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McDonald’s in Russia – Defeated Communism with a “Happy” Meal

Overview

Serving more than 58 million customers every day, McDonald’s Corporation is the world’s major chain of hamburger fast food restaurants. The name as well as the hamburgers is “digested” easily by celebrities or common man. To pursue its endeavors in emerging markets, McDonald’s stalled its growth in developed nations and leaped in Russia which had emerged as a major economic force in the world.
It was George Cohen, head of McDonald’s Canada, who started an almost impossible dream of introducing a McDonald’s hamburger in Russia. It took 12 years of efforts and finally in April 1988, he convinced the officials of Moscow that McDonald’s can be set up in Russian culture. After 14 years of intense negotiations; McDonald’s finally entered into the Soviet Union on January 31, 1990. This flagship store located in Moscow’s Pushkin Square, was the world’s largest McDonald’s boasting of 28 cash registers and seating capacity for around 700 customers. The first day of McDonald’s in Russia broke the record for inaugural sales in McDonald’s history serving more than 30,000 customers on the first day itself.
The Pushkin Square McDonald’s is the world’s busiest McDonald’s restaurant serving more than 20,000 customers daily. As the fast food market in Russia is growing rapidly, McDonald’s is trying to expand its presence throughout the country.


Objectives

  • The growth of Russian Fast Food Industry, its market size and the competition that McDonald’s is facing.
  • To analyze the strategies adopted by McDonald’s in Russia.
  • To understand the process of production as well as the distribution methods of McDonald’s combined with Supply Chain Management.
  • To analyze the future of McDonald’s in Russia.

Synopsis

Russian Fast Food Industry – The Russian Fast Food market is relatively small as compared to the US Fast Food market. The Russian fast food industry grew rapidly after the 1998 financial crisis. The Russian restaurant market consists of following players –

  • McDonald’s
  • KFC
  • Rostick’s
  • Russkoye bistro
  • Kroshka - Kartoshka
  • Sbarro
  • Mobile “Stop-top” units
  • Teremok Russian bliny
  • Burger King

The distribution of Food service sector in Russia can be shown in fiq 1.1

distribution-of-food-in-russia
mcdonalds-one
mcdonalds-two
mcdonalds-three

McDonald’s in Russia is recording highest sales and profit figures in the world and the expansion plans are moving forward quite well with effective branding and operational excellence. This has enabled McDonald’s to capture more than 70% of Russian fast food market. Business analysts say that McDonald’s Russia is reporting profits in the margin of mid 20% which is much higher than the company average. The prices of menu in Russian McDonald's increases at around four intervals in a year owing to high inflation. The demand for fast food in Russia is ever-increasing, so McDonald’s is taking desperate measures to prevent its competitors from eating up its market share.
In a bid to expand effectively, McDonald’s real estate venture commenced in the early 1990’s and they converted the sales to purchase farmlands, put up office towers, a distribution center and a factory in the suburbs of the capital, Moscow. This later came to be known as McComplex. McDonald’s also opened their office in Kremlin in 1993. As loans for operating small businesses weren’t easily available in Russia, McDonald’s added more property in their kitty and opened new restaurants.
Experts as well as local population has questioned the Russian authorities over the property bought by McDonald’s to such a large extent. The Pushkin Square restaurant in Russia is of vital significance as it is like a jewel in the crown of the growing real estate empire in which McDonald’s is regarded as one of the largest corporate landowners. This “land acquire” has led to a huge increase in real estate rates and these days when it’s nearly impossible to purchase land in central Moscow, many complaint about McDonald’s land purchase. It is been portrayed that George Cohen maintained good relationship with the city officials and succeeded in “obtaining” the land. The real estate value of McDonald’s assets is been estimated at $115 million.


McDonald’s Strategy in Russia -

McDonald’s offers a series of signature items that are served in restaurants all over the world. To enhance the local food preferences, McDonald’s Russia have included potato wedges, cabbage pie and cherry pie. In the year 2005, McDonald’s initiated breakfast menu and stronger coffee at different locations in Moscow that enabled commuters who left early for work, to avoid traffic and eating out.
McDonald’s has also implemented a concept restaurant within its McDonald’s restaurant known as McCafe which is separated from its main dining area and serves coffee, soft lights and desert menu. This concept of McCafe originated in Australia; the Russian officials say that McCafe has become a huge hit in the locations where it had been implemented in Russia. The Pushkin Square McDonald’s as well as the Arbat are two of the locations where the McCafe was introduced. The Pushkin Square McCafe serves an average of 600 transactions per day and it is seen that 6 out of 10 people prefer to have beverages at McCafe than other restaurants. The pricing of the beverages have been kept within the Russian budget and their competitors Starbucks.
McDonald’s Russia has a modified menu that can appeal to the local masses. This includes cabbage pies, potato wedges and cherry pie.
This strategy by McDonalds have been applauded by one and all, as McDonald’s have captured the minds of the Russia masses who have developed a taste of McDonald’s as well as their quality.


McDonald’s Supply Chain Management –

Suppliers - When McDonald’s first opened in Russia, a majority of the raw materials used were not grown in Russia whereas as of now over 75% of raw ingredients needed for McDonald’s are supplied by over 130 independent Russian suppliers. Many agricultural experts are of the view that McDonald’s had changed the way Russians ate and now the “Corporation” is also deciding what should be grown in the country. The crop preferences of McDonald’s have led to shortage of other crops which should be otherwise grown.
Food Processing –
Food Processing was necessary for McDonald’s that will further add quality to the product as well as would ensure reliable delivery. McDonald’s invested around $45 million for the construction of 105,000 square foot food processing and distribution center in South-West suburb of Moscow, known as McComplex. McComplex assures that an adequate supply of high-quality standards are made available. In Russia, the McComplex produces all the pies that are sold in the country and it also exports pie to all Europe. Around 13,500 pies are produced every hour and works for 20 hours a day.
The entire supply of fries and wedges for McDonald’s Russia comes from McCain Foods Limited, Poland, and the fishes from Cargill in Europe. Some amount of meat is imported from Germany, Lithuania and Brazil which is mixed with Russian beef to meet the McDonald’s standard of 18-22% fat. This has raised some eyebrows as the food which is imported increases McDonald’s carbon footprint as the food is travelling a long distance before reaching the plates.
Quality and Safety -
The facilities at McDonald’s Russia are modern, clean; the processes are streamlined and efficient whereas there is a clear evidence of the quality and customer satisfaction.
Logistics –
Supplying the raw materials in McDonald’s Russia is a significant challenge in itself due to its geographical features. McDonald’s Russia purchases raw materials from more than 130 local suppliers. Due to poor road networks and diverse geography of the country, it is a big challenge to transport raw materials.

Criticism –

The Economist, an English language weekly publication developed a Big Mac Index which informs about the real cost of currency. According to this, the fair price of one dollar in Russia should be around 15 rubles which is around 31 rubles at present. There is surely awareness about the role that McDonald’s restaurants play in the world financial neocolonialism. It is a fact that anti-Americanism has economic grounds and the measures against McDonald’s are proficient of bringing certain outcomes. If the McDonald’s in Russia were to shut down, it would deny USA of its dollar cost measurement tool on Russian soil and once this “Neocolonial system” collapses, Russia will be able to regain its “Lost Independence”. It is just the Russian government that can close down McDonald’s or at least they can complicate the business to choke it off and finally make it wither away.
Some of the McDonald’s employees in Russia say that the wages paid to them are quite low. It has been observed that these employees are usually under 21 and majority of them quit within 4-5 weeks. Furthermore, McDonald’s say that they need not pay more to their employees, as working in McDonald’s doesn’t require special skill. This view of McDonald’s has been highly criticized and the entry of McDonald’s is considered as growing Authority of America, animal abuse, ruthless earning of profit, unecological, unhealthy food and exploitation of workers.
The mass use of refrigeration by McDonald’s have been said to contribute towards global warming. There was a recent stir in the global media which reported that an artist bought a McDonald’s Happy Meal, set it out on a plate and left it as it is. The Happy Meal stood on the table unaffected for as long as 180-days without forlorn and odor. Thus, a big question arises about this Kid’s food which is unaffected and did not turn moldy after months of exposure to open air.

Criticism regarding the diet of McDonald’s –

The images show that Morgan Spurlock consumed McDonald’s food for 30 days and the physical as well as psychological effects the diet had on him. As a result, Spurlock gained 24.5 lbs weight, cholesterol level went up dangerously by 230 and he also experienced a 13% body mass increase. Spurlock also experienced sexual dysfunction, mood swings as well as fat accumulation to his liver. Besides these, the risk of heart failure as well as heart diseases doubled; he also experienced massive headaches and cravings.

Growth and Future prospects of McDonald’s in Russia

After the opening of first McDonald’s in Russia it just went one way – UP. In 2002, McDonald’s was active in 23 cities which had a total number of 74 restaurants consisting of 9,000 employees. In 2005, it grew to 37 cities with 17,000 employees. Recently, McDonald’s marked 20 years of business in Russia having expanded its business in 60 Russian cities with over 245 restaurants that serve around 950,000 customers daily with the help of its 25,000 employees. The US based food service giant said that in 2010 they will be investing $135 million with a view to inaugurate 45 restaurants.

With the ever-increasing revenues of McDonald’s in Russia it is quite visible that the Russians are open to the Burger Revolution by McDonald’s. It also made sure to hit the last nail in the Russian Communism coffin and since then it was no looking back for McDonald’s which is just expanding in Russia every day. Maybe, a new McDonald’s store opened meanwhile this case study is complete.

*Image courtesy – Supersize Me, 2004

The Writer Ravi Krishnani is Senior Editor at Application Nexus India and can be reached at ravi.k(at_the_rate)applicationnexus.com as well on his Facebook Page.

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