International Business Cases Combined

8/10/2019 International Business Cases Combined

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McDonalds Russia: A Jewel in the

McDonalds 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 itspresence 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 asnew 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 discussesin 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.


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McDonaldsRussia:

A Jewel in the McDonalds Emerging Market

Operations?

We arenot 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, McDonalds Corporation, president for Russia

and Eastern Europe, in December 2009.

Of the 118 countries where McDonaldsCorp. 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 McDonalds other markets. That has presented

the worlds 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 McDonalds system.3

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

Introduction

The year 2008 was considered a landmark year for the wo rlds largest fast food chain,

McDonalds Corporation (McDonalds). 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 McDonalds.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

Companys history,4said Jim Skinner, Vice Chairman and CEO, McDonalds.

The companys European operations accounted for 42% of McDonalds totalrevenues. According to the company, McDonalds had registered sound growth inEurope in 2008, and this growth was spurred by performance in countries such asFrance, the UK, Russia, and Germany. The company also posed strong results in2009, with these markets spurring the growth.

5McDonalds had started investing in

1 Maria Kiselyova and Maria Plis, McDonalds 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 McDonalds inRussia. He was named to McDonalds top Russia position in 1999 and later took on theresponsibility for the companys Eastern European restaurants.

3 Janet Adamy, As Burgers Boom in Russia, McDonalds Touts Discipline,http://online.wsj.com, October 16, 2007.

4 McDonalds Corporation, 2008 Annual Report, www.mcdonalds.com5 McDonalds Delivers Another Year of Strong Results in 2009, www.chainleade r.com,

January 25, 2010.


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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 feltthat Russia was the companys best performing market in Europe and one of its best

performing markets in the world in 2009.7

As of early 2010, McDonalds dominatedthe Russian fast food market with a 70 percent market share.

8Out of 10 people who

enter a food court, six go to McDonalds,9 said Mikhail Goncharov (Goncharov),

general director of the Teremok fast food chain.

McDonalds came into being in the late 1930s as a hot dog stand set up by twobrothers Richard McDonald and Maurice McDonald in California, the US. It startedits international expansion in 1967. McDonalds opened its first outlet in Russia in1990, more than a decade after it had planned to enter the country. The entry was led

by George Cohon (Cohon), founder of McDonalds Canada operations, who had beenstriving to enter the country since 1976.

The company faced several challenges in the country, primarily due to thebureaucratic set up, strict laws, inability to convert the Russian ruble

10 into other

currencies, and economic instability. According to analysts, McDonalds faced thechallenges successfully and developed its own supply chain in Russia, bringing inexperts from other countries. In order to standardize its services, it gave importance tothe training and development of its work force. The number of stores kept on growingat a slow and steady pace in the 1990s and early 2000s.

In 2005, McDonalds Russia emerged as the second largest among McDonaldsmarkets in terms of average number of consumers per restaurant.

11From 127 stores in

2004, the company had opened multiple numbers of outlets each year. In 2007 and2008, it also invested in overhauling the existing stores, with investment worth US$500,000 on each store.

12Khamzat Khasbulatov (Khasbulatov), McDonalds president

for Russia and Eastern Europe, said that the company was interested in expanding itsbusiness in Russia. He said McDonaldswas 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 McDonaldsCorporation in Europe,

13said Khasbulatov. As of early 2010, it continued to be one

the leading revenue contributors to the parent company. With 245 outlets already inRussia as of early 2010, McDonalds was gearing up to add another 45 outlets by theend of 2012.

14

6 Prior to 1991, Russia was the largest republic in the Soviet Union (or USSR). The troubledeconomic conditions together with political turmoil led to the dissolution of the Soviet Unionin 1991 into fifteen separate countries. As a result, Russia together with Ukraine and Belarusformed the Commonwealth of Independent States which was later joined by other Sovietrepublics.

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, McDonalds to Target Stay-at-home Russians,

www.reuters.com, December 17, 2009.9 Vladimir Kozlov, McDonalds 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, McDonalds Plans to Double Russian Presence, www.foodnavigator.com,

February 3, 2005.12 McDonalds to Open 40 Restaurants in Russia in 2008, www.cdi.org, April 22, 2008. 13 McDonalds 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.


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Background Note

McDonalds was started in the late 1930s by Richard and Maurice McDonald in

California, after they failed to make profits from running a movie theater. Thebrothers were inspired by a hot dog stand nearby, which always did brisk businesseven when other businesses were struggling under the effects of the GreatDepression

15.16

In 1937, the McDonald brothers started a hot dog stand called Airdrome, situated atArcadia in California. Later, in 1940, they opened a barbeque restaurant in SanBernardino17and called it McDonalds Barbeque.18The barbeque restaurant had about25 items on its menu like barbequed beef and pork sandwiches. It employed 20carhops19to provide service to customers. It soon became a favorite hangout for theteenagers in the city.

20

In, 1948, the brothers found it difficult to manage such a large scale business with itsextensive menus, staff, and the huge crowds that thronged the restaurant. Theyrealized that the need of the hour was quick service and mass production of fooditems. Richard analyzed their menu and found that about 80% of the restaurant s saleswere generated by the sale of hamburgers.

21

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

22This system was called the Speedee Systemand it greatly improved the

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

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

23Around the same time,

the companys first mascot was conceptualized and was called Speedee,24

primarilyto signify its quick service.

In 1953, the McDonald brothers decided to go in for franchising in order to expandtheir business. For a thousand dollars, franchisees would receive the McDonaldsname, 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. Bendertrained the people at the franchise, supervised the installation of the equipment, madecontact with the butchers and bakeries for the supplies, etc. McDonalds firstfranchisee 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 aresult of crash of the Wall Street stock market and lasted till around early 1940s.

16

Jane McGrathHow McDonalds Works, http://money.howstuffworks.com17 San Bernardino is a county in California, USA.18 Dick and Mac McDonald, www.nationmaster.com19 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 McDonalds, 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.25Art Bender was associated with the McDonald brothers and was credited with serving the

first McDonalds hamburger at their San Bernardino store. He later became a franchisee ofMcDonalds.


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restaurant became the prototype for the McDonald s chain. The red & white buildingwith a slanting roof and the Golden Arches on the sides became the model forMcDonalds restaurants. In the years that followed, McDonalds grew from strength

to strength and by the mid-1950s, the fast food chains 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 brotherswere 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 McDonalds restaurants and he succeeded in convincing them. In 1955, the

company was incorporated as McDonalds Corporation.27

The McDonalds bothers

finally sold the business to Kroc in 1961.

Over the years, as the business expanded, the companys 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 McDonalds 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 risingconcern among people about the effects of fast food on health. Responding to the

concern, McDonalds switched to healthier meals and introduced salads and fresh

fruits on its menu.28

As of 2010, McDonalds 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 McDonalds Corporation:2004-2008).

International Expansion

McDonalds 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 McDonalds in Europe came up in the Netherlands.

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

McDonalds also entered France and England.

26 http://www.mcdonalds.ca27 McDonalds Corporation, Company History, www.answers.com28 Geoffrey Jones, Multinationals and GlobalCapitalism, Oxford University Press.29 Den Fujita owned an import company in Japan, specializing in handbags, shoes, and apparel,

before opening McDonalds in Japan.


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Exhibit I

Growth of McDonalds Corporation

1950s

1954 Ray Kroc became the franchising agent of McDonalds. Krocs vision wasto expand the fast food chain in every American State and internationallyas well. He wanted McDonalds fast food restaurants to serve quality food

by adhering to standards and specifications

1955 Kroc started a new franchising company under the name McDonaldsSystem, Inc. and in the same year opened his own McDonalds drive -in atDes Plaines, Illinois. McDonalds franchising agreement was that anyonewho wished to become a franchisee would initially pay a sum of athousand dollars. Later on, 1.9 percent of the annual profits of therestaurant 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 McDonalds restaurants that

served nearly 50 million hamburgers. The company reported annual salesof US$1.2 million.

1960s

1960 Kroc was running the whole show by this time. He renamed the companyas McDonald's Corporation. He wanted to put up a McDonaldsrestaurant in every state of America. He personally looked after theoperations, measured every product, and tasted burgers in every outlet toensure that the quality of food served was uniform in every McDonaldsrestaurant. In the same year, McDonalds started its advertising campaignLook for the Golden Arches which gave sales a big boost. The McDonald

brothers were happy with the results and were not concerned about thecompany Kroc had formed. In 1960, there were 228 McDonaldsrestaurants that reported US$37.6 million in sales, and sold 400 millionhamburgers.

1961 Ray Kroc began letting out more franchises. The revenues that thecompany received from the franchises made it easier for him to raisecapital in the financial markets. He utilized some of the money to create anadvertising campaign with the theme, Look for the Golden Arches. Thecompanys logo was changed from Speedee to a letter M symbolizingthe Golden Arches. Kroc was not happy with the restrictive agreement hehad been operating under and wanted to operate the franchising businesson his own. So he offered to buy out McDonalds for US$ 2.7 million. Heobtained a loan and took over the business from the McDonald brothers.

That same year, he opened a Hamburger University in the basement of arestaurant in Elk Grove Village, Illinois. It was a training facility wherenew franchisees and store managers were taught how to manage aMcDonalds restaurantusing sophisticated training techniques and throughhigh-level management courses.

1963 McDonalds sold one million hamburgers per day in the US. In the sameyear, the company introduced Ronald McDonald, a red-haired clown, toappeal to children.

1965 On July 5, McDonalds was listed on the New York Stock Exchange andsold its shares for US$ 22.50 each.


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1968 McDonalds well known product Big Mac30 was created. Fred Turnerbecame the companys president and chief administrative officer whileKroc became the chairman and remained CEO until 1973. McDonalds

opened its 1000threstaurant in Des Plaines, Illinois.

1970s

1970 By 1970, McDonalds reported US$587 million in sales from almost 1,600

restaurants in all 50 states of the US.

1973 McDonalds introduced its first breakfast fast food The Egg McMuffin .

1975 McDonalds opened its first drive-thru restaurant in Oklahoma City.

1979 McDonalds Happy Meal32

was created and was popular with children as

well as adults.

1980s

1980 By 1980, McDonalds reported sales of US$ 6.2 billion from its 6,263restaurants in 27 countries and surpassed the 35 billion hamburgermilestone. During the 1980s, McDonalds diversified its menu to suit thechanging tastes of consumers.

1982 McDonalds received The American Marketing Association AchievementAward for excellence in marketing programs.

1983 Chicken McNuggets were introduced. By the end of the year, McDonaldshad become the second largest retailer of chicken based products in theworld.

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

1986 McDonalds opened its ten thousandth restaurant.

1988 Fortune Magazine listed McDonalds hamburgers among the 100 productsAmerica makes best.

1990s

1990 By 1990, McDonalds sales had grown to US$ 18.7 billion with 11,800restaurants in 54 countries. In 1990, Life Magazine named Kroc as one ofthe 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 McDonalds restaurants reachedthe 23,000

thmark.

1999 McDonalds acquired its first stake in a Colorado-based fast food chain,Chipotle Mexican Grill, by buying a minor share in the company. In 1999,McDonalds 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 McDonalds Mac sauce served on a three -part sesame seed bun.

31 The Egg McMuffin is the signature breakfast sandwich sold by McDonalds in varioussizes and configurations.

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


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2000s

2000 In May, McDonalds bought the bankrupt Boston Market chain33

for

$173.5 million in cash and debt, the largest acquisition till date. In the2000s, McDonalds introduced low-calorie menu items and switched tohealthy cooking ways like using low fat oil.

2002 In October, McDonalds introduced its famous Dollar menu.

2003 In September, McDonalds launched its advertising campaign on MTVwith the tag line, Im lovin it. This was McDonalds first globalcampaign to be advertised in more than 100 countries. This campaign wassuccessful as store sales for the year 2003 increased by 2.4 percent afterfalling 2.1 percent in 2002.

Compiled from various sources

Exhibit II

Financial Summary of McDonaldsCorporation (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 shareholders 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, whichspecialized in home-styled meals like rotisserie chicken.


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Per common share:

Income from continuingoperationsdiluted

Net income-diluted

Dividends declared

Market price at year end

3.76(1)

3.76(1)

1.6362.19

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 Companysminority 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 andother charges primarily as a result of the Companys sale of its businesses in 18 LatinAmerican and Caribbean markets to a developmental licensee (see Latam transaction note tothe consolidated financial statements for further details).

(3) Includes a tax benefit of $316.4 million ($0.26 per share) resulting from the completion of anInternal Revenue Service (IRS) examination of the Companys 2003-2004 U.S. federal taxreturns.

(4) Includes income of $60.1 million ($0.05 per share) related to discontinued operationsprimarily 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 operationsprimarily resulting from the disposal of McDonalds investment in Chipotle.

(7) Includes a net tax benefit of $73 million ($0.05 per share) comprised of $179 million ($0.14per share) of income tax benefit resulting from the completion of an IRS examination of theCompanys 2000-2002 U.S. tax returns, partly offset by $106 million ($0.09 per share) ofincremental tax expense resulting from the decision to repatriate certain foreign earningsunder 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

Companys lease accounting practices and policies, as well as a non-operating gain of $49million related to the sale of the Companys interest in a U.S. real estate partnership, for atotal pretax expense of $202 million ($148 million after tax or $0.12 per share).

Source: 2008 Annual Report

In 1990, McDonalds opened up in Russia by starting a restaurant in Moscow. This

was the largest McDonalds restaurant at that time. During the year, McDonalds 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 McDonalds.


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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 McDonalds entry into Africa with the opening of a restaurant in Morocco.

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

In October 1993, another important phase of the company s expansion came when itentered 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 about7,033 McDonalds restaurants spread across 89 countries and they generated salesworth US$14 billion.

34

In 1996, McDonalds entered India with a restaurant coming up in New Delhi. InIndia, it entered through a franchisee. By 2007, international sales were reported to bea major contributor to the companys annual revenue (Refer to Table I for therevenues of McDonalds Four Operational Regions: 2006-2009).

Table I: Revenues of McDonalds 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: McDonalds Corporation, Annual Reports, www.mcdonalds.com

34 McDonalds History, www.mcdonalds.ca.


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By 2008, McDonalds had more than 31,000 restaurants spread over 121 countriesand it was regarded as one of the most successful restaurant chains (Refer to ExhibitIII for a list of countries where McDonalds was operational, as of 2008).35

Exhibit III

List of Countries Where McDonalds was Operational, as of 2008

Year of

Opening

Restaurant

Country and Date of First Restaurant Opening

1967 Canada - June 1

Puerto RicoNovember 10

Costa RicaDecember 28

1971 Guam- June 10

Australia-May 30

Japan - July 20Netherlands-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 BahamasAugust 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

PhilippinesSeptember 27

1982 MalaysiaApril 291983 NorwayNovember 18

1984 Taiwan (Republic of China)-January 28

AndorraJune 29

FinlandDecember 14

1985 ThailandFebruary 23

LuxembourgJuly 17

VenezuelaAugust 31

Italy - October 15

Mexico- October 29

35 McDonalds Corporation, www.fortune500news.com.


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Year of

Opening

Restaurant


1986 CubaApril 24TurkeyOctober 24

ArgentinaNovember 24

1987 Macau - April 11

1988 Serbia - March 24

South Korea -March 29

HungaryApril 30

1990 Union of Soviet Socialist Republics - 31 January -(in Russian SFSR, now Russia)

Peoples Republic of China - October 8 (inShenzhen)

ChileNovember 19

1991 IndonesiaFebruary 23

Portugal - May 23

Greece-November 12

UruguayNovember 18

1992 Czechoslovakia (Later became the Czech Republicand Slovakia) - March 20

PolandJune 17

Monaco - November 20

BruneiDecember 12

MoroccoDecember 18

1993 Northern Mariana Islands 18 March

Iceland - September 3Israel - October 14

SloveniaDecember 2

Saudi ArabiaDecember 8

1994 KuwaitJune 15

New Caledonia - July 26

OmanJuly 30

EgyptOctober 20

BulgariaDecember 10

BahrainDecember 15

LatviaDecember 15

United Arab EmiratesDecember 21

1995 EstoniaApril 29

RomaniaJune 16

MaltaJuly 7

ColombiaJuly 14

SlovakiaOctober 13

South AfricaNovember 11

QatarDecember 13

HondurasDecember 14

1996 CroatiaFebruary 2

SamoaMarch 2


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Year of

Opening

Restaurant


FijiMay 1LiechtensteinMay 3

Lithuania - May 31

IndiaOctober 13

PeruOctober 18

JordanNovember 7

ParaguayNovember 21

Dominican Republic - November 30

BelarusDecember 10

French PolynesiaDecember 10

1997 Ukraine - May 28

Cyprus - June 12Macedonia - September 6

Ecuador - October 9

Isle of Man - December 15

Suriname - December 18

1998 Moldova - April 30

LebanonSeptember 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 MauritiusJuly 4

2003 Kazakhstan

2004 Montenegro - June

+ McDonalds 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, McDonalds 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 itwent 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.

McDonalds 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, McDonalds 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


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

chains name, McDonalds was changed to Makudonaldo. Keeping in mind local

sentiments, McDonalds restaurants in Arab countries, Malaysia, and Singapore

maintained halalmenus36and did not serve pork, abiding by Islamic laws for foodpreparation. In Saudi Arabia, McDonalds did not display statues or posters of Ronald

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

In Israel, McDonalds outlets did not serve dairy products37

, and they were closed on

Saturdays, the Jewish Sabbath Day38. In India, McDonalds 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 McDonalds promotions stated Our name may be American, but were

all Irish.

McDonalds 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 McDonalds menu. Beer inGermany, 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 McDonalds restaurants. McDonalds 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, McDonalds 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 McDonalds outlets in Uruguay. In Thailand, McDonalds 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 McDonalds 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 permissibleaccording to Islamic law. McDonalds 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.


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Entering Russia

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

officials to a local McDonalds restaurant and offered them some of its signature

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

the McDonalds experience could be taken to Russia.43

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

McDonalds to open its outlets in Russia during the 1980 Moscow Olympic Games.

However, that did not materialize. For several years, Cohonsplans 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 McDonalds 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 McDonalds

outlets in Russia, some of the officials at the companys headquarters in the US

criticized his efforts. According to analysts, McDonalds 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 McDonalds Russia.49

McDonalds Canadaagreed to reinvest all its profits in Moscow for a chain of20 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

McDonalds 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

McDonalds Canadian Institute of Hamburgerology.

42 Montreal Games referred to the 1976 Summer Olympics, or XXI Olympics, held inMontreal, Quebec, Canada.

43 Janet Adamy, As Burgers Boom in Russia, McDonalds 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., McDonalds Excellent Soviet Venture? Canadian Business, Vol. 64, Issue 5,

May 1991.48 Tony Royle, The Union Recognition Dispute at McDonalds Moscow Food-Processing,

Industrial Relationship Journal, Blackwell Publishing Ltd., 2005.49 As of 2009, McDonalds owned all of its Russian operations.


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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 theirsupport to the companys 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 thecompanys other restaurants in 17 other countries.

50

On January 31, 1990, McDonalds opened its first restaurant in Russia at PushkinSquare, Moscow. The opening was widely publicized not only by the Russian media

but by the international media as well. It was the largest McDonalds restaurant tillthat time, spread over 23,680 square foot area on multi levels, had a seating space for700 customers, and 27 cash registers. According to reports, around 40,000 peoplequeued up and waited for two hours for the opening.

51According to Khasbulatov, on

the opening day, there were queues outside the store even at closing time at night andhe had to unwillingly turn them away. On the opening day, the store first served

orphans and children, before entertaining other guests, who included high rankedgovernment officials as well as some celebrities.

52The 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 McDonalds in Russia but the firstfast food restaurant to ever come up in Russia. With this beginning, McDonalds also

became a symbol of the advent of American capitalism in the country, opined theanalysts.

In contrast to its standard procedure of going in for a franchising agreement or a jointventure, the McDonalds outlets in Russia were wholly owned without any partners.53The company also did not use franchising in Russia despite it being a key factor for itsinternational operations in other countries. According to Khasbulatov, this was due tothe fact that there were some gaps in the existing legislations relating to franchising inRussia. In Russia, the law on commercial concession governed franchising, but

franchisers often felt that the legislation lacked clarity.54However, the company didnot rule out the franchise option. Commenting on the companysfranchise 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 industrywas new in the country and it was difficult to find an efficient partner who wouldcompletely understand the operation and stand up to the quality standards set by thecompany. 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 theyoffer. 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 Russias Agrifood System,http://ageconsearch.umn.edu, May 18, 2007.

51 McDonalds Russia, Brand Strategy, November 2005.52 McDonalds in Moscow, http://goldenessays.com/free_essays/2/economics/mcdonalds-in-

moscow.shtml53 McDonalds Set for 20% Expansion in Russia, www.sptimes.ru, June 10, 2005.54 Maria Levitov, McDonalds to Invest $50 Million, The Moscow Times, March 16, 2006.55 McDonalds 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 isheadquartered in New York, USA.

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


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Expansion in Russia

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

acquiring various properties in Russia. As there was some difficulty in the conversionof 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 thecountry. In 1993, McDonalds first corporate building in Russia came up nearMoscow Kremlin

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

Company59

and Upjohn60

. McDonalds continued to purchase many restaurantproperties over the years.61

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

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

In 1996, McDonalds introduced the drive-thru format in Russia. It was a new conceptin 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 convenienceassociated with the format, but also started to acknowledge the delivery speed.

In 1998, 19 McDonalds restaurants opened in various parts of the country. However,due to the Russian financial crisis64and weakening of the economy around the sametime, the company decided to go slow with the expansion. By 1999, the company hadmade 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 McDonalds.Things took a turn for the worse around 2000, as the condition of some of therestaurants deteriorated. Some items on the menu were also losing their appeal.

According to Svetlana Polyakova, Public Relations Manager, McDonalds Russia, by

2001, the company had invested around US$ 215 million in Russia. There were about6,000 employees at that time.66As of 2001, McDonalds 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. 67The 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, McDonalds 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, McDonalds Touts Discipline,http://online.wsj.com, October 16, 2007.

64 The Russian financial crisis started in August 1998, primarily due to a financial crisis inAsia. There was a decline in world commodity prices, which impacted countries thatdepended heavily on the export of raw materials. Russia, which depended a lot on theexports of petroleum, natural gas, metals, and timber, was also affected.

65Natalia 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.


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2000s, and this provided a boost to the companys growth plans (Refer to Exhibit IVfor a brief note on Russias economy in the early 2000s).

Exhibit IVA Brief Note on Russias Economy in the Early 2000s

Since the early 2000s, the Russian economy had seen a steady growth, fueled by therise 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 averageRussian disposable income. In 2008, it was estimated that above 60% of the

population had a disposable income of US$ 350 on an average, after regularhousehold expenses. However, analysts suggested that there existed an incomeinequality in Russia, which was higher than that in any other European country butstill lower than that in the US. Analysts said that about 80% of consumption camefrom the top 10% earners in the country. Therefore, they added, if the differencereduced in future and more people became wealthy, consumerism would further

rise.

In addition to the rise in disposable income, consumerism was also boosted by theavailability of liquid money due to growth in the credit market. This gave thehouseholds 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 primefactors that boosted the Russian economy in the early 2000s.

In 2007, Russia became a favorable place for foreign investment and witnessedabout US$ 100 billion worth of investment, a record for any emerging country andmore than what the worlds top 15 leading economies could attract. Also, most ofthese investments were reported to be for a long time basis.

The country witnessed an inflation rate of about 9% in 2007, with the FMCGsection witnessing 13% inflation. Analysts feared that the rising inflation couldimpact the growing economy. They pointed out that the consumer prices hadincreased since there was an increase in salaries, pension, etc, that led to spendingthat was higher than the economic growth. As a result, the supply of moneyincreased, leading to a decrease in the purchasing power of the ruble. Thecirculation of money was also higher, leading to erosion in the purchasing power ofthe currency.

The average growth rate of Gross Domestic Product (GDP) in the period between2000 and 2007 was about 6.5%. In the first half of 2008, the country witnessed aGross Domestic Product (GDP) growth of 8%. However, toward the end of 2008,the Russian economy faced some challenges due to rising oil prices and thedepreciating value of the ruble in the international market.

Like other western countries, Russias economy was affected by the credit crunch,thus reducing the liquidity in the country. The stock market also crashed. There wasa 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 thegrowth in the GDP might even reduce by 4% in 2009. Many also believed thatRussia, with cash reserves amounting to US$ 595.9 billion, would be able to pullout its banking sector and industry from the crisis very soon.



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In 2002, there were around 79 Russian stores that together drew around 200,000customers each day.

68By 2003, McDonalds 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 inRussia: 2006-2008).

Exhibit V

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

Retailer Global brand owner 2003 2004 2005 2006

McDonalds McDonalds Corp 35.3 30 30.7 30.3

RostiksRostiks InternationalInc 3.6 5 5.9 4.3

Sbarro Sbarro Inc 2.8 2.9 3 3

Rostiks-KFCRostiks InternationalInc - - - 2.8

TeremokTeremok - RusskieBliny 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 thefastest growing segments in the economy of Russia, with a growth rate of between20 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 20percent annually for the next few years.

70

Analysts considered a major section of fast food customers to be price sensitive andkeen 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, McDonalds Plans to Double Russian Presence, www.foodnavigator.com,

February 3, 2005.


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trend among Russians who tended to spend more on food and dining out morethan any other country in Europe. Moreover, the increasing number of shoppingcenters 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 andrestaurants.

According to research conducted by Euromonitor Plc.71, almost 50% of the Russianpopulation in the age group of 16-50, bought fast food at least once a week. Thestudies showed that 64% of the customers considered location as the mostimportant factor among the reasons that drove customers into the stores, followed

by 54% of customers who focused on cost. 43% of customers regarded quality and25% regarded cleanliness as the factors that made them visit any fast food store.

According to analysts, one quarter of Russian restaurants were situated in Moscowitself, 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 cateringformats in Russia were cafs 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-pricedcategory of outlets.

The national fast food chains and stalls that were slowly gaining ground wereStardog, Teremok, Russkie Blini etc. Street food vendors like KroshkaKartoshka were also very popular in Russia. However, in 2007, the Mayor ofMoscow prohibited the street vendors from doing business, in a bid to clean up thecity. 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 placesbecause of high rentals. Further, analysts also said that the high rents paid by thevendors would lead to an increase in the prices of the food items. In order to bearthe increasing operational costs, Kroshka Kartoshka, joined hands with Polands

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

Among the fast food chain operators, the food court format was slowly becomingpopular as of 2008. People visited the food courts not just for the food but also tosocialize with friends and families. Most of the leading chains such as Rosticks-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 thecountry. As of 2008, Baskin Robbins was one of the largest franchises, whichcapitalized on the Russians fondness for ice-cream. Among the drive-inrestaurants, Rostiks was considered the market leader. In popularity, it stoodsecond to McDonalds, which was among the most popular fast food chains since

1990.One of the major challenges for the restaurant industry in Russia wasunderdeveloped distribution and logistics in most parts of the country, other thanlarge 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.


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eating food was a lengthy procedure, with people sitting at the table for longperiods of time.

73

Around the end of 2008, the Russian economy also experienced the effects of theglobal economic slowdown and credit crunch. The stock markets performed poorlyand the ruble depreciated considerably against the US dollar. Industrial productionsuffered, leading to wage reductions, lay-offs etc. Retail sales also suffered a lotdue to the reduction in spending as well as lack of availability of cheap loans andliquidity 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 forvalue for money in these tougher times rather than opting for fine diningexperiences. It was reported that in 2009, Russian consumer sentiment had indeed

been hit dramatically by the economic crisis, and the overall restaurant industry wasestimated to be down 7-8 percent.

75Denying that the crisis had been beneficial for

cheap restaurants, Oleg Sukhotin, executive director of the Russian Association ofFast 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 alsoplummeted. People no longer order pancakes with caviar that much.76

As of early 2010, companies like McDonalds, KFC, and Sbarro dominated theRussian fast food market.77In late 2009, Andrey Petrakov, executive director of theRestcon company, said that this was the right time fast for food chains to expandinto 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 menuarose after research revealed that around 90% of the people did not have anyopportunity to get breakfast when outside their homes. 79The breakfast menu mainlytargeted professionals in the big cities like Moscow, who left home very early to avoidthe traffic and needed to have breakfast somewhere outside.

By 2005, there were a total of 129 McDonalds restaurants in Russia, out of which 82were in Moscow and 15 in St. Petersburg. According to analysts, the company spentabout US$ 1.5 million to US$ 2 million on setting up each new restaurant.80 Thecompany 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 McDonalds and Burger King Kill Russian Bistro, http://english.pravda.ru, November 9,2009.

74 The Fast Deteriorating State of Russias Economy, www.economist.com, December 14,2008


76 Vladimir Kozlov, McDonalds Supersize Profits Conquer Moscow, www.mnweekly.ru,January 25, 2010.


78 McDonalds 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


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largest among McDonalds markets in terms of average number of consumers perrestaurant.

81

In 2006, more than 20 new restaurants were added to the Russian operation. Even in2006, after 16 years of operations, the first restaurant at Pushkin Square was the

busiest McDonalds in the world.82

By the end of 2007, there were more than 180 McDonalds restaurants present inaround 40 cities of Russia.83 The Russian venture was one of the most lucrative

businesses for McDonalds, fueled by the ever increasing quest for American productsand brands among the growing middle class in Russia. However, the companydecided to concentrate on increasing the quality and to extract more sales from theexisting stores, instead of going in for rapid expansion. Some analysts pointed out thehigh real estate prices of the prime locations was the main reason for McDonald sdeciding to go slow on its expansion (Refer to Table II for new outlets opened inRussia: 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 accessibilityto its products in Russia, such as the 24-hour express windows and drive-thruwindows.

Table II: New McDonalds 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, McDonalds had more than 220 restaurants in over 50 cities in Russiaand had served more than 2 billion customers.

85

McDonalds Strategies in Russia

The company faced stiff operational hurdles from time to time because of the strongbureaucracy that was present in Russia. According to analysts, opening a single storerequired the sanction signatures from about 200 different officials. The governmentissued guidelines running into 40 pages instructing the restaurants on numerous dosand donts, while operating in the country. Nevertheless, the company went ahead,implementing several strategies that eased its difficulties and paved the way forsmooth operations. The menu was kept similar to the one in the US, with the additionof cabbage pie and a few popular Russian dishes.

The Human Factor

McDonalds 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 inthese places. However, it gave the best training to the local recruits, who were familiarwith neither customer service nor the hamburger. Moreover, molding them in the

81 Chris Mercer, McDonalds 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, McDonalds Touts Discipline,

http://online.wsj.com, October 16, 2007.84 McDonalds to Open 40 Restaurants in Russia in 2008, www.cdi.org, April 22, 2008.85 George Cohon, Founder of McDonalds Canada and McDonalds Russia, Honored in

Washington, D.C.,www.marketwire.com, October 6, 2009.
http://www.marketwire.com%2C/http://www.marketwire.com%2C/http://www.marketwire.com%2C/


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McDonalds waywas a challenge when most of the local recruits were not familiarwith working under the capitalist system. Experts felt that they were victims of theinertia brought about by the old system of central planning for so long that

productivity remained low.

Hiring local employees was a challenge though McDonalds first recruitment ad drew

27,000 applications. The company selected a 630-member crew comprising hires ofbetween 18 and 27 years. Craig Sopkowicz, who was McDonalds quality-controlexpert and in charge of the new employees, said, We looked for applicants who livedclose to the restaurant, among other things, in order to control the timeliness ofemployees.

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 withschoolwork. Initially, the company provided a starting salary that was on a par withthe industry average in Russia (1.5 rubles an hour) for new hires.

87

Local employees required lengthy training. To be flexible when positions changed, thenew crew was trained in all aspects of the restaurants functions; the new staff logged

in more than 15,000 training hours to ensure control similar to that in westernoperations. Before the opening of the first Russian store, a team of 30 newly recruitedmanagers (including Khasbulatov) was sent to Europe and the Institute ofHamburgerology in Toronto for comprehensive training. These people in turn trainedthe other new employees on quality, customer service, general conduct, as well as thehealth and safety standards that were to be followed in the stores. According to anexecutive from McDonalds, at first it was difficult to teach the store employees tosmile and look straight into the eyes of the people. To teach the trainees, the trainingmanuals were translated into Russian and they were also shown videotapes aboutvarious chores, like the right way to wash the windows and clean the floors, as well asthe correct way to arrange the ingredients in the Big Mac.

88Since the company had

some concerns about the employees appearance, it decided to construct an on-sitelaundry room so that the companys standards could be ensured.89

In 2006, McDonalds Russia was named as the Best Employer in Russia by theRussian Chamber of Commerce and Industry. The award recognized the company as aresponsible 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 companyemployed more than 24,500 Russians at its restaurants, processing facilities, andcorporate offices, and there were more than 100,000 Russians employed bysuppliers.

92The 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 didnot 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,Moscows Big Mak Attack, www.time.com, February 5, 1990.88 Ann Blackman, Moscows Big Mak Attack, www.time.com, February 05, 1990.89 Helen Deresky, International Management: Managing Across Borders and Cultures,

(Pearson Prentice Hall, 2006).90 McDonalds 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 McDonalds Canada and McDonalds Russia, Honored in

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


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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-incomesegment 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 marginssomewhere around the mid 20 percent range. It was considered to be much higherthan the global average profit margins that the company earned. The same store sales

94

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 inthe year, in order to maintain the desired profit margins, keeping up with the risinginflation. However, the percentage increase was different for different items. Forinstance, the price of less expensive items like ice-cream cones, was raised at half therate 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, McDonalds had lowered some prices to gain frombigger turnover. The companys endeavor was to not increase prices above annualinflation rates of between 13 percent and 14 percent. However, in mid-2009, the priceof the Big Mac in Russia grew by 13.5 percent to 67 rubles, but it became lessexpensive in dollar terms - US$0.5 (19.7 percent).

95Consumers in Russia are really

price sensitive . . . weve been very careful in managing our menu prices,96 said

Khasbulatov.

Procurement

Sourcing and quality control of food was a huge challenge for McDonalds in Russia.Right at the time of entry, the company realized that many of the ingredients that itrequired were not available in the country at all. Greg Steeves, former Chief OperatingOfficer of McDonalds Europe, explained, Russia is often plagued by shortages, and

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

McDonalds Canada or from other international market to procure items for Russia.

McDonalds 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,

McDonalds built a US$40 million, 110,000 sqft plant in a Moscow suburb toprocess

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

included laboratories for testing to ensure compliance with quality and consistencystandards. The company also brought in Peter Frings, an agronomist with Mccain

93 Ann Blackman, Moscows 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 McDonalds Russia, Brand Strategy, November 2005.98 Ann Blackman,Moscows Big Mak Attack, www.time.com, February 5, 1990.


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In 2004, McDonalds 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

McDonalds leading market in comparable sales and total sales growth.105By the time

the company celebrated the 15th anniversary of the opening of its first restaurant inRussia 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, McDonalds, Russia ranked second in the entire McDonalds system for

average guest counts per restaurant.106

The company was also credited with having

made significant contributions to the development of Russias foodservice and

processing industries, agriculture, and business practices. Customers view

McDonalds as a company that builds in Russia with a pioneer spirit. It is nowviewed

as an international brand, run by local people and supplied by local people. Its part of

Russias history,107

said Khasbulatov.

In 2005, McDonalds 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 directlycompete with McDonalds 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 McDonalds 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 McDonalds 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, McDonalds President

Ralph Alvarez commented, Itd be very easy today to go in and say, Khamzat,

youve got to build 100 restaurants,because were getting phenomenal returns.110

By 2007, McDonalds turnover in Russia was growing 30% annually, and the rate ofgrowth 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 McDonalds.112

According to analysts, the

companys profit margins in Russia were in the mid-20% range, much higher than the

global average of McDonalds.113

105Chris Mercer, McDonalds Plans to Double Russian Presence, www.foodnavigator.com,February 3, 2005.

106 McDonalds Celebrates its 15th Anniversary in Russia, www.prnewswire.co.uk, January31 2005.

107 McDonalds Russia,Brand Strategy, November 2005.108 McDonalds and Burger King Kill Russian Bistro, http://english.pravda.ru, November 9,

2009.109 Number of McDonalds 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, McDonalds Touts Discipline,

http://online.wsj.com, October 16, 2007.111 McDonalds Turnover in Russia Growing 30% Annually, Russia & CIS Business and

FinancialNewswire, October 24, 2007.112 McDonalds to Open 40 Restaurants in Russia in 2008, www.cdi.org, April 22, 2008.113 Janet Adamy, As Burgers Boom in Russia, McDonalds Touts Discipline,

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


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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.114Experts noted that other companiessuch 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 McDonalds, 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 McDonalds, 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 itsbrand, the quality and nutrition of its food items, and about itself as an employer.

According to the company, its European operations 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, McDonalds 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 theworse,

119said Khasbulatov.

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

McDonalds had also benefited from being a foreign brand. If we look at ads from

pre-revolutionary Russia, we hardly see a Russian brand. Its 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, June29, 2009.

115

In February 2006, Coca-Cola announced that it would invest US$1.2 billion in Russia overthe next three to five years as it felt that the sale of carbonated drink would increase duringthe economic crisis.

116 Benjamin Scent and Natallie Cai, To Russia with Love, www.thestandard.com.hk, June29, 2009.

117 Moscow Wants to Up Rent on its Two McDonalds, www.dailyherald.com, July 10,2009.

118 Diane Francis, Russia Good for Business: McDonalds, http://network.nationalpost.com,September 11, 2008.




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Overcoming Challenges

Analysts felt that the biggest challenge before McDonalds Russia was dealing with

the ministries. They felt that these regulators adhered to rigid regulations in doling outsupplies. When we need more sand or gravel for building and go to the department incharge, they say, Sorry, youre not in my five-year plan, 121said Cohon. The levelof bureaucracy in the country was a big impediment to growth, according toKhasbulatov.

Catering to the local population was also challenging as their eating habits were quitedifferent and many of them were unaccustomed to eating foods such as burgers. Forinstance, some people who were initially invited to test the Big Mac reportedly ate itlayer by layer.122Moreover, eating habits were different. Eating food in Russia was alengthy procedure, with people sitting at a table for long periods of time.

123They

were also not familiar with the drive-thru format. However, with the offerings atMcDonalds being viewed as a novelty by customers, the company had to contendwith long queues.

Right from the first day, the company had to work differently to cater to this market. Ittook various initiatives to reduce long waiting lines by hiring private security peopleto 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 customersreached 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 tenBig Macs to each customer.124To move things fast, the company also invested in newcooking 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 tocontinue to have this problem.125

In addition to the political challenges that the company faced, the company alsosuffered 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 economicinstability in the country. As a consequence, customer traffic decreased considerablyin the McDonalds stores and sales suffered a serious setback.

126

In 1998, McDonalds also experienced a major labor dispute in its processing plant,the McComplex, when attempts by security personnel in the unit to form a union werereportedly blocked by the company time and again. According to analysts, manylaborers accused the company of ill-treating them and of illegally holding them backfrom forming a union. At that time, the company, under the pressure of an economicslowdown, did lay off some employees and reduce salaries, which made the laborforce think about unionization. However, McDonalds Russia denied having ill treatedits employees and said that it was strictly abiding by the Russian laws. The incidentled to legal proceedings as well and tainted the employee friendly image of thecompany not only in Russia but also in several other markets during that time.127

121 Ann Blackman,Moscows Big Mak Attack, www.time.com, February 5, 1990.122 Ann Blackman,Moscows Big Mak Attack, www.time.com, February 5, 1990.123 McDonalds and Burger King Kill Russian Bistro, http://english.pravda.ru, Nove mber 9,

2009.124 Helen Deresky, International Management: Managing Across Borders and Cultures,

(Pearson Prentice Hall, 2006).125 Janet Adamy, As Burgers Boom in Russia, McDonalds Touts Discipline,

http://online.wsj.com, October 16, 2007.126 Youngme Moon, Kerry Herman, McDonalds Russia: Managing a Crisis,

http://harvardbusinessonline.hbsp.harvard.edu, October 21, 2002.127 Angela Charlton, Natalya Gracheva is Giving McDonalds Heartburn,

www.mcspotlight.org, June 23, 1999.


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On February 19, 2007, the McDonalds at St. Petersburg was bombed in a terroristattack, injuring six people and damaging the store to a great extent. A similarexplosion had earlier occurred in 2002, when a bomb went off in a car at a

McDonalds restaurant in Moscow.128

In November 2007, McDonalds 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, McDonalds 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 McDonalds Russia faced minimum competition as it was the

pioneer in fast food chains in the country and enjoyed the first mover advantage. Overthe years, many other retailers came up but none could attain the stature enjoyed by

McDonalds (Refer to Exhibit VII for Leading Fast Food Chains in Russia).

According to analysts, the fact that McDonalds 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 thats not

their only outlet with such rent conditions,132

said Goncharov.

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

government that sought higher rental payments from its two restaurants (on Arbat andon 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 McDonalds to pay this rent.133

In December 2009, Moscow's arbitration

court upheld the city authoritiesmove.134

128 Explosion Hits McDonalds 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, Dec

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International Business Cases Combined