Food Companies, Long Symbols of the West in Russia, Pause Operations

 

Food Companies, Long Symbols of the West in Russia, Pause Operations

 

After years of cultivating the Russian market, McDonald’s, Starbucks, PepsiCo and Coca-Cola said they would temporarily close locations or stop selling products there.

 

By Julie Creswell

March 8, 2022

https://www.nytimes.com/2022/03/08/business/mcdonalds-russia-starbucks-pepsi-coca-cola.html

 

When McDonald’s opened its doors in Moscow’s Pushkin Square in 1990, it was welcomed by more than 30,000 Russians who happily waited hours in line, eager to spend a sizable chunk of their daily wages for a taste of America.

 

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

 

“McDonald’s was more than the opening of a simple restaurant,” Marc Carena, a former managing director 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 the Soviet Union. “It came to symbolize the entire opening of the U.S.S.R. to the West.”

 

But Russia’s invasion of Ukraine has changed everything, and food companies and restaurant chains have struggled with how to respond. Amid mounting 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 30-plus years that McDonald’s has operated in Russia, we’ve become an essential 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.

 

Soon after the McDonald’s announcement, other prominent food companies and restaurants followed. Starbucks said it, too, was closing all of its locations in Russia, where they are owned and operated by the Kuwaiti conglomerate Alshaya Group. Coca-Cola said it was halting 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 products in the country as a “humanitarian” effort and to keep tens of thousands manufacturing and farm workers employed.

 

Investors, as well as social media users, have been applying pressure on businesses to pull out of Russia, especially fast-food chains, which have been criticized for lagging behind other companies with decisions about their Russia operations.

 

For food companies that have spent decades cultivating the Russian market, the act of pausing or ceasing operations in the country is complex. It involves unwinding often byzantine local supply and manufacturing chains, addressing the fates of tens of thousands of Russian employees, and untangling close ties with Russian banks, investors and others that allowed them to flourish all these years.

 

Russian operations make up only 3 percent of McDonald’s operating income but 9 percent of its revenue. Likewise, Russia accounts for $3.4 billion, or 4 percent, of PepsiCo’s annual revenue of $79.4 billion. The company says on its website that it is the largest food and beverage manufacturer in Russia. It owns more than 20 factories in the country.

 

“PepsiCo has been there forever. PepsiCo was there under Nixon,” said Bruce W. Bean, a professor emeritus at Michigan State University’s law school who, as an American lawyer in Russia, worked with companies making investments there.

 

“Obviously, PepsiCo can walk away from the business,” Mr. Bean added. “It will hurt them, but it will hurt the Russians who have picked up the business, the Russians that distribute its product — it hurts them more.”

 

Some companies — like Yum Brands and Papa John’s, which have hundreds of restaurants bearing their names across Russia — most likely have less control over whether those restaurants close because many are owned by individuals or groups of investors through franchise agreements, franchise experts said.

 

“It’s messy,” said Ben Lawrence, a professor of franchise entrepreneurship at Georgia State University. As long as the franchisees are meeting the requirements under their agreement and paying the royalty fees, it’s hard to tell them to shut down, he said.

 

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

 

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

 

For the better part of the last two decades, Russia has been one of the fastest-growing markets for American brands, particularly fast-food chains. McDonald’s, KFC, Subway and others thrived not only because they were a midday glimpse of Western civilization but also because they were relatively cheap places to grab a meal.

 

Rising concerns. Russia’s attack on Ukraine has started reverberating across the globe, adding to the stock market’s woes and spooking investors. The conflict could cause​​ dizzying spikes in prices for energy and food, and severely affect various countries and industries.

 

The cost of energy. Oil prices already are the highest since 2014, and they have jumped as the conflict has escalated. Russia is the third-largest producer of oil, providing roughly one of every 10 barrels the global economy consumes.

 

Gas supplies. Europe gets nearly 40 percent of its natural gas from Russia, and it is likely to be walloped with higher heating bills. Natural gas reserves are running low, and European leaders have accused Russia’s president, Vladimir V. Putin, of reducing supplies to gain a political edge.

 

Food prices. Russia is the world’s largest supplier of wheat and, together with Ukraine, accounts for nearly a quarter of total global exports. In countries like Egypt and Turkey, that flow of grain makes up more than 70 percent of wheat imports.

 

Shortages of essential metals. The price of palladium, used in automotive exhaust systems and mobile phones, has been soaring amid fears that Russia, the world’s largest exporter of the metal, could be cut off from global markets. The price of nickel, another key Russian export, has also been rising.

 

Financial turmoil. Global banks are bracing for the effects of sanctions intended to restrict Russia’s access to foreign capital and limit its ability to process payments in dollars, euros and other currencies crucial for trade. Banks are also on alert for retaliatory cyberattacks by Russia.

 

Visits to fast-food restaurants in Russia in 2018 grew 13 percent, according to a report by the research firm NPD Group, as consumers turned to the inexpensive restaurants for “the best in terms of price and portion size.” Last year, traffic jumped 21 percent as the industry rebounded from Covid-19, the group noted.

 

“I could succeed in my sleep, there is so much opportunity here,” Christopher Wynne said in a New York Times interview in 2011. A Colorado native who arrived in Russia with the National Nuclear Security Administration in the early 2000s, Mr. Wynne soon saw other opportunities, buying into and becoming the largest Papa John’s pizza franchisee in Russia. (He also owned restaurants in Poland and Germany.)

 

In May last year, Mr. Wynne’s company, PJ Western, which now holds the exclusive rights to sell Papa John’s pizza in the region, showed plans to open about 30 stores each year in Russia through 2029 and forecast that sales would more than quadruple during that time.

 

The document also shows the close ties that Mr. Wynne has forged with others to expand the business in Russia. Partners include Alex Ovechkin, the Washington Capitals hockey star, who has previously expressed support for Vladimir V. Putin, the Russian president; the Finnish private-equity firm CapMan; and the 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 McDonald’s recognized the precariousness of its position in 2014, it worked hard to show that it is one of the most “Russified” foreign corporations in the country, said Mr. Carena, the former managing director of McDonald’s Russia. The company, which owns 84 percent of its 847 restaurants in Russia, employed tens of thousands of people, sourced all of its food and packaging locally and was the largest taxpayer to Russia in the food industry, Mr. Carena told CEO Magazine a year ago. (He now works for the confection company Mars Wrigley.)

 

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