CASE McDONALD`S

 

Some historians trace the origin of the hamburger to Russia. Supposedly, sailors brought a dish made up of raw ground beef and hot spices to the port of Hamburg, where the recipe was altered, cooked, popularized, and given its name. Hamburgers eventually went from Hamburg to England and then to North America. If this historical account is accurate, then when McDonald's opened its first Moscow establishment in 1990, the hamburger's round-trip journey was complete.

The process of the Russian entry for McDonald's was a long one. George A. Cohon, president of McDonald's Canadian subsidiary, first made contact with Soviet officials during the 1976 Olympics in Montreal. This began lengthy negotiations, during which Cohon traveled to Moscow about once every three weeks until a protocol agreement was signed in 1987. This protocol agreement came about shortly after the former USSR enacted legislation to permit joint ventures with Western firms. Thereafter, progress was swift. A formal agreement was signed in 1988, and Cohon was able to reduce his traveling to only "about one trip a month." In the meantime, McDonald's opened restaurants in Hungary and Yugoslavia, which provided some operating experience in communist countries.

These moves were highly compatible with McDonald's growth strategy. By the mid-1980s the company was growing more rapidly outside the United States than within, and company executives reasoned that the pattern must continue if rapid growth objectives were to be met. In essence, the U.S. market for McDonald's had become nearly saturated. The figures seem like hyperbole: McDonald's controlled almost 20 percent of the U.S. fast-food market. It accounted for 32 percent of all hamburgers and 26 percent of all french-fry sales by U.S. commercial restaurants. The company of the entire U.S. potato food-crop, was the world's largest owner of retail real estate, and accounted for about 5 percent of all Coca-Cola sales in the United States. It was estimated that 7 percent of the entire U.S. work force had at one time worked for McDonald's, and that McDonald's was the first employer for one out of every fifteen U.S. workers. Slightly more than half of the U.S. population lived within a three-minute drive to a McDonald's unit. The company had to look abroad, and by 1987 about 30 percent of McDonald's restaurants were located outside the United States. They were in 51 countries and in such far-flung locations that communist countries seemed the logical next frontier.

McDonald's Russian joint venture is between its Canadian subsidiary and the Moscow City Council. McDonald's has a 49 percent interest, the maximum then allowed by local law. (Since 1990 foreigners may own a 99 percent joint venture interest.) The minority ownership has not proved a problem since local law requires at least a three quarters majority vote to approve important decisions. In effect, the representatives from McDonald's and the Moscow City Council must come to an agreement on virtually any major decision.

Between the signing of the joint venture agreement and the 1990 inauguration, much planning and other work had to be completed. In actuality, most of the joint ventures in the former Soviet Union never manage to become operative. When the Moscow restaurant opened, an American legal specialist on joint ventures in Moscow estimated that although about 1400 joint venture agreements had been signed with Western firms since enactment of the 1987 law, only about 50 were actually operating. He also reckoned that only about 100 others had a real prospect of reaching a successful implementation.

The procurement of supplies has proved to be a major hurdle for foreign investors in the former USSR, and McDonald's experience was no exception. For McDonald's the supply problem was created partly by the rigid bureaucratic system, partly by shortages, and partly by the fact that available supplies did not meet McDonald's standards. In spite of having the Moscow City Council as the majority owner in the venture, and in spite of having backing from some strong Kremlin ties, the venture continually ran into negative responses, such as, "Sorry, you're not in my five-year plan," when attempting to obtain such materials as sand or gravel to build the restaurant. The company had to negotiate to assure that it would be allocated, in the central plan, sufficient sugar and flour, which are both in short sup­ply. For some products in sufficient supply, such as mustard, there were regulations that prevented manufacturers from deviating from present recipes in order to comply with McDonald's needs. For many other supplies, local plants were required under strict allocation regulations to sell all output to existing Soviet companies, leaving no opportunity to produce extra products for McDonald's. McDonald's buyers were sickened by the conditions in slaughterhouses within the former USSR. Yet another problem was that some supplies simply were not produced or consumed in the former USSR, such as iceberg lettuce, pickling cucumbers, and the Russet Burbank potatoes that are the secret behind McDonald's fries.

McDonald's had to scour the country for supplies, making contracts, for example, for milk, cheddar cheese, and beef. In addition, the company undertook several approaches to ensure ample supplies of the quality it needs. The company brought in seed potatoes and pickling cucumber seeds from the Netherlands to grow on a collective farm under the supervision of a McDonald's hired agronomist from planting to harvest. The company brought in bull semen to improve the quality of cattle, taught the farmers how to raise leaner beef by castrating their cattle a month later than usual and slaughtering them a month earlier. They trained farmers in the former Soviet Union to harvest and pack produce without bruising it. Yet Mc­Donald's had to import some supplies: mustard from Canada, tomato paste from Portugal, apples from Bulgaria, and packaging material and sesame seeds from several locations. McDonald's built a $40 million food-processing center about 45 minutes away from the first restaurant. The center is capable of making 1 million buns per week and uses 23,400 gallons of milk, 127,740 cheese slices, 17,715 gallons of sauce, and more than 5200 gallons of pickles per week. Since distribution is as much a cause of shortages as production, McDonald's carries supplies in its own trucks. Because McDonald's is concentrating on long-term development, adequate supplies are critical. People in the former USSR are accustomed to waiting in long lines, even though there is no assurance that there will be anything left to buy after the wait. Adequate supplies are, therefore, a way for McDonald's to differentiate itself.

A major hindrance for foreign investors in the former Soviet Union is the shortage of hard currency. McDonald's was not successful at negotiating the conversion of its ruble profits, but it did not expect to repatriate its earnings and investment quickly. Since the joint venture agreement is for 20 restaurants, most of the profits for many years will have to be reinvested to finance the expansion. Nevertheless, McDonald's has done several things to increase convertibility possibilities and to minimize its hard-currency expenditures. To begin with, many of the furnishings were brought in from Yugoslavia so that some already blocked dinars could be used as part of its investment. McDonald's was able to negotiate a hard-currency royalty payment of 5 percent of sales; however, the subsequent weakening of the ruble has resulted in fewer U.S. dollars when converting its ruble profits. The Russian partner has arranged barter transactions for imported supplies. The second restaurant to be opened in Moscow will accept only hard currency, and this currency can be used to convert ruble profits earned in other restaurants. The processing center exports apple pies to European countries and plans to supply food to other restaurants and hotel facilities in Moscow, which have foreign joint venture partners. These payments will be in hard currencies as will be rentals in an office building McDonald's is planning to construct.

McDonald's placed one small help-wanted ad and received approximately 27,000 applicants for its 605 positions. The company sent six managers from Moscow to its hamburger university outside Chicago for six months' training and sent another 30 restaurant managers for several months' training in Canada or Europe. After training, they instructed new employees. The company translated manuals and videotapes into Russian so that trainees could learn everything from how to wash windows and mop floors to assemble a Big Mac (pronounced "Beeg Mek" in Moscow). Since McDonald's wants to be in the former Soviet Union for the long haul, an important part of training has been to teach employees to be very polite to customers by smiling and saying "May I help you?" and "Thank you for coming." These courtesies are not common in the former Soviet Union. The company pays wages to most workers that are about average by local standards; however, managers can earn much more if they prove themselves. In the United States McDonald's has an aversion to labor unions; however, it helped organize a work collective for the Russian staff in order to comply with the nation's labor laws. In contrast to North America, McDonald's placed a laundry room within its restaurant where uniforms are washed by machine and ironed by hand. This helps assure a standard of cleanliness not usually present in the former Soviet Union, especially since few homes have appliances for washing and drying and because soap is in short supply.

One problem McDonald's did not encounter was attracting sufficient customers. Based on its Hungarian experience, where the company cut its advertising after an unusually heavy response, McDonald's did no advertising prior to its Moscow opening. However, television covered the upcoming event extensively. When the doors opened for the Moscow restaurant, it was almost impossible to accommodate the crowds despite the fact that the 700 indoor seats made this the largest McDonald's anywhere in the world. (There are another 200 outside seats that could not be used for the opening because of the cold January weather.) An estimated 30,000 people were served the first day, eclipsing the previous record of 9100 for one day in 1988 in Budapest, Hungary. The crowds arrived even though the price of a Big Mac, French fries, and soft drink were equivalent to the average pay for four hours of work. In contrast, one could get lunch at a state-run or private-sector cafe for between 15 and 25 percent of what it cost at McDonald's. In spite of such crowds, a Russian engineer was quoted as saying, "We only stood in line for 45 minutes. I've never seen such fast service." Overall response has since been so high that McDonald's has limited sales to ten Big Macs per customer in order to minimize the scalping of hamburgers outside the restaurant.

Given the prices and having to line up outside in the January cold, why were sales so high? Savings rates in the former Soviet were very high, primarily because of insufficient available goods and services to purchase. There was thus a pent-up demand, especially for any type of Western product that could be bought for rubles. The store's location on busy Pushkin Square was another advantage. Having the Moscow City Council as a partner was certainly helpful. About this, Cohon said, "In one way, doing business is easier in Russia. The state owns all the land, so if you want a corner on their equivalent of Park Avenue, all the state has to say is: here's the address."

What will be the future of McDonald's in historically planned economies? The managing director of McDonald's Development Corp. said, "We'll do one store, one country at a time, and plans will be made as we grow and develop." After observing the success of Pizza Hut's restaurant in China, McDonald's has since opened a 500-seat restaurant in Shenzhen, China, near Hong Kong. McDonald's knew that the cost for a meal there in relation to customers' incomes would be even higher than in Moscow; however, Pizza Hut had served to capacity even though one of its pizzas cost about two weeks' salary for the average worker.

The ability to expand by franchising might be limited. McDonald's movements into Hungary, Yugoslavia, the former Soviet Union, and China have all been through its direct ownership in joint ventures. The president of McDonald's international division explained two franchising problems: The first is that franchisers look for individuals with entrepreneurial track records, and in these countries, it's hard to find that; the second is that it is difficult to find people who can afford to buy a franchise.

 

New words

raw ground beef – сырая молотая говядина

hot spices – острые специи

subsidiary - филиал

swift - быстрый

experience - опыт

joint venture – совместное предприятие

interest - процент

implementation - осуществление

shortage - нехватка

backing - помощь

mustard -горчица

slaughterhouses - скотобойня

to harvest – собирать урожай

supply - поставка

furnishings - снабжение

hard currencies – твердая валюта

employee - служащий

laundry room - прачечная

direct ownership –прямая собственность

entrepreneurial - предпринимательский