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The enormous cost of McDonald’s Russian exit

Pskov, Russia – February 4, 2021: McDonald’s fast food store in city center. Brown colour facade of McCafe. Nobody near building. McDelivery service. Contact-free Payment. Franchisees. Snow on roof. (Source: Bigstock)

McDonald’s is set to take a one-off impairment of US$1.2 billion to $1.4 billion from its decision to sell its Russian business and withdraw from the market in response to Russia’s invasion of neighbouring Ukraine. 

In the hope of finding ongoing employment for the 62,000 people working across its business, the US company is seeking a local buyer to take over its 850-strong store network. However, the stores will be “de-Arched” which means the buyer will not be able to use the McDonald’s name, logo, branding, or menu. 

“We have a long history of establishing deep, local roots wherever the Arches shine,” said McDonald’s president and CEO, Chris Kempczinski. “We’re exceptionally proud of the 62,000 employees who work in our restaurants, along with the hundreds of Russian suppliers who support our business, and our local franchisees. Their dedication and loyalty to McDonald’s make today’s announcement extremely difficult.”

In a statement, the company said: “The humanitarian crisis caused by the war in Ukraine, and the precipitating unpredictable operating environment, have led McDonald’s to conclude that continued ownership of the business in Russia is no longer tenable, nor is it consistent with McDonald’s values.”

The company will continue to pay staff until such time as any sale is closed and will prioritise their ongoing employment with any new buyer. 

Neil Saunders, MD at GlobalData, says Russia and Ukraine generated about 9 per cent of McDonald’s sales and 3 per cent of its operating income before the invasion. The stores in Russia have been shuttered since March.

“The fact that McDonald’s owns most of its restaurants in Russia means there is an asset-rich business to sell. However, given the circumstances of the sale, the financial challenges faced by potential Russian buyers, and the fact that McDonald’s will not license its brand name or identity, it is unlikely the sale price will be anywhere near the pre-invasion book value of the business,” he said.

“While McDonald’s can take such a hit in its stride, it will leave a hole in its growth plans that is not easily filled in the near term.” 

A McDonald’s restaurant in Moscow’s Domodedovo Airport. Image: Bigstock.

He said the exit of such a high-profile brand from Russia is symbolic because McDonald’s was one of the first US consumer companies to enter the Soviet Union 32 years ago, ushering in a new era of commercial relations between the East and West.

“Its departure represents a new isolationism in Russia, which must now look inward for investment and consumer brand development,” said Saunders, adding that the decision underlines the view that relations with Russia are unlikely to be normalised in the near future. 

“Against this backdrop, McDonald’s has decided it is better to exit the country entirely than face ongoing uncertainty over when operations may resume.

“McDonald’s decision will likely make other brands, especially those from the US which take a principled stance on the concepts of freedom and democracy, revisit their plans for Russia.”

Meanwhile, McDonald’s restaurants in Ukraine remain closed with the company continuing to pay employees their full salaries as well as supporting local relief efforts led by Ronald McDonald House Charities. Across Europe, the McDonald’s System is supporting Ukrainian refugees through food donations, housing and employment.

Remembering an era past

In a moving letter to staff, franchisees and suppliers worldwide, Kempczinski talked of how Russians have welcomed McDonald’s into their daily lives, their families, and their friendships since the brand entered the country. 

“McDonald’s became an integral part of Russia, serving millions of Russians every day across 11 time zones and 850 communities. From Kaliningrad to St. Petersburg, Moscow to Nizhny Novgorod all the way out to Vladivostok, Russians embraced McDonald’s. And we embraced Russia,” he wrote. 

“Over the years, McDonald’s has invested billions of dollars in the country to build the supply chain, infrastructure and human capital necessary to support our growing business. Today, we employ more than 60,000 people in our restaurants, and we’ve cultivated from scratch a network of local suppliers who employ tens of thousands more. If you want to understand the McDonald’s multiplier effect on a local economy, one need only look at our impact on Russia.

“McDonald’s and Russia have become so intertwined that it seems impossible to imagine one without the other. And yet, unfortunately, that is where we are today.”

He said almost every multinational company like McDonald’s is reconsidering its presence in Russia, “a complicated issue that’s without precedent and with profound consequences”. 

“As I’ve reflected on this issue, I’ve asked myself five fundamental questions, the first four of which are practical and largely commercial: Are we legally allowed to operate in the country? Do we have the freedom to operate the business and meet the needs of our customers and crew unimpeded? Is our presence in the market brand-enhancing to our global operations? And does it make good business sense? Unfortunately, the answer to each of these questions is currently no – and I don’t see that changing [in] the foreseeable future.

“The fifth and final question is more complicated: does it align with our values? Fred Turner espoused one value more than any other: do the right thing. Some might argue that providing access to food and continuing to employ tens of thousands of ordinary citizens, is surely the right thing to do,” he wrote.

“But it is impossible to ignore the humanitarian crisis caused by the war in Ukraine. And it is impossible to imagine the Golden Arches representing the same hope and promise that led us to enter the Russian market 32 years ago.”

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