#16
Moscow News
February 26-March 4, 2003
Big Mac Does Not Give Up
While McDonald's, the world's fast-food service leader, is going through the worst ever crisis at home, Russia's fast-food market seems to be impervious to external upheavals
Dmitry Babich, Yulia Ignatyeva

M-Crisis

Until recently the golden letter "M" outside McDonald's restaurants was known as the "golden arc" - a gate to the realm of successful investment. In 2002, however, McDonald's stock value fell to $20 billion - an eight-year low. Howard Penny, an expert with the Suntrust investment fund, predicts a loss of corporate shareholders as a result of client base shrinkage: According to a Michigan State University study, since 1994 McDonald's has placed last on the list of American consumer fast-food preferences.

What happened? Experts point to two reasons. First, McDonald's years-long expansion resulted in the company simply exhausting its client base - people prepared to pay a couple of dollars for an on-the-run snack without being over-fastidious about the quality standards. One more thing that sapped the "golden arc's" strength was the health-food craze actively stimulated by an army of lawyers specializing in "tobacco" and "restaurant" suits.

None of this, however, seems to affect McDonald's fate in Russia. Its share of the market exceeds the total share of all Russian-based fast-food outlets put together: 83 percent. An average fast-food outlet in Moscow (be it a restaurant or a mobile stall) serves 300 customers a day. McDonald's capacity is 10 times as big. Andrei Petrakov, an expert on restaurant consulting with the Asessor company, comments on the disparity of trends here and across the ocean: "Americans, in choosing a place to have a snack, are only guided by the extent to which an outlet's menu corresponds to their idea of healthy eating. What Russians expect from McDonald's and other fast-food outlets is simply fast, low-cost food."

The Russians' devotion to McDonald's is not affected by its problems in the United States, nor even by local horror stories - say, about the fat that is used to fry salty meat cutlets and sweet pies at the same time, according to an anonymous site on the Internet.

Growing Pains

Meanwhile, the domestic fast-food market shows an impressive diversity of menus, prices, and service standards. According to the Moscow City Government Consumer Market and Services Department, there is an estimated 3,000 fast-food eateries in Moscow. One-third of them are walk-in outlets. They differ from regular restaurants, bars and cafes in having self-service and a stable menu of ready dishes. The remaining 2,000 outlets are mobile setups. In the foreseeable future the correlation of mobile and walk-in outlets can change in favor of the latter: Owners of the popular Kroshka-kartoshka (Little Spud) and Stop-Top brands are planning to open a chain of restaurants.

"I estimate the annual trade turnover of Moscow's fast-food sector at $650 million," Andrei Petrakov says. "The market grows at a rate of approximately 20 percent a year, and there is no reason to expect that it will slow down any time soon." Moscow companies are seeking regional expansion. Here, however, they are coming up against specific Russian difficulties. Neither experts nor market players are ready to cite any concrete examples, but they mention Voronezh, Penza, Orel, and Kursk as cities where local authorities are obstructing the penetration of "outsider" fast-food networks. Local companies affiliated with local bureaucracy keep outsiders at bay or the bureaucracy may ask them to come up with additional outlays "to facilitate the right decision."

Yet it is dangerous to push expansion too far. A case in point is Russkoye Bistro. The first snack bars under this patriotic brand name, sponsored by the Moscow City Government (it has a stake of 55.6 percent), appeared in 1996. More than $15 million was invested in the chain at the initial stage, and it was a spectacular success. The majority of customers were perfectly happy with the quality of kulebyaka meat, fish and cabbage pies, but especially with the prices. The company management, however, made some very bad marketing errors. Russkoye bistro started selling hard liquor, encouraging patrons to linger on and thus reducing its operation capacity; franchise outlets did not make their own pies but received frozen semi-finished products, which impaired the general quality; finally, personnel policy was allowed to slacken: In this respect Russkoye bistro before long slipped to the worst Soviet-era food catering standards. Andrei Petrakov believes that now it is all but impossible to turn the situation around: "A tainted brand is no brand."

The most advanced fast-food chains are looking for new ways to develop: Rostik's recently opened a drive-in on Leningradskoye Shosse, planning to increase their number to 20 within the next two years. McDonald's already has 40 McAuto's in Moscow city and the surrounding area. Furthermore, McDonald's has opened a coffee house in its Arbat restaurant to attract clients who despise hamburgers but have a sweet tooth.

Purse or Life

A study of Russian fast-food consumer habits, conducted by the Magram market research group, shows that half of male and female respondents in the 16 to 50 age bracket buy fast food at least once a week. Some 74 percent of respondents choose a fast-food outlet spontaneously, guided mainly by the convenience of its location and low prices with 43 percent giving priority to the quality of food.

A comparative analysis of consumer preferences produced some surprise results. McDonald's, far and away in the lead with 71 percent, is followed by mobile setups selling hot dogs and shaurma meat sandwiches, 24 percent and 23 percent, respectively. In this context, it would seem to be rather senseless to speculate on the problem of fast-food safety in general and the fad for health foods in particular. After all, as we were advised at the city Sanitation and Epidemiology Inspectorate, almost one-half of finished products do not meet the standards while 42 percent of eateries violate the established regulations - from forged medical certificates to substandard raw materials. Sanitation inspectors are especially worried by mobile booths offering grilled chicken and shaurma although there have not been many cases of poisoning at fast-food outlets. Inspectors interviewed for this article were unable to recall a case when an outlet was closed on these grounds.

Be that as it may, as of March 1, new sanitation regulations kick in, designed to ensure better control of the public catering sector. Thus, any mobile booth without running water or sewerage will be closed. If the new rules are enforced, by the summer there will not be a single Kroshka-kartoshka, Shaurma, or suchlike outlets left within the Garden Ring because 100 percent of the mobile booths in the Central District have none of the aforementioned creature comforts.

These changes are unlikely to please clients, the prices being an important consideration for more than a half of them. According to Asessor, the average bill at mobile fast-food outlets is 20 to 50 rubles and double that in fast-food restaurants.

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