McDonald’s faces biggest test in Russia since end of Soviet era

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A woman sits at a table of a closed McDonald's restaurant, the first to be opened in the Soviet Union in 1990, in Moscow on Aug. 21, 2014. A woman sits at a table of a closed McDonald's restaurant, the first to be opened in the Soviet Union in 1990, in Moscow on Aug. 21, 2014.

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McDonald’s Corp. (MCD), which arrived in Soviet-era Russia in 1990 and helped open the communist nation to foreign enterprise, is now under pressure to retreat.
Russian consumer-safety regulators have ordered 12 of the chain’s restaurants to temporarily close, including its highest-profile locations, and locals are increasingly turning against the U.S. company. While regulators have cited violations of sanitary rules by McDonald’s, the timing and scope of the shutdowns are seen as a response to Western sanctions in Russia. More than 100 restaurants are now being inspected, meaning dozens more locations could be under threat of closing.
Consumer sentiment also is changing in the nation. Many Russians are now convinced that McDonald’s sells harmful food and deserves to be shut down, said Yulia Bushueva, a managing director at investment firm Arbat Capital. That’s a turnabout from the chain’s arrival in Pushkin Square almost a quarter-century ago, when it drew long lines and was seen a symbol of the nation’s rising prospects. That original restaurant is currently shuttered.
“It’s been a good market for them historically, but when you do business in a foreign country there’s geopolitical risk you run into,” said Jack Russo, an analyst at Edward Jones in St. Louis.
McDonald’s, based in Oak Brook, Illinois, said yesterday that it’s appealing the court-ordered closing of its restaurants, which were based on claims by the federal consumer agency known as Rospotrebnadzor.
Fighting it
“We do not agree with the court’s decision,” the company said on its website. “We will continue taking care of our employees and will do our best to continue the success of McDonald’s business in Russia.”
Shares of McDonald’s, which has more than 35,600 restaurants globally, fell 0.5 percent to $93.71 at the close in New York. The stock has declined 3.4 percent this year.
The U.S. and European Union imposed sanctions against Russian companies and officials after President Vladimir Putin annexed Crimea earlier this year, escalating the worst standoff between the two sides since the Cold War. In response to the sanctions, Putin banned $9.5 billion in food imports from Western countries.
McDonald’s, which says it has a total of 440 restaurants in the country, is now caught in the crossfire, said Sabina Mukhamedzhanova, a fund manager at Promsvyaz Asset Management in Moscow.
‘Prominent symbol’
“It’s Russian retaliation to the sanctions -- first it was a ban of food imports and then McDonald’s,” she said. “This is a prominent symbol of the U.S. It has a lot of restaurants and therefore is a meaningful target. I don’t recall McDonald’s having consumer-safety problems of such a scale in over more than two decades of presence in Russia.”
McDonald’s expansion into Russia was spearheaded by George Cohon, who also founded the chain’s Canadian business. Negotiations to open the country’s first location began in 1976 while the Cold War was still under way. When the restaurant opened in 1990, a year before the collapse of the Soviet Union, it was the biggest McDonald’s in the world -- with 27 cash registers and enough seating for 700 people.
For some Russians, this was heralded as “the first step of opening the country for business and for foreign capital,” Arbat Capital’s Bushueva said. “These people may now see closure of McDonald’s as a step in the opposite direction.”
Too soon
Still, political winds shift and it’s too early to determine the fate of McDonald’s in Russia, Russo said. In fact, it would be better in the long run if the company is perceived as a political scapegoat -- rather than a chain with a legitimate health problem, he said.
“As an operator of a business, you don’t want to be accused of having products that are unsafe for consumers, so that’s clearly worse in this case,” Russo said. “The political thing you just have to deal with.”
Some Russians are ambivalent about the crackdown on McDonald’s.
“As a consumer, the closing down of McDonald’s isn’t tragic -- it means one less unhealthy temptation in my life,” Alexandra Malkina, 27, a brand manager in Moscow, said by phone. “But from a political standpoint, I’m looking at this circus and think it’s terrible.”
Others Muscovites lament the loss of cheap food options in a city that has grown increasingly expensive.
“I think the closure hits consumers rather than McDonald’s,” said Nikolay Sudarikov, a 23-year-old public-relations representative in Moscow.

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