Case 2 McDonalds Russia

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 its
presence in other international markets.
McDonald's opened its first outlet in Russia in 1990. It entered at a time when the
country was still struggling to gain political and economic stability after reforms had
been introduced.
It started by developing the food processing unit and training the local suppliers.
McDonald's became an instant hit in the country where the culture of fast food was as
new as the burger. The company experienced many obstacles along the way but it
continued its slow and steady growth in the country. As of 2010, Russia was one of its
key markets in Europe and some experts considered it as the jewel in McDonald's
system.
The case details the difficulties McDonald's had in entering the country and discusses
how it overcame various challenges to establish itself firmly in the market. It discusses
in detail some of the strategies adopted by McDonald's in Russia, including HR
strategies, procurement strategies, expansion strategies, etc. that helped it gain a
strong footing in the Russian market - so much so that the company accounted for
more than two-third of the fast food market in Russia.
McDonalds Russia:
A Jewel in the McDonalds Emerging Market
Operations?
We are not afraid of competition. The market is still in the making and one who takes
right decisions at the right time will be the leader. We did it 20 years ago When we
saw the first queues that were lining up to our first restaurant in Moscow every day
and night all year round, our success was predetermined and all we had to do was to
develop as fast as possible.1
-
Khamzat Khasbulatov2, McDonalds Corporation, president for Russia

and Eastern Europe, in December 2009.
Of the 118 countries where McDonalds Corp. does business, none can boast more
activity than Russia. On average, each location serves about 850,000 diners annually
-- more than twice the store traffic in 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 worlds 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,4 said Jim Skinner, Vice Chairman and CEO, McDonalds.
The companys European operations accounted for 42% of McDonalds total
revenues. According to the company, McDonalds had registered sound growth in
Europe in 2008, and this growth was spurred by performance in countries such as
France, the UK, Russia, and Germany. The company also posed strong results in
2009, with these markets spurring the growth.5 McDonalds had started investing in
4
5
Maria Kiselyova and Maria Plis, McDonalds to Target Stay-at-home Russians,

www.reuters.com, December 17, 2009.
Khamzat Khasbulatov was one of the four managers for the first outlet of McDonalds in
Russia. He was named to McDonalds top Russia position in 1999 and later took on the
responsibility for the companys Eastern European restaurants.
Janet Adamy, As Burgers Boom in Russia, McDonalds Touts Discipline,
http://online.wsj.com, October 16, 2007.
McDonalds Corporation, 2008 Annual Report, www.mcdonalds.com
McDonalds Delivers Another Year of Strong Results in 2009, www.chainleader.com,
January 25, 2010.
327
International Business
Russia (then Soviet Union6) in the late 1980s and had ramped up its presence through
the 1990s and early 2000s despite facing some serious challenges. Some experts felt
that Russia was the companys best performing market in Europe and one of its best
performing markets in the world in 2009.7 As of early 2010, McDonalds dominated
the Russian fast food market with a 70 percent market share.8 Out of 10 people who
enter a food court, six go to 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 two
brothers Richard McDonald and Maurice McDonald in California, the US. It started
its international expansion in 1967. McDonalds opened its first outlet in Russia in
1990, more than a decade after it had planned to enter the country. The entry was led
by George Cohon (Cohon), founder of McDonalds Canada operations, who had been
striving to enter the country since 1976.
The company faced several challenges in the country, primarily due to the
bureaucratic set up, strict laws, inability to convert the Russian ruble10 into other
currencies, and economic instability. According to analysts, McDonalds faced the
challenges successfully and developed its own supply chain in Russia, bringing in
experts from other countries. In order to standardize its services, it gave importance to
the training and development of its work force. The number of stores kept on growing
at a slow and steady pace in the 1990s and early 2000s.
In 2005, McDonalds Russia emerged as the second largest among McDonalds
markets in terms of average number of consumers per restaurant.11 From 127 stores in
2004, the company had opened multiple numbers of outlets each year. In 2007 and
2008, it also invested in overhauling the existing stores, with investment worth US$
500,000 on each store.12 Khamzat Khasbulatov (Khasbulatov), McDonalds president
for Russia and Eastern Europe, said that the company was interested in expanding its
business in Russia. He said McDonalds was keen on growing convenient formats like
express windows and drive-thru windows in the country.
Russia is one of the most successfully developing markets of the McDonalds
Corporation in Europe,13 said Khasbulatov. As of early 2010, it continued to be one
the leading revenue contributors to the parent company. With 245 outlets already in
Russia as of early 2010, McDonalds was gearing up to add another 45 outlets by the
end of 2012.14
6
10
11
12
13
14
Prior to 1991, Russia was the largest republic in the Soviet Union (or USSR). The troubled
economic conditions together with political turmoil led to the dissolution of the Soviet Union
in 1991 into fifteen separate countries. As a result, Russia together with Ukraine and Belarus
formed the Commonwealth of Independent States which was later joined by other Soviet
republics.
Yuri Mumchur, Obama in Moscow: True Reset or Just Walking in Circles?
www.russiablog.org, July 8, 2008.
Vladimir Kozlov, McDonalds Supersize Profits Conquer Moscow, www.mnweekly.ru,
January 25, 2010.
Ruble is Russian currency. 1 US$=29.403 Ruble (As of January 2, 2009).
Chris Mercer, McDonalds Plans to Double Russian Presence, www.foodnavigator.com,
February 3, 2005.
McDonalds to Open 40 Restaurants in Russia in 2008, www.cdi.org, April 22, 2008.
Jenny Wiggins, Growing Taste for Quality Goods Lures Big Brands, www.ft.com, January
20, 2010.
328
McDonalds Russia: A Jewel in the McDonalds Emerging
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. The
brothers were inspired by a hot dog stand nearby, which always did brisk business
even when other businesses were struggling under the effects of the Great
Depression15.16
In 1937, the McDonald brothers started a hot dog stand called Airdrome, situated at
Arcadia in California. Later, in 1940, they opened a barbeque restaurant in San
Bernardino17 and called it McDonalds Barbeque.18 The barbeque restaurant had about
25 items on its menu like barbequed beef and pork sandwiches. It employed 20
carhops19 to provide service to customers. It soon became a favorite hangout for the
teenagers in the city.20
In, 1948, the brothers found it difficult to manage such a large scale business with its
extensive menus, staff, and the huge crowds that thronged the restaurant. They
realized that the need of the hour was quick service and mass production of food
items. Richard analyzed their menu and found that about 80% of the restaurants sales
were generated by the sale of hamburgers. 21
In December, 1948, the McDonald brothers reopened the store after incorporating new
strategies to enable provision of fast service at a low price. This, they believed, would
help in selling larger volumes. Taking a cue from the automobile industry, they
decided to adopt an assembly line kind of approach to preparing food at the new
restaurant.22 This system was called the Speedee System and it greatly improved the
efficiency of the restaurant. The new concept established the principles of
McDonalds fast food restaurants, and these were later adopted by several fast food
restaurants.
After implementing the new system, McDonalds was able to sell a hamburger at 15
cents (it cost 30 cents earlier) and French Fries at 10 cents.23 Around the same time,
the companys first mascot was conceptualized and was called Speedee,24 primarily
to signify its quick service.
In 1953, the McDonald brothers decided to go in for franchising in order to expand
their business. For a thousand dollars, franchisees would receive the McDonalds
name, a basic description of its service system, and the services of Art Bender 25
(Bender) at the new restaurant for a week, to help them with the business. Bender
trained the people at the franchise, supervised the installation of the equipment, made
contact with the butchers and bakeries for the supplies, etc. McDonalds first
franchisee was Neil Fox, who had a drive-in restaurant in Phoenix, Arizona. This
15
16
17
18
19
20
21
22
23
24
25
Great Depression in the US was a period of acute economic crisis that started in 1929 as a
result of crash of the Wall Street stock market and lasted till around early 1940s.
Jane McGrath How McDonalds Works, http://money.howstuffworks.com
San Bernardino is a county in California, USA.
Dick and Mac McDonald, www.nationmaster.com
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.
McDonalds-Site History, http://www.route-66.com.
McDonalds-Site History, www.route-66.com.
A Brief History of McDonalds, www.bbc.co.uk, April 18, 2005.
www.mcdonalds.ca.
Speedee looked like a man with a hamburger shaped head, wearing a hat.
Art 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 of
McDonalds.
329
restaurant became the prototype for the McDonalds chain. The red & white building
with a slanting roof and the Golden Arches on the sides became the model for
McDonalds 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 McDonalds
store that opened. The purpose of the visit was to persuade the McDonald brothers to
open more restaurants so that he could sell milkshake mixers to them. But the brothers
were not interested in expanding the business further and seemed content with the
existing operations. Kroc then expressed his willingness to become the franchising
agent of 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 rising
concern 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, McDonalds
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
27
28
29
http://www.mcdonalds.ca
McDonalds Corporation, Company History, www.answers.com
Geoffrey Jones, Multinationals and Global Capitalism, Oxford University Press.
Den Fujita owned an import company in Japan, specializing in handbags, shoes, and apparel,
before opening McDonalds in Japan.
330
Exhibit I
Growth of McDonalds Corporation
1950s
1954
Ray Kroc became the franchising agent of McDonalds. Krocs vision was
to expand the fast food chain in every American State and internationally
as 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 McDonalds

System, Inc. and in the same year opened his own McDonalds drive-in at
Des Plaines, Illinois. McDonalds franchising agreement was that anyone
who wished to become a franchisee would initially pay a sum of a
thousand dollars. Later on, 1.9 percent of the annual profits of the
restaurant were to be paid. Kroc would then pass 0.5 percent of the takings
to the McDonald brothers, keeping the other 1.4 percent with him.
1956
By the end of this year, there were fourteen McDonalds restaurants that
served nearly 50 million hamburgers. The company reported annual sales
of US$1.2 million.
1960s
1960
Kroc was running the whole show by this time. He renamed the company
as McDonald's Corporation. He wanted to put up a McDonalds
restaurant in every state of America. He personally looked after the
operations, measured every product, and tasted burgers in every outlet to
ensure that the quality of food served was uniform in every McDonalds
restaurant. In the same year, McDonalds started its advertising campaign
Look for the Golden Arches which gave sales a big boost. The McDonald
brothers were happy with the results and were not concerned about the
company Kroc had formed. In 1960, there were 228 McDonalds
restaurants that reported US$37.6 million in sales, and sold 400 million
hamburgers.
1961
Ray Kroc began letting out more franchises. The revenues that the
company received from the franchises made it easier for him to raise
capital in the financial markets. He utilized some of the money to create an
advertising campaign with the theme, Look for the Golden Arches. The
companys logo was changed from Speedee to a letter M symbolizing
the Golden Arches. Kroc was not happy with the restrictive agreement he
had been operating under and wanted to operate the franchising business
on his own. So he offered to buy out McDonalds for US$ 2.7 million. He
obtained a loan and took over the business from the McDonald brothers.
That same year, he opened a Hamburger University in the basement of a
restaurant in Elk Grove Village, Illinois. It was a training facility where
new franchisees and store managers were taught how to manage a
McDonalds restaurant using sophisticated training techniques and through
high-level management courses.
1963
McDonalds sold one million hamburgers per day in the US. In the same
year, the company introduced Ronald McDonald, a red-haired clown, to
appeal to children.
1965
On July 5, McDonalds was listed on the New York Stock Exchange and
sold its shares for US$ 22.50 each.
331
1968
McDonalds well known product Big Mac30 was created. Fred Turner
became the companys president and chief administrative officer while
Kroc became the chairman and remained CEO until 1973. McDonalds
opened its 1000th restaurant 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 McMuffin31.
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 6,263
restaurants in 27 countries and surpassed the 35 billion hamburger
milestone. During the 1980s, McDonalds diversified its menu to suit the
changing tastes of consumers.
1982
McDonalds received The American Marketing Association Achievement

Award for excellence in marketing programs.
1983
Chicken McNuggets were introduced. By the end of the year, McDonalds

had become the second largest retailer of chicken based products in the
world.
1984
On January 14, Kroc died. That same year, McDonalds broke the US$ 10
billion sales barrier and served its 50 billionth hamburger.
1986
McDonalds opened its ten thousandth restaurant.
1988
Fortune Magazine listed McDonalds hamburgers among the 100 products

America makes best.
1990s
1990
By 1990, McDonalds sales had grown to US$ 18.7 billion with 11,800
restaurants in 54 countries. In 1990, Life Magazine named Kroc as one of
the 100 Most Important Americans of the 20th Century.
1996
The fast food chain reached the 20,000-restaurant mark.
1997
By the end of the year, the total number of McDonalds restaurants reached
the 23,000th mark.
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
31
32
332
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 threepart sesame seed bun.
The Egg McMuffin is the signature breakfast sandwich sold by McDonalds in various
sizes and configurations.
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.

2000s
2000
In May, McDonalds bought the bankrupt Boston Market chain 33 for

$173.5 million in cash and debt, the largest acquisition till date. In the
2000s, McDonalds introduced low-calorie menu items and switched to
healthy 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 MTV

with the tag line, Im lovin it. This was McDonalds first global
campaign to be advertised in more than 100 countries. This campaign was
successful as store sales for the year 2003 increased by 2.4 percent after
falling 2.1 percent in 2002.
Compiled from various sources
Exhibit II
Financial Summary of McDonalds Corporation (2004-2008)
US Dollars in millions, except
per share data
Company-operated sales
Franchised revenues
2008
16,561
6,961
2007
2006
16,611
6,176
2005
15,402
5,493
14,018
5,099
2004
13,055
4,834
23,522
22,787
20,895
19,117
17,889
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)
5,917
1,625
2,136
4,876
1,150
1,947
4,341
1,274
1,742
4,337
1,818
1,607
3,904
1,383
1,419
4,115
3,981
1,823
3,996
3,949
1,766
5,460
3,719
1,217
(442)
1,228
842
1,634
605
695
Total assets
28,462
29,392
28,974
29,989
27,838
Total debt
10,218
9,301
8,408
10,137
9,220
Total shareholders equity
13,383
15,280
15,458
15,146
14,201
1,115
1,165
1,204
1,263
1,270
Total revenues
Operating income
Income from continuing
operations
Net income
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
Financial position at year end:
Shares outstanding in millions
33
At the time of acquisition, there were more than 850 Boston Market outlets, which
specialized in home-styled meals like rotisserie chicken.
333
Per common share:
Income from continuing
operationsdiluted
3.76(1)
1.93(2,3)
2.29(5)
2.02(7)
1.80(8)
3.76(1)
1.98(2,3,4)
2.83(5,6)
2.04(7)
1.79(8)
1.63
62.19
1.50
1.00
.67
0.55
Market price at year end
58.91
44.33
33.72
32.06
Company-operated restaurants
6,502
6,906
8,166
8,173
8,179
Franchised restaurants
25,465
24,471
22,880
22,593
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
Net income-diluted
Dividends declared
(1) Includes income of $109.0 million ($0.09 per share) from the sale of the Companys
minority ownership interest in U.K.- based Pret A Manger.
(2) Includes pretax operating charges of $1.7 billion ($1.32 per share) related to impairment and
other charges primarily as a result of the Companys sale of its businesses in 18 Latin
American and Caribbean markets to a developmental licensee (see Latam transaction note to
the consolidated financial statements for further details).
(3) Includes a tax benefit of $316.4 million ($0.26 per share) resulting from the completion of an
Internal Revenue Service (IRS) examination of the Companys 2003-2004 U.S. federal tax
returns.
(4) Includes income of $60.1 million ($0.05 per share) related to discontinued operations
primarily from the sale of our investment in Boston Market.
(5) Includes pretax operating charges of $134 million ($98 million after tax or $0.08 per share)
related to impairment and other charges.
(6) Includes income of $678 million ($0.54 per share) related to discontinued operations
primarily resulting from the disposal of McDonalds investment in Chipotle.
(7) Includes a net tax benefit of $73 million ($0.05 per share) comprised of $179 million ($0.14
per share) of income tax benefit resulting from the completion of an IRS examination of the
Companys 2000-2002 U.S. tax returns, partly offset by $106 million ($0.09 per share) of
incremental tax expense resulting from the decision to repatriate certain foreign earnings
under the Homeland Investment Act (HIA).
(8) Includes pretax operating charges of $130 million related to impairment and $121 million
($12 million related to 2004 and $109 million related to prior years) for a correction in the
Companys lease accounting practices and policies, as well as a non-operating gain of $49
million related to the sale of the Companys interest in a U.S. real estate partnership, for a
total pretax expense of $202 million ($148 million after tax or $0.12 per share).
Source: 2008 Annual Report
In 1990, 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.
334

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 companys expansion came when it
entered the Middle East market by starting a restaurant in Tel Aviv, Israel. Slowly,
restaurants also came up in the Gulf region in Saudi Arabia, Oman, Kuwait,
Bahrain, the United Arab Emirates, and Qatar and Egypt. By 1995, there were about
7,033 McDonalds restaurants spread across 89 countries and they generated sales
worth US$14 billion.34
In 1996, McDonalds entered India with a restaurant coming up in New Delhi. In
India, it entered through a franchisee. By 2007, international sales were reported to be
a major contributor to the companys annual revenue (Refer to Table I for the
revenues of McDonalds Four Operational Regions: 2006-2009).
Table I: Revenues of McDonalds Four Operational Regions: 2006-2009

(In US$ million)
2008
2007
2006
US
4,636
4,682
4,410
Europe
7,424
6,817
5,885
APMEA
3,660
3,134
2,674
841
1,978
2,433
16,561
16,611
15,402
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
6,961
6,176
5,493
US
8,078
7,909
7,464
Europe
9,923
8,962
7,638
APMEA
4,231
3,599
3,053
1,290
2,356
2,740
23,522
22,787
20,896
Company operated sales:

Total
Franchised and affiliated:
Total
Total revenues:
Total
Source: McDonalds Corporation, Annual Reports, www.mcdonalds.com
34
McDonalds History, www.mcdonalds.ca.
335
By 2008, McDonalds had more than 31,000 restaurants spread over 121 countries
and it was regarded as one of the most successful restaurant chains (Refer to Exhibit
III for a list of countries where McDonalds was operational, as of 2008).35
Exhibit III
List of Countries Where McDonalds was Operational, as of 2008
Year of
Opening
Restaurant
1967
1971
1972
1973
1974
1975
1976
1977
1978
1979
1981
1982
1983
1984
1985
35
Country and Date of First Restaurant Opening

Canada - June 1
Puerto Rico November 10
Costa Rica December 28
Guam- June 10
Australia-May 30
Japan - July 20
Netherlands-August 21
Panama -September 1
Germany (West)- November 22
France-May 30
El Salvador-July 20
Sweden-27 October
Guatemala-June 6
United Kingdom-October 1
Netherlands Antilles-16 August
Hong Kong-January 8
Nicaragua+
The Bahamas August 4
New Zealand -June 7
Switzerland - October 20
Ireland - May 9
Austria - July 21
Belgium- March 21
Brazil-February 13
Singapore - October 20
Spain - March 10
Denmark - April 15
Philippines September 27
Malaysia April 29
Norway November 18
Taiwan (Republic of China)-January 28
Andorra June 29
Finland December 14
Thailand February 23
Luxembourg July 17
Venezuela August 31
Italy - October 15
Mexico- October 29
McDonalds Corporation, www.fortune500news.com.
336

Year of
Opening
Restaurant
1986
1987
1988
1990
1991
1992
1993
1994
1995
1996

Cuba April 24
Turkey October 24
Argentina November 24
Macau - April 11
Serbia - March 24
South Korea -March 29
Hungary April 30
Union of Soviet Socialist Republics - 31 January (in Russian SFSR, now Russia)
Peoples Republic of China - October 8 (in
Shenzhen)
Chile November 19
Indonesia February 23
Portugal - May 23
Greece-November 12
Uruguay November 18
Czechoslovakia (Later became the Czech Republic
and Slovakia) - March 20
Poland June 17
Monaco - November 20
Brunei December 12
Morocco December 18
Northern Mariana Islands 18 March
Iceland - September 3
Israel - October 14
Slovenia December 2
Saudi Arabia December 8
Kuwait June 15
New Caledonia - July 26
Oman July 30
Egypt October 20
Bulgaria December 10
Bahrain December 15
Latvia December 15
United Arab Emirates December 21
Estonia April 29
Romania June 16
Malta July 7
Colombia July 14
Slovakia October 13
South Africa November 11
Qatar December 13
Honduras December 14
Croatia February 2
Samoa March 2
337
Year of
Opening
Restaurant
1997
1998
1999
2000
2001
2003
2004

Fiji May 1
Liechtenstein May 3
Lithuania - May 31
India October 13
Peru October 18
Jordan November 7
Paraguay November 21
Dominican Republic - November 30
Belarus December 10
French Polynesia December 10
Ukraine - May 28
Cyprus - June 12
Macedonia - September 6
Ecuador - October 9
Isle of Man - December 15
Suriname - December 18
Moldova - April 30
Lebanon September 18
Pakistan -September 19
Sri Lanka -October 16
Georgia -February 5
San Marino - July 6
Gibraltar -August 13
Azerbaijan - November 6
American Samoa - 29 September
Mauritius July 4
Kazakhstan
Montenegro - June
+ McDonalds outlets ceased operation during the Nicaraguan civil war and reestablished 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 it
went in for franchise agreements or self-owned stores. However, it mainly in went for
a franchise mode of operation and about 80% of its restaurants were franchised.
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
338

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 halal menus36 and did not serve pork, abiding by Islamic laws for food
preparation. 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 products 37, 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 in
Germany, fired egg sandwiches in Malaysia, chilled yogurt drinks in Turkey, espresso
and cold pasta in Italy, and vegetarian burgers in the Netherlands were some of the
menu variations at the McDonalds restaurants. McDonalds offered choice and
variety with locally suitable menus such as the Teriyaki Mac 40 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 McDonalds 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 permissible
according 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.
Teriyaki Mac is a Japanese styled burger containing pork with mayonnaise, lettuce, and
teriyaki sauce.
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.
40
41
339
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 company
bus 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 McDonalds. 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, Cohons plans of entering Russia
did not bear fruit. Cohon paid numerous visits to the Soviet Union, each time trying to
convince the bureaucrats in that country. During some of his visits, he even carried
along a video to show the bureaucrats the visuals of the restaurants, so that they could
understand better what actually 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. McDonalds 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 Canada agreed to reinvest all its profits in Moscow for a chain of
20 restaurants.
The company brought out an employment advertisement in newspapers for 630 posts
and received about 27,000 applications. One of the first managers to be recruited was
Khasbulatov, who contributed significantly to the establishment and expansion of
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
43
44
45
46
47
48
49
Montreal Games referred to the 1976 Summer Olympics, or XXI Olympics, held in
Montreal, Quebec, Canada.
Alf Nucifora, Russians Learn to Smile-for Profit, Business News, September 27, 1999.
Perestroika is the Russian term, meaning restructuring, for the political and economic
reforms introduced in June 1987 by the Soviet leader Mikhail Gorbachev.
Glavobshchepit, a part of the government body, was the food services agency of the city of
Moscow. It was later renamed as Mosobshchepit.
Foster, P., McDonalds Excellent Soviet Venture? Canadian Business, Vol. 64, Issue 5,
May 1991.
Tony Royle, The Union Recognition Dispute at McDonalds Moscow Food-Processing,
Industrial Relationship Journal, Blackwell Publishing Ltd., 2005.
As of 2009, McDonalds owned all of its Russian operations.
340

According to Cohon, he had made good friends in the political circles of Russia,
which turned out to be very valuable for the company as these people lent their
support to the 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 the
companys other restaurants in 17 other countries.50
On January 31, 1990, McDonalds opened its first restaurant in Russia at Pushkin
Square, Moscow. The opening was widely publicized not only by the Russian media
but by the international media as well. It was the largest McDonalds restaurant till
that time, spread over 23,680 square foot area on multi levels, had a seating space for
700 customers, and 27 cash registers. According to reports, around 40,000 people
queued up and waited for two hours for the opening. 51 According to Khasbulatov, on
the opening day, there were queues outside the store even at closing time at night and
he had to unwillingly turn them away. On the opening day, the store first served
orphans and children, before entertaining other guests, who included high ranked
government officials as well as some celebrities. 52 The store broke the then existing
records for the number of customers served on the opening day.
This store marked the beginning of not just the first McDonalds in Russia but the first
fast 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 the
analysts.
In contrast to its standard procedure of going in for a franchising agreement or a joint
venture, the McDonalds outlets in Russia were wholly owned without any partners.53
The company also did not use franchising in Russia despite it being a key factor for its
international operations in other countries. According to Khasbulatov, this was due to
the fact that there were some gaps in the existing legislations relating to franchising in
Russia. In Russia, the law on commercial concession governed franchising, but
franchisers often felt that the legislation lacked clarity.54 However, the company did
not rule out the franchise option. Commenting on the companys franchise program,
Khasbulatov said franchising will appear in Russia as soon as it becomes possible,
but for now there is no motivation to sell franchised restaurants.55
Analysts felt that it was a wise decision for the company since the fast food industry
was new in the country and it was difficult to find an efficient partner who would
completely understand the operation and stand up to the quality standards set by the
company. As Alexander Gragin, a partner at Deloitte 56, Moscow, put it, Regional
restaurant franchises [in Russia] can really vary in the quality and service that they
offer. The tricky part of selling franchises is finding reliable partners in the regions.
Also the legal situation with franchises at the federal level is as yet unclear. 57
50
51
52
53
54
55
56
57
The Taste of Pace: Situating Fast Food Restaurants in Russias Agrifood System,
http://ageconsearch.umn.edu, May 18, 2007.
McDonalds Russia, Brand Strategy, November 2005.
McDonalds in Moscow, http://goldenessays.com/free_essays/2/economics/mcdonalds-inmoscow.shtml
McDonalds Set for 20% Expansion in Russia, www.sptimes.ru, June 10, 2005.
Maria Levitov, McDonalds to Invest $50 Million, The Moscow Times, March 16, 2006.
Deloitte Touche Tohmatsu (Deloitte), founded in 1845, is one of the leading firms in the
world, delivering professional services like auditing, consulting, financial advisory etc. It is
headquartered in New York, USA.
341
Expansion in Russia
Right from the early 1990s, McDonalds started to invest in real estate ventures by
acquiring various properties in Russia. As there was some difficulty in the conversion
of the Russian ruble into any other currency, the company thought of using it for
buying farmland and for building an office tower and distribution center in the
country. In 1993, McDonalds first corporate building in Russia came up near
Moscow Kremlin58. The company also leased out office space to Coca-Cola
Company59 and Upjohn60. McDonalds continued to purchase many restaurant
properties over the years.61
In 1993, two restaurants came up in Gazetny Pereulok and Stary Arbat. 62 By the end
of the year, three of its restaurants in Russia had begun to earn profits.63
In 1996, McDonalds introduced the drive-thru format in Russia. It was a new concept
in the country. Initially, people bought the food from the drive-thru windows, then
parked their cars around the store and went inside the restaurants to eat whatever they
bought. Over the years, the Russians not only learnt to appreciate the convenience
associated with the format, but also started to acknowledge the delivery speed.
In 1998, 19 McDonalds restaurants opened in various parts of the country. However,
due to the Russian financial crisis64 and weakening of the economy around the same
time, the company decided to go slow with the expansion. By 1999, the company had
made investments worth around US$ 134 million in the country since 1989. 65
However, the strong bureaucracy in the country continued to create hindrances.
In 1999, Khasbulatov was made the head of the Russian venture of McDonalds.
Things took a turn for the worse around 2000, as the condition of some of the
restaurants deteriorated. Some items on the menu were also losing their appeal.
According to Svetlana Polyakova, Public Relations Manager, McDonalds Russia, by
2001, the company had invested around US$ 215 million in Russia. There were about
6,000 employees at that time.66 As of 2001, McDonalds International held an 80%
stake while the government held the remaining 20% in McDonalds Russia. By then,
there were about 40 stores in Moscow and more than 32 in the rest of the country. 67
The Russian economy also started to improve around the same time in the early
58
59
60
61
62
63
64
65
66
67
Moscow Kremlin is the official residence of the President of Russia.

Coco-Cola Company is a leading beverage company with a worldwide presence.
Upjohn was a pharmaceutical company.
Erin E. Arvedlund, McDonalds Gobbles up Russian Real Estate, www.iht.com, March 18,
2005.
Dmitry Dobrov, Kommersant Vlast Food Industry 1991-2000, www.russiajournal.com,
October 26, 2001.
The Russian financial crisis started in August 1998, primarily due to a financial crisis in
Asia. There was a decline in world commodity prices, which impacted countries that
depended heavily on the export of raw materials. Russia, which depended a lot on the
exports of petroleum, natural gas, metals, and timber, was also affected.
Natalia
Olynec,
Big
Mac
Blues
in
Russia,
Bloomberg
News,
www.bellybuttonwindow.com, 1999.
US Fast Food Firm Expanding in Russia, Interfax, CDi Russia Weekly #136,
www.cdi.org, January 05, 2001.
Vladimir Kozlov, Fast-Food Profits Offer Food for Thought, www.russiajournal.com,
November 29, 2001.
342

2000s, and this provided a boost to the companys growth plans (Refer to Exhibit IV
for a brief note on Russias economy in the early 2000s).
Exhibit IV
A Brief Note on Russias Economy in the Early 2000s
Since the early 2000s, the Russian economy had seen a steady growth, fueled by the
rise of consumerism. According to analysts, the economy grew at 6.9% rate
between 2003 and 2007. In 2007, there was an increase by 10.4% in the average
Russian disposable income. In 2008, it was estimated that above 60% of the
population had a disposable income of US$ 350 on an average, after regular
household expenses. However, analysts suggested that there existed an income
inequality in Russia, which was higher than that in any other European country but
still lower than that in the US. Analysts said that about 80% of consumption came
from the top 10% earners in the country. Therefore, they added, if the difference
reduced in future and more people became wealthy, consumerism would further
rise.
In addition to the rise in disposable income, consumerism was also boosted by the
availability of liquid money due to growth in the credit market. This gave the
households added power to spend, which in turn propelled the retail sector. Thus,
analysts suggested that the rise of retail trade turnover, consumer spending power,
and increased visits to restaurants and other food joints had become the prime
factors that boosted the Russian economy in the early 2000s.
In 2007, Russia became a favorable place for foreign investment and witnessed
about US$ 100 billion worth of investment, a record for any emerging country and
more than what the worlds top 15 leading economies could attract. Also, most of
these investments were reported to be for a long time basis.
The country witnessed an inflation rate of about 9% in 2007, with the FMCG
section witnessing 13% inflation. Analysts feared that the rising inflation could
impact the growing economy. They pointed out that the consumer prices had
increased since there was an increase in salaries, pension, etc, that led to spending
that was higher than the economic growth. As a result, the supply of money
increased, leading to a decrease in the purchasing power of the ruble. The
circulation of money was also higher, leading to erosion in the purchasing power of
the currency.
The average growth rate of Gross Domestic Product (GDP) in the period between
2000 and 2007 was about 6.5%. In the first half of 2008, the country witnessed a
Gross Domestic Product (GDP) growth of 8%. However, toward the end of 2008,
the Russian economy faced some challenges due to rising oil prices and the
depreciating value of the ruble in the international market.
Like other western countries, Russias economy was affected by the credit crunch,
thus reducing the liquidity in the country. The stock market also crashed. There was
a reduction in industrial production as well, resulting in many lay-offs and job cuts.
Analysts predicted that the crisis would continue in 2009. Some feared that the
growth in the GDP might even reduce by 4% in 2009. Many also believed that
Russia, with cash reserves amounting to US$ 595.9 billion, would be able to pull
out its banking sector and industry from the crisis very soon.
343
In 2002, there were around 79 Russian stores that together drew around 200,000
customers each day.68 By 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 in
Russia: 2006-2008).
Exhibit V
Market Share of Fast Food Retailers in Russia between 2003-2006
Retailer
Global brand owner
2003
2004
2005
2006
McDonalds
McDonalds Corp
35.3
30
30.7
30.3
Rostiks
Rostiks International
Inc
3.6
5.9
4.3
Sbarro
Sbarro Inc
2.8
2.9
Rostiks-KFC
Rostiks International
Inc
2.8
Teremok
Teremok - Russkie
Bliny
0.4
0.6
1.4
KroshkaKartoshka
Tekhnologiya &
Pitanie Ltd
0.4
0.6
1.4
Chaynaya Lozhka
Solo OOO
0.5
1.2
1.3
1.4
Baskin-Robbins
Dunkin Brands Inc
1.3
Others
57.4
56.9
57.5
54.1
Total, %
100
100
100
100
Source: Russian Federation HRI Food Service Sector-2008, www.fas.usda.gov,

July 28, 2008.
Exhibit VI
A Brief Note on the Fast Food Market in Russia: 2006-2008
According to some studies, the Russian fast food service market was one of the
fastest growing segments in the economy of Russia, with a growth rate of between
20 and 30%. In 2005, Moscow's fast-food market alone was estimated to be worth
between US$400 and US$700 million, and was projected to grow at a rate of 20
percent annually for the next few years. 70
Analysts considered a major section of fast food customers to be price sensitive and
keen on new products. With the restaurants growing more sophisticated in Russia,
there was an increased demand for different products. Analysts witnessed a new
68
69
70
Daniel Rogers, Can Mac Fight Back? www.marketingmagazine.co.uk, October 17, 2002.
Dmitry Babich, Yulia Ignatyeva Big Mac Does not Give Up, Foreign Investment-CDI
Russia Weekly, www.cdi.org, February 26-March 4, 2003.
February 3, 2005.
344

trend among Russians who tended to spend more on food and dining out more
than any other country in Europe. Moreover, the increasing number of shopping
centers and malls in the country were in a way propelling the fast food culture, as
most of these places had food courts with various low priced fast food stalls and
restaurants.
According to research conducted by Euromonitor Plc.71, almost 50% of the Russian
population in the age group of 16-50, bought fast food at least once a week. The
studies showed that 64% of the customers considered location as the most
important factor among the reasons that drove customers into the stores, followed
by 54% of customers who focused on cost. 43% of customers regarded quality and
25% regarded cleanliness as the factors that made them visit any fast food store.
According to analysts, one quarter of Russian restaurants were situated in Moscow
itself, out of which 60% of the market share was held by low-priced restaurants,
14% by elite restaurants, and 11% by fast food outlets. The most popular catering
formats in Russia were 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-priced
category of outlets.
The national fast food chains and stalls that were slowly gaining ground were
Stardog, Teremok, Russkie Blini etc. Street food vendors like Kroshka
Kartoshka were also very popular in Russia. However, in 2007, the Mayor of
Moscow prohibited the street vendors from doing business, in a bid to clean up the
city. Some of them were allowed to rent space in the malls and shopping centers,
but analysts pointed out that not all the vendors would be able to afford these places
because of high rentals. Further, analysts also said that the high rents paid by the
vendors would lead to an increase in the prices of the food items. In order to bear
the increasing operational costs, Kroshka Kartoshka, joined hands with Polands
AmRest Holding, a franchisee of Pizza Hut, KFC, Burger King, etc., in eastern
Europe.
Among the fast food chain operators, the food court format was slowly becoming
popular as of 2008. People visited the food courts not just for the food but also to
socialize with friends and families. Most of the leading chains such as RosticksKFC, Chaynaya Lozhka, Sbarro, and Baskin-Robbins had outlets in many malls,
shopping centers, and hypermarkets.72
For the foreign fast food chains, franchising was a popular option to enter the
country. As of 2008, Baskin Robbins was one of the largest franchises, which
capitalized on the Russians fondness for ice-cream. Among the drive-in
restaurants, Rostiks was considered the market leader. In popularity, it stood
second to McDonalds, which was among the most popular fast food chains since
1990.
One of the major challenges for the restaurant industry in Russia was
underdeveloped distribution and logistics in most parts of the country, other than
large urban cities. It was also difficult to find experienced and efficient distributors.
Moreover, in Russia, restaurants offering traditional Russian cuisine were widely
popular, while fast food joints were not. This was due to the fact that to Russians,
71
72
Euromonitor Plc is a London, UK-based provider of information services.

Russian Federation HRI Food Service Sector-2008, www.fas.usda.gov, July 28, 2008.
345
eating food was a lengthy procedure, with people sitting at the table for long
periods of time.73
Around the end of 2008, the Russian economy also experienced the effects of the
global economic slowdown and credit crunch. The stock markets performed poorly
and the ruble depreciated considerably against the US dollar. Industrial production
suffered, leading to wage reductions, lay-offs etc. Retail sales also suffered a lot
due to the reduction in spending as well as lack of availability of cheap loans and
liquidity of money.74 However, some analysts opined that the fast food industry
might not be impacted as much as high-end restaurants as people would look for
value for money in these tougher times rather than opting for fine dining
experiences. It was reported that in 2009, Russian consumer sentiment had indeed
been hit dramatically by the economic crisis, and the overall restaurant industry was
estimated to be down 7-8 percent.75 Denying that the crisis had been beneficial for
cheap restaurants, Oleg Sukhotin, executive director of the Russian Association of
Fast Food Enterprises, said, In the fourth quarter of 2009, most fast food
operators' turnover fell by 20% to 45%, year-on-year, and an average bill has also
plummeted. People no longer order pancakes with caviar that much. 76
As of early 2010, companies like McDonalds, KFC, and Sbarro dominated the
Russian fast food market.77 In late 2009, Andrey Petrakov, executive director of the
Restcon company, said that this was the right time fast for food chains to expand
into the Russian market as the market had enough room for new players, and rental
prices had dropped. 78
Source: Food & Drinks Industry Day Converting Opportunities to Business: Russian
and Ukrainian, www.bordbia.ie, 2008; and, Top 10 Consumer Trends in Russia,
www.euromonitor.com, May 7, 2008.
In 2005, the company invested about US$ 10,000 in each restaurant to start a new
breakfast menu. According to Khasbulatov, the decision to launch the breakfast menu
arose after research revealed that around 90% of the people did not have any
opportunity to get breakfast when outside their homes. 79 The breakfast menu mainly
targeted professionals in the big cities like Moscow, who left home very early to avoid
the traffic and needed to have breakfast somewhere outside.
By 2005, there were a total of 129 McDonalds restaurants in Russia, out of which 82
were in Moscow and 15 in St. Petersburg. According to analysts, the company spent
about US$ 1.5 million to US$ 2 million on setting up each new restaurant.80 The
company intended to spend around half of its marketing budget in promoting its
breakfast menu. Around the same time, the Russian operation became the second
73
74
75
76
77
78
79
80
McDonalds and Burger King Kill Russian Bistro, http://english.pravda.ru, November 9,

2009.
The Fast Deteriorating State of Russias Economy, www.economist.com, December 14,
2008
January 25, 2010.
January 25, 2010.
2009.
McDonalds Set for 20% Expansion in Russia, www.sptimes.ru, June 10, 2005
McDonalds Set for 20% Expansion in Russia, www.sptimes.ru, June 10, 2005
346

largest among McDonalds markets in terms of average number of consumers per
restaurant.81
In 2006, more than 20 new restaurants were added to the Russian operation. Even in
2006, after 16 years of operations, the first restaurant at Pushkin Square was the
busiest McDonalds in the world.82
By the end of 2007, there were more than 180 McDonalds restaurants present in
around 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 products
and brands among the growing middle class in Russia. However, the company
decided to concentrate on increasing the quality and to extract more sales from the
existing stores, instead of going in for rapid expansion. Some analysts pointed out the
high real estate prices of the prime locations was the main reason for McDonalds
deciding to go slow on its expansion (Refer to Table II for new outlets opened in
Russia: 2005-2009). We would like to open more restaurants in Russia, but,
unfortunately, the procedure for receiving permission is not becoming any easier,84
said Khasbulatov. The company also intended to introduce new forms of accessibility
to its products in Russia, such as the 24-hour express windows and drive-thru
windows.
Table II: New McDonalds Outlets Opened in Russia: 2005-2009

Restaurants opened
2009
2008
2007
2006
2005
33 (Planned)
22
21
23
18
Compiled from various sources.

By mid-2009, McDonalds had more than 220 restaurants in over 50 cities in Russia
and 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 strong
bureaucracy that was present in Russia. According to analysts, opening a single store
required the sanction signatures from about 200 different officials. The government
issued guidelines running into 40 pages instructing the restaurants on numerous dos
and donts, while operating in the country. Nevertheless, the company went ahead,
implementing several strategies that eased its difficulties and paved the way for
smooth operations. The menu was kept similar to the one in the US, with the addition
of cabbage pie and a few popular Russian dishes.
The Human Factor

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 in
these places. However, it gave the best training to the local recruits, who were familiar
with neither customer service nor the hamburger. Moreover, molding them in the
81
82
83
84
85

February 3, 2005.
Top 10 Consumer Trends in Russia, www.euromonitor.com, May 7, 2008
George Cohon, Founder of McDonalds Canada and McDonalds Russia, Honored in
Washington, D.C., www.marketwire.com, October 6, 2009.
347
McDonalds way was a challenge when most of the local recruits were not familiar
with working under the capitalist system. Experts felt that they were victims of the
inertia brought about by the old system of central planning for so long that
productivity remained low.
Hiring local employees was a challenge though McDonalds first recruitment ad drew
27,000 applications. The company selected a 630-member crew comprising hires of
between 18 and 27 years. Craig Sopkowicz, who was McDonalds quality-control
expert and in charge of the new employees, said, We looked for applicants who lived
close to the restaurant, among other things, in order to control the timeliness of
employees. 86 For most of these new hires, this was their first job as labor laws in
Russia protected teenagers from indulging in any activity that conflicted with
schoolwork. Initially, the company provided a starting salary that was on a par with
the industry average in Russia (1.5 rubles an hour) for new hires.87
Local employees required lengthy training. To be flexible when positions changed, the
new crew was trained in all aspects of the restaurants functions; the new staff logged
in more than 15,000 training hours to ensure control similar to that in western
operations. Before the opening of the first Russian store, a team of 30 newly recruited
managers (including Khasbulatov) was sent to Europe and the Institute of
Hamburgerology in Toronto for comprehensive training. These people in turn trained
the other new employees on quality, customer service, general conduct, as well as the
health and safety standards that were to be followed in the stores. According to an
executive from McDonalds, at first it was difficult to teach the store employees to
smile and look straight into the eyes of the people. To teach the trainees, the training
manuals were translated into Russian and they were also shown videotapes about
various chores, like the right way to wash the windows and clean the floors, as well as
the correct way to arrange the ingredients in the Big Mac.88 Since the company had
some concerns about the employees appearance, it decided to construct an on-site
laundry room so that the companys standards could be ensured.89
In 2006, McDonalds Russia was named as the Best Employer in Russia by the
Russian Chamber of Commerce and Industry. The award recognized the company as a
responsible employer.90 It was also named as the Best Employer in Central Eastern
Europe from 2007-2009 by Hewitt Associates91. As of end 2009, the company
employed more than 24,500 Russians at its restaurants, processing facilities, and
corporate offices, and there were more than 100,000 Russians employed by
suppliers.92 The company executives were Russian and most of them had started their
career as crew-members.
Pricing
The company began its operations by transacting in rubles, so that the customers did
not face any issues with the currency. A few analysts called it a shrewd strategy
targeted at luring the locals who were always attracted to foreign goods but could not
86
87
88
89
90
91
92
Helen Deresky, International Management: Managing Across Borders and Cultures,

(Pearson Prentice Hall, 2006).
Ann Blackman, Moscows Big Mak Attack, www.time.com, February 5, 1990.
McDonalds Russia Named Best Employer, www.crmcdonalds.com, January 16, 2007.
Hewitt Associates is a leading global human resources consulting and outsourcing company.
George Cohon, Founder of McDonalds Canada and McDonalds Russia, Honored in
Washington, D.C., www.marketwire.com, October 6, 2009.
348

purchase them since these goods could usually be bought in foreign currencies only.93
However, at 5.5 rubles for a Big Mac, fries, and Coke, only the higher-income
segment could afford it as this was twice the cost of a meal in state-run outlets.
According to analysts, the company in Russia maintained the profit margins
somewhere around the mid 20 percent range. It was considered to be much higher
than the global average profit margins that the company earned. The same store sales94
were also considered to be higher than in other markets.
In 2007, the prices of the food items in the menu were increased around four times in
the year, in order to maintain the desired profit margins, keeping up with the rising
inflation. However, the percentage increase was different for different items. For
instance, the price of less expensive items like ice-cream cones, was raised at half the
rate of the inflation at that time, whereas for more expensive items, like the Big tasty
burger, the price rise was above the inflation rate.
According to Khasbulatov, despite a 35 percent devaluation of the ruble against the
dollar in late 2008 and early 2009, McDonalds had lowered some prices to gain from
bigger turnover. The companys endeavor was to not increase prices above annual
inflation rates of between 13 percent and 14 percent. However, in mid-2009, the price
of the Big Mac in Russia grew by 13.5 percent to 67 rubles, but it became less
expensive in dollar terms - US$0.5 (19.7 percent).95 Consumers in Russia are really
price sensitive . . . 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 it
required were not available in the country at all. Greg Steeves, former Chief Operating
Officer of McDonalds Europe, explained, Russia is often plagued by shortages, and
in some cases the ingredients we required, such as iceberg lettuce, didnt even exist in
the country.97
Right from the very beginning, the company understood that importing food items
from other countries would not be a viable option as the rubles earned in Russia would
be unconvertible. In that case, it would have to divert some of the income from
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 to process
the required beef, milk, buns, vegetables, sauces, and potatoes.98 This facility also
included laboratories for testing to ensure compliance with quality and consistency
standards. The company also brought in Peter Frings, an agronomist with Mccain
93
94
95
96
97
98
Same-store sales is defined as sales at stores open for at least 13 months.
Russian Ruble 43 Percent Underestimated, According to Big Mac Index,
http://newsfromrussia.com, July 21, 2009.
Jenny Wiggins, Growing Taste for Quality Goods Lures Big Brands, www.ft.com, January
20, 2010.
349
Foods Ltd., to introduce the Russian farmers to the non-native Russian Burbank
potato used to make the companys fries. 99 Some selected farmers were educated on
improving the quality as well as production volumes. Some Netherlands-based potato
farmers and processors helped the local farmers to grow a specific variety of potato
that was suitable for making frozen French fries. Bakers were also brought in not only
from the US and Canada, but also from some European countries like Sweden and
Germany, to develop baking systems for buns and pies. The pasteurization process, set
up by dairy experts from Sweden, was a very significant step as the milk in Russia
was highly contaminated compared to other countries in Europe and the US.
Initially, there were problems in the procurement of beef as well, due to its shortage in
Moscow. Even though European meat experts were brought in to start new feed
programs for the Russian cattle, the local supply was unable to meet the huge demand
of 1,500 tons of beef per year. Also the company was not allowed by the government
to buy meat directly on its own, in spite of initiating such feed programs. It had to
strike a deal with the government-run slaughter houses, but then, the company was
also restricted from picking up its choice of meat. As a result, McDonalds installed
different buyers at various slaughter houses who bought the beef for the company in
limited quantities.100
By 1999, about 75-80% of the raw materials were being sourced from more than 100
local producers in Russia. Our main goal is to develop local suppliers. We check
their production every three months to guarantee quality, 101 commented Khasbulatov.
But even in 2001, the company was importing chickens from France, cheese, fish, and
apple segments from Poland, potatoes cut and frozen from the Netherlands.
While McDonalds continued to select its own suppliers in Russia, in 2007, it handed
over the companys logistics to Alfa Group affiliate Rulog102 in a bid to remove
logistics from its own management. McDonalds also transferred chicken production
to a plant in the Kaliningrad region, which was set up jointly with Brazils Sadia. The
production of beef patties will be handed over before the end of the year to an
enterprise that Italys Inalca is building in the Moscow region Thus, more than 80%
of the products for our chain will be produced on Russian territory. Only the
production and processing of potatoes and fish products will remain abroad, 103 said
Khasbulatov.
Results
McDonalds was a huge success in Russia right from the first day of its operations.
Thousands of customers queued up for hours to experience it. The restaurant served
over 30,000 customers on the opening day. By 1993, the company started making
profits in Russia and did not look back after that. In a country where there was
nothing available, McDonalds was everything, 104 said Russian restaurant magnate
Rostislav Ordovsky.
99
100
101
102
103
104
350

Foster, P, McDonalds Excellent Soviet Venture? Canadian Business, Vol. 64, Issue 5,
May 1991.
Anatoly Vereshchagin, McDonalds Rules Russian Fast Food Market, www.cdi.org,
October 29, 2001.
Rulog had a distribution center in Moscow and was planning to open similar facilities in
St. Petersburg, Kazan, the Urals, and in southern Russia.

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. 105 By the time
the company celebrated the 15th anniversary of the opening of its first restaurant in
Russia in January 2005, it had served over one billion customers and was serving
more than 500,000 customers every day. According to Mike Roberts, President and
COO, 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 now viewed
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 directly
compete 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 of
growth was the fastest in the world. It was also opening more stores in Russia
annually than any other country with the exception of China. 111 In terms of turnover, it
was among the top ten markets of 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
105
106
107
108
109
110
111
112
113

February 3, 2005.
McDonalds Celebrates its 15th Anniversary in Russia, www.prnewswire.co.uk, January
31 2005.
2009.
Number of McDonalds Restaurants in Russia to Exceed 200 by End of 2007,
http://eng.investmarket.ru, March 27, 2007.
McDonalds Turnover in Russia Growing 30% Annually, Russia & CIS Business and
Financial Newswire, October 24, 2007.
351
Experts felt that the company had done well in Russia despite facing some serious
challenges. Although the political environment had been murky at times, the company
had increased its investment in the country. In 2009, it planned to invest US$120
million on expanding its operations in Russia.114 Experts noted that other companies
such as Coca-Cola too were investing generously in the country. 115 According to
Douglas Helfer, a senior portfolio manager at the Halbis unit of HSBC Global Asset
Management, They see that the opportunity outweighs the price of the risk. 116
According to 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 its
brand, 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 the
worse,119 said 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
115
116
117
118
119
120
352
Benjamin Scent and Natallie Cai, To Russia with Love, www.thestandard.com.hk, June
29, 2009.
In February 2006, Coca-Cola announced that it would invest US$1.2 billion in Russia over
the next three to five years as it felt that the sale of carbonated drink would increase during
the economic crisis.
Benjamin Scent and Natallie Cai, To Russia with Love, www.thestandard.com.hk, June
29, 2009.
Moscow Wants to Up Rent on its Two McDonalds, www.dailyherald.com, July 10,
2009.
Diane Francis, Russia Good for Business: McDonalds, http://network.nationalpost.com,
September 11, 2008.
January 25, 2010.
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 out
supplies. When we need more sand or gravel for building and go to the department in
charge, they say, Sorry, youre not in my five-year plan, 121 said Cohon. The level
of bureaucracy in the country was a big impediment to growth, according to
Khasbulatov.
Catering to the local population was also challenging as their eating habits were quite
different and many of them were unaccustomed to eating foods such as burgers. For
instance, some people who were initially invited to test the Big Mac reportedly ate it
layer by layer.122 Moreover, eating habits were different. Eating food in Russia was a
lengthy procedure, with people sitting at a table for long periods of time. 123 They
were also not familiar with the drive-thru format. However, with the offerings at
McDonalds being viewed as a novelty by customers, the company had to contend
with long queues.
Right from the first day, the company had to work differently to cater to this market. It
took various initiatives to reduce long waiting lines by hiring private security people
to keep order and by using public-address systems to tell patrons how to place orders.
In some locations, employees took orders on handheld devices before customers
reached the counter. In addition to verbal instructions, customers were given picturemenus to simplify the ordering process. To deal with black marketing and pilferage,
the company maintained a one-door policy. In the initial days, there was a limit of ten
Big Macs to each customer.124 To move things fast, the company also invested in new
cooking equipment that helped serve customers faster. According to Khasbulatov,
When I said I have too many customers, it's a nice problem to have I would love to
continue to have this problem.125
In addition to the political challenges that the company faced, the company also
suffered a financial crisis during the economic turmoil in Russia around 1998. During
that time, the ruble fell drastically in value, leading to high inflation and economic
instability in the country. As a consequence, customer traffic decreased considerably
in the 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 were
reportedly blocked by the company time and again. According to analysts, many
laborers accused the company of ill-treating them and of illegally holding them back
from forming a union. At that time, the company, under the pressure of an economic
slowdown, did lay off some employees and reduce salaries, which made the labor
force think about unionization. However, McDonalds Russia denied having ill treated
its employees and said that it was strictly abiding by the Russian laws. The incident
led to legal proceedings as well and tainted the employee friendly image of the
company not only in Russia but also in several other markets during that time.127
121
122
123
124
125
126
127

2009.
Youngme Moon, Kerry Herman, McDonalds Russia: Managing a Crisis,
http://harvardbusinessonline.hbsp.harvard.edu, October 21, 2002.
Angela Charlton, Natalya Gracheva is Giving McDonalds Heartburn,
www.mcspotlight.org, June 23, 1999.
353
On February 19, 2007, the McDonalds at St. Petersburg was bombed in a terrorist
attack, injuring six people and damaging the store to a great extent. A similar
explosion had earlier occurred in 2002, when a bomb went off in a car at a
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. Over
the 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 and
on Bolshoy Nikolopeskovsky Pereulok) in the center of Moscow. In the early 1990s,
the company had signed a 49-year agreement with the city government at an annual
rate of 1 ruble per square meter. The government sought to enforce a local law
requiring a minimum annual rental rate of 1,000 rubles (US$30.67) per square meter
and wanted McDonalds to pay this rent.133 In December 2009, Moscow's arbitration
court upheld the city authorities move.134
128
129
130
131
132
133
134
354
Explosion Hits McDonalds Restaurant in St. Petersburg; 6 injured, www.iht.com,

February 18, 2007
McDonalds Russia Fights $6.5 mln Tax Claim, www.flex-news-food.com, December 5,
2007.
Shaun Walker, McDonalds Faces 3m Back-tax Bill in Russia, www.independent.co.uk,
December 5, 2007.
Starbucks Corporation was started in 1971, at Seattle, the US. It is regarded as one of the
leading coffee chains in the world. As of 2008, it was present in 43 countries across the
world with 7,087 company operated stores and 4,081 licensed stores.
January 25, 2010.
Moscow Wants to Up Rent on its Two McDonalds, www.dailyherald.com, July 10,
2009.
January 25, 2010.
Exhibit VII
Leading Fast Food Chains in Russia
Name of the
Chain
Country of Origin
KroshkaKartoshka
Russia (Moscow)
Stardogs
Year of Est. in
Russia
No. of Outlets
2005
2006
2007
March
2008
1991
141
170
230
252
Russia (Moscow)
1993 (2003 as
new brand)
186
197
224
234
McDonalds
USA
1990
137
157
174
190
Baskin
Robbins
USA
1992
118
132
139
139
Teremok
Russia
1998
62
92
135
142
Rostiks KFC
Russia/USA
1993 (2005 as
new brand)
87
97
135
141
Sbarro
USA
1997
52
83
111
114
Riksha I Van
Russia (Moscow)
1998 (2006 as
new brand)
79
90
Chaynaya
Lozhka
Russia (St.Petersburg)
2001
28
42
59
64
Eurasia
Russia (St.Petersburg)
2001
30
49
49
49
Moo - moo
Russia (Moscow)
2000
14
17
17
PrimeStar
Russia/USA
2007
13
14
Grabli
Russia (Moscow)
2003
Source: Russian Federation HRI Food Service Sector-2008, www.fas.usda.gov, July 28, 2008.
In Old Arbat pedestrian Tourist Mall, McDonalds constructed side cafs and served a
dessert menu. McDonalds also began to make stronger McCafes, 135 as a pre-emptive
measure to face competition from Starbucks, much before it entered in Russia in
2007.136 McDonalds, however, faced some competition from a few local retailers like
the Rostiks Group137 and Elki-Palki138 as well as from the US-based companies like
Yum! Brands.139 Some of the local fast food stalls that served local dishes at very low
prices also took away a lot of McDonalds customers and added to the competition.
135
136
137
138
139
McDonalds coffee house style cafs were first launched in Russia in 2002.
McDonalds Becoming Largest Corporate Land Owner in Russia,
www.organicconsumers.org, March 22, 2005.
Rosticks Group (Rosticks), started in 1993, in Russia, operated restaurants in different
formats that included including Il Patio, Planetsushi, Fridays Moka Loka, and Siberian
Crown. There were 174 stores under Rostick in 2004. As of 2007, it controlled 14% of the
restaurant market. Rosticks was the second most popular fast food name in Russia, after
McDonalds.
Founded in 1996, this Russian chain specialized in Russian cuisine and was moderately
priced.
Yum! Brands, based in Kentucky, USA, operates around the world through 36,000
restaurants in 110 countries and territories. In 2007, it reported sales worth US$ 9,100
355
Despite many obstacles that included two bomb attacks on its stores, Russias two
wars in Chechnya,140 the economic crisis in 1998, and many other challenges,
McDonalds Russia continued to grow at a slow and steady pace. Some analysts also
pointed out that though McDonalds Russia faced a lot of challenges, it remained
shielded from controversies related to the paying of low wages and health-related
accusations that it suffered in the US and European countries. They said that obesity
related controversies did not bother the company in Russia where people themselves
asked for mayonnaise that had 40% fat content.141 This was despite some nutritionists
raising concerns that the local populations love for a burger could lead to health
issues in the country.142
McDonalds also said that though it encountered some problems in dealing with the
regulators, it did not have any trouble in terms of corruption or harassment in Russia.
According to Cohon, Russia was a great place to do business, if politics were not
involved.143
Outlook
With more than two-third of Russias fast food business, McDonalds was a dominant
player. In 2009, Russia was again one of the markets that spurred the companys
growth as it was McDonalds fastest-growing market in Europe in terms of restaurant
openings.
Analysts said that McDonalds strong performance in Russia came at a time when the
country was in the grip of an economic downturn and its competitors were struggling
(Refer to Exhibit VIII for Comparison between McDonalds Comparable Sales in
November 2008 and 2007). According to the company, the sales were driven by
extended operational hours and more variety in the breakfast and regular menu. In the
words of Skinner, McDonalds continued strong performance reflects the benefits of
our multidimensional approach. Convenient locations, extended hours, and quality
food at an outstanding value are all reasons why people are choosing McDonalds. 144
However, Khasbulatov admitted that McDonalds was affected by the economic
downturn and that its growth in the market would slow down. I cant say we have
gained from the crisis by taking the share from more expensive restaurants The
recession has had an impact on our customers and we havent gained from it ... We
wont see the previous pace of growth of 15-20 percent a year any more, 145 he said.
140
141
142
143
144
145
356
million. Restaurant chains under it include Kentucky Fried Chicken (KFC), Pizza Hut,
Taco Bell, and Long John Silver. In 2005, KFC co-branded with Rosticks in Russia to sell
their chicken products.
Chechnya was a Republic within the Russian Federation. This region had been in constant
conflict with Russian Federation for a long time. The First Chechen War was fought
between 1994 and1996 and resulted in the independence of Chechnya. In August 1999, the
Second War started, which ended around mid-2000. It resulted in Russia gaining control
over the separatist region of Chechnya. However, sporadic fighting continued even till
2005.
McDonalds Becoming Largest Corporate Land Owner in Russia,
January 25, 2010.
Diane Francis, Russia Good for Business: McDonalds, http://network.nationalpost.com,
September 11, 2008.
McDonalds delivers another Month of Strong Global Comparable Sales - November Up
7.7%, www.mcdonalds.com, December 8, 2008.
Maria Plis, McDonalds Eyes Russia Growth with 40 New Stores, http://uk.reuters.com,
February 26, 2009.

However, he added that Russia would remain one of its most dynamic markets despite
the economic downturn and that McDonalds Russia would continue to be the
companys fastest growing and most profitable market.
Exhibit VIII
McDonalds Comparable Sales in November 2008 and 2007
Major segments of the company
% Increase in Sales
2008
2007
7.7
8.2
US
4.5
4.4
Europe
7.8
10.8
APMEA
13.2
12
7.1
7.0
US
3.9
4.9
Europe
8.8
7.6
APMEA
9.3
10.4
Month ended November 30

McDonalds Corporation
Year-to- Date November 30

McDonalds Corporation
McDonalds Delivers Another Month of Strong Global Comparable Sales November Up 7.7%, www.mcdonalds.com, December 8, 2008.
The company planned to open another 45 outlets in Russia by the end of 2012. 146 It
planned to expand into areas that were less penetrated by fast-food chains. It was also
speculated that the company might launch a franchise scheme to expand beyond the Ural
mountains in the eastern part of the country. Analysts expected McDonalds to spend US$120200 million in 2010 on opening new outlets and also to spend a significant amount on
revamping existing outlets. Establishing the entire production chain for McDonalds
Russia in the country was another priority for the company. Currently, 80% of what
we produce [in Russia] is made in Russia. The task is to move the remaining 20% to
Russia,147 said Khasbulatov.
In January 2010, Burger King entered Russia, opening its first outlet in Moscow. 148
Experts felt that Burger King had taken the plunge attracted by the success of
McDonalds. Subway too planned to expand its chain in Russia from 78 in December
2009 to 1,000 outlets by 2015.149 While analysts expected the competition to intensify
with the entry of Burger King and the emergence of some strong domestic players,
146
147
148
149
Jenny Wiggins, Growing Taste for Quality Goods Lures Big Brands, www.ft.com,
January 20, 2010.
McDonalds to Invest in New Restaurants in Russia, http://bbjonline.hu, February 26,
2009.
Burger King Opens First Outlet in Russia, http://abcnews.go.com, January 21, 2010.
357
they did not expect McDonalds position to come under threat immediately.
According to Oleg Sukhotin, executive director of the Russian Association of Fast
Food Enterprises, Its difficult to compete with McDonalds because it received
privileges from the city government at least at some stage. But Im sure that, for
instance, Kroshka-Kartoshka has been successfully taking over McDonalds
customers. 150
McDonalds seemed unpurterbed by the competition and felt that there was plenty of
scope for growth in Russia. According to Khasbulatov, more than two third of the
population were not in the habit of eating out. While 70 percent of our population is
not used to eating outside the house, we will have a niche that we should be looking at
carefully as there are big opportunities to make these people eat out, 151 he said.
150
151
358

January 25, 2010.
References and Suggested Readings:

1. Ann Blackman, Moscows Big Mak Attack, www.time.com, February 05, 1990.
2. Foster, P, McDonalds Excellent Soviet Venture? Canadian Business, Vol. 64,
Issue 5, May 1991.
3. Angela Charlton, Natalya Gracheva is Giving McDonalds Heartburn,
www.mcspotlight.org, June 23, 1999.
4. Alf Nucifora, Russians Learn to Smile-for Profit, Business News, September 27,
1999.
5. Natalia Olynec, Big Mac Blues in Russia, Bloomberg News,
www.bellybuttonwindow.com, 1999.
6. Amy Zuber, McDonalds 10th Anniversary in Russia Brings Future Confidence
Despite Struggles, National Restaurant News, http://findarticles.com, February 21,
2000.
7. US Fast Food Firm Expanding in Russia, Interfax, CDi Russia Weekly #136,
www.cdi.org, January 05, 2001.
8. The McDonalds Effect, http://web-japan.org, August 20, 2001.
9. Dmitry Dobrov and Kommersant Vlast
www.russiajournal.com, October 26, 2001.
Food
Industry
1991-2000,
10. Anatoly Vereshchagin, McDonalds Rules Russian Fast Food Market,

www.cdi.org, October 29, 2001.
11. Vladimir Kozlov, Fast-Food Profits Offer Food for Thought,
www.russiajournal.com, November 29, 2001.
12. Daniel Rogers, Can Mac Fight Back? www.marketingmagazine.co.uk, October
17, 2002.
13. Youngme Moon and Kerry Herman, McDonalds Russia: Managing a Crisis,
http://harvardbusinessonline.hbsp.harvard.edu, October 21, 2002.
14. Dmitry Babich, Yulia Ignatyeva Big Mac does not Give Up, Foreign InvestmentCDI Russia Weekly, www.cdi.org, February 26-March 4, 2003.
15. McDonalds Celebrates its 15th Anniversary in Russia, www.prnewswire.co.uk,
January 31, 2005.
16. Chris Mercer, McDonalds Plans to Double Russian Presence,
www.foodnavigator.com, February 3, 2005.
17. Geoffrey Jones, Multinationals and Global Capitalism, (Oxford University Press,
February 2005).
18. Erin E. Arvedlund, McDonalds Gobbles up Russian Real estate, www.iht.com,
March 18, 2005.
19. McDonalds Becoming Largest Corporate
20.
Land
Owner
in
Russia,
21. McDonalds Russia, Brand Strategy, November 2005.

22. Tony Royle, The Union Recognition Dispute at McDonalds Moscow FoodProcessing, Industrial Relationship Journal, Blackwell Publishing Ltd., 2005.
23. Helen Deresky, International Management: Managing Across Borders and Cultures,
24. McDonalds Russia Named Best Employer, www.crmcdonalds.com, January 16,
2007.
359
25. Explosion hits McDonalds restaurant in St. Petersburg; 6 injured,
www.iht.com, February 18, 2007
26. Russian
Police
See
McDonalds
http://news.webindia123.com, February 19, 2007.
Blast
as
Hooliganism,
27. Number of McDonalds Restaurants in Russia to Exceed 200 by End of 2007,

http://eng.investmarket.ru, March 27, 2007.
28. The Taste of Pace: Situating Fast Food Restaurants in Russias Agrifood
System, http://ageconsearch.umn.edu, May 18, 2007.
29. Janet Adamy, As Burgers Boom in Russia, McDonalds Touts Discipline,
30. Russia Loves the Golden Arches, www.newser.com, October 16, 2007.
31.
McDonalds Russia Fights $6.5 mln Tax Claim, Reuters, www.flex-newsfood.com, December 5, 2007.
32. Vladimir Kvint Russias Surging Economy, www.forbes.com, January 8, 2008.

33. McDonalds to Open 40 Restaurants in Russia in 2008, www.cdi.org, April 22,
2008.
34. Top 10 Consumer Trends in Russia, www.euromonitor.com, May 7, 2008.
35. Yuri Mumchur, Obama in Moscow: True Reset or Just Walking in Circles?
www.russiablog.org, July 8, 2008.
36. Kerry Capell, A Golden Recipe for McDonalds Europe, www.spiegel.de, July
18, 2008.
37. Russian Federation HRI Food Service Sector-2008, www.fas.usda.gov, July 28,
2008.
38. Diane Francis Russia Good for Business: McDonalds,
http://network.nationalpost.com, September 11, 2008.
39. McDonalds Delivers another Month of Strong Global Comparable Sales November Up 7.7%, www.mcdonalds.com, December 8, 2008.
40. The Fast Deteriorating State of Russias Economy, www.economist.com,
December 14, 2008.
41. Crisis Will not Affect McDonalds in Russia, www.realestatelife.org, December
24, 2008.
42. Food & Drinks Industry Day Converting Opportunities to Business: Russian
and Ukrainian, www.bordbia.ie, 2008.
43. McDonalds Corporation, 2008 Annual Report, www.mcdonalds.com.
44. McDonalds to Invest in New Restaurants in Russia, http://bbjonline.hu,
February 26, 2009.
45. Benjamin Scent and Natallie Cai, To Russia with Love, www.thestandard.com.hk,
June 29, 2009.
46. Moscow Wants to Up Rent on its Two McDonalds, www.dailyherald.com, July
10, 2009.
47. Russian Ruble 43 Percent Underestimated, According to Big Mac Index,
http://newsfromrussia.com, July 21, 2009.
48. George Cohon, Founder of McDonalds Canada and McDonalds Russia,
Honored in Washington, D.C., www.marketwire.com, October 6, 2009.
49. McDonalds and Burger King Kill Russian Bistro, http://english.pravda.ru,
November 9, 2009.
360

50. Maria Kiselyova and Maria Plis, McDonalds to Target Stay-at-home Russians,
51. Jenny Wiggins, Growing Taste for Quality Goods Lures Big Brands,
www.ft.com, January 20, 2010.
52. Burger King Opens First Outlet in Russia, http://abcnews.go.com, January 21, 2010.
53. McDonalds Delivers Another Year of Strong Results in 2009,
www.chainleader.com, January 25, 2010.
54. Vladimir Kozlov, McDonalds Supersize Profits Conquer Moscow,
www.mnweekly.ru, January 25, 2010.
55. McDonalds in Moscow, http://goldenessays.com
56. McDonalds Corporation, www.fortune500news.com.
57.
McDonalds Corporation, Company History, www.answers.com.
58. Eating out in Moscow & St. Petersburg, www.gateway2russia.com.

59. McDonalds History, www.mcdonalds.ca.
60. www.mcdonalds.com
61. www.mcdonalds.ca
62. http://finance.yahoo.com.
63. www.yumbrands.com.
361

Case 2 McDonalds Russia

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McDonalds Russia: A Jewel in the

McDonalds Emerging Market Operations?

Khamzat Khasbulatov2, McDonalds Corporation, president for Russia

- The Wall Street Journal, October 16, 2007.

Maria Kiselyova and Maria Plis, McDonalds to Target Stay-at-home Russians,

McDonalds Russia: A Jewel in the McDonalds Emerging

McDonalds Russia: A Jewel in the McDonalds Emerging

Kroc started a new franchising company under the name McDonalds

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

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

McDonalds received The American Marketing Association Achievement

Chicken McNuggets were introduced. By the end of the year, McDonalds

McDonalds opened its ten thousandth restaurant.

Fortune Magazine listed McDonalds hamburgers among the 100 products

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

McDonalds acquired its first stake in a Colorado-based fast food chain,

McDonalds Russia: A Jewel in the McDonalds Emerging

In May, McDonalds bought the bankrupt Boston Market chain 33 for

In October, McDonalds introduced its famous Dollar menu.

In September, McDonalds launched its advertising campaign on MTV

Compiled from various sources

Total shareholders equity

Shares outstanding in millions

Market price at year end

Total Systemwide restaurants

McDonalds Russia: A Jewel in the McDonalds Emerging

Table I: Revenues of McDonalds Four Operational Regions: 2006-2009

Other Countries and Corporate

Other Countries and Corporate

Company operated sales:

Other Countries and Corporate

Source: McDonalds Corporation, Annual Reports, www.mcdonalds.com

McDonalds History, www.mcdonalds.ca.

Country and Date of First Restaurant Opening

McDonalds Corporation, www.fortune500news.com.

McDonalds Russia: A Jewel in the McDonalds Emerging

Country and Date of First Restaurant Opening

Country and Date of First Restaurant Opening

McDonalds Russia: A Jewel in the McDonalds Emerging

Jews do not eat or cook meat and dairy products together.

McDonalds Russia: A Jewel in the McDonalds Emerging

Moscow Kremlin is the official residence of the President of Russia.

McDonalds Russia: A Jewel in the McDonalds Emerging

Global brand owner

Dunkin Brands Inc

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

McDonalds Russia: A Jewel in the McDonalds Emerging

Euromonitor Plc is a London, UK-based provider of information services.

McDonalds and Burger King Kill Russian Bistro, http://english.pravda.ru, November 9,

McDonalds Russia: A Jewel in the McDonalds Emerging

Table II: New McDonalds Outlets Opened in Russia: 2005-2009

Compiled from various sources.

McDonalds Strategies in Russia

The Human Factor

Chris Mercer, McDonalds Plans to Double Russian Presence, www.foodnavigator.com,

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

McDonalds Russia: A Jewel in the McDonalds Emerging

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

McDonalds Russia: A Jewel in the McDonalds Emerging

Chris Mercer, McDonalds Plans to Double Russian Presence, www.foodnavigator.com,

McDonalds Russia: A Jewel in the McDonalds Emerging

Ann Blackman, Moscows Big Mak Attack, www.time.com, February 5, 1990.

Explosion Hits McDonalds Restaurant in St. Petersburg; 6 injured, www.iht.com,