McDonald’s Russia
Fisher College of Business
Where Theory Meets Practice
Fisher College of Business at The Ohio State University
McDonald’s Russia
MBA 808 – Emerging Markets (Russia)
Submitted to: Professor Kinard
Submitted by: Ed Bittel, Blaine Bosley, and John-David de La Harpe
Submitted on: May 1, 2008
Edward Bittel, Blaine Bosley, and John-David de La Harpe prepared this report under the supervision of Professor
Jim Kinard about McDonald’s in Russia. The report reflects research done by the authors before, during, and after
taking a trip to Moscow in March, 2008 that included visits to several McDonald’s facilities.
1
Fisher College of Business
McDonald’s Russia
Table of Contents
Introduction ..................................................................................................................................... 3
Russia as a Re-Emerging Market................................................................................................ 3
McDonald’s in Russia ................................................................................................................. 4
History............................................................................................................................................. 4
McDonald’s Strategy ...................................................................................................................... 6
Menu ........................................................................................................................................... 6
McCafé........................................................................................................................................ 6
Store Design ................................................................................................................................ 7
Production, Distribution, and Supply Chain Management ............................................................. 7
Suppliers ..................................................................................................................................... 7
Food Processing .......................................................................................................................... 8
Quality & Safety ......................................................................................................................... 9
Logistics ...................................................................................................................................... 9
Store Operations ....................................................................................................................... 10
Real Estate ................................................................................................................................ 10
Job Creation, Employment, and Training ................................................................................. 11
Community Involvement .......................................................................................................... 14
The Russian Fast Food Industry ................................................................................................... 15
Market Size & Consumption .................................................................................................... 15
Competition .............................................................................................................................. 15
The Future: Addressing Customer Demand ................................................................................ 16
Exhibits & Photos ......................................................................................................................... 18
2
Fisher College of Business
McDonald’s Russia
Introduction
Russia as a Re-Emerging Market
Russia has re-emerged as a major economic force in the world. The country has a
population of 148 million people, a landmass that spans 17 million square kilometers and 11 time
zones, and an abundance of natural resources. In addition to these statistics, the country’s
successful move away from communism to a market system in the last 20 years is accelerating
economic growth. As Exhibit 1 illustrates, during the last two years (2006 & 2007), Russia was
the third fastest growing economy in the world in terms of GDP behind China and India.
Russia’s GDP grew at a rate that was between 5% and 6% during these two years, and the rate of
growth is forecasted to continue at, or above, 4.5% through 2010. The country’s GDP growth
rates from 2001 to 2010 are shown in Exhibit 2, and illustrate seven consecutive years of
economic expansion. Further, the Russian government estimates that over $80 billion of foreign
direct investment entered the country in 2007, which is dramatically up from $16.7 billion in
2005.
Like any rapidly emerging market, the Russian economy has its share of economic risks.
These risks include inflation at an estimated 12% in 2008, a poor enforcement of intellectual
property rights, a weak infrastructure that can make transporting goods via road expensive, and a
reputation for corruption that is exemplified by the 2007 Transparency International Corruption
Perceptions Index, which ranks Russia 143rd out of the 179 countries included in the survey. For
comparison, the USA is 20th of 179. However, where there are risks, there are potential rewards,
and a number of both domestic and international companies are thriving in Russia’s current
economic environment. A prime example of a company that is thriving in Russia today is
McDonald’s.
This paper provides a brief overview of McDonald’s history in Russia, and then discusses
the company’s strategy, supply chain, and future plans in the Russian market for fast food. It is
the result of research done by the authors in early 2008, and includes insights gleaned from a trip
to Moscow in March 2008, which included guided tours of both the Pushkin Square McDonald’s
restaurant and the McComplex, and a detailed question & answer session with several members
of the McDonald’s management team in Russia. During the trip, the authors were both delighted
by their hospitality and impressed by their operations and future plans.
3
Fisher College of Business
McDonald’s Russia
McDonald’s in Russia
McDonald’s officially entered Russia on January 31, 1990 with the opening of the largest
capacity restaurant in its history. This flagship store, located in Pushkin Square, contained 27
cash registers and 700 seats and served an opening day crowd of 30,000 people. As shown in
Exhibit 3, more than 5,000 people waited in line for the store’s grand opening. The McDonald’s
entry into Russia, which was part of the Soviet Union then, was more than a novelty news item.
The Pushkin Square location remains the busiest McDonald’s restaurant in the world and serves
more than 20,000 customers each day.1 By McDonald’s 18th anniversary in Russia (2008), the
Pushkin Square restaurant had served more than 127 million people.2
As of 2008, McDonald’s currently operates over 190 restaurants in Russia, with locations in
more than 40 Russian cities, and serves 600,000 customers each day.3 McDonald’s Russian
operations are ranked 2nd internationally in guest counts per restaurant.4 The market for fast food
continues to grow rapidly in Russia, so aggressive expansion is underway and is expected to
continue through the next decade.5
History
McDonald’s expansion into Russia was a slow and laborious process that resulted primarily
from the determination of George Cohon. Mr. Cohon began his effort to open a McDonald’s in
Russia after he met the Soviet Union’s Olympic delegation during the 1976 Montreal Olympic
Games. The Soviet Union was slated to host the 1980 Olympics in Moscow and Cohon saw this
as an opportunity to introduce McDonald’s to Russia. Cohon believed that the size of the
Russian market, the traditional Russian diet of beef and potatoes, and a lack of viable fast food
alternatives could allow Russia to become one of the most successful markets in the world for
McDonald's food.6
Cohon started making regular trips to Russia immediately following the Montreal Olympics.
After three years of meetings with government officials he believed that the opening of the first
1
2
3
4
5
6
Zuber, Amy. Nation's Restaurant News. "McDonald's 10th anniversary in Russia
brings future confidence despite struggles." Vol. 34, No. 8. February 21, 2000.
McDonald’s In Russia, McDonald’s Corporation, 2008
McDonald’s Corporation
PR Newswire Europe Ltd
Adamy, Janet. The Wall Street Journal. "As Burgers Boom in Russia, McDonald's
Touts Discipline." October 16, 2007.
Moon, Youngme and Kerry Herman., Harvard Business School. "McDonald's Russia:
Managing a Crisis." January 8, 2008.
4
McDonald’s Russia
Fisher College of Business
McDonald’s was imminent.
Unfortunately, the outbreak of war in Afghanistan postponed
negotiations for several years. In April 1988, an agreement establishing a Joint Venture between
McDonald’s Restaurants of Canada Limited and the Moscow City Government was signed. 7
Once an agreement had been reached, Cohon had to overcome challenges posed by bureaucratic
inefficiency, an underdeveloped agricultural infrastructure, and problems building investor
confidence.8
By 1990, Cohon had overcome the challenge of building a network of suppliers and a food
processing facility capable of meeting McDonald’s stringent quality requirements in a country
with an underdeveloped agricultural sector. He had also convinced investors to accept the
Russian Ruble in McDonald’s restaurants as the only form of payment despite the fact that it was
not an international currency at the time. As shown in Exhibit 4, he proudly displayed the result
of this accomplishment outside of a McDonald’s restaurant in Russia. This decision illustrated
McDonald’s commitment to Russian consumers who accustomed to needing foreign currency to
frequent other foreign establishments. Once the challenges of entering the Russian market had
been overcome, McDonald’s success matched Cohon’s expectations. As noted above, the grand
opening of the first McDonald’s was an overwhelming success. Over the next eight years 25
other McDonald’s joined the Pushkin Square store and increasing demand propelled growth.
In 1998 the “Ruble Crisis” subjected Russians to a period of hyper-inflation and led many
multinational corporations to divest their interests in Russia. Cohon lead McDonald's through
that difficult period by resolving to focus on the long-term viability of the investment
McDonald's had made. The first essential strategy Cohon used to navigate the tumult was to
keep price increases to a minimum.9 This kept most of McDonald’s regular customers coming
back and made the price of McDonald’s food one of the few things that could be counted on
during a time when inflation was skyrocketing. To support this strategy several low cost local
products, such as cabbage soup and potato pie, were added to the menu.10 McDonald’s steadfast
commitment to its workers and the community through this time period built a trust that enabled
the company to flourish after the crisis had waned.
7
8
9
10
McDonald’s Corporation
Moon, Youngme and Kerry Herman.
Zuber, Amy.
Zuber, Amy.
5
Fisher College of Business
McDonald’s Russia
McDonald’s Strategy
The McDonald’s strategy in Russia is not unique to Russia. While McDonald’s may
adjust tactics to meet the needs of Russian consumers, McDonald’s Russia still relies on standard
McDonald’s menu items, food quality and consistency, clean facilities, friendly service,
convenient locations, and reasonable prices to drive growth. For these reasons, the customer
experience at a Russian McDonald’s is strikingly similar to the customer experience in
Columbus, Ohio.
Menu
The core of McDonald’s operation is a series of signature items that can be found in its
restaurants around the world, as shown in Exhibit 5. These items offer good value, quick
processing time, and worldwide consistency. Slight variation on the basic American menu is
allowed at international locations in order to accommodate people’s religious beliefs and local
food preferences. Examples of these practices in Russia include cabbage pie, potato wedges, and
cherry pie.
In 2005 McDonald’s introduced a breakfast menu and stronger coffee at locations in
Moscow, so commuters that were leaving earlier for work to avoid traffic might consider eating
out.11 In order to respond to patrons that wanted a hamburger in the morning, McDonald’s
introduced the Fresh McMuffin, which is an English muffin with a sausage patty topped with
cheese, lettuce, tomato and special sauce, as shown in Exhibit 6.12
McCafé
McCafé is a concept restaurant that is implemented as a store within a traditional McDonald's
restaurant. The McCafé area is typically partitioned off the main dining area and features a
dessert menu, coffee, and soft lights, as shown in Exhibit 7. The addition of a McCafé is one of
the ways McDonald’s differentiates its restaurant from competitors’ restaurants.
McCafé originated in Australia and, according to McDonald’s Russia officials, has been
popular in the locations where it has been implemented in Russia. The Arbat and Pushkin
Square McDonald’s are two of the location in which the McCafé concept has been introduced.
The McCafé at Pushkin Square processes an average of 600 transactions per day and sells about
60% of the total beverages at that location.
11
12
Adamy, Janet
Adamy, Janet
6
Fisher College of Business
McDonald’s Russia
The most popular McCafé beverages are cappuccino and café Americano. These items are
viewed as complementary to the regular cappuccino and coffee served at McDonald’s because
they use a different mix of beans. McCafé selections are intended to appeal to customers that
may be looking for something a little different, but still want McDonald’s pricing and quality.
McDonald’s believes one of the reasons the concept has been successful is that McCafé
prices are more in line with Russian budgets than competitors such as Starbucks. The addition of
McCafé at select Russian locations indicates an intention to ward off new entrants into the fast
food market and defend, and possibly expand, McDonald’s customer base. McDonald’s desire
to appeal to consumers that might otherwise visit more up-scale competitors (e.g., Starbucks) is
supported by its classy McCafé advertisements (see Exhibit 8). Despite the popularity of the
McCafé concept, there are no plans to introduce standalone McCafé stores because McDonald’s
believes McCafé is a complementary addition to a traditional restaurant.
Store Design
McDonald’s Russia has remodeled several restaurants in order to set the McDonald’s
corporation in a modern context that speaks to a new generation of customers, as shown in
Exhibit 9. In addition to updated furnishings and designs, McDonald’s has added free WiFi at
some store locations. At select locations, such as Pushkin Square, they have even installed
publicly available computers to allow patrons to access the internet, as shown in Exhibit 10.
Production, Distribution, and Supply Chain Management
Suppliers
When the McDonald’s Pushkin Square restaurant opened on January 31, 1990, a majority
of the raw materials used to feed the 30,000 visitors that showed up that day were not grown in
Russia.
Since that time, McDonald’s efforts to work with local growers, suppliers, and
government officials have drastically reduced its dependence on imports. Over 75% of the raw
ingredients needed for McDonald's restaurants in Russia are now purchased from over 130
independent Russian suppliers. McDonalds’ demand for agricultural products is believed to
have created more than 80,000 jobs in Russia. In fact, McDonalds’ own food processing facility,
McComplex, now exports Russian agricultural products to McDonald’s restaurants in 17
neighboring countries.13 Beyond logistics, another added benefit of working to increase the
13
http://www.mcdonalds.com/countries/russia.html
7
Fisher College of Business
McDonald’s Russia
number of Russian suppliers is that Muscovites claim to prefer domestic meats and dairy
products because they are confident they will not be filled with additives and preservatives. 14
Food Processing
At the heart of McDonald’s original approach to supply chain management in Russia was
vertical integration into food processing operations in order to ensure sufficient product quality
and reliable delivery.
McDonald's invested $45 million (US dollars) to construct the
“McComplex”, a 105,000 square-foot food processing and distribution center in the South-West
suburb of Moscow, Solntsevo, as shown in Exhibit 11. The McComplex opened in 1989 and
currently employees approximately 450 people.15 The McComplex originally contained eight
processing lines- a meat line, bakery, pie line, dairy, fry line, liquid line, cheese line and garnish
line – that processed raw materials from mostly international and a few local suppliers.
While the McComplex facility was originally necessary to assure a sufficient supply of
high-quality ingredients, a number of food processors in Eastern Europe are now capable of
satisfying McDonald’s quality requirements and demand for product. As a result, it has become
cheaper and easier for McDonald’s to outsource the preparation of many ingredients to external
firms. This is how the company has done it in the West for years, and demonstrates how the
Russian food market is evolving. McDonald’s still employees a small team of chemists to
perform chemical analysis to ensure the quality of its ingredients and new products before they
enter the market, as shown in Exhibit 12.
The number of food processing lines in the McComplex has been reduced from eight to
three. The McComplex now contains only a pie line, meat line (Exhibit 13), and bakery line
(Exhibit 14). While the variety of McComplex products has been reduced, the volume has
increased. For example, the McComplex now makes all of the pies that are sold in Russia and
exports pies to all of Europe. It produces 13,500 pies per hour for 20 hours a day and use 27
different pie fillings. Cherry pie is a unique product that they make for the Russian market,
which is not available in most of the rest of the world’s McDonalds stores. This pie filling is
used year round due to its popularity and availability of the ingredients, but some fillings, such as
apple, are seasonal.
14
15
Caldwell, Melissa L. Journal of Consumer Culture. “Domesticating the French Fry.”
Vol. 4(1).
http://www.mcdonalds.com/countries/russia.html
8
Fisher College of Business
McDonald’s Russia
McDonald’s Russia currently imports 100% of its fries & wedges from McCain Foods
Limited in Poland. All fish products are imported from Cargill in Europe. The liquids product
line, which includes toppings, syrup, ketchup, and sauces, has been transferred to Heinz,
although the McComplex still operates a small liquids line for internal consumption. Russian
beef is too lean to meet McDonald’s standard of 18-22% fat, so it must be mixed with meat that
is imported from Brazil, Germany, and Lithuania. The McComplex produces 25,000 buns per
hour for 20 hours a day; however, the demand for buns has outgrown the McComplex bakery’s
capacity, so Unibake, located in Istanbul, Turkey, supplies extra capacity as needed. The shelf
life for fresh buns is 6 days and 60 days for frozen buns, so the logistics chain must be carefully
executed in order to prevent waste.
Quality & Safety
During the tour of the Old Arbat and Pushkin Square restaurants and the McComplex,
both the authors of this paper and the larger Fisher College of Business group was impressed
with almost every aspect of McDonald’s operations. The facilities were modern, clean, the
processes were streamlined and efficient, and the team members were consistently enthusiastic
and intelligent. During the restaurant tours, there was visible evidence of McDonald’s efforts to
measure quality and customer satisfaction. There were similar quality audits at the McComplex
– buns were sampled and every lot of meat was tested to ensure it met standards.
The one area that stood out in contrast to expectations was the lack of visible
environmental health and safety protocols within the McComplex facility. While there was
obvious effort put towards cleanliness (e.g., multiple hand washings) and product quality (e.g.,
sampling audits), there seemed to be no visible sign that the company tracks injury rates or that
injury prevention was one of its major efforts. The group that toured the McComplex asked the
same question several different ways: “How are injury rates tracked for employees?” “What
metrics are used for safety?” “When was the last injury in the plant?”. In all cases, the answer
conveyed was that the health and safety of factory workers in Russia, even for McDonald’s
Russia, is an area of less concern than in the United States. Several discussions in the classroom
prepared the group for this before the trip, but it was still a surprise to hear McDonald’s had
accepted these standards when everything else the company did matched so well with the highest
level of Western standards.
Logistics
McDonald’s Russia faces a significant challenge supplying its stores in geographically
9
Fisher College of Business
McDonald’s Russia
diverse locations. It uses use more than 130 local suppliers that must navigate a transportation
network that lags far behind that of the United States or Western Europe. While road networks
are more developed in the greater Moscow and St. Petersburg areas than they are in the rest of
the country, traffic still poses a significant challenge.
Rulog, an Alpha Group company, has handled logistics for the McComplex since 2003,
and built a distribution center adjacent to the McComplex to support this task. The Alpha Group
has also taken over the responsibility for distributing supplies to McDonald’s stores in Moscow
and St. Petersburg.
While the Alpha Group’s sophisticated logistics and experience has
improved the reliability and efficiency of store supply distribution, McDonald’s still maintains
adequate safety stock at its stores as a buffer against the unpredictable nature of Russian traffic
and road conditions.
Store Operations
Store operations in Russia are similar to those at McDonald’s restaurants worldwide. The
stores of McDonald’s Russia are evaluated using McDonald’s performance criteria, which allows
for comparison across all of McDonald’s stores and markets.
McDonald’s employs a “mystery shopper” program, using local firms, to capture data
about the customer experience at each of its stores. Each restaurant has a target customer
satisfaction index.
performance.
McDonald’s will work with underperforming stores to improve their
McDonald’s does this by using operations managers, store managers, and
consultants to perform comprehensive audits of underperforming stores.
McDonald’s Russia develops profit & loss (P&L) targets and operational plans at the
beginning of each year and then measures performance against those plans throughout the year.
The operational plan for each store includes customer satisfaction targets discussed above.
McDonald’s does not measure margins at the store level, but they do track margins at the
company and country levels. All financial metrics are based on the local currency.
Real Estate
McDonald’s is a paragon of the “early entrance” strategy in real estate, which relies heavily
on market research to identify areas of significant growth before prices become prohibitively
expensive. Buying land in central Moscow has become increasingly difficult and expensive, but
McDonald’s restaurants cover the map, as shown in Exhibit 15. George Cohon worked hard
establishing the key governmental relationships that enabled him to get into the market early and
10
Fisher College of Business
McDonald’s Russia
buy real estate that was not fully developed, but now carries an estimated real estate value in
excess of $115 million.16
The Moscow region currently has 115 stores, and the current Assistant VP of Operations
of McDonald’s Russia, Karina Pogosova, indicated that the company needs to open additional
stores to meet consumer demand. McDonald’s continuously monitors demand for its products
and works to identify opportunities to open new stores. However, demand for real estate in
Moscow has increased dramatically in recent years.
As a result, McDonald's now faces
competition for the best locations from a wide assortment of businesses. Despite increased real
estate competition, Pogosova indicated that McDonald’s Russia remains focused on the best
locations for its restaurants and is not willing to compromise on location in order to grow the
restaurant network more quickly.
Despite a flourishing real estate market in Moscow, the government bureaucracy remains
an obstacle that reduces the predictability of McDonald's store expansion plans. While
McDonalds has developed good working relationships with government officials, the
bureaucracy challenge is not always one that McDonald’s can confront head-on. For example,
McDonald’s has plans to open stores in 60 shopping centers in order to increase the brand’s
reach. However, McDonald’s store openings in these locations are sometimes affected by the
bureaucratic delays that are encountered by shopping center developers. To the extent that it
can, McDonald’s has tried to combat these problems by sharing best practices and building trust
with government officials. McDonald’s staff indicated that they have seen improvements in the
Moscow City bureaucracy, but problems still arise.
Job Creation, Employment, and Training
McDonald’s has become a major employer within Russia with more than 17,000 employees
in its restaurants, in the McComplex, and in the central office in Moscow. It is further estimated
by McDonald’s that each new McDonald’s restaurant created approximately 100 new job
opportunities for local citizens, so the employment figure is projected to steadily grow over the
coming decade.17
Of special importance for these employees is the understanding that
McDonald’s offers comprehensive training programs for all staff levels and is committed to
promoting from within the company. 18 Every store manager receives 2,000 hours of training,
16
17
18
Arvedlund, Erin E. New York Times. “McDonalds Becoming Largest Corporate Land
Owner in Russia.” March 22, 2005.
http://www.mcdonalds.com/countries/russia.html
http://www.mcdonalds.com/countries/russia.html
11
McDonald’s Russia
Fisher College of Business
including a 6-day course at Hamburger University in Chicago. This internal support system has
been so successful that most Russian senior managers started their careers as McDonald's crew
and 200 Russian employees are twelve-year McDonald's veterans. 19 The Russian Chamber of
Commerce has recognized these successes by naming McDonald’s the “Best Employer in
Russia” for 2006. 20
When McDonald’s entered the Russian market, its compensation package, along with the
appeal of working for a successful Western company, drew applications from the highest
educated cross-section of society.
As employment opportunities becoming increasingly
available to Russian citizens, the competition for the best applicants is likely to become much
more intense. The emergence of a union in 1999 for workers within the McComplex certainly
suggests workers are starting to expect more.21 The union was dissolved in 2002, but not before
it secured an average increase in wages from $130 (US) per month to $200 (US) per month. 22
The wage increased again in 2005 to an average of $250 (US) per month. 23 Overall, the outlook
for McDonald’s employees in Russia appears to be optimistic over the next decade.
Current employment conditions in Moscow are dramatically different than those that
existed when McDonalds entered the country 18 years ago. Far from having thousands of overqualified applicants for every new store opening, McDonald’s now has to compete in the
vigorous market that exists for talent. Moscow has an unemployment rate that is currently at or
below 1% and the government continues to regulate the labor market in the city.
The typical entry-level employee is no longer an aerospace engineer, but rather a student
that is looking for part-time work. The average age of these floor employees is 21. The
minimum age to legally work in Russia is 16, but McDonald’s does not hire employees that are
younger than 17. The average age of a store manager is 30 years old, which is relatively young
within this industry according to Karina Pogosova. There are approximately 20,000 McDonald’s
employees in Russia, about 10% of which are managers.
In order to be successful at McDonald’s Russia, a person has to be fast and energetic, as
exemplified in Exhibit 16. The McDonald’s restaurants in Russia are amongst the busiest in the
world, so this creates an environment that is not appropriate for everyone. McDonald’s Russia
19
20
21
22
23
http://www.mcdonalds.com/countries/russia.html
http://www.mcdonalds.com/countries/russia.html
Royle, Tony. Industrial Relations Journal. “The union recognition dispute at
McDonald’s Moscow food-processing factory.” 36:4.
Royle, Tony.
http://www.mcdonalds.com/countries/russia.html
12
Fisher College of Business
McDonald’s Russia
appears to focus on retention more than McDonald’s in the US. They do this by working to
create a positive atmosphere, retention programs, and by offering benefits such as free uniforms,
free lunch, and support for education. McDonald’s has a very low turnover rate for managers.
The turn-over rate for part-time employees, which are 70% students, is higher. It was stated that
the average part time employee tenure is one-year.
McDonald’s has seen several senior managers leave the company to start and manage
competitors in the Moscow fast-food market. Karina Pogosova, Assistant VP of Operations for
McDonald’s Russia, stated that she viewed these events as a good thing for Russian consumers.
She noted that the level of quality at McDonald’s was still the exception compared to most
Moscow eateries. As a consumer, she viewed the introduction of the diffusion of McDonald’s
standards and practices to other restaurants as a positive trend.
During our time with the McDonald’s team, which included visits to two restaurants &
the McComplex, the authors witnessed several real-world examples of what McDonald’s was
doing to attract and retain talented people were seen. The top management at McDonald’s
Russia are examples of the company’s “promote from within” policy. Every manager that was
met was bright, young, energetic, and driven. A brief description of the management team that
was encountered during the visit is provided below.
1) Karina Pogosova graduated from the Moscow Aviation University. She was part of the
floor crew for the grand opening of the Pushkin Square restaurant, and she was the one of
the store managers that opened the second store in 1993. She returned to Pushkin Square
as a store manager in 1995. She has worked for McDonald’s Russia for 18 years and is
now the Assistant Vice President of Operations.
2) Alexy started with McDonald’s in Belarus and has been with McDonald’s for 13 years.
He loves working for McDonald’s because it provides a good salary, a company car, and
the opportunity to rise far in the company. He also was quick to point out how great the
people are that he works with.
3) Vasily is a Director of Operations and is responsible for one of three areas within Russia,
which includes 80 stores. He was one of the store managers that opened the 3rd restaurant
in Russia and was a manager at Pushkin Square for one year.
Upward mobility as a reward for superior performance was visible at the store manager
level as well. A bright, energetic manager named Gregory, who currently manages the Pushkin
Square location, led the tour of his restaurant with Karina. Gregory began by pointing out a
13
McDonald’s Russia
Fisher College of Business
series of billboards by the changing room & employee cafeteria of the restaurant. Among other
things, the billboards displayed the most recent customer satisfaction metrics for the store for all
employees to see, as shown in Exhibits 17 and 18. Karina Pogosova indicated that Gregory’s
last store had a customer dissatisfaction rating of zero and that scores in the 20’s are generally
considered acceptable. The connection between carefully chosen metrics, managed quality,
employee performance, and promotion as a reward for superior performance were all evident
during the Pushkin Square tour.
Billboards in employee areas also illustrated high levels of employee engagement. The
restaurant was divided into teams and each team had a billboard highlighting recent promotions
and/or the team’s organization structure. There was also an employee-managed billboard that
acted like a store newsletter.
McDonald’s prides itself on choosing the right people for advancement and investing in
them so they can reach their full potential. It does this by clearly outlining the path for career
advancement and the criteria people need to satisfy to advance to the next level. For example, in
order to reach the first level of management, which is crew trainer, a person must pass a test and
meet certain performance criteria.
McDonald’s uses Hamburger University in the US and a McDonald’s training center in
Munich to provide training for its store managers. One of the managers we met, Alexy, has been
to Hamburger University three times and had training in Munich twice. McDonald’s also
encourages peer learning by bringing store managers together for meetings that allow them to
exchange information and share best practices.
Community Involvement
The McDonald’s Corporation has a longstanding history of strong community
involvement, and the Russian operation is no different, as shown in Exhibit 19. Over the past
eleven years, McDonald's in Russia has provided the equivalent of more than $4.5 million
dollars to multiple Russian charitable organizations for projects ranging from purchasing medical
and transportation equipment to providing meals to those in need.
24
This support of charity
within the local community has furthered the perception that McDonald’s is a Russian company.
This helps McDonald’s in Russia to avoid negative anti-globalization sentiments, instills pride in
their employees, and builds trust within the community.
24
http://www.mcdonalds.com/countries/russia.html
14
Fisher College of Business
McDonald’s Russia
The Russian Fast Food Industry
Market Size & Consumption
The Russian fast food market is still relatively small when compared with highly
franchised markets, like the United States; however, McDonald’s in Russia is returning some of
the highest sales and profit numbers in the world with further expansion planned. Additionally,
the rate of store growth in Russia is among the highest in the world. Data behind these
statements is shown in Exhibits 20 and 21, respectively. This growth, combined with an early
entry into Russia, successful branding, and operational excellence have enabled McDonald’s to
take more than two-thirds of Russia’s fast food maket.25 Analysts say Russia is delivering profit
margins in the mid-20% range, which is significantly higher than the company average. 26 In
order to maintain these margins in an environment of high inflation, Russian McDonald’s are
currently increasing menu prices four times per year. 27 Although sales and profitability figures
for McDonald’s Russia are not available, Exhibit 22 shows how sales in Europe compare with
McDonald’s operations in other regions. The demand for fast food in Russia shows no signs of
waning, so McDonald’s will have to position itself to respond to this demand or else its
competitors will begin to take market share.
Competition
McDonald’s primary competitors in the Russian market are Rostik’s and KFC restaurants.
The latter is a subsidiary of Yum! Brands Inc., which is a large multination food chain also
including Pizza Hut, Long John Silver’s, Taco Bell, and A&W Root Beer. Rostik’s currently
operates a 125-location chain of fast food chicken outlets and KFC operates 12 licensed outlets
between Moscow and St Petersburg. 28 These two entities have now entered into a cooperative
agreement that includes plans to build 300 co-branded KFC-Rostik’s restaurants in the Eastern
European region.
29
They have already completed their first 364-seat model for the project.
These new restaurants will compete directly with McDonald’s and should be taken very
seriously. Other competitors, such as Russkoye Bisto, do not have as much financial backing,
25
26
27
28
29
Adamy, Janet
Adamy, Janet
Adamy, Janet
Adamy, Janet
Adamy, Janet
15
Fisher College of Business
McDonald’s Russia
have seen growth slow and margins decrease as they’ve expanded into the Moscow market. This
can partially be attributed to increased rent on prime real estate.30
The Future: Addressing Customer Demand
In the short term, the management team for McDonald’s in Russia must seek new ways to
meet increasing demand, and in the long term, they must not lose sight of their competitors or
lessons learned abroad. The chief executive of McDonald’s Russia, Mr. Khasbulatov, says his
biggest problem with his Russian locations is, “I have too many customers.”
31
He has made
some operational changes to address this issue: more McDonald’s are now open 24 hours a day,
more restaurants now have drive-throughs, and the store in Pushkin square can now seat 900
people. The dramatic nature of the latter renovation is shown in Exhibit 23 compared to Exhibit
24.32 Nonetheless, he is still pushing forward with a plan to increase the number of McDonald’s
in Russia by 15% per year over the next decade, which makes Russia one of the fastest-growing
markets in the McDonald’s Corporation.33 Unfortunately, bureaucracy is still a problem. As of
October 2007, McDonald’s had launched 12 new restaurants that year, which was 20 shy of its
goal, because opening a McDonald’s can require as many as 200 governmental signatures.34
Disheartening as this is, it still represents a substantial improvement over the process George
Cohon had to traverse in the early 1990’s. McDonald’s has been cautious in expanding store
numbers in Russia, but they must stick with the aggressive schedule they have proposed or they
might find KFC-Rostick’s as the market leader.
It would behoove McDonald’s in Russia to continue the implementation of initiatives that
have come from recent conflicts with the Food and Drug Administration in the United States.
Russia ranks second, behind Ukraine, for the number of people suffering from cardiovascular
disease.35 McDonald’s appears to be taking the social responsibility to inform consumers of the
nutritional value of their food, as shown in Exhibit 25. Further, they have recently launched
several new products in Russia and an accompanying marketing campaign that aims to provide
30
31
32
33
34
35
IPR Strategic Business Database. “Russkoye Bistro To Open 17 New Restaurants in
Moscow.” May 5, 2000.
Adamy, Janet
Adamy, Janet
Adamy, Janet
Adamy, Janet
“Heart disease kills 1.3 million annually in Russia - chief cardiologist”, RIA Novosti, Feb. 14, 2007
16
Fisher College of Business
McDonald’s Russia
Russian consumers with some healthy alternatives to a Big Mac and fries, as shown in Exhibit
26.
17
Fisher College of Business
McDonald’s Russia
Exhibits & Photos
Exhibit 1: Russia GDP Growth Rate Compared to Other Countries
Source: PwC Macro Consulting (via Greif Presentation to OSU MBA Students)
Exhibit 2: Russia GDP Growth Rate (2001 – 2010 Forecast)
Source: Federal Statistics Service (via Greif Presentation to OSU MBA Students)
18
Fisher College of Business
McDonald’s Russia
Exhibit 3: Line for McDonald’s Russia Opening at Pushkin Square
Source: McDonald’s Russia Brochure
Exhibit 4: George Cohon Installing “Rubles Only” Sign
Source: McDonald’s Russia Brochure
19
Fisher College of Business
McDonald’s Russia
Exhibit 5: McDonald’s Russia Menu is Nearly Identical to US
Source: McDonald’s Russia Brochure
Exhibit 6: Fresh McMuffin Advertised on a Tray Liner
Source: McDonald’s Russia Brochure
20
Fisher College of Business
McDonald’s Russia
Exhibit 7: Design of McCafe at Pushkin Square
Source: John-David de La Harpe
Exhibit 8: McCafe Advertisement
Source: McDonald’s Russia Brochure
21
Fisher College of Business
McDonald’s Russia
Exhibit 9: Recently Remodeled McDonald’s Restaurants in Russia
Source: McDonald’s Russia Brochure
22
Fisher College of Business
McDonald’s Russia
Exhibit 10: Free Access to Computers with Internet Connectivity at Pushkin Store
Source: John-David de La Harpe
Exhibit 11: McComplex
Source: McDonald’s Russia Brochure
23
Fisher College of Business
McDonald’s Russia
Exhibit 12: Chemist Performing Titration to Evaluate Quality for McComplex
Source: McDonald’s Russia Brochure
Exhibit 13: Quality Control Inspector Watching the McComplex Meat Line
Source: McDonald’s Russia Brochure
24
Fisher College of Business
McDonald’s Russia
Exhibit 14: Quality Control Inspector Watching the McComplex Bun Line
Source: McDonald’s Russia Brochure
Exhibit 15
McDonald’s in Central Moscow
Source: AnnaLise svp – Research & Intelligence
25
Fisher College of Business
Exhibit 16
McDonald’s Russia
Part-Time Employee
Source: McDonald’s Russia Brochure
Exhibit 17
Team Boards in Employee Area
Source: Ed Bittel
26
Fisher College of Business
Exhibit 18
McDonald’s Russia
Performance Metric Display
Source: John-David de La Harpe
Exhibit 19
McDonald’s Supporting Youth Soccer Tournament
Source: McDonald’s Russia Brochure
27
McDonald’s Russia
Fisher College of Business
Exhibit 20
McDonald’s Store Growth
McDonalds Stores
2001
2006
Change
% Change
All Stores
29,916 31,667
1,751
5.9%
US
13,099 13,774
675
5.2%
Canada
1,223
1,391
168
13.7%
Europe
5,794
6,403
609
10.5%
Asia/Pacific, Middle East & Africa
7,321
7,822
501
6.8%
Latin America
1,581
1,656
75
4.7%
73
168
95
130.1%
Russia
Russia % of Europe Store Growth
15.6%
Source: McDonalds 2006 Financial Data
Exhibit 21
McDonald’s Store Growth (Top 10 Countries)
Rank McDonald's Stores
1
United States
2
2001
2006
Change % Change
13,099
13,774
675
5.2%
China
430
784
354
82.3%
3
France
913
1,084
171
18.7%
4
Canada
1,223
1,391
168
13.7%
5
Germany
1,152
1,276
124
10.8%
6
Mexico
235
351
116
49.4%
7
Russia
73
168
95
130.1%
8
India
34
105
71
208.8%
9
Spain
309
372
63
20.4%
10 Israel*
94
126
32
34.0%
Source: McDonalds 2006 Financial Data
28
McDonald’s Russia
Fisher College of Business
Exhibit 22
McDonald’s Revenues by Division
McDonald's Total Revenues
Amount Increase/(decrease)
DOLLARS IN
2006
2005
2004
$7,464
$6,955
$6,525
Europe
7,638
7,072
APMEA
3,053
Latin America
Canada
MILLIONS
U.S.
Corporate & Other
Total
2006
2005
Increase/(decrease) excluding
currency translation
2006
2005
7%
7%
7%
7%
6,737
8
5
6
5
2,815
2,721
8
3
8
1
1,659
1,327
1,008
25
32
20
22
1,081
948
898
14
6
7
(2)
691
715
705
(3)
1
(3)
1
$21,586 $19,832 $18,594
9%
7%
7%
5%
Source: McDonalds 2006 Financial Data
29
Fisher College of Business
McDonald’s Russia
Exhibit 23: McDonald’s Pushkin Square Store Before Remodeling
Source: http://www.mcdonalds.com/countries/russia.html
Exhibit 24: McDonald’s Pushkin Square Store After Remodeling
Source: McDonald’s Russia Brochure
30
Fisher College of Business
McDonald’s Russia
Exhibit 25: McDonald’s Russia Nutrition Information
Source: Back of McDonald’s Russia Tray Liner
31
Fisher College of Business
McDonald’s Russia
Exhibit 26: McDonald’s Russia Healthy Options Advertisements
Source: McDonald’s Russia Brochure
32