Twenty years ago, McDonald’s opened its first store in Russia. The appearance of the Golden Arches in Moscow’s Pushkin Square predated the collapse of the Soviet Union, but it should have been seen as a harbinger of the end of the autarkic Soviet economic model. The company marked the landmark event — Jan. 31 was the exact day — with a birthday party and a “buy one get one free deal” along with the announcement of plans for ambitious expansion in the Russian market. Russian economic officials must hope that other companies will follow McDonald’s lead as the country struggles to recover from its worst economic performance in decades.
When the first McDonald’s franchise opened in 1990, Mikhail Gorbachev was still in power and the Cold War superpower standoff still defined international politics. Glasnost and perestroika were poorly understood — and bitterly contested — concepts. While McDonald’s was not the first Western company in the Soviet Union — Pepsi was available for years before — raising the Golden Arches signaled that Russia was open for business.
The breakthrough was not easy. Investors hoped the first McDonald’s would open in time for the 1980 Moscow Olympics when they began discussions with Soviet bureaucrats in 1976. Instead, 14 years of tough negotiations preceded the opening of the first restaurant. Finding employees and materials that would meet McDonald’s exacting standards was thought to be beyond reach. And then there were Russian tastes: Would they be satisfied by Big Macs and fries?
On opening day in 1990, 5,000 people waited at dawn for their first taste of Western capitalism and by the time the doors had closed, 30,000 people had been served. The lines have been long ever since. Today, McDonald’s has 245 restaurants in Russia that serve 950,000 customers a day; that is more than twice the average for McDonald’s stores in the United States. The company employs 25,000 people in its Russian restaurants, and four times that number work for its suppliers.
After doing an estimated $800 million worth of business in Russia in 2009, McDonald’s announced that Russia — now home to its top three outlets in the world in terms of turnover — was chosen as the top country for reinvestment in 2010. It is estimated that the company will invest at least $135 million in Russia this year and open another 45 restaurants.
That is a vital statement of confidence for an economy that is coming off its worst performance in 15 years. In 2009, the Russian economy shrunk 7.9 percent, the biggest contraction since 1994, and even worse than the 5.1 percent decline experienced during the 1998 financial crisis. Officials can take some comfort that this miserable performance actually was better than most economists’ expectations: Most analysts had anticipated an 8.5 percent fall. Global recovery should drive a pickup in energy prices, which should result in 3.2 percent growth this year. The World Bank forecasts the economy will not recover to pre-crisis levels until 2012.
In these circumstances, every vote of confidence in Russia is needed. Just as important as McDonald’s success in filling its stores, however, is its impact on the other end of the supply chain. Normally, McDonald’s purchases the 300 ingredients it needs for its products from local distributors. Those suppliers did not exist in the Soviet Union when McDonald’s opened. Instead, it had to build a $50 million factory outside Moscow — the McComplex — to make everything it would sell in its stores — from buns to yogurt desserts.
Then, 80 percent of ingredients were imported. Today, private businesses in Russia supply 80 percent of the ingredients, and the last product was finally outsourced from the McComplex. Planned obsolescence was always the objective and the plan succeeded. Dozens of businesses have been spun off the McComplex; some of them are among the most successful in the country’s food industry. There is another important sign of McDonald’s success: Burger King, the world’s second-largest hamburger chain, opened its first Russian store last month and will open two more shortly.
The idea that McDonald’s would have such cross-cultural appeal should not be strange to Japanese. The first McDonald’s franchise opened in Japan in Ginza in 1971. It has enjoyed great success since then: The company now has 3,800 restaurants with an annual turnover of $4 billion, and holds about 60 percent of the hamburger market. Capturing Russian hearts should be no more difficult than winning over fussy Japanese eaters.
The ubiquity of McDonald’s prompted The Economist magazine to create its “Big Mac Index” in 1986. This exercise is designed to illustrate the principle of purchasing power parity: When its local price is divided by the exchange rate (in some constant currency), a Big Mac should always cost the same amount. If it does not, then arbitrage opportunities exist: Buy Big Macs where they are cheap and sell where they are expensive. It is an interesting theory, even if the burgers do not travel well. Although, in reality, the burgers have traveled very well indeed.
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