Stay-at-home Russians,‖ www.reuters.com, December 17, 2009.

9 Vladimir Kozlov, ―McDonald‘s Supersize Profits Conquer Moscow,‖ www.mnweekly.ru,

January 25, 2010. 10 Ruble is Russian currency. 1 US$=29.403 Ruble (As of January 2, 2009). 11 Chris Mercer, ―McDonald‘s Plans to Double Russian Presence,‖ www.foodnavigator.com,

February 3, 2005. 12 ―McDonald‘s to Open 40 Restaurants in Russia in 2008,‖ www.cdi.org, April 22, 2008. 13 ―McDonald‘s to Open 40 Restaurants in Russia in 2008,‖ www.cdi.org, April 22, 2008. 14 Jenny Wiggins, ―Growing Taste for Quality Goods Lures Big Brands,‖ www.ft.com, January

20, 2010.

McDonald’s Russia: A Jewel in the McDonald’s Emerging…

329

Background Note

McDonald‘s was started in the late 1930s by Richard and Maurice McDonald in California, after they failed to make profits from running a movie theater. The brothers were inspired by a hot dog stand nearby, which always did brisk business even when other businesses were struggling under the effects of the Great Depression

15.16

In 1937, the McDonald brothers started a hot dog stand called Airdrome, situated at Arcadia in California. Later, in 1940, they opened a barbeque restaurant in San Bernardino

17 and called it McDonald‘s Barbeque.

18 The barbeque restaurant had about

25 items on its menu like barbequed beef and pork sandwiches. It employed 20 carhops

19 to provide service to customers. It soon became a favorite hangout for the

teenagers in the city.20

In, 1948, the brothers found it difficult to manage such a large scale business with its extensive menus, staff, and the huge crowds that thronged the restaurant. They realized that the need of the hour was quick service and mass production of food items. Richard analyzed their menu and found that about 80% of the restaurant‘s sales were generated by the sale of hamburgers.

21

In December, 1948, the McDonald brothers reopened the store after incorporating new strategies to enable provision of fast service at a low price. This, they believed, would help in selling larger volumes. Taking a cue from the automobile industry, they decided to adopt an assembly line kind of approach to preparing food at the new restaurant.

22 This system was called the ‗Speedee System‘ and it greatly improved the

efficiency of the restaurant. The new concept established the principles of McDonald‘s fast food restaurants, and these were later adopted by several fast food restaurants.

After implementing the new system, McDonald‘s was able to sell a hamburger at 15 cents (it cost 30 cents earlier) and French Fries at 10 cents.

23 Around the same time,

the company‘s first mascot was conceptualized and was called ‗Speedee,‘24

primarily to signify its quick service.

In 1953, the McDonald brothers decided to go in for franchising in order to expand their business. For a thousand dollars, franchisees would receive the McDonald‘s name, a basic description of its service system, and the services of Art Bender

25

(Bender) at the new restaurant for a week, to help them with the business. Bender trained the people at the franchise, supervised the installation of the equipment, made contact with the butchers and bakeries for the supplies, etc. McDonald‘s first franchisee was Neil Fox, who had a drive-in restaurant in Phoenix, Arizona. This

15 Great Depression in the US was a period of acute economic crisis that started in 1929 as a

result of crash of the Wall Street stock market and lasted till around early 1940s. 16 Jane McGrath ―How McDonald‘s Works,‖ http://money.howstuffworks.com 17 San Bernardino is a county in California, USA. 18 ―Dick and Mac McDonald,‖ www.nationmaster.com 19 A carhop is a waiter or waitress who delivers food to customers in their cars at drive-in

restaurants. Carhops originated in the 1940s when drive-in eateries became popular. 20 ―McDonalds-Site History,‖ http://www.route-66.com. 21 ―McDonalds-Site History,‖ www.route-66.com. 22 ―A Brief History of McDonald‘s,‖ www.bbc.co.uk, April 18, 2005. 23 www.mcdonalds.ca. 24 ‗Speedee‘ looked like a man with a hamburger shaped head, wearing a hat. 25 Art Bender was associated with the McDonald brothers and was credited with serving the

first McDonald‘s hamburger at their San Bernardino store. He later became a franchisee of McDonald‘s.


330

restaurant became the prototype for the McDonald‘s chain. The red & white building with a slanting roof and the ‗Golden Arches‘ on the sides became the model for McDonald‘s restaurants. In the years that followed, McDonald‘s grew from strength to strength and by the mid-1950s, the fast food chain‘s annual revenues were US$ 350,000.

26

In 1954, Ray Kroc (Kroc), a salesman for a company that manufactured milkshake

mixers, noticed that one of his largest customers was a California-based restaurant

owned by the McDonald brothers. Kroc found out that they used an assembly line-like

system for making hamburgers and sandwiches and that the restaurant already used

eight milkshake machines. Sensing an opportunity for more business, he went to meet

the McDonald brothers.

One look at the orderly, efficient restaurant that served a huge customer base was

enough to convince him that he could sell the milkshake mixers to every McDonald‘s

store that opened. The purpose of the visit was to persuade the McDonald brothers to

open more restaurants so that he could sell milkshake mixers to them. But the brothers

were not interested in expanding the business further and seemed content with the

existing operations. Kroc then expressed his willingness to become the franchising

agent of McDonald‘s restaurants and he succeeded in convincing them. In 1955, the

company was incorporated as McDonald‘s Corporation.27

The McDonald‘s bothers

finally sold the business to Kroc in 1961.

Over the years, as the business expanded, the company‘s operation was divided into

four segments – the US, Europe, Asia Pacific, the Middle East & Africa (APMEA)

and other countries including corporate sales (Refer to Exhibit I for Important

Milestones in McDonald‘s Growth).

In 2003, the company experienced a quarterly loss for the first time since it went

public in 1965. This was mainly due to the decrease in sales as a result of a rising

concern among people about the effects of fast food on health. Responding to the

concern, McDonald‘s switched to healthier meals and introduced salads and fresh

fruits on its menu.28

As of 2010, McDonald‘s was headquartered in Oak Brook,

Illinois, with James A. Skinner (Skinner), as Chairman and CEO of the company.

Experts felt that the company had negotiated the economic slowdown well and things

were looking up for the fast food chain (Refer to Exhibit II for the financial summary

of McDonald‘s Corporation: 2004-2008).

International Expansion

McDonald‘s began its international expansion in 1967 with its first restaurant outside

the US coming up in Richmond B.C, Canada on June 1. In July 1971, McDonald‘s

began operating in Tokyo, Japan, in a joint venture with a local partner Den Fujita.29

In the same year, the first McDonald‘s in Europe came up in the Netherlands.

Restaurants also opened in Munich, Germany; and Australia. In the early 1970s,

McDonald‘s also entered France and England.

26 http://www.mcdonalds.ca 27 ―McDonald‘s Corporation, Company History,‖ www.answers.com 28 Geoffrey Jones, ―Multinationals and Global Capitalism,‖ Oxford University Press. 29 Den Fujita owned an import company in Japan, specializing in handbags, shoes, and apparel,

before opening McDonald‘s in Japan.


331

Exhibit I

Growth of McDonald’s Corporation

1950s

1954 Ray Kroc became the franchising agent of McDonald‘s. Kroc‘s vision was

to expand the fast food chain in every American State and internationally

as well. He wanted McDonald‘s fast food restaurants to serve quality food

by adhering to standards and specifications

1955 Kroc started a new franchising company under the name McDonald‘s System, Inc. and in the same year opened his own McDonald‘s drive-in at Des Plaines, Illinois. McDonald‘s franchising agreement was that anyone who wished to become a franchisee would initially pay a sum of a thousand dollars. Later on, 1.9 percent of the annual profits of the restaurant were to be paid. Kroc would then pass 0.5 percent of the takings to the McDonald brothers, keeping the other 1.4 percent with him.

1956 By the end of this year, there were fourteen McDonald‘s restaurants that served nearly 50 million hamburgers. The company reported annual sales of US$1.2 million.

1960s

1960 Kroc was running the whole show by this time. He renamed the company as ‗McDonald's Corporation.‘ He wanted to put up a McDonald‘s restaurant in every state of America. He personally looked after the operations, measured every product, and tasted burgers in every outlet to ensure that the quality of food served was uniform in every McDonald‘s restaurant. In the same year, McDonald‘s started its advertising campaign ‗Look for the Golden Arches‘ which gave sales a big boost. The McDonald brothers were happy with the results and were not concerned about the company Kroc had formed. In 1960, there were 228 McDonald‘s restaurants that reported US$37.6 million in sales, and sold 400 million hamburgers.

1961 Ray Kroc began letting out more franchises. The revenues that the company received from the franchises made it easier for him to raise capital in the financial markets. He utilized some of the money to create an advertising campaign with the theme, ‗Look for the Golden Arches‘. The company‘s logo was changed from ‗Speedee‘ to a letter ‗M‘ symbolizing the Golden Arches. Kroc was not happy with the restrictive agreement he had been operating under and wanted to operate the franchising business on his own. So he offered to buy out McDonald‘s for US$ 2.7 million. He obtained a loan and took over the business from the McDonald brothers. That same year, he opened a Hamburger University in the basement of a restaurant in Elk Grove Village, Illinois. It was a training facility where new franchisees and store managers were taught how to manage a McDonald‘s restaurant using sophisticated training techniques and through high-level management courses.

1963 McDonald‘s sold one million hamburgers per day in the US. In the same

year, the company introduced Ronald McDonald, a red-haired clown, to

appeal to children.

1965 On July 5, McDonald‘s was listed on the New York Stock Exchange and

sold its shares for US$ 22.50 each.


332

1968 McDonald‘s well known product Big Mac30

was created. Fred Turner

became the company‘s president and chief administrative officer while

Kroc became the chairman and remained CEO until 1973. McDonald‘s

opened its 1000th

restaurant in Des Plaines, Illinois.

1970s

1970 By 1970, McDonald‘s reported US$587 million in sales from almost 1,600

restaurants in all 50 states of the US.

1973 McDonald‘s introduced its first breakfast fast food ‗The Egg McMuffin‘31

.

1975 McDonald‘s opened its first drive-thru restaurant in Oklahoma City.

1979 McDonald‘s Happy Meal32

was created and was popular with children as

well as adults.

1980s

1980 By 1980, McDonald‘s reported sales of US$ 6.2 billion from its 6,263 restaurants in 27 countries and surpassed the 35 billion hamburger milestone. During the 1980s, McDonald‘s diversified its menu to suit the changing tastes of consumers.

1982 McDonald‘s received The American Marketing Association Achievement Award for excellence in marketing programs.

1983 Chicken McNuggets were introduced. By the end of the year, McDonald‘s had become the second largest retailer of chicken based products in the world.

1984 On January 14, Kroc died. That same year, McDonald‘s broke the US$ 10 billion sales barrier and served its 50 billionth hamburger.

1986 McDonald‘s opened its ten thousandth restaurant.

1988 Fortune Magazine listed McDonald‘s hamburgers among ‗the 100 products America makes best‘.

1990s

1990 By 1990, McDonald‘s sales had grown to US$ 18.7 billion with 11,800 restaurants in 54 countries. In 1990, Life Magazine named Kroc as one of the ‗100 Most Important Americans of the 20th Century‘.

1996 The fast food chain reached the 20,000-restaurant mark.

1997 By the end of the year, the total number of McDonald‘s restaurants reached the 23,000

th mark.

1999 McDonald‘s acquired its first stake in a Colorado-based fast food chain,

Chipotle Mexican Grill, by buying a minor share in the company. In 1999,

McDonald‘s 25,000th unit opened.

30 The Big Mac is a hamburger consisting of two 1.6 oz (45.4 g) beef patties, iceberg lettuce,

American cheese, pickles, onion, and special McDonald‘s Mac sauce served on a three-part sesame seed bun.

31 The Egg McMuffin is the signature breakfast sandwich sold by McDonald‘s in various sizes and configurations.

32 Happy Meal is a combo meal with a toy, specially tailored for children by McDonald‘s. The meal includes a burger or Chicken McNuggets, French fries, a drink and a toy.


333

2000s

2000 In May, McDonald‘s bought the bankrupt Boston Market chain33

for

$173.5 million in cash and debt, the largest acquisition till date. In the

2000s, McDonald‘s introduced low-calorie menu items and switched to

healthy cooking ways like using low fat oil.

2002 In October, McDonald‘s introduced its famous Dollar menu.

2003 In September, McDonald‘s launched its advertising campaign on MTV

with the tag line, ‗I‘m lovin‘ it‘. This was McDonald‘s first global

campaign to be advertised in more than 100 countries. This campaign was

successful as store sales for the year 2003 increased by 2.4 percent after

falling 2.1 percent in 2002.

Compiled from various sources

Exhibit II

Financial Summary of McDonald’s Corporation (2004-2008)

US Dollars in millions, except

per share data

2008 2007 2006 2005 2004

Company-operated sales

Franchised revenues

16,561

6,961

16,611

6,176

15,402

5,493

14,018

5,099

13,055

4,834

Total revenues 23,522 22,787 20,895 19,117 17,889

Operating income

Income from continuing

operations

Net income

6,443

4,313(1)

4,313(1)

3,879(2)

2,335(2,3)

2,395(2,3,4)

4,433(5)

2,866(5)

3,544(5,6)

3,984

2,578(7)

2,602(7)

3,554(8)

2,287(8)

2,279(8)

Cash provided by operations

Cash used for investing

activities

Capital expenditures

Cash used for (provided by)

financing activities

Treasury stock repurchased

Common stock cash dividends

5,917

1,625

2,136

4,115

3,981

1,823

4,876

1,150

1,947

3,996

3,949

1,766

4,341

1,274

1,742

5,460

3,719

1,217

4,337

1,818

1,607

(442)

1,228

842

3,904

1,383

1,419

1,634

605

695

Financial position at year end:

Total assets

Total debt

Total shareholder‘s equity

Shares outstanding in millions

28,462

10,218

13,383

1,115

29,392

9,301

15,280

1,165

28,974

8,408

15,458

1,204

29,989

10,137

15,146

1,263

27,838

9,220

14,201

1,270

33 At the time of acquisition, there were more than 850 Boston Market outlets, which

specialized in home-styled meals like rotisserie chicken.


334

Per common share:

Income from continuing

operations–diluted

Net income-diluted

Dividends declared

Market price at year end

3.76(1)

3.76(1)

1.63

62.19

1.93(2,3)

1.98(2,3,4)

1.50

58.91

2.29(5)

2.83(5,6)

1.00

44.33

2.02(7)

2.04(7)

.67

33.72

1.80(8)

1.79(8)

0.55

32.06

Company-operated restaurants

Franchised restaurants

6,502

25,465

6,906

24,471

8,166

22,880

8,173

22,593

8,179

22,317

Total Systemwide restaurants 31,967 31,377 31,046 30,766 30,496

Franchised sales 54,132 46,943 41,380 38,913 37,052

(1) Includes income of $109.0 million ($0.09 per share) from the sale of the Company‘s

minority ownership interest in U.K.- based Pret A Manger.

(2) Includes pretax operating charges of $1.7 billion ($1.32 per share) related to impairment and

other charges primarily as a result of the Company‘s sale of its businesses in 18 Latin

American and Caribbean markets to a developmental licensee (see Latam transaction note to

the consolidated financial statements for further details).

(3) Includes a tax benefit of $316.4 million ($0.26 per share) resulting from the completion of an

Internal Revenue Service (IRS) examination of the Company‘s 2003-2004 U.S. federal tax

returns.

(4) Includes income of $60.1 million ($0.05 per share) related to discontinued operations

primarily from the sale of our investment in Boston Market.

(5) Includes pretax operating charges of $134 million ($98 million after tax or $0.08 per share)

related to impairment and other charges.

(6) Includes income of $678 million ($0.54 per share) related to discontinued operations

primarily resulting from the disposal of McDonald‘s investment in Chipotle.

(7) Includes a net tax benefit of $73 million ($0.05 per share) comprised of $179 million ($0.14

per share) of income tax benefit resulting from the completion of an IRS examination of the

Company‘s 2000-2002 U.S. tax returns, partly offset by $106 million ($0.09 per share) of

incremental tax expense resulting from the decision to repatriate certain foreign earnings

under the Homeland Investment Act (HIA).

(8) Includes pretax operating charges of $130 million related to impairment and $121 million

($12 million related to 2004 and $109 million related to prior years) for a correction in the

Company‘s lease accounting practices and policies, as well as a non-operating gain of $49

million related to the sale of the Company‘s interest in a U.S. real estate partnership, for a

total pretax expense of $202 million ($148 million after tax or $0.12 per share).

Source: 2008 Annual Report

In 1990, McDonald‘s opened up in Russia by starting a restaurant in Moscow. This

was the largest McDonald‘s restaurant at that time. During the year, McDonald‘s also

opened in Shenzhen, China. This restaurant was even bigger than the Russian one and

attracted a larger number of people (around 40,000) on the opening day. The store was

spread over an area of 28,000 square feet and had 29 cash counters. The Chinese

operation was a joint venture agreement between the General Corporation of Beijing

Agriculture, Industry, and Commerce and McDonald‘s.


335

In 1992, two outlets were opened in Poland and each separately surpassed the records

set earlier by Russia and China in terms of first day transactions. The year also

witnessed McDonald‘s entry into Africa with the opening of a restaurant in Morocco.

By the early 1990s, McDonald‘s had a presence in 58 countries worldwide.

In October 1993, another important phase of the company‘s expansion came when it

entered the Middle East market by starting a restaurant in Tel Aviv, Israel. Slowly,

restaurants also came up in the Gulf region — in Saudi Arabia, Oman, Kuwait,

Bahrain, the United Arab Emirates, and Qatar and Egypt. By 1995, there were about

7,033 McDonald‘s restaurants spread across 89 countries and they generated sales

worth US$14 billion.34

In 1996, McDonald‘s entered India with a restaurant coming up in New Delhi. In

India, it entered through a franchisee. By 2007, international sales were reported to be

a major contributor to the company‘s annual revenue (Refer to Table I for the

revenues of McDonald‘s Four Operational Regions: 2006-2009).

Table I: Revenues of McDonald’s Four Operational Regions: 2006-2009

(In US$ million) 2008 2007 2006

Company operated sales:

US 4,636 4,682 4,410

Europe 7,424 6,817 5,885

APMEA 3,660 3,134 2,674

Other Countries and Corporate 841 1,978 2,433

Total 16,561 16,611 15,402

Franchised and affiliated:

US 3,442 3,224 3,054

Europe 2,499 2,109 1,753

APMEA 571 465 379

Other Countries and Corporate 449 378 307

Total 6,961 6,176 5,493

Total revenues:

US 8,078 7,909 7,464

Europe 9,923 8,962 7,638

APMEA 4,231 3,599 3,053

Other Countries and Corporate 1,290 2,356 2,740

Total 23,522 22,787 20,896

Source: McDonald’s Corporation, Annual Reports, www.mcdonalds.com

34 ―McDonald‘s History,‖ www.mcdonalds.ca.


336

By 2008, McDonald‘s had more than 31,000 restaurants spread over 121 countries

and it was regarded as one of the most successful restaurant chains (Refer to Exhibit

III for a list of countries where McDonald‘s was operational, as of 2008).35

Exhibit III

List of Countries Where McDonald’s was Operational, as of 2008

Year of

Opening

Restaurant

Country and Date of First Restaurant Opening

1967 Canada - June 1

Puerto Rico – November 10

Costa Rica –December 28

1971 Guam- June 10

Australia-May 30

Japan - July 20

Netherlands-August 21

Panama -September 1

Germany (West)- November 22

1972 France-May 30

El Salvador-July 20

1973 Sweden-27 October

1974 Guatemala-June 6

United Kingdom-October 1

Netherlands Antilles-16 August

1975 Hong Kong-January 8

Nicaragua+

The Bahamas –August 4

1976 New Zealand -June 7

Switzerland - October 20

1977 Ireland - May 9

Austria - July 21

1978 Belgium- March 21

1979 Brazil-February 13

Singapore - October 20

1981 Spain - March 10

Denmark - April 15

Philippines – September 27

1982 Malaysia – April 29

1983 Norway –November 18

1984 Taiwan (Republic of China)-January 28

Andorra – June 29

Finland – December 14

1985 Thailand –February 23

Luxembourg –July 17

Venezuela –August 31

Italy - October 15

Mexico- October 29

35 ―McDonalds Corporation,‖ www.fortune500news.com.


337

Year of

Opening

Restaurant


1986 Cuba – April 24

Turkey – October 24

Argentina –November 24

1987 Macau - April 11

1988 Serbia - March 24

South Korea -March 29

Hungary –April 30

1990 Union of Soviet Socialist Republics - 31 January -

(in Russian SFSR, now Russia)

People‘s Republic of China - October 8 (in

Shenzhen)

Chile –November 19

1991 Indonesia –February 23

Portugal - May 23

Greece-November 12

Uruguay – November 18

1992 Czechoslovakia (Later became the Czech Republic

and Slovakia) - March 20

Poland – June 17

Monaco - November 20

Brunei – December 12

Morocco –December 18

1993 Northern Mariana Islands 18 March

Iceland - September 3

Israel - October 14

Slovenia –December 2

Saudi Arabia –December 8

1994 Kuwait –June 15

New Caledonia - July 26

Oman –July 30

Egypt –October 20

Bulgaria –December 10

Bahrain –December 15

Latvia –December 15

United Arab Emirates –December 21

1995 Estonia –April 29

Romania –June 16

Malta – July 7

Colombia –July 14

Slovakia –October 13

South Africa –November 11

Qatar –December 13

Honduras –December 14

1996 Croatia –February 2

Samoa –March 2


338

Year of

Opening

Restaurant


Fiji –May 1

Liechtenstein –May 3

Lithuania - May 31

India –October 13

Peru –October 18

Jordan –November 7

Paraguay –November 21

Dominican Republic - November 30

Belarus – December 10

French Polynesia – December 10

1997 Ukraine - May 28

Cyprus - June 12

Macedonia - September 6

Ecuador - October 9

Isle of Man - December 15

Suriname - December 18

1998 Moldova - April 30

Lebanon –September 18

Pakistan -September 19

Sri Lanka -October 16

1999 Georgia -February 5

San Marino - July 6

Gibraltar -August 13

Azerbaijan - November 6

2000 American Samoa - 29 September

2001 Mauritius – July 4

2003 Kazakhstan

2004 Montenegro - June

+ McDonald‘s outlets ceased operation during the Nicaraguan civil war and re-

established a presence on 11 July 1998 after an absence of two decades.

# List not exhaustive


In every country, McDonald‘s followed a few basic strategies of entry and expansion.

In some places it opened stores as a joint venture with a local partner while in others it

went in for franchise agreements or self-owned stores. However, it mainly in went for

a franchise mode of operation and about 80% of its restaurants were franchised.

McDonald‘s tried to maintain a standard menu in all countries. It followed standard

practices of store operation, such as mostly hiring local people, maintaining the same

look and feel to the stores, offering the same level of customer service in all its stores,

the same methods of food preparation, etc.

According to analysts, McDonald‘s key to international success was — ‗think global,

act local‘. This helped the company to do well in every region in which it opened its

fast food restaurants. It localized its operations depending on the country in which it


339

was operating. For instance, to make it easy for Japanese consumers to pronounce the

chain‘s name, McDonald‘s was changed to Makudonaldo. Keeping in mind local

sentiments, McDonald‘s restaurants in Arab countries, Malaysia, and Singapore

maintained ‗halal‘ menus36

and did not serve pork, abiding by Islamic laws for food

preparation. In Saudi Arabia, McDonald‘s did not display statues or posters of Ronald

McDonald, since the display of idols was prohibited in Islam.

In Israel, McDonald‘s outlets did not serve dairy products37

, and they were closed on

Saturdays, the Jewish Sabbath Day38

. In India, McDonald‘s restaurants served

Vegetable McNuggets, to cater to the vegetarians and a mutton-based Maharaja Mac39

as in that country some communities considered the cow sacred and did not eat beef.

In Ireland, the McDonald‘s promotions stated ―Our name may be American, but we‘re

all Irish‖.

McDonald‘s even altered the original menu to meet the needs of the customers in

different countries. It adapted its product offerings to suit the tastes of the local

people. In tropical countries, guava juice was added to the McDonald‘s menu. Beer in

Germany, fired egg sandwiches in Malaysia, chilled yogurt drinks in Turkey, espresso

and cold pasta in Italy, and vegetarian burgers in the Netherlands were some of the

menu variations at the McDonald‘s restaurants. McDonald‘s offered choice and

variety with locally suitable menus such as the Teriyaki Mac40

in Japan and variations

of the Filet-O-Fish41

in China. It also introduced McGriddles sandwiches in Japan.

In Norway, McDonald‘s sold a grilled salmon sandwich called McLaks. It sold

spaghetti noodles served in sweet tomato-based sauce, hot dogs and grated pasteurized

cheese called McSpaghetti in Philippines. McHuevo, a poached egg hamburger, was

available at McDonald‘s outlets in Uruguay. In Thailand, McDonald‘s introduced the

Samurai Pork Burger with sweet sauce.

Irrespective of variations and additions, the basic structure of the McDonald‘s menu

remained uniform throughout the world comprising a main course of burger or

sandwich, fries, and a Coca Cola drink. Even though the main course varied in some

countries, the signature product of McDonald‘s – the fries — were present in all its

menus worldwide.

As for the prices, they were set in each country on the basis of the demand for the

item. For instance, in the US, a Big Mac with fries was priced low as it was a common

food item but in some other countries where it was perceived as a luxury, it was priced

higher.

36 Halal is an Arabic term meaning ‗permissible.‘ It usually refers to food that is permissible

according to Islamic law. McDonald‘s underwent rigorous inspections by Muslim clerics to

ensure that its food was halal. The chain was then awarded the halal certificate indicating the

total absence of pork products. 37 Jews do not eat or cook meat and dairy products together. 38 The Jewish Sabbath day, called Shabbat in Hebrew, begins on Friday evening and ends on

Saturday evening. The Jewish refrain from doing any kind of activity on this day. 39 Maharaja Mac is another name for Big Mac, and is made with lamb instead of beef. 40 Teriyaki Mac is a Japanese styled burger containing pork with mayonnaise, lettuce, and

teriyaki sauce. 41 The Filet-O-Fish is a fish sandwich containing fish patty made mostly from whitefish, half a

slice of processed cheese, tartar sauce, and filet seasoning on a steamed bun.


340

Entering Russia

McDonald‘s pre-entry plans for Russia started way back in 1976. Cohon, at the time

of the Montreal Games42

in Canada, offered the services of the McDonald‘s company

bus to some of the Olympic officials from the erstwhile Soviet Union. He took the

officials to a local McDonald‘s restaurant and offered them some of its signature

dishes. The group enjoyed the food at McDonald‘s. It immediately struck Cohon that

the McDonald‘s experience could be taken to Russia. 43

Over the next four years, Cohon kept on persuading government officials to allow

McDonald‘s to open its outlets in Russia during the 1980 Moscow Olympic Games.

However, that did not materialize. For several years, Cohon‘s plans of entering Russia

did not bear fruit. Cohon paid numerous visits to the Soviet Union, each time trying to

convince the bureaucrats in that country. During some of his visits, he even carried

along a video to show the bureaucrats the visuals of the restaurants, so that they could

understand better what actually McDonald‘s was all about. But these efforts proved to

be in vain due to the high level of bureaucracy in the country.

According to Cohon, while he earnestly tried to strike a deal to open McDonald‘s

outlets in Russia, some of the officials at the company‘s headquarters in the US

criticized his efforts. According to analysts, McDonald‘s chairman Kroc himself had

ruled out the idea of being able to open an outlet in Russia.44

In April 1988, after the reforms movements of perestroika45

led by Mikhail

Gorbachev, liberalized the Soviet economy, the Soviet government allowed foreign

companies to have 49% ownership in ventures in the country. McDonald‘s Canada

entered into a US$ 50 million joint venture million with Glavobshchepit46

, to open 20

restaurants in the country.47

The deal also allowed the company to purchase land to

build a processing unit.48

The joint venture was called McDonald‘s Russia.49

McDonald‘s Canada agreed to reinvest all its profits in Moscow for a chain of

20 restaurants.

The company brought out an employment advertisement in newspapers for 630 posts

and received about 27,000 applications. One of the first managers to be recruited was

Khasbulatov, who contributed significantly to the establishment and expansion of

McDonald‘s in the country and later went on to become the managing director of the

Russian Operations. The Russian junior managers were sent for training to

McDonald‘s Canadian Institute of Hamburgerology.

42 Montreal Games referred to the 1976 Summer Olympics, or XXI Olympics, held in

Montreal, Quebec, Canada. 43 Janet Adamy, ―As Burgers Boom in Russia, McDonald‘s Touts Discipline,‖

http://online.wsj.com, October 16, 2007. 44 Alf Nucifora, ―Russians Learn to Smile-for Profit,‖ Business News, September 27, 1999. 45 Perestroika is the Russian term, meaning restructuring, for the political and economic

reforms introduced in June 1987 by the Soviet leader Mikhail Gorbachev. 46 Glavobshchepit, a part of the government body, was the food services agency of the city of

Moscow. It was later renamed as Mosobshchepit. 47 Foster, P., ―McDonald‘s Excellent Soviet Venture?‖ Canadian Business, Vol. 64, Issue 5,

May 1991. 48 Tony Royle, ―The Union Recognition Dispute at McDonald‘s Moscow Food-Processing,‖

Industrial Relationship Journal, Blackwell Publishing Ltd., 2005. 49 As of 2009, McDonald‘s owned all of its Russian operations.


341

According to Cohon, he had made good friends in the political circles of Russia, which turned out to be very valuable for the company as these people lent their support to the company‘s activities in the country. For instance, the Russian army helped to dig trenches when the processing unit, called McComplex, was being built.

In 1989, a 100,000 square feet McComplex, built at an investment of US$ 45 million, was opened in Solntsevo, a suburb near Moscow. It manufactured buns, cheese, burger patties, as well as other items, not just for the Russia market but also for the company‘s other restaurants in 17 other countries.

50

On January 31, 1990, McDonald‘s opened its first restaurant in Russia at Pushkin Square, Moscow. The opening was widely publicized not only by the Russian media but by the international media as well. It was the largest McDonald‘s restaurant till that time, spread over 23,680 square foot area on multi levels, had a seating space for 700 customers, and 27 cash registers. According to reports, around 40,000 people queued up and waited for two hours for the opening.

51 According to Khasbulatov, on

the opening day, there were queues outside the store even at closing time at night and he had to unwillingly turn them away. On the opening day, the store first served orphans and children, before entertaining other guests, who included high ranked government officials as well as some celebrities.

52 The store broke the then existing

records for the number of customers served on the opening day.

This store marked the beginning of not just the first McDonald‘s in Russia but the first fast food restaurant to ever come up in Russia. With this beginning, McDonald‘s also became a symbol of the advent of American capitalism in the country, opined the analysts.

In contrast to its standard procedure of going in for a franchising agreement or a joint venture, the McDonald‘s outlets in Russia were wholly owned without any partners.

53

The company also did not use franchising in Russia despite it being a key factor for its international operations in other countries. According to Khasbulatov, this was due to the fact that there were some gaps in the existing legislations relating to franchising in Russia. In Russia, the law on commercial concession governed franchising, but franchisers often felt that the legislation lacked clarity.

54 However, the company did

not rule out the franchise option. Commenting on the company‘s franchise program, Khasbulatov said ―franchising will appear in Russia as soon as it becomes possible, but for now there is no motivation to sell franchised restaurants.‖

55

Analysts felt that it was a wise decision for the company since the fast food industry was new in the country and it was difficult to find an efficient partner who would completely understand the operation and stand up to the quality standards set by the company. As Alexander Gragin, a partner at Deloitte

56, Moscow, put it, ―Regional

restaurant franchises [in Russia] can really vary in the quality and service that they offer. The tricky part of selling franchises is finding reliable partners in the regions. Also the legal situation with franchises at the federal level is as yet unclear.‖

57

50 ―The Taste of Pace: Situating Fast Food Restaurants in Russia‘s Agrifood System,‖

http://ageconsearch.umn.edu, May 18, 2007. 51 ―McDonald‘s Russia,‖ Brand Strategy, November 2005. 52 ―McDonald‘s in Moscow,‖ http://goldenessays.com/free_essays/2/economics/mcdonalds-in-

moscow.shtml 53 ―McDonalds Set for 20% Expansion in Russia,‖ www.sptimes.ru, June 10, 2005. 54 Maria Levitov, ―McDonald‘s to Invest $50 Million,‖ The Moscow Times, March 16, 2006. 55 ―McDonald‘s to Open 40 Restaurants in Russia in 2008,‖ www.cdi.org, April 22, 2008. 56 Deloitte Touche Tohmatsu (Deloitte), founded in 1845, is one of the leading firms in the

world, delivering professional services like auditing, consulting, financial advisory etc. It is headquartered in New York, USA.

57 ―McDonalds Set for 20% Expansion in Russia,‖ www.sptimes.ru, June 10, 2005.


342

Expansion in Russia

Right from the early 1990s, McDonald‘s started to invest in real estate ventures by

acquiring various properties in Russia. As there was some difficulty in the conversion

of the Russian ruble into any other currency, the company thought of using it for

buying farmland and for building an office tower and distribution center in the

country. In 1993, McDonald‘s first corporate building in Russia came up near

Moscow Kremlin58

. The company also leased out office space to Coca-Cola

Company59

and Upjohn60

. McDonald‘s continued to purchase many restaurant

properties over the years.61

In 1993, two restaurants came up in Gazetny Pereulok and Stary Arbat.62

By the end

of the year, three of its restaurants in Russia had begun to earn profits.63

In 1996, McDonald‘s introduced the drive-thru format in Russia. It was a new concept

in the country. Initially, people bought the food from the drive-thru windows, then

parked their cars around the store and went inside the restaurants to eat whatever they

bought. Over the years, the Russians not only learnt to appreciate the convenience

associated with the format, but also started to acknowledge the delivery speed.

In 1998, 19 McDonald‘s restaurants opened in various parts of the country. However,

due to the Russian financial crisis64

and weakening of the economy around the same

time, the company decided to go slow with the expansion. By 1999, the company had

made investments worth around US$ 134 million in the country since 1989.65

However, the strong bureaucracy in the country continued to create hindrances.

In 1999, Khasbulatov was made the head of the Russian venture of McDonald‘s.

Things took a turn for the worse around 2000, as the condition of some of the

restaurants deteriorated. Some items on the menu were also losing their appeal.

According to Svetlana Polyakova, Public Relations Manager, McDonald‘s Russia, by

2001, the company had invested around US$ 215 million in Russia. There were about

6,000 employees at that time.66

As of 2001, McDonald‘s International held an 80%

stake while the government held the remaining 20% in McDonald‘s Russia. By then,

there were about 40 stores in Moscow and more than 32 in the rest of the country.67

The Russian economy also started to improve around the same time in the early

58 Moscow Kremlin is the official residence of the President of Russia. 59 Coco-Cola Company is a leading beverage company with a worldwide presence. 60 Upjohn was a pharmaceutical company. 61 Erin E. Arvedlund, ―McDonald‘s Gobbles up Russian Real Estate,‖ www.iht.com, March 18,

2005. 62 Dmitry Dobrov, Kommersant Vlast ―Food Industry 1991-2000,‖ www.russiajournal.com,

October 26, 2001. 63 Janet Adamy, ―As Burgers Boom in Russia, McDonald‘s Touts Discipline,‖

http://online.wsj.com, October 16, 2007. 64 The Russian financial crisis started in August 1998, primarily due to a financial crisis in

Asia. There was a decline in world commodity prices, which impacted countries that

depended heavily on the export of raw materials. Russia, which depended a lot on the exports of petroleum, natural gas, metals, and timber, was also affected.

65 Natalia Olynec, ―Big Mac Blues in Russia,‖ Bloomberg News, www.bellybuttonwindow.com, 1999.

66 ―US Fast Food Firm Expanding in Russia,‖ Interfax, CDi Russia Weekly #136, www.cdi.org, January 05, 2001.

67 Vladimir Kozlov, ―Fast-Food Profits Offer Food for Thought,‖ www.russiajournal.com, November 29, 2001.


343

2000s, and this provided a boost to the company‘s growth plans (Refer to Exhibit IV

for a brief note on Russia‘s economy in the early 2000s).

Exhibit IV

A Brief Note on Russia’s Economy in the Early 2000s

Since the early 2000s, the Russian economy had seen a steady growth, fueled by the

rise of consumerism. According to analysts, the economy grew at 6.9% rate

between 2003 and 2007. In 2007, there was an increase by 10.4% in the average

Russian disposable income. In 2008, it was estimated that above 60% of the

population had a disposable income of US$ 350 on an average, after regular

household expenses. However, analysts suggested that there existed an income

inequality in Russia, which was higher than that in any other European country but

still lower than that in the US. Analysts said that about 80% of consumption came

from the top 10% earners in the country. Therefore, they added, if the difference

reduced in future and more people became wealthy, consumerism would further

rise.

In addition to the rise in disposable income, consumerism was also boosted by the

availability of liquid money due to growth in the credit market. This gave the

households added power to spend, which in turn propelled the retail sector. Thus,

analysts suggested that the rise of retail trade turnover, consumer spending power,

and increased visits to restaurants and other food joints had become the prime

factors that boosted the Russian economy in the early 2000s.

In 2007, Russia became a favorable place for foreign investment and witnessed

about US$ 100 billion worth of investment, a record for any emerging country and

more than what the world‘s top 15 leading economies could attract. Also, most of

these investments were reported to be for a long time basis.

The country witnessed an inflation rate of about 9% in 2007, with the FMCG

section witnessing 13% inflation. Analysts feared that the rising inflation could

impact the growing economy. They pointed out that the consumer prices had

increased since there was an increase in salaries, pension, etc, that led to spending

that was higher than the economic growth. As a result, the supply of money

increased, leading to a decrease in the purchasing power of the ruble. The

circulation of money was also higher, leading to erosion in the purchasing power of

the currency.

The average growth rate of Gross Domestic Product (GDP) in the period between

2000 and 2007 was about 6.5%. In the first half of 2008, the country witnessed a

Gross Domestic Product (GDP) growth of 8%. However, toward the end of 2008,

the Russian economy faced some challenges due to rising oil prices and the

depreciating value of the ruble in the international market.

Like other western countries, Russia‘s economy was affected by the credit crunch,

thus reducing the liquidity in the country. The stock market also crashed. There was

a reduction in industrial production as well, resulting in many lay-offs and job cuts.

Analysts predicted that the crisis would continue in 2009. Some feared that the

growth in the GDP might even reduce by 4% in 2009. Many also believed that

Russia, with cash reserves amounting to US$ 595.9 billion, would be able to pull

out its banking sector and industry from the crisis very soon.



344

In 2002, there were around 79 Russian stores that together drew around 200,000

customers each day.68

By 2003, McDonald‘s had a major share of the Russian fast

food market.69

(Refer to Exhibit V for market share of fast food retailers in Russia

between 2003-2006 and to Exhibit VI for a brief note on the fast food market in

Russia: 2006-2008).

Exhibit V

Market Share of Fast Food Retailers in Russia between 2003-2006

Retailer Global brand owner 2003 2004 2005 2006

McDonald‘s McDonald‘s Corp 35.3 30 30.7 30.3

Rostik‘s

Rostik‘s International

Inc 3.6 5 5.9 4.3

Sbarro Sbarro Inc 2.8 2.9 3 3

Rostik‘s-KFC

Rostik‘s International

Inc - - - 2.8

Teremok

Teremok - Russkie

Bliny 0.4 0.6 1.4

Kroshka-

Kartoshka

Tekhnologiya &

Pitanie Ltd 0.4 0.6 1 1.4

Chaynaya Lozhka Solo OOO 0.5 1.2 1.3 1.4

Baskin-Robbins Dunkin‘ Brands Inc 1.3

Others 57.4 56.9 57.5 54.1

Total, % 100 100 100 100

Source: “Russian Federation HRI Food Service Sector-2008,” www.fas.usda.gov,

July 28, 2008.

Exhibit VI

A Brief Note on the Fast Food Market in Russia: 2006-2008

According to some studies, the Russian fast food service market was one of the

fastest growing segments in the economy of Russia, with a growth rate of between

20 and 30%. In 2005, Moscow's fast-food market alone was estimated to be worth

between US$400 and US$700 million, and was projected to grow at a rate of 20

percent annually for the next few years. 70

Analysts considered a major section of fast food customers to be price sensitive and

keen on new products. With the restaurants growing more sophisticated in Russia,

there was an increased demand for different products. Analysts witnessed a new

68 Daniel Rogers, ―Can Mac Fight Back?‖ www.marketingmagazine.co.uk, October 17, 2002. 69 Dmitry Babich, Yulia Ignatyeva ―Big Mac Does not Give Up,‖ Foreign Investment-CDI

Russia Weekly, www.cdi.org, February 26-March 4, 2003. 70 Chris Mercer, ―McDonald‘s Plans to Double Russian Presence,‖ www.foodnavigator.com,

February 3, 2005.


345

trend among Russians who tended to spend more on food and dining out – more

than any other country in Europe. Moreover, the increasing number of shopping

centers and malls in the country were in a way propelling the fast food culture, as

most of these places had ‗food courts‘ with various low priced fast food stalls and

restaurants.

According to research conducted by Euromonitor Plc.71

, almost 50% of the Russian

population in the age group of 16-50, bought fast food at least once a week. The

studies showed that 64% of the customers considered location as the most

important factor among the reasons that drove customers into the stores, followed

by 54% of customers who focused on cost. 43% of customers regarded quality and

25% regarded cleanliness as the factors that made them visit any fast food store.

According to analysts, one quarter of Russian restaurants were situated in Moscow

itself, out of which 60% of the market share was held by low-priced restaurants,

14% by elite restaurants, and 11% by fast food outlets. The most popular catering

formats in Russia were cafés that offered ‗lunch deals‘ with the buffet option. The

European and Asian menus were considered as the most popular ones. As of 2007,

the fastest development in the restaurant segment was the mid-range, low-priced

category of outlets.

The national fast food chains and stalls that were slowly gaining ground were

‗Stardog,‘ ‗Teremok,‘ ‗Russkie Blini‘ etc. Street food vendors like ‗Kroshka

Kartoshka‘ were also very popular in Russia. However, in 2007, the Mayor of

Moscow prohibited the street vendors from doing business, in a bid to clean up the

city. Some of them were allowed to rent space in the malls and shopping centers,

but analysts pointed out that not all the vendors would be able to afford these places

because of high rentals. Further, analysts also said that the high rents paid by the

vendors would lead to an increase in the prices of the food items. In order to bear

the increasing operational costs, Kroshka Kartoshka, joined hands with Poland‘s

AmRest Holding, a franchisee of Pizza Hut, KFC, Burger King, etc., in eastern

Europe.

Among the fast food chain operators, the food court format was slowly becoming

popular as of 2008. People visited the food courts not just for the food but also to

socialize with friends and families. Most of the leading chains such as Rostick‘s-

KFC, Chaynaya Lozhka, Sbarro, and Baskin-Robbins had outlets in many malls,

shopping centers, and hypermarkets.72

For the foreign fast food chains, franchising was a popular option to enter the

country. As of 2008, Baskin Robbins was one of the largest franchises, which

capitalized on the Russians‘ fondness for ice-cream. Among the drive-in

restaurants, Rostik‘s was considered the market leader. In popularity, it stood

second to McDonald‘s, which was among the most popular fast food chains since

1990.

One of the major challenges for the restaurant industry in Russia was

underdeveloped distribution and logistics in most parts of the country, other than

large urban cities. It was also difficult to find experienced and efficient distributors.

Moreover, in Russia, restaurants offering traditional Russian cuisine were widely

popular, while fast food joints were not. This was due to the fact that to Russians,

71 Euromonitor Plc is a London, UK-based provider of information services. 72 ―Russian Federation HRI Food Service Sector-2008,‖ www.fas.usda.gov, July 28, 2008.


346

eating food was a ―lengthy‖ procedure, with people sitting at the table for long

periods of time.73

Around the end of 2008, the Russian economy also experienced the effects of the

global economic slowdown and credit crunch. The stock markets performed poorly

and the ruble depreciated considerably against the US dollar. Industrial production

suffered, leading to wage reductions, lay-offs etc. Retail sales also suffered a lot

due to the reduction in spending as well as lack of availability of cheap loans and

liquidity of money.74

However, some analysts opined that the fast food industry

might not be impacted as much as high-end restaurants as people would look for

value for money in these tougher times rather than opting for fine dining

experiences. It was reported that in 2009, Russian consumer sentiment had indeed

been hit dramatically by the economic crisis, and the overall restaurant industry was

estimated to be down 7-8 percent.75

Denying that the crisis had been beneficial for

cheap restaurants, Oleg Sukhotin, executive director of the Russian Association of

Fast Food Enterprises, said, ―In the fourth quarter of 2009, most fast food

operators' turnover fell by 20% to 45%, year-on-year, and an average bill has also

plummeted. People no longer order pancakes with caviar that much.‖76

As of early 2010, companies like McDonald‘s, KFC, and Sbarro dominated the

Russian fast food market.77

In late 2009, Andrey Petrakov, executive director of the

Restcon company, said that this was the right time fast for food chains to expand

into the Russian market as the market had enough room for new players, and rental

prices had dropped. 78

Source: “Food & Drinks Industry Day Converting Opportunities to Business: Russian

and Ukrainian,” www.bordbia.ie, 2008; and, “Top 10 Consumer Trends in Russia,”

www.euromonitor.com, May 7, 2008.

In 2005, the company invested about US$ 10,000 in each restaurant to start a new

breakfast menu. According to Khasbulatov, the decision to launch the breakfast menu

arose after research revealed that around 90% of the people did not have any

opportunity to get breakfast when outside their homes.79

The breakfast menu mainly

targeted professionals in the big cities like Moscow, who left home very early to avoid

the traffic and needed to have breakfast somewhere outside.

By 2005, there were a total of 129 McDonald‘s restaurants in Russia, out of which 82

were in Moscow and 15 in St. Petersburg. According to analysts, the company spent

about US$ 1.5 million to US$ 2 million on setting up each new restaurant.80

The

company intended to spend around half of its marketing budget in promoting its

breakfast menu. Around the same time, the Russian operation became the second

73 ―McDonald‘s and Burger King Kill Russian Bistro,‖ http://english.pravda.ru, November 9,

2009. 74 ―The Fast Deteriorating State of Russia‘s Economy,‖ www.economist.com, December 14,

2008 75 Maria Kiselyova and Maria Plis, ―McDonald‘s to Target Stay-at-home Russians,‖

www.reuters.com, December 17, 2009. 76 Vladimir Kozlov, ―McDonald‘s Supersize Profits Conquer Moscow,‖ www.mnweekly.ru,

January 25, 2010. 77 Vladimir Kozlov, ―McDonald‘s Supersize Profits Conquer Moscow,‖ www.mnweekly.ru,

January 25, 2010. 78 ―McDonald‘s and Burger King Kill Russian Bistro,‖ http://english.pravda.ru, November 9,

2009. 79 “McDonalds Set for 20% Expansion in Russia,‖ www.sptimes.ru, June 10, 2005 80 ―McDonalds Set for 20% Expansion in Russia,‖ www.sptimes.ru, June 10, 2005


347

largest among McDonald‘s markets in terms of average number of consumers per

restaurant.81

In 2006, more than 20 new restaurants were added to the Russian operation. Even in

2006, after 16 years of operations, the first restaurant at Pushkin Square was the

busiest McDonald‘s in the world.82

By the end of 2007, there were more than 180 McDonald‘s restaurants present in

around 40 cities of Russia.83

The Russian venture was one of the most lucrative

businesses for McDonald‘s, fueled by the ever increasing quest for American products

and brands among the growing middle class in Russia. However, the company

decided to concentrate on increasing the quality and to extract more sales from the

existing stores, instead of going in for rapid expansion. Some analysts pointed out the

high real estate prices of the prime locations was the main reason for McDonald‘s

deciding to go slow on its expansion (Refer to Table II for new outlets opened in

Russia: 2005-2009). ―We would like to open more restaurants in Russia, but,

unfortunately, the procedure for receiving permission is not becoming any easier,‖84

said Khasbulatov. The company also intended to introduce new forms of accessibility

to its products in Russia, such as the 24-hour express windows and drive-thru

windows.

Table II: New McDonald’s Outlets Opened in Russia: 2005-2009

2009 2008 2007 2006 2005

Restaurants opened 33 (Planned) 22 21 23 18

Compiled from various sources.

By mid-2009, McDonald‘s had more than 220 restaurants in over 50 cities in Russia

and had served more than 2 billion customers.85

McDonald’s Strategies in Russia

The company faced stiff operational hurdles from time to time because of the strong

bureaucracy that was present in Russia. According to analysts, opening a single store

required the sanction signatures from about 200 different officials. The government

issued guidelines running into 40 pages instructing the restaurants on numerous dos

and don‘ts, while operating in the country. Nevertheless, the company went ahead,

implementing several strategies that eased its difficulties and paved the way for

smooth operations. The menu was kept similar to the one in the US, with the addition

of cabbage pie and a few popular Russian dishes.

The Human Factor

McDonald‘s faced some difficulties in getting the right talent, especially in the bigger

cities like Moscow and St.Petersburg, as there was a low rate of unemployment in

these places. However, it gave the best training to the local recruits, who were familiar

with neither customer service nor the hamburger. Moreover, molding them in the

81 Chris Mercer, ―McDonald‘s Plans to Double Russian Presence,‖ www.foodnavigator.com,

February 3, 2005. 82 ―Top 10 Consumer Trends in Russia,‖ www.euromonitor.com, May 7, 2008 83 Janet Adamy, ―As Burgers Boom in Russia, McDonald‘s Touts Discipline,‖

http://online.wsj.com, October 16, 2007. 84 ―McDonald‘s to Open 40 Restaurants in Russia in 2008,‖ www.cdi.org, April 22, 2008. 85 ―George Cohon, Founder of McDonald‘s Canada and McDonald‘s Russia, Honored in

Washington, D.C.,‖ www.marketwire.com, October 6, 2009.

http://www.marketwire.com,/


348

―McDonald‘s way‖ was a challenge when most of the local recruits were not familiar

with working under the capitalist system. Experts felt that they were victims of the

inertia brought about by the old system of central planning for so long that

productivity remained low.

Hiring local employees was a challenge though McDonald‘s first recruitment ad drew

27,000 applications. The company selected a 630-member crew comprising hires of

between 18 and 27 years. Craig Sopkowicz, who was McDonald‘s quality-control

expert and in charge of the new employees, said, ―We looked for applicants who lived

close to the restaurant, among other things, in order to control the timeliness of

employees.‖ 86

For most of these new hires, this was their first job as labor laws in

Russia protected teenagers from indulging in any activity that conflicted with

schoolwork. Initially, the company provided a starting salary that was on a par with

the industry average in Russia (1.5 rubles an hour) for new hires.87

Local employees required lengthy training. To be flexible when positions changed, the

new crew was trained in all aspects of the restaurant‘s functions; the new staff logged

in more than 15,000 training hours to ensure control similar to that in western

operations. Before the opening of the first Russian store, a team of 30 newly recruited

managers (including Khasbulatov) was sent to Europe and the Institute of

Hamburgerology in Toronto for comprehensive training. These people in turn trained

the other new employees on quality, customer service, general conduct, as well as the

health and safety standards that were to be followed in the stores. According to an

executive from McDonald‘s, at first it was difficult to teach the store employees to

smile and look straight into the eyes of the people. To teach the trainees, the training

manuals were translated into Russian and they were also shown videotapes about

various chores, like the right way to wash the windows and clean the floors, as well as

the correct way to arrange the ingredients in the Big Mac.88

Since the company had

some concerns about the employees‘ appearance, it decided to construct an on-site

laundry room so that the company‘s standards could be ensured.89

In 2006, McDonald‘s Russia was named as the ―Best Employer in Russia‖ by the

Russian Chamber of Commerce and Industry. The award recognized the company as a

responsible employer.90

It was also named as the Best Employer in Central Eastern

Europe from 2007-2009 by Hewitt Associates91

. As of end 2009, the company

employed more than 24,500 Russians at its restaurants, processing facilities, and

corporate offices, and there were more than 100,000 Russians employed by

suppliers.92

The company executives were Russian and most of them had started their

career as crew-members.

Pricing

The company began its operations by transacting in rubles, so that the customers did

not face any issues with the currency. A few analysts called it a shrewd strategy

targeted at luring the locals who were always attracted to foreign goods but could not

86 Helen Deresky, International Management: Managing Across Borders and Cultures,

(Pearson Prentice Hall, 2006). 87 Ann Blackman, ―Moscow‘s Big Mak Attack,‖ www.time.com, February 5, 1990. 88 Ann Blackman, ―Moscow‘s Big Mak Attack,‖ www.time.com, February 05, 1990. 89 Helen Deresky, International Management: Managing Across Borders and Cultures,

(Pearson Prentice Hall, 2006). 90 ―McDonald‘s Russia Named Best Employer,‖ www.crmcdonalds.com, January 16, 2007. 91 Hewitt Associates is a leading global human resources consulting and outsourcing company. 92 ―George Cohon, Founder of McDonald‘s Canada and McDonald‘s Russia, Honored in

Washington, D.C.,‖ www.marketwire.com, October 6, 2009.


349

purchase them since these goods could usually be bought in foreign currencies only.93

However, at 5.5 rubles for a Big Mac, fries, and Coke, only the higher-income

segment could afford it as this was twice the cost of a meal in state-run outlets.

According to analysts, the company in Russia maintained the profit margins

somewhere around the mid 20 percent range. It was considered to be much higher

than the global average profit margins that the company earned. The same store sales94

were also considered to be higher than in other markets.

In 2007, the prices of the food items in the menu were increased around four times in

the year, in order to maintain the desired profit margins, keeping up with the rising

inflation. However, the percentage increase was different for different items. For

instance, the price of less expensive items like ice-cream cones, was raised at half the

rate of the inflation at that time, whereas for more expensive items, like the Big tasty

burger, the price rise was above the inflation rate.

According to Khasbulatov, despite a 35 percent devaluation of the ruble against the

dollar in late 2008 and early 2009, McDonald‘s had lowered some prices to gain from

bigger turnover. The company‘s endeavor was to not increase prices above annual

inflation rates of between 13 percent and 14 percent. However, in mid-2009, the price

of the Big Mac in Russia grew by 13.5 percent to 67 rubles, but it became less

expensive in dollar terms - US$0.5 (19.7 percent).95

―Consumers in Russia are really

price sensitive . . . we‘ve been very careful in managing our menu prices,‖96

said

Khasbulatov.

Procurement

Sourcing and quality control of food was a huge challenge for McDonald‘s in Russia.

Right at the time of entry, the company realized that many of the ingredients that it

required were not available in the country at all. Greg Steeves, former Chief Operating

Officer of McDonald‘s Europe, explained, ―Russia is often plagued by shortages, and

in some cases the ingredients we required, such as iceberg lettuce, didn‘t even exist in

the country.‖97

Right from the very beginning, the company understood that importing food items

from other countries would not be a viable option as the rubles earned in Russia would

be unconvertible. In that case, it would have to divert some of the income from

McDonald‘s Canada or from other international market to procure items for Russia.

McDonald‘s therefore decided to source food items locally, instead of importing and

started to build partnerships with the local suppliers by providing them with adequate

training. The company had to resort to vertical integration for sourcing raw materials.

In order to control the quality, distribution, and reliability of its ingredients,

McDonald‘s built a US$40 million, 110,000 sqft plant in a Moscow suburb to process

the required beef, milk, buns, vegetables, sauces, and potatoes.98

This facility also

included laboratories for testing to ensure compliance with quality and consistency

standards. The company also brought in Peter Frings, an agronomist with Mccain

93 Ann Blackman, ―Moscow‘s Big Mak Attack,‖ www.time.com, February 05, 1990. 94 Same-store sales is defined as sales at stores open for at least 13 months. 95 ―Russian Ruble 43 Percent Underestimated, According to Big Mac Index,‖

http://newsfromrussia.com, July 21, 2009. 96 Jenny Wiggins, ―Growing Taste for Quality Goods Lures Big Brands,‖ www.ft.com, January

20, 2010. 97 ―McDonald‘s Russia,‖ Brand Strategy, November 2005. 98 Ann Blackman, ―Moscow‘s Big Mak Attack,‖ www.time.com, February 5, 1990.


350

Foods Ltd., to introduce the Russian farmers to the non-native Russian Burbank

potato used to make the company‘s fries.99

Some selected farmers were educated on

improving the quality as well as production volumes. Some Netherlands-based potato

farmers and processors helped the local farmers to grow a specific variety of potato

that was suitable for making frozen French fries. Bakers were also brought in not only

from the US and Canada, but also from some European countries like Sweden and

Germany, to develop baking systems for buns and pies. The pasteurization process, set

up by dairy experts from Sweden, was a very significant step as the milk in Russia

was highly contaminated compared to other countries in Europe and the US.

Initially, there were problems in the procurement of beef as well, due to its shortage in Moscow. Even though European meat experts were brought in to start new feed programs for the Russian cattle, the local supply was unable to meet the huge demand of 1,500 tons of beef per year. Also the company was not allowed by the government to buy meat directly on its own, in spite of initiating such feed programs. It had to strike a deal with the government-run slaughter houses, but then, the company was also restricted from picking up its choice of meat. As a result, McDonald‘s installed different buyers at various slaughter houses who bought the beef for the company in limited quantities.

100

By 1999, about 75-80% of the raw materials were being sourced from more than 100 local producers in Russia. ―Our main goal is to develop local suppliers. We check their production every three months to guarantee quality,‖

101 commented Khasbulatov.

But even in 2001, the company was importing chickens from France, cheese, fish, and apple segments from Poland, potatoes — cut and frozen – from the Netherlands.

While McDonald‘s continued to select its own suppliers in Russia, in 2007, it handed over the company‘s logistics to Alfa Group affiliate Rulog

102 in a bid to remove

logistics from its own management. McDonald‘s also transferred chicken production to a plant in the Kaliningrad region, which was set up jointly with Brazil‘s Sadia. ―The production of beef patties will be handed over before the end of the year to an enterprise that Italy‘s Inalca is building in the Moscow region… Thus, more than 80% of the products for our chain will be produced on Russian territory. Only the production and processing of potatoes and fish products will remain abroad,‖

103 said

Khasbulatov.

Results

McDonald‘s was a huge success in Russia right from the first day of its operations.

Thousands of customers queued up for hours to experience it. The restaurant served

over 30,000 customers on the opening day. By 1993, the company started making

profits in Russia and did not look back after that. ―In a country where there was

nothing available, McDonald‘s was everything,‖ 104

said Russian restaurant magnate

Rostislav Ordovsky.

99 Helen Deresky, International Management: Managing Across Borders and Cultures,

(Pearson Prentice Hall, 2006). 100 Foster, P, ―McDonald‘s Excellent Soviet Venture?‖ Canadian Business, Vol. 64, Issue 5,

May 1991. 101 Anatoly Vereshchagin, ―McDonald‘s Rules Russian Fast Food Market,‖ www.cdi.org,

October 29, 2001. 102 Rulog had a distribution center in Moscow and was planning to open similar facilities in

St. Petersburg, Kazan, the Urals, and in southern Russia. 103 ―McDonald‘s to Open 40 Restaurants in Russia in 2008,‖ www.cdi.org, April 22, 2008. 104 Janet Adamy, ―As Burgers Boom in Russia, McDonald‘s Touts Discipline,‖

http://online.wsj.com, October 16, 2007.


351

In 2004, McDonald‘s sales growth of 18 percent in Russia was the first time that its

sales growth was below 20 percent since the year of its launch, but it still emerged as

McDonald‘s leading market in comparable sales and total sales growth.105

By the time

the company celebrated the 15th anniversary of the opening of its first restaurant in

Russia in January 2005, it had served over one billion customers and was serving

more than 500,000 customers every day. According to Mike Roberts, President and

COO, McDonald‘s, Russia ranked second in the entire McDonald‘s system for

average guest counts per restaurant.106

The company was also credited with having

made significant contributions to the development of Russia‘s foodservice and

processing industries, agriculture, and business practices. ―Customers view

McDonald‘s as a company that builds in Russia with a pioneer spirit. It is now viewed

as an international brand, run by local people and supplied by local people. It‘s part of

Russia‘s history,‖107

said Khasbulatov.

In 2005, McDonald‘s turnover in Russia grew by 26 percent. According to

Khasbulatov, with a growth rate of more than 20 percent per year, it was comparable

to China. The Russian state backed Russian Bistro that was set up in 1995 to directly

compete with McDonald‘s too could not match it, and in 2005, the government

transferred the managerial tasks to Arpikom Company, which started leasing the

snack shops out.108

In 2006, the direct investment in the development of the McDonald‘s chain was more

than 1 billion rubles and the company said that this figure was set to rise in subsequent

years.109

Analysts felt that few of McDonald‘s markets could boast of more activity

than Russia, which, on an average, served 850,000 diners annually. The figure was

twice the store traffic in McDonald's other markets. In 2007, McDonald‘s President

Ralph Alvarez commented, ―It‘d be very easy today to go in and say, ‗Khamzat,

you‘ve got to build 100 restaurants,‘ because we‘re getting phenomenal returns.‖ 110

By 2007, McDonald‘s turnover in Russia was growing 30% annually, and the rate of

growth was the fastest in the world. It was also opening more stores in Russia

annually than any other country with the exception of China.111

In terms of turnover, it

was among the top ten markets of McDonald‘s.112

According to analysts, the

company‘s profit margins in Russia were in the mid-20% range, much higher than the

global average of McDonald‘s.113

105 Chris Mercer, ―McDonald‘s Plans to Double Russian Presence,‖ www.foodnavigator.com,

February 3, 2005. 106 ―McDonald‘s Celebrates its 15th Anniversary in Russia,‖ www.prnewswire.co.uk, January

31 2005. 107 ―McDonald‘s Russia,‖ Brand Strategy, November 2005. 108 ―McDonald‘s and Burger King Kill Russian Bistro,‖ http://english.pravda.ru, November 9,

2009. 109 ―Number of McDonald‘s Restaurants in Russia to Exceed 200 by End of 2007,‖

http://eng.investmarket.ru, March 27, 2007. 110 Janet Adamy, ―As Burgers Boom in Russia, McDonald‘s Touts Discipline,‖

http://online.wsj.com, October 16, 2007. 111 ―McDonald‘s Turnover in Russia Growing 30% Annually,‖ Russia & CIS Business and

Financial Newswire, October 24, 2007. 112 ―McDonald‘s to Open 40 Restaurants in Russia in 2008,‖ www.cdi.org, April 22, 2008. 113 Janet Adamy, ―As Burgers Boom in Russia, McDonald‘s Touts Discipline,‖



352

Experts felt that the company had done well in Russia despite facing some serious

challenges. Although the political environment had been murky at times, the company

had increased its investment in the country. In 2009, it planned to invest US$120

million on expanding its operations in Russia.114

Experts noted that other companies

such as Coca-Cola too were investing generously in the country.115

According to

Douglas Helfer, a senior portfolio manager at the Halbis unit of HSBC Global Asset

Management, ―They see that the opportunity outweighs the price of the risk.‖116

According to McDonald‘s, it had posted record-high comparable sales growth in

Europe in 2008. It attributed this success to markets such as Russia, France, the UK,

and Germany. According to McDonald‘s, this was partly due to the fact that the

company created local customer relevance through a tiered menu approach, which had

‗an effective combination of premium selections, classic menu favorites, everyday

value, and popular limited-time food promotions‘. Like other markets in the Europe

such as France, Germany, and the UK, the company strove to improve operational

efficiency in its restaurants in Russia and transparently communicated facts about its

brand, the quality and nutrition of its food items, and about itself as an employer.

According to the company, its European operation‘s constant currency increase in

revenues in 2008 and 2007 was mainly due to strong comparable sales in Russia,

France, and the UK.117

―We have 25,000 employees in Russia, US$1 billion in sales,

and net profits of US$200 million… We are in 130 countries and Russia is, by far, the

best… We do 800,000 transactions a year, which is double the number in North

America,‖118

said Cohon.

Despite a tough environment, with the Russian consumer sentiment being

dramatically hit by the economic crisis, McDonald‘s Russia continued its stellar

performance in 2009. ―In 2009, we have seen positive dynamics in customer traffic

and sales. The average bill was higher than in 2008 although it did not reach what we

forecast. We have no fundamental concerns that the situation may turn for the

worse,‖119

said Khasbulatov.

Industry observers felt that in addition to obtaining a first mover advantage in Russia,

McDonald‘s had also benefited from being a foreign brand. ―If we look at ads from

pre-revolutionary Russia, we hardly see a Russian brand. It‘s all Bormann, Einem,

Wolf, Marx, Singer, etc. So, on a genetic level, our people trust only Western

companies,‖120

said Goncharov.

114 Benjamin Scent and Natallie Cai, ―To Russia with Love,‖ www.thestandard.com.hk, June

29, 2009. 115 In February 2006, Coca-Cola announced that it would invest US$1.2 billion in Russia over

the next three to five years as it felt that the sale of carbonated drink would increase during the economic crisis.

116 Benjamin Scent and Natallie Cai, ―To Russia with Love,‖ www.thestandard.com.hk, June

29, 2009. 117 ―Moscow Wants to Up Rent on its Two McDonald‘s,‖ www.dailyherald.com, July 10,

2009. 118 Diane Francis, ―Russia Good for Business: McDonald‘s,‖ http://network.nationalpost.com,

September 11, 2008. 119 Maria Kiselyova and Maria Plis, ―McDonald‘s to Target Stay-at-home Russians,‖

www.reuters.com, December 17, 2009. 120 Vladimir Kozlov, ―McDonald‘s Supersize Profits Conquer Moscow,‖ www.mnweekly.ru,

January 25, 2010.


353

Overcoming Challenges

Analysts felt that the biggest challenge before McDonald‘s Russia was dealing with the ministries. They felt that these regulators adhered to rigid regulations in doling out supplies. ―When we need more sand or gravel for building and go to the department in charge, they say, ‗Sorry, you‘re not in my five-year plan‘,‖

121 said Cohon. The level

of bureaucracy in the country was a big impediment to growth, according to Khasbulatov.

Catering to the local population was also challenging as their eating habits were quite different and many of them were unaccustomed to eating foods such as burgers. For instance, some people who were initially invited to test the Big Mac reportedly ate it layer by layer.

122 Moreover, eating habits were different. Eating food in Russia was a

―lengthy‖ procedure, with people sitting at a table for long periods of time.123

They were also not familiar with the drive-thru format. However, with the offerings at McDonald‘s being viewed as a novelty by customers, the company had to contend with long queues.

Right from the first day, the company had to work differently to cater to this market. It took various initiatives to reduce long waiting lines by hiring private security people to keep order and by using public-address systems to tell patrons how to place orders. In some locations, employees took orders on handheld devices before customers reached the counter. In addition to verbal instructions, customers were given picture-menus to simplify the ordering process. To deal with black marketing and pilferage, the company maintained a one-door policy. In the initial days, there was a limit of ten Big Macs to each customer.

124 To move things fast, the company also invested in new

cooking equipment that helped serve customers faster. According to Khasbulatov, ―When I said I have too many customers, it's a nice problem to have… I would love to continue to have this problem.‖

125

In addition to the political challenges that the company faced, the company also suffered a financial crisis during the economic turmoil in Russia around 1998. During that time, the ruble fell drastically in value, leading to high inflation and economic instability in the country. As a consequence, customer traffic decreased considerably in the McDonald‘s stores and sales suffered a serious setback.

126

In 1998, McDonald‘s also experienced a major labor dispute in its processing plant, the McComplex, when attempts by security personnel in the unit to form a union were reportedly blocked by the company time and again. According to analysts, many laborers accused the company of ill-treating them and of illegally holding them back from forming a union. At that time, the company, under the pressure of an economic slowdown, did lay off some employees and reduce salaries, which made the labor force think about unionization. However, McDonald‘s Russia denied having ill treated its employees and said that it was strictly abiding by the Russian laws. The incident led to legal proceedings as well and tainted the employee friendly image of the company not only in Russia but also in several other markets during that time.

127

121 Ann Blackman, ―Moscow‘s Big Mak Attack,‖ www.time.com, February 5, 1990. 122 Ann Blackman, ―Moscow‘s Big Mak Attack,‖ www.time.com, February 5, 1990. 123 ―McDonald‘s and Burger King Kill Russian Bistro,‖ http://english.pravda.ru, November 9,

2009. 124 Helen Deresky, International Management: Managing Across Borders and Cultures,

(Pearson Prentice Hall, 2006). 125 Janet Adamy, ―As Burgers Boom in Russia, McDonald‘s Touts Discipline,‖

http://online.wsj.com, October 16, 2007. 126 Youngme Moon, Kerry Herman, ―McDonald‘s Russia: Managing a Crisis,‖

http://harvardbusinessonline.hbsp.harvard.edu, October 21, 2002. 127 Angela Charlton, ―Natalya Gracheva is Giving McDonald‘s Heartburn,‖

www.mcspotlight.org, June 23, 1999.


354

On February 19, 2007, the McDonald‘s at St. Petersburg was bombed in a terrorist

attack, injuring six people and damaging the store to a great extent. A similar

explosion had earlier occurred in 2002, when a bomb went off in a car at a

McDonald‘s restaurant in Moscow.128

In November 2007, McDonald‘s Russia was suspected of tax evasion and its offices

were raided by tax inspectors, who later claimed US$ 6.5 million from the company.

According to a newspaper, the Kommersant daily, the income tax department

suspected that the company bought meat and packaging materials through the shell

companies and availed of value-added tax redemption on milk and meat purchases

without having proper documentation.129

The Russian Tax officials contended that by

allegedly using unlicensed suppliers, McDonald‘s had posed a threat to Russian

society. Analysts felt that the Russian tax law was very complicated and left foreign

players at the mercy of regulators.130

Experts said that McDonald‘s Russia faced minimum competition as it was the

pioneer in fast food chains in the country and enjoyed the first mover advantage. Over

the years, many other retailers came up but none could attain the stature enjoyed by

McDonald‘s (Refer to Exhibit VII for Leading Fast Food Chains in Russia).

According to analysts, the fact that McDonald‘s locked the prime locations in the

country well in advance helped it to beat competition later when other companies like

Starbucks Corporation (Starbucks)131

struggled against the rising real estate prices to

gain a significant presence in the country. ―When they are paying 3,000 rubles a

month for a 1,500 sq. meter outlet on Arbat, and we are paying $20,000 a month for a

60 sq. meter outlet, who do you think is going to have the upper hand? And that‘s not

their only outlet with such rent conditions,‖132

said Goncharov.

In mid-2009, McDonald‘s also had to deal with a lawsuit filed against it by the

government that sought higher rental payments from its two restaurants (on Arbat and

on Bolshoy Nikolopeskovsky Pereulok) in the center of Moscow. In the early 1990s,

the company had signed a 49-year agreement with the city government at an annual

rate of 1 ruble per square meter. The government sought to enforce a local law

requiring a minimum annual rental rate of 1,000 rubles (US$30.67) per square meter

and wanted McDonald‘s to pay this rent.133

In December 2009, Moscow's arbitration

court upheld the city authorities‘ move.134

128 ―Explosion Hits McDonald‘s Restaurant in St. Petersburg; 6 injured,‖ www.iht.com,

February 18, 2007 129 ―McDonalds Russia Fights $6.5 mln Tax Claim,‖ www.flex-news-food.com, December 5,

2007. 130 Shaun Walker, ―McDonald‘s Faces 3m Back-tax Bill in Russia,‖ www.independent.co.uk,

December 5, 2007. 131 Starbucks Corporation was started in 1971, at Seattle, the US. It is regarded as one of the

leading coffee chains in the world. As of 2008, it was present in 43 countries across the world with 7,087 company operated stores and 4,081 licensed stores.

132 Vladimir Kozlov, ―McDonald‘s Supersize Profits Conquer Moscow,‖ www.mnweekly.ru, January 25, 2010.

133 ―Moscow Wants to Up Rent on its Two McDonald‘s,‖ www.dailyherald.com, July 10, 2009.

134 Vladimir Kozlov, ―McDonald‘s Supersize Profits Conquer Moscow,‖ www.mnweekly.ru, January 25, 2010.


355

Exhibit VII

Leading Fast Food Chains in Russia

Name of the

Chain

Country of Origin Year of Est. in

Russia

No. of Outlets

2005 2006 2007 March

2008

Kroshka-

Kartoshka

Russia (Moscow) 1991 141 170 230 252

Stardog‘s Russia (Moscow) 1993 (2003 as

new brand)

186 197 224 234

McDonald‘s USA 1990 137 157 174 190

Baskin

Robbins

USA 1992 118 132 139 139

Teremok Russia 1998 62 92 135 142

Rostik‘s -

KFC

Russia/USA 1993 (2005 as

new brand)

87 97 135 141

Sbarro USA 1997 52 83 111 114

Riksha I Van Russia (Moscow) 1998 (2006 as

new brand)

79 90

Chaynaya

Lozhka

Russia (St.Petersburg) 2001 28 42 59 64

Eurasia Russia (St.Petersburg) 2001 30 49 49 49

Moo - moo Russia (Moscow) 2000 14 17 17

PrimeStar Russia/USA 2007 13 14

Grabli Russia (Moscow) 2003 1 3 4 5

Source: “Russian Federation HRI Food Service Sector-2008,” www.fas.usda.gov, July 28, 2008.

In Old Arbat pedestrian Tourist Mall, McDonald‘s constructed side cafés and served a

dessert menu. McDonald‘s also began to make stronger McCafes,135

as a pre-emptive

measure to face competition from Starbucks, much before it entered in Russia in

2007.136

McDonald‘s, however, faced some competition from a few local retailers like

the Rostik‘s Group137

and Elki-Palki138

as well as from the US-based companies like

Yum! Brands.139

Some of the local fast food stalls that served local dishes at very low

prices also took away a lot of McDonald‘s customers and added to the competition.

135 McDonald‘s coffee house style cafés were first launched in Russia in 2002. 136 ―McDonalds Becoming Largest Corporate Land Owner in Russia,‖

www.organicconsumers.org, March 22, 2005. 137 Rostick‘s Group (Rostick‘s), started in 1993, in Russia, operated restaurants in different

formats that included including Il Patio, Planetsushi, Friday‘s Moka Loka, and Siberian

Crown. There were 174 stores under Rostick in 2004. As of 2007, it controlled 14% of the

restaurant market. Rostick‘s was the second most popular fast food name in Russia, after

McDonald‘s. 138 Founded in 1996, this Russian chain specialized in Russian cuisine and was moderately

priced. 139 Yum! Brands, based in Kentucky, USA, operates around the world through 36,000

restaurants in 110 countries and territories. In 2007, it reported sales worth US$ 9,100


356

Despite many obstacles that included two bomb attacks on its stores, Russia‘s two

wars in Chechnya,140

the economic crisis in 1998, and many other challenges,

McDonald‘s Russia continued to grow at a slow and steady pace. Some analysts also

pointed out that though McDonald‘s Russia faced a lot of challenges, it remained

shielded from controversies related to the paying of low wages and health-related

accusations that it suffered in the US and European countries. They said that obesity

related controversies did not bother the company in Russia where people themselves

asked for mayonnaise that had 40% fat content.141

This was despite some nutritionists

raising concerns that the local population‘s love for a burger could lead to health

issues in the country.142

McDonald‘s also said that though it encountered some problems in dealing with the

regulators, it did not have any trouble in terms of corruption or harassment in Russia.

According to Cohon, Russia was a great place to do business, if politics were not

involved.143

Outlook

With more than two-third of Russia‘s fast food business, McDonald‘s was a dominant

player. In 2009, Russia was again one of the markets that spurred the company‘s

growth as it was McDonald‘s fastest-growing market in Europe in terms of restaurant

openings.

Analysts said that McDonald‘s strong performance in Russia came at a time when the

country was in the grip of an economic downturn and its competitors were struggling

(Refer to Exhibit VIII for Comparison between McDonald‘s Comparable Sales in

November 2008 and 2007). According to the company, the sales were driven by

extended operational hours and more variety in the breakfast and regular menu. In the

words of Skinner, ―McDonald‘s continued strong performance reflects the benefits of

our multidimensional approach. Convenient locations, extended hours, and quality

food at an outstanding value are all reasons why people are choosing McDonald‘s.‖ 144

However, Khasbulatov admitted that McDonald‘s was affected by the economic

downturn and that its growth in the market would slow down. ―I can‘t say we have

gained from the crisis by taking the share from more expensive restaurants… The

recession has had an impact on our customers and we haven‘t gained from it ... We

won‘t see the previous pace of growth of 15-20 percent a year any more,‖ 145

he said.

million. Restaurant chains under it include Kentucky Fried Chicken (KFC), Pizza Hut,

Taco Bell, and Long John Silver. In 2005, KFC co-branded with Rostick‘s in Russia to sell their chicken products.

140 Chechnya was a Republic within the Russian Federation. This region had been in constant

conflict with Russian Federation for a long time. The First Chechen War was fought

between 1994 and1996 and resulted in the independence of Chechnya. In August 1999, the

Second War started, which ended around mid-2000. It resulted in Russia gaining control

over the separatist region of Chechnya. However, sporadic fighting continued even till 2005.

141 ―McDonalds Becoming Largest Corporate Land Owner in Russia,‖

www.organicconsumers.org, March 22, 2005. 142 Vladimir Kozlov, ―McDonald‘s Supersize Profits Conquer Moscow,‖ www.mnweekly.ru,

January 25, 2010. 143 Diane Francis, ―Russia Good for Business: McDonald‘s,‖ http://network.nationalpost.com,

September 11, 2008. 144 ―McDonald‘s delivers another Month of Strong Global Comparable Sales - November Up

7.7%,‖ www.mcdonalds.com, December 8, 2008. 145 Maria Plis, ―McDonald‘s Eyes Russia Growth with 40 New Stores,‖ http://uk.reuters.com,

February 26, 2009.


357

However, he added that Russia would remain one of its most dynamic markets despite

the economic downturn and that McDonald‘s Russia would continue to be the

company‘s fastest growing and most profitable market.

Exhibit VIII

McDonald’s Comparable Sales in November 2008 and 2007

Major segments of the company % Increase in Sales

2008 2007

Month ended November 30

McDonald‘s Corporation 7.7 8.2

US 4.5 4.4

Europe 7.8 10.8

APMEA 13.2 12

Year-to- Date November 30

McDonald‘s Corporation 7.1 7.0

US 3.9 4.9

Europe 8.8 7.6

APMEA 9.3 10.4

“McDonald’s Delivers Another Month of Strong Global Comparable Sales -

November Up 7.7%,” www.mcdonalds.com, December 8, 2008.

The company planned to open another 45 outlets in Russia by the end of 2012.146 It

planned to expand into areas that were less penetrated by fast-food chains. It was also

speculated that the company might launch a franchise scheme to expand beyond the Ural

mountains in the eastern part of the country. Analysts expected McDonald‘s to spend US$120-

200 million in 2010 on opening new outlets and also to spend a significant amount on

revamping existing outlets. Establishing the entire production chain for McDonald‘s

Russia in the country was another priority for the company. ―Currently, 80% of what

we produce [in Russia] is made in Russia. The task is to move the remaining 20% to

Russia,‖147

said Khasbulatov.

In January 2010, Burger King entered Russia, opening its first outlet in Moscow.148

Experts felt that Burger King had taken the plunge attracted by the success of

McDonald‘s. Subway too planned to expand its chain in Russia from 78 in December

2009 to 1,000 outlets by 2015.149

While analysts expected the competition to intensify

with the entry of Burger King and the emergence of some strong domestic players,

146 Jenny Wiggins, ―Growing Taste for Quality Goods Lures Big Brands,‖ www.ft.com,

January 20, 2010. 147 ―McDonalds to Invest in New Restaurants in Russia,‖ http://bbjonline.hu, February 26,

2009. 148 ―Burger King Opens First Outlet in Russia,‖ http://abcnews.go.com, January 21, 2010. 149 Maria Kiselyova and Maria Plis, ―McDonald‘s to Target Stay-at-home Russians,‖

www.reuters.com, December 17, 2009.


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they did not expect McDonald‘s position to come under threat immediately.

According to Oleg Sukhotin, executive director of the Russian Association of Fast

Food Enterprises, ―It‘s difficult to compete with McDonald‘s because it received

privileges from the city government — at least at some stage. But I‘m sure that, for

instance, Kroshka-Kartoshka has been successfully taking over McDonald‘s

customers.‖ 150

McDonald‘s seemed unpurterbed by the competition and felt that there was plenty of

scope for growth in Russia. According to Khasbulatov, more than two third of the

population were not in the habit of eating out. ―While 70 percent of our population is

not used to eating outside the house, we will have a niche that we should be looking at

carefully as there are big opportunities to make these people eat out,‖ 151

he said.

150 Vladimir Kozlov, ―McDonald‘s Supersize Profits Conquer Moscow,‖ www.mnweekly.ru,

January 25, 2010. 151 Maria Kiselyova and Maria Plis, ―McDonald‘s to Target Stay-at-home Russians,‖



359

References and Suggested Readings:

1. Ann Blackman, “Moscow’s Big Mak Attack,” www.time.com, February 05, 1990.

2. Foster, P, “McDonald’s Excellent Soviet Venture?” Canadian Business, Vol. 64,

Issue 5, May 1991.

3. Angela Charlton, “Natalya Gracheva is Giving McDonald’s Heartburn,”

www.mcspotlight.org, June 23, 1999.

4. Alf Nucifora, “Russians Learn to Smile-for Profit,” Business News, September 27,

1999.

5. Natalia Olynec, “Big Mac Blues in Russia,” Bloomberg News,

www.bellybuttonwindow.com, 1999.

6. Amy Zuber, “McDonald’s 10th Anniversary in Russia Brings Future Confidence

Despite Struggles,” National Restaurant News, http://findarticles.com, February 21,

2000.

7. “US Fast Food Firm Expanding in Russia,” Interfax, CDi Russia Weekly #136,

www.cdi.org, January 05, 2001.

8. “The McDonald’s Effect,” http://web-japan.org, August 20, 2001.

9. Dmitry Dobrov and Kommersant Vlast “Food Industry 1991-2000,”

www.russiajournal.com, October 26, 2001.

10. Anatoly Vereshchagin, “McDonald’s Rules Russian Fast Food Market,”

www.cdi.org, October 29, 2001.

11. Vladimir Kozlov, “Fast-Food Profits Offer Food for Thought,”

www.russiajournal.com, November 29, 2001.

12. Daniel Rogers, “Can Mac Fight Back?” www.marketingmagazine.co.uk, October

17, 2002.

13. Youngme Moon and Kerry Herman, “McDonald’s Russia: Managing a Crisis,”

http://harvardbusinessonline.hbsp.harvard.edu, October 21, 2002.

14. Dmitry Babich, Yulia Ignatyeva “Big Mac does not Give Up,” Foreign Investment-

CDI Russia Weekly, www.cdi.org, February 26-March 4, 2003.

15. “McDonald’s Celebrates its 15th Anniversary in Russia,” www.prnewswire.co.uk,

January 31, 2005.

16. Chris Mercer, “McDonald’s Plans to Double Russian Presence,”

www.foodnavigator.com, February 3, 2005.

17. Geoffrey Jones, Multinationals and Global Capitalism, (Oxford University Press,

February 2005).

18. Erin E. Arvedlund, “McDonald’s Gobbles up Russian Real estate,” www.iht.com,

March 18, 2005.

19. “McDonalds Becoming Largest Corporate Land Owner in Russia,” www.organicconsumers.org, March 22, 2005.

20. “McDonalds Set for 20% Expansion in Russia,” www.sptimes.ru, June 10, 2005.

21. “McDonald’s Russia,” Brand Strategy, November 2005.

22. Tony Royle, “The Union Recognition Dispute at McDonald’s Moscow Food-

Processing,” Industrial Relationship Journal, Blackwell Publishing Ltd., 2005.

23. Helen Deresky, International Management: Managing Across Borders and Cultures,

(Pearson Prentice Hall, 2006).

24. “McDonald’s Russia Named Best Employer,” www.crmcdonalds.com, January 16,

2007.


360

25. “Explosion hits McDonald’s restaurant in St. Petersburg; 6 injured,” www.iht.com, February 18, 2007

26. “Russian Police See McDonald’s Blast as Hooliganism,” http://news.webindia123.com, February 19, 2007.

27. “Number of McDonald’s Restaurants in Russia to Exceed 200 by End of 2007,” http://eng.investmarket.ru, March 27, 2007.

28. “The Taste of Pace: Situating Fast Food Restaurants in Russia’s Agrifood

System,” http://ageconsearch.umn.edu, May 18, 2007.

29. Janet Adamy, “As Burgers Boom in Russia, McDonald’s Touts Discipline,”


30. ―Russia Loves the Golden Arches,‖ www.newser.com, October 16, 2007.

31. ―McDonalds Russia Fights $6.5 mln Tax Claim,‖ Reuters, www.flex-news-

food.com, December 5, 2007.

32. Vladimir Kvint ―Russia’s Surging Economy,‖ www.forbes.com, January 8, 2008.

33. ―McDonald’s to Open 40 Restaurants in Russia in 2008,‖ www.cdi.org, April 22,

2008.

34. “Top 10 Consumer Trends in Russia,” www.euromonitor.com, May 7, 2008.

35. Yuri Mumchur, “Obama in Moscow: True Reset or Just Walking in Circles?”

www.russiablog.org, July 8, 2008.

36. Kerry Capell, ―A Golden Recipe for McDonald’s Europe,‖ www.spiegel.de, July

18, 2008.

37. “Russian Federation HRI Food Service Sector-2008,” www.fas.usda.gov, July 28,

2008.

38. Diane Francis ―Russia Good for Business: McDonald’s,‖

http://network.nationalpost.com, September 11, 2008.

39. ―McDonald’s Delivers another Month of Strong Global Comparable Sales -

November Up 7.7%,‖ www.mcdonalds.com, December 8, 2008.

40. ―The Fast Deteriorating State of Russia’s Economy,‖ www.economist.com,

December 14, 2008.

41. “Crisis Will not Affect McDonald’s in Russia,‖ www.realestatelife.org, December

24, 2008.

42. ―Food & Drinks Industry Day Converting Opportunities to Business: Russian

and Ukrainian,‖ www.bordbia.ie, 2008.

43. “McDonald’s Corporation, 2008 Annual Report,” www.mcdonalds.com.

44. “McDonalds to Invest in New Restaurants in Russia,” http://bbjonline.hu,

February 26, 2009.

45. Benjamin Scent and Natallie Cai, “To Russia with Love,” www.thestandard.com.hk,

June 29, 2009.

46. “Moscow Wants to Up Rent on its Two McDonald’s,” www.dailyherald.com, July

10, 2009.

47. “Russian Ruble 43 Percent Underestimated, According to Big Mac Index,”

http://newsfromrussia.com, July 21, 2009.

48. “George Cohon, Founder of McDonald’s Canada and McDonald’s Russia,

Honored in Washington, D.C.,” www.marketwire.com, October 6, 2009.

49. “McDonald’s and Burger King Kill Russian Bistro,” http://english.pravda.ru,

November 9, 2009.

http://www.marketwire.com,/


361

50. Maria Kiselyova and Maria Plis, “McDonald’s to Target Stay-at-home Russians,”


51. Jenny Wiggins, “Growing Taste for Quality Goods Lures Big Brands,”

www.ft.com, January 20, 2010.

52. “Burger King Opens First Outlet in Russia,” http://abcnews.go.com, January 21, 2010.

53. “McDonald’s Delivers Another Year of Strong Results in 2009,” www.chainleader.com, January 25, 2010.

54. Vladimir Kozlov, “McDonald’s Supersize Profits Conquer Moscow,”

www.mnweekly.ru, January 25, 2010.

55. “McDonald’s in Moscow,” http://goldenessays.com

56. “McDonalds Corporation,” www.fortune500news.com.

57. “McDonald’s Corporation, Company History,” www.answers.com.

58. “Eating out in Moscow & St. Petersburg,” www.gateway2russia.com.

59. “McDonald’s History,” www.mcdonalds.ca.

60. www.mcdonalds.com

61. www.mcdonalds.ca

62. http://finance.yahoo.com.

63. www.yumbrands.com.

Case 2 McDonalds Russia

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