MCD McDonalds Corp

By Thomas Grove 

MOSCOW-- McDonald's Corp. became a leading ambassador of American culture after opening its first restaurant here in the twilight of the Soviet Union. Now, as Russia-U.S. tensions rise and pro-Kremlin politicians call repeatedly to close the U.S. chain, management is taking a new tack: Go Russian.

Earlier this year, the company boosted the share of Russian suppliers its restaurants use to 98%, and it has embarked on a marketing campaign to drive home the point that in Russia McDonald's doesn't have to be an American company.

"People are only now starting to understand: We're one of the most Russian companies there is," Moscow-based McDonald's spokeswoman Elena Chilingaryan said.

McDonald's has succeeded world-wide in part by finding local suppliers wherever its restaurants operate, shortening supply chains and insulating against foreign-exchange volatility. But as tensions between Washington and Moscow rise, the company is finding that strategy can ease political pressures as well.

"McDonald's has remained profitable here and weathered the storm in geopolitics by going local," said Narek Avakyan, chief financial officer at Moscow-based consulting company Alliskit.

The local focus appears to be paying off. The number of McDonald's restaurants in Russia grew 6% year-over-year last quarter, well above the global average of 1.5%. And while Russian outlets only account for a fraction of McDonald's world-wide total, the company still sees Russia as a high-growth market able to offset saturated markets like the U.S. A large majority of McDonald's restaurants in Russia are company-owned.

"Even though it's an emerging market, over time Russia's been pretty good to McDonald's," said Sara Senatore, senior analyst for U.S. restaurants at Bernstein Research.

The company opened its first restaurant down the street from the Kremlin on Pushkin Square in 1990, where it served 30,000 hungry Soviet Muscovites on its first day. But deteriorating ties over the past several years between Moscow and Washington has made McDonald's a target for Russian authorities seeking retaliation against successive waves of U.S. sanctions.

U.S.-Russian ties have frayed in recent years to their worst condition since the fall of the Soviet Union. Washington has applied numerous rounds of sanctions in retaliation for Russia's political and military actions in Ukraine, its meddling in the 2016 presidential election and its involvement in poisoning a former Russian spy.

The first shots against McDonald's were fired in 2014 after the U.S. sanctioned Russia following Moscow's annexation of Crimea. Russian authorities at the time closed a dozen restaurants nationwide, including the Moscow flagship, and subjected hundreds of others to snap health inspections. Calls to close the chain have continued, most recently during regional elections last September.

The temporary closures had little effect on sales that year, analysts said, but management used them as an opportunity to refurbish restaurant interiors and start digitizing internal processes, said Roman Bezdudny, a former regional marketing manager. McDonald's says it regularly carries out modernization and that it wasn't necessarily planned.

McDonald's didn't respond to requests for comment about other aspects of its sourcing and marketing.

After that experience, McDonald's focused on boosting purchases from local producers for almost everything it served, from bacon to fish sticks, according to information the company has published. Earlier this year, McDonald's signed a contract to buy its french fries from a Russian producer--a first in its almost 30-year history. The french fry factory is expected to reach full capacity next year.

The agreement ends one of McDonald's most fraught endeavors here: finding the right supplier to reliably deliver the iconic golden fries up to the standards the company expects, former employees said.

"No one could get the french fries right, to get that golden crisp that it took years to perfect," Mr. Bezdudny said.

Russian company Belaya Dacha, which built the potato processing plant in the Lipetsk region together with Dutch company Lamb Weston/Meijer, is teaching farmers how to produce according to the standards and quantities McDonald's needs.

And McDonald's advertising strategy is focused on getting the word out. Delivery trucks are painted with a large "98%," signifying the company's share of local suppliers. A commercial produced earlier this year showed Russian farmers picking through crops as the voice-over says: "When it's about food, you choose what's close, what's native."

Some restaurants have brought in cutouts of the farmers producing tomatoes, lettuce and cucumbers to reinforce the point.

McDonald's success contrasts with Russia's most recognizable fast food brand Teremok, known in Russia for its blini, or crepes, heaping with caviar, sour cream or ham and cheese. The company, which touts its Russian roots, ventured into the U.S. market in 2016 and withdrew earlier this year.

Teremok's general director Mikhail Goncharov said the company had come up against "open hostility" in the U.S. market with health inspections and questions over its ties to Russian President Vladimir Putin.

Meantime, McDonald's seems unlikely to escape the ire of Russian politicians soon. Earlier this year, a lawmaker in the lower house of parliament, or Duma, and a member of the committee for health protection wondered aloud why Russia doesn't sanction American companies.

"Americans are laying the sanctions on," Nikolai Gerasimenko told Russian state broadcaster RT. "Why can't we impose sanctions on the purchase of McDonald's?"

Write to Thomas Grove at thomas.grove@wsj.com

(END) Dow Jones Newswires

November 08, 2018 07:14 ET (12:14 GMT)

McDonalds (NYSE:MCD)
Historical Stock Chart
From Apr 2024 to May 2024

McDonalds (NYSE:MCD)
Historical Stock Chart
From May 2023 to May 2024