It’s been nearly 13 years since McDonald’s opened the first Western fastfood restaurant in the heart of Soviet Russia. The Moscow outlet was heralded as cementing East-West relations, with commentators predicting that the burger behemoth had paved the way for others. Is it any easier to export branded concepts today, however? Clare Harman reports.
On 31 January 1990, a handful of soviet managers fresh out of training from the Hamburger University in suburban Chicago lit up the golden arches in Pushkin Square and ushered in what many believed would be a new period in Russian history. A time in which the Soviet state would embrace the global market and capitalism; a seismic shift epitomised by Amerikanski fastfood and dreams.
Big Mac’s entry into the Russian market was self-confident and brazen. Two months after the fall of the Berlin Wall marked a dramatic end to the cold war, the burger behemoth cemented east-west relations with the opening of its largest ever restaurant with 900 seats (the largest now overlooks Tiananmen square in Beijing). It was a gamble fourteen years in the making, according to McDonald’s, but in the predawn hours of that auspicious day, more than 5000 Russians queued for a chance to sample a piece of America. By closing time, over 30,000 people had been served.
Twelve years on, US and UK government agencies are keen to promote the opportunities in the Russian market for those brave enough to follow in McDonald’s footsteps. The company hails the “outstanding success” of its Moscow operations, the Pushkin Square outlet being its busiest in the world, but nevertheless it seems rather alone. Following the economic crash of August 1999, bold exploration and exportation by Western food concepts has given way to a reticence to tempt fate in an unstable market.
But companies can pay heavily for such trepidation in missed opportunities. Exactly how easy is it for western fastfood concepts to conquer the infamous Russian winter? Can the benefits outweigh the inevitable pitfalls?
Russia is a famously difficult country to conquer, not least due to its relative financial instability, a feature to be expected of a market economy still emerging from the rigours of state-run communism and a crash in 1999, prompted when the government defaulted on domestic loans. Dunn and Bradstreet still give the market a DB6d high-risk rating and the rouble, which currently lingers at around 49-50: £1 (US$1.55) is still a long way from the 8-9:£1 mark immediately prior to the 1999 crash. Many companies still work on a cash-up-front basis, avoiding open accounts to minimise the risk of getting their fingers burned.
“There is still an enormous amount of pent-up demand for western products at the right price” – Tradepartners UK
Notwithstanding this, the US Foreign Commercial Service (FCS) released a report in February this year stating confidently “among the most promising prospects for US companies are fastfood restaurants and eateries. This is a rapidly growing market segment, with five fastfood outlets opening for each traditional restaurant.” It claimed that around 30 fastfood chains were already operating in Moscow, and numerous local “well-established entrepreneurs are seeking to attract the famous names from the West, and invest in branding”. Tradepartners UK, a government initiative to support UK exporters, insists: “There is still an enormous amount of pent-up demand for western products at the right price.”
But who is buying the food, and buying into the myth that surrounds Amerikanski foods?
Battling the black market
More importantly, perhaps, who is paying full price for it? The burgeoning black market already offers a variety of Western goods, but while this increases brand awareness, it also offers cheaper off-the-shelf alternatives to visiting fully established restaurants. In January 1990, a Quarter Pounder, fries and a Coke cost more than the average Russian’s weekly pay. Potentially then, is this a product for ex-pats and Western diplomats? Not so, according to the FCS, because “despite their low levels of disposable income by European standards, Muscovites appear willing to pay to enjoy a wide variety of good quality foods”.
Fastfood may not rank amongst many Westerners’ ideas of good quality, but many foreign firms will certainly bring new standards in health and hygiene to the Russian foodservice market. Compared to the pirozhkis (stuffed buns) offered by street stalls, a good honest Big Mac is far less likely to cause food poisoning. This is reportedly a factor encouraging the patronage of the wealthiest Russians. And luckily, says the FCS, “a reviving middle class is creating a solid customer base, [making] the restaurant sector […] one of the most attractive areas of investment.”
Matthew Nash, head of New Market Development at Food From Britain, told just-fod.com however that any approach to the Russian market should be undertaken “with a great deal of care”. The much anticipated growth of the middle classes is, in Nash’s words, “overestimated”.
“The majority of government reports tend to be partisan in the extreme,” he said, often representing “political aspiration over commercial realisation”.
“Interaction with local business is costly, as Western companies subsidise the slow process of modernisation”
With objective market information so scarce, many companies are forced to create commercial strategy from anecdotal evidence. Fear of the unknown is potent and approaches to the market are geographically limited. Spanning a vast area across Northern Asia, from Europe to the North Pacific Ocean, Russia boasts such diversity that Nash says companies need first to decide “if it is really one market at all? I don’t think so.”
Half the problem, it seems, is in the bureaucracy that faces potential players. For firms keen to play by the rules, the costs of completing extended paperwork and registration, working with language barriers and understanding the complex market are high. Even the Russian Franchise Association admits that when starting up a business “unexpected costs may also occur and are difficult to estimate.”
Local partners are essential, and with one eye on the potential development of the retail environment with the entrance of foreign players, many Russian food processors are working hard to develop warehousing, storage and distribution capabilities, as well as more stringent quality control technologies. McDonald’s boasts of sourcing over 75% of the raw ingredients for its Russian restaurant chain from “more than 100 independent Russian and CIS suppliers”.
Interaction with local business is costly, however. Western companies often subsidise the slow process of modernising established operations and workforces grounded in Soviet ideology, having little notion of cost efficiency and profitability. McDonald’s $45m food processing and distribution centre in a Moscow suburb, McComplex, is testament to the kind of investment firms can find themselves making to kickstart operations and create viable businesses.
Illustrating the workforce difficulties meanwhile, fastfood chain Dunkin’ Donuts left Moscow in 1999 ostensibly due to the economic crash, although Kim Lopdrup, CEO of the parent company Allied Domecq, admitted that the firm had had problems with a franchise adamant that he would sell liquor and meat pies alongside the doughnuts.
Nevertheless success stories are to be found amongst those companies with enough capital, and determination, to make it work. US sandwich chain Subway learnt the rigours of Russian retailing the hard way, but so far is still fighting. Company officials blamed illegal manoeuvres for the ousting of its franchise just a few months after it first opened in St Petersburg in 1994, but undeterred, the company was keen to pursue further involvement in the Russian market.
“Only companies with patience and deep pockets should brave the Russian winter”
Others are boosted by the sporadic moves by Russia’s leaders to highlight their familiarity with the West. Mikhail Gorbachev, the former Soviet premier who introduced the market economy to Russia, famously lent his political weight to Pizza Hut’s advertising campaign in 1997. The pizza chain, a subsidiary of the US’ Tricon Global Restaurants, filmed Gorbachev tucking into his favourite pizza while expounding his glasnost policies.
Interestingly, however, the ad was only aired as part of a marketing campaign in the US; it reached the Russian television screens via news programmes due to Gorbachev’s unpopularity. His wife Raisa later admitted to press that he never liked pizza. And despite the marketing coup, Pizza Hut was forced out of the market in 1999; only returning 15 months later in July 2000, at a time when its key US competitor Domino’s was making public plans to add several more outlets to its three-strong chain in Russia.
Putting one’s faith in anecdotal evidence is an all too common approach to the Russian market. Relying on unfettered enthusiasm of those with political agendas can be just as dangerous. The UK’s Minister of State for Trade and Investment, Baroness Symons, told the Russo-British Chamber of Commerce in March this year that “Russia is potentially one of the biggest markets in the world […] Now is the time to get serious.”
Significant efforts are being made to turn around the Russian economy, but those determined to speed feed Russians must not underestimate the problems the market still faces. Consumers may be warming to the West, but only companies with patience and deep pockets should brave the Russian winter.