Food companies, long symbols of the West in Russia, halt operations

When McDonald’s opened in Moscow’s Pushkin Square in 1990, it was greeted by more than 30,000 Russians happily waiting in line for hours, eager to spend a good chunk of their daily wages on a taste of America.

Through hamburgers and fries, a food diplomacy has been forged, a diplomacy that has flourished over the past three decades as corporations like McDonald’s and PepsiCo, private investment firms and individuals have invested billions of dollars in building factories and restaurants to bring food, culture and good old times. American capitalism to Russia. It was perestroika and glasnost sandwiched between two buns.

“McDonald’s was more than just opening a restaurant,” Marc Carena, former general manager of McDonald’s Russia, told Voice of America in 2020 when the Golden Arches celebrated the 30th anniversary of its first location in what was Soviet Union. “He came to symbolize the whole openness of the USSR to the West.”

But Russia’s invasion of Ukraine has changed everything, and food companies and restaurant chains are struggling to respond. Amid growing pressure to act, McDonald’s announced on Tuesday that it was temporarily closing its nearly 850 locations in Russia and halting operations in the country.

“In the more than 30 years that McDonald’s has operated in Russia, we have become a vital part of the 850 communities in which we operate,” Chris Kempczinski, the company’s chief executive, said in a statement announcing the move. He noted that the company employed 62,000 people in the country.

Shortly after McDonald’s announcement, other leading food companies and restaurants followed suit. Starbucks also said it was closing all of its locations in Russia, where they are owned and operated by Kuwaiti conglomerate Alshaya Group. Coca-Cola said it was stopping sales there.

And PepsiCo, whose products have been in Russia since the early 1970s, said it would no longer sell Pepsi and 7-Up there but would continue to produce dairy and baby food in the country in as part of a “humanitarian” effort and to keep tens of thousands of manufacturing and agricultural workers employed.

Investors, as well as social media users, have pressured companies to pull out of Russia, especially fast food chains, which have been criticized for lagging behind others companies in decisions about their operations in Russia.

For food companies that have spent decades cultivating the Russian market, the act of suspending or ceasing operations in the country is complex. It is about unraveling the often byzantine local supply and manufacturing chains, addressing the plight of tens of thousands of Russian employees, and unraveling the close ties to Russian banks, investors and others that have allowed them to thrive for all these years.

Russian operations represent only 3% of McDonald’s operating profit, but 9% of its turnover. Similarly, Russia accounts for $3.4 billion, or 4%, of PepsiCo’s annual revenue of $79.4 billion. The company states on its website that it is the largest food and beverage manufacturer in Russia. It has more than 20 factories in the country.

“PepsiCo has been around forever. PepsiCo was there under Nixon,” said Bruce W. Bean, a professor emeritus at Michigan State University School of Law who, as a US lawyer in Russia, worked with companies investing there.

“Obviously PepsiCo can walk away from the business,” Bean added. “It will hurt them, but it will hurt the Russians who have taken over the company, the Russians who distribute its product – it hurts them more.”

Some companies — like Yum Brands and Papa John’s, which have hundreds of restaurants named after them across Russia — most likely have less control over the closure of those restaurants, as many are owned by individuals or investor groups. under franchise agreements, franchise experts said.

“It’s messy,” said Ben Lawrence, a franchise entrepreneurship professor at Georgia State University. As long as franchisees meet the requirements of their agreement and pay royalties, it’s hard to tell them to close, he said.

Yum, which owns KFC and Pizza Hut, said Tuesday it was suspending operations at 70 company-owned KFCs and 50 franchise-owned Pizza Huts in Russia. (The vast majority of the 1,000 KFCs in Russia are owned by franchisees and, at this time, are not part of these suspensions.) Yum also said he would suspend all “restaurant investment and development” in Russia and divert all proceeds from the region towards humanitarian efforts.

McDonald’s, which has invested millions of dollars building restaurants in Russia and is a symbol of American culture, has already felt the impact of geopolitics. In 2014, when the United States and other countries imposed economic sanctions on Russia for its annexation of Crimea, authorities suddenly closed a number of McDonald’s restaurants in Russia, including in Pushkin Square, citing the sanitary conditions. The Pushkin Square site reopened 90 days later.

For most of the past two decades, Russia has been one of the fastest growing markets for American brands, especially fast food chains. McDonald’s, KFC, Subway and others flourished not only because they were midday glimpses of Western civilization, but also because they were relatively inexpensive places to grab a meal.

Visits to fast food restaurants in Russia in 2018 increased by 13%, according to a report by research firm NPD Group, with consumers turning to budget restaurants for “the best in terms of price and size of dishes”. portions”. Last year, traffic jumped 21% as the industry rebounded from Covid-19, the group noted.

“I could be successful in my sleep, there are so many opportunities here,” Christopher Wynne said in a 2011 New York Times interview. Originally from Colorado, came to Russia with the National Nuclear Security Administration in the early 2000s Mr. Wynne soon saw other opportunities, buying and becoming the largest franchisee of Papa John’s pizza in Russia. (He also owned restaurants in Poland and Germany.)

In May last year, Mr Wynne’s company PJ Western, which now has the exclusive rights to sell Papa John’s pizza in the region, announced plans to open around 30 stores each year in Russia until ‘ in 2029 and predicted that sales would more than quadruple during that time.

The document also shows the close ties Mr. Wynne has forged with others to grow the business in Russia. Partners include Washington Capitals hockey star Alex Ovechkin, who has previously expressed support for Russian President Vladimir V. Putin; Finnish private equity firm CapMan; and Russian private equity firm Baring Vostok.

Emails sent to PJ Western, Papa John’s, Mr. Ovechkin, CapMan and Baring Vostok seeking comment were not returned.

After acknowledging the precariousness of its position in 2014, McDonald’s has worked hard to show that it is one of the most “Russianized” foreign companies in the country, said Mr. Carena, the former general manager of McDonald’s Russia. The company, which owns 84% ​​of its 847 restaurants in Russia, employed tens of thousands of people, sourced food and packaging locally and was Russia’s biggest taxpayer in the food industry, Carena said. to CEO Magazine a year ago. . (He now works for the Mars Wrigley clothing company.)

“Over the past two years, we’ve been more proactive in showing authorities how Russified we are and how much we actually contribute to the economy,” Carena told the magazine. “We produce everything locally and, apart from me, everyone in the company is Russian. We are very local and we support local businesses and communities.

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