What McDonald’s Could Do Next in Russia

“It’s clear that this crisis is far from over,” Kempczinski said on the call. “With an ever-changing situation, we are analyzing our options and expect to provide clear guidance to investors and other stakeholders no later than the end of the second quarter.”

Kempczinski declined to tell investors more about what the new plan for Russia might look like. Other companies operating in the country have hinted at what options McDonald’s might take, experts said. The business could reopen and donate profits to charity or sell stores to franchisees, for example.

At this point, the costs of keeping its Russian stores closed will only continue to mount for the Chicago-based company, said Morningstar equity analyst Sean Dunlop. Food spoilage costs probably haven’t been accounted for yet either.

“What I don’t think they’ll do is keep swallowing $50 million in costs,” Dunlop said. “Something is going to happen in this second quarter.”

Here’s a look at some strategies McDonald’s could be rolling out, analysts say.

Transfer of ownership

Of the 847 McDonald’s in Russia, 84% are owned by the company. McDonald’s could sell these stores to franchisees.

This process is called refranchising and is common in food chains. Potbelly is following the process in the United States, hoping to fuel growth and improve results that have been underwater since 2017. Other fast food chains have also discussed the possibility. with their Russian sites, Dunlop said.

Selling stores to local franchisees would give McDonald’s money, plus franchise fees in the future. It would also mean that the franchisees would be the ones paying the employees. This would save McDonald’s on its huge monthly bill and solve the ethical dilemma McDonald’s faces that could disrupt the livelihood of the average Russian wartime employee.

McDonald’s would likely need local operators to sign up, so they wouldn’t face currency remittance issues, Dunlop said. The Golden Arches are likely a good prospect for Russian franchisees – “It’s a strong brand and money talks,” Dunlop said – and there’s likely pent-up demand for the products as many fast-food chains are closed in the country. But the Russian economy is in turmoil, which could turn the search for local franchisees into a quagmire.

If McDonald’s goes this route, it could run into optical issues. The company faced massive pressure in early March for keeping its stores open after Russia invaded Ukraine. Some experts said at the time that the delay likely damaged McDonald’s reputation. If Russian McDonald’s locations were to reopen, even though the financial structure was different, consumers who oppose the war in Ukraine might not be happy.

“How is it fundamentally different from running your own stores and making money from the marketplace?” said Dunlop. “You’re kind of brushing the dust off your shoulder, like, ‘Okay, well, that’s not us doing it.'”

This could ultimately hurt McDonald’s sales worldwide. Yum! The brands have been pushed back for keeping KFC franchise stores open in Russia, as has Burger King, despite agreements that often prevent companies from forcing franchisees to close their stores. One solution could be to donate profits to charity, Dunlop said.

Resume operations and return profits

McDonald’s could reopen its Russian stores, so it has cash to pay employees, suppliers and owners. To maintain goodwill, excess profits could be donated to charity.

In this scenario, McDonald’s would not take advantage of the Russian market, but would have revenue to maintain the payroll.

German chocolate maker Ritter Sport, which makes 10% of its sales in Russia and has maintained operations there, suggested something similar, Dunlop said.

Create a spin-off

The Big Mac creator could turn its Russian operations into a separate company that would operate on its own, said Harry Kraemer, former CEO of Baxter International and professor at Northwestern University’s Kellogg School of Management.

Kraemer cited the example of pharmaceutical company AbbVie, which spun off from medical device and healthcare company Abbott Laboratories in 2013.

“You’re literally creating a separate business and letting it run on its own,” he said. “You’re not as involved with it, but it can drive sales and pay its employees.”

Abandon Russia

Experts have been saying for months that McDonald’s is unlikely to exit the Russian market altogether, and that sentiment remains. The chain has spent three decades developing its business there.

Business in Russia and Ukraine, where all 108 McDonald’s-owned stores remain closed, accounted for about 2% of systemwide sales last year and generated 9% of total company revenue.

Additionally, McDonald’s employs 62,000 people in Russia and works with hundreds of local suppliers. Kempczinski reiterated that “our people” remain a priority.

Still, it’s unclear what the closures, however temporary, will mean for the future of McDonald’s in Russia. Marketing experts said the shutdown during such a tumultuous time could rub Russian consumers the wrong way, making it difficult to win back customers when McDonald’s reopens. Russian trademark applications involving McDonald’s trademarks have also been filed, which could damage the chain’s reputation if dishonest operators start serving copies of Big Macs.

Kempczinski said McDonald’s “was comprehensive” in its thoughts on what to do next.

“I guess there’s probably not a scenario that you could imagine on your own that we don’t consider,” he said.

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