McDonald’s Russia: Managing a Crisis

Table of Contents

List of illustrations

Table list

List of abbreviations

1 Introduction
1.1 History McDonald´s
1.2 Story of McDonald´s Russia
1.3 Big-Mac-Index

2 Situation and construction
2.1 Market entry
2.2 Marketing strategies
2.3 Marks admission strategies
2.4 Franchising
2.5 Strategic planning and construction

3 Problems and solution trials
3.1 Crisis
3.2 Solution of McDonald´s

4 Own assessment
4.1 Analyse enviroment
4.2 Best Mix of 4P´s
4.3 Experienced partners and personal contacts
4.4 Marketing process and strategic planning

5 Conclusion and view
5.1 Success by different factors
5.2 View

Bibliography

List of illustrations

Figure 1-1: The first McDonald’s restaurant in San Bernardino in the year 1948. URL: <http://www.fiftiesweb.com/pop/mcdonalds.jpg>, available at this 29.11.07

Figure 1-2: Purchasing Power Parity: Local price divided by price in United States on January 31.st 2007. URL: <http://www.economist.com/images/ 20070707/CFN628.gif>, available at this 03.12.07

Figure 1-3: Local currency over- or undervaluation against the U.S. Dollar in per cent on January 9.th 2007. URL: <http://www. businessinnovationinsider.com/images/2006/02/Big%20Max%20Index.gif>, available at this 03.12.07

Figure 2-1: Internationalization steps into dependence of capital and management performances in domestic and abroad. Source: <representation of one's own>, available at this 03.12.07

Figure 2-2: Categorisation of the franchising and subdivision of the marks admission strategies. Source: <representation of one's own>, created at this 03.12.07

Figure 2-3: Full particulars of operation of the franchising system. Source: <representation of one's own>, created at this 03.12.07

Figure 2-4: Inside the McComplex near Moscow. URL: <http://semba.utk.edu/travelogue%202004/images/Photo1011000.jpg>, available at this 17.11.07

Figure 3-1: Scenario of the Rouble from the year 1998 up to today. URL: <http://www.onvista.de>, available at this 17.11.07

Figure 4-1: Representation of the mix of 4P´s. Source: <representation of one's own>, created at this 03.12.07

Figure 4-2: The traditional ritual „Kreschenija” in the „Besdonnoje Lake”. URL: <http://img.rg.ru/img/content/9/47/77/kreschenie.jpg>, available at this 17.11.07

Figure 5-1: Symbolic for the growing upswing the emergence new office buildings i n the Russian capital in the year 2007. URL: <http://www.russiablog.org/ Akritas-MoscowCity.jpg>, available at this 03.12.07

Table list

Table 5-1: Overview of the most important economy factors in Russia up to the year 2010 23

List of abbreviations

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1 Introduction

Quotation:

„Strategy is a pattern in a stream of decisions“ Henry Mintzberg [1]

The introduction and description of the story of McDonald’s worldwide and McDonalds Russia are carried out the first chapter in this. The last section of this chapter takes a consideration of the „Big Mac Index”.

1.1 History McDonald’s

Unbelievable, but in the year 1937 the brothers Maurice and Richard McDonald opened a „Drive-In Stand” in Pasadena in the federal state California. They offered hot dogs and milk shakes as there first products. Then, in 1940 the first milestone with the erection of the first McDonald’s Restaurant in San Bernardino, fifty miles from Los Angeles. Now, they offered twenty-five foods e.g. sandwiches, chips or spareribs. Twenty employees were looked after the 125 car parks. Later, the brothers comes the idea that a self-service restaurant is more productive. So they could lower the personnel expenditures and offer their products at low prices and with the faster self-service serve more customers. The brothers closed their restaurant in autumn in 1948 for three months. The workers were dismissed, the porcelain replaced by dishes made of cardboard and significantly for today's fast food restaurants the kitchen switched over to mass production. Moreover, an equipment of one's own which the production of whose production simplified was designed. Another measure was, this it nine food and drinks were only offered instead of 25 before [4]. The supply now the Hamburgers, the Cheeseburger, chips, three non-alcoholic mineral water drinks, milk, coffee and a piece of cake. The products were in front of produced so that the customer could immediately take his product along. On December 20th in the year 1948 the restaurant was after reorganisation and rearrangement newly reopens to a „fast food restaurant" as can be seen in figure 1-1.

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Figure 1-1: The first McDonald’s restaurant in San Bernardino in the year 1948

The milk shake blender seller Ray Kroc, the later president of McDonalds worldwide, concluded a contract with the brothers to give him exclusive rights to recruiting franchisees in all of America in 1954. Kroc should require may 950 Dollars for a single licence fee and he get 1,4 % of the sales volume for the support of the new partners. His first McDonald’s restaurant opened in Des Plaines in the federal state Illinois on April 15th in the year 1955 and he opened his second restaurant in Fresno in the federal state California in July [5].

For a licence fee of one thousand Dollars the franchisee got a plan of the kitchen and a short description of the system and he gets the right to lead a one restaurant under the brand name McDonald’s. Harry Sonneborn changed to McDonald’s in 1956 and at that time the McDonald’s was an unprofitable enterprise. The breakthrough to profit money came with his idea, to connect the leasing fees to the sales volume. The new franchising system insisted to find property owners into this now, which built a McDonald’s restaurant in her country and leased this to the McDonald’s for twenty years at their own expense. In turn the fast food chain further leased the building to a franchisee with an impact of 20% and with a contract which tied the lease to the sales volume.

1.2 Story of McDonald’s Russia

The idea to open a McDonald’s restaurant was created by George Cohon, founder und senior chairman of McDonald’s Russia, in the year 1976 in Montreal during the Olympic Games.

Cohon met a group of delegations from the Soviet Union and he escorted the group to a nearby McDonald’s restaurant for a snack. In the year 1979 there was a shot agreement for 17 days before the politburo chief had called the deal off [6].

Negotiations to make McDonald’s the official food of the 1980 Moscow Olympic Games, however, were a spectacular failure. But this small setback is now a mere footnote to Russian McDonald’s history. The early 1980s brought with the dawn of the glasnost era Russia unite step further for the market economy, and in 1985 there was introduced the revolutionary idea of perestroika for opening and liberalization the market. Next step in the history was in 1987 as the Kremlin passed a new law on joint ventures. After twelve years of creating the idea to open a McDonald’s restaurant, the long negotiations to bring burgers and chips to the heart of Soviet Russia began. Resulting from it the breakthrough came in the year 1988 with the official approval form the politburo to bring McDonald’s restaurants to Russia. Consequently the first Russia McDonald’s opened in the end of the January in 1990 in Moscow on the Pushkin Square.

1.3 Big-Mac-Index

The „Big Mac Index” is an international price and spending power comparison. The Idea based on the theory of the purchasing power parity (PPP), the notion that a Dollar should buy the same amount in all countries. The exchange rates between two countries should move towards the rate that equalises the prices of identical same sets of goods in each country.

Since the year 1986 the economy magazine „The Economist” lifts up every year the local prices of the Big Mac’s in the States where it is sold. The Economist chose the Big Mac as a comparison product from two reasons primarily: Firstly, it is a product which is almost sold worldwide and standardized extremely through which the Big Mac prices of different countries could be compared with each other. Secondly, the Big Mac internationally nevertheless is not tradable in a country. This prevents that prices of it’s adjust internationally after the theory of the spending power parity [3]. Is instead Big Mac involves many areas of the home economy in production and sale of one which as it were represented a representative cross-section by the production costs in a country [2].

The „Big Mac Index” is therefore one of the simplest methods to compare the respective inland spending power of currencies with each other, as can be recognized in the figure 1-2.

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Figure 1-2: Purchasing Power Parity:

Local price divided by price in United States on January 31.st 2007

The Big Mac is a product standardized strongly and becomes approximately 120 different countries from the same ingredients produces. The Big Mac is sold practically worldwide without the Hamburger being traded for single countries between this one.

To calculate the Big Mac PPP the price becomes one Big Mac of a country by the price one Big Mac divided in the USA. If the Big Mac PPP is bigger than the actual exchange rate, this means an overvaluation of the currency. If the Big Mac PPP is smaller than the actual exchange rate, an undervaluation is spoken about.

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Figure 1-3: Local currency over- or undervaluation against the U.S. Dollar in per cent on January 9.th 2007

For example the figure 1-3, suppose the price of a Big Mac is $3.15 in the United States and 49 Rouble in Russia; thus, the purchasing power parity rate is 49 Rouble/$3.15 = 15.5 Rouble/$. If, in fact, $1 buys 24.4 Rouble (or $ 3.15 buys 76.86 Rouble), then the Rouble is undervalued by 8.9 Rouble (24.4 Rouble – 15.5 Rouble), or approximately 56 % (8.9 Rouble/15.5 Rouble) in comparison with the price of the Big Mac in both countries.

2 Situation and construction

The second point of this thesis contains the description of the strategic situation before the first opening in 1990 up to the strategic construction of McDonald’s restaurants to the financial crisis in the year 1998. First the market entry was judged on advantages and disadvantages in Russia. The decision of McDonald’s shall clarify this in Russia to open a fast food chain.

Furthermore the description of different marketing strategies is carried out to prepare around itself on the Russian market. Those of potential marks admission strategies as well as these from this are resulting decision of the strategy looked in the third sub point. The chosen franchise system is declared in detail after that and judges the advantages and disadvantages. The strategic planning and construction are listed in the last sub point.

2.1 Market entry

Why should open a restaurant to McDonald’s in Russia? Which environment had and which situation to be expected? Clarify in this chapter become relevant facts this one be regarded as a basic decision support for the enterprise with regard to the investment as well as orientation. Pros for the market entry in Russia for McDonald’s are:

- Important point is that Russia is a big market with more than 280 millions costumers. In Summary that’s more than USA and Canada population together [6].
- After the revolutionary idea of perestroika for opening and liberalization the market the population had the impulse after western products.
- The Russian food consist meat, bread, potatoes and milk just like the same products of McDonald’s.
- In Russia where favourable wage costs and the Russian employees are highly motivated workers and sophisticated [12].
- And the last Aspect is the market opportunity because in Russia are few competitors, what favours a market entry.
Cons for the market entry in Russia can be declared in the regard of:
- In the Country are many infrastructure deficits e.g. badly fully developed highways and ailing of transports.
- The second cons for the market entry is a really slow bureaucratic procedure, which one prevents efficient and economic management.
- Another point is the ownership for Russian cities. One wants to start a business in Russia in 1990, 51 % of the ownership convict to the Russian city [6].
- Moreover there is a missing certainty of law like a situational right.
- And as last Cons for the market entry, the economic disarray can be mentioned [6].

2.2 Marketing strategies

The next and important step to build up a fast food chain in Russia was to apply differently marketing strategies. The first problem consisted in it that up to the year 1988 the Russian population have no one an idea what is McDonald’s. A few Russians had only a little heard it of McDonald’s up to these times, however. Therefore became honour unorthodox to announce marketing initiatives started around the brand McDonald’s and the products like the Big Mac. The enterprise creates a biweekly television show which was known as „Flight 910”. Children flew into different countries into this and the episodes ended inevitably in a McDonald’s restaurant. Impression therefore did this one good spectators unite like the life of a worker of doing in this and like the life with McDonald’s. About 50 million Russians saw every show and the population got a relationship from this to McDonald’s.

As the opening day drew nearer, there was additional some different marketing decision taken. The first decision concerned the design the menu. These should contain nothing special, only the same core items like everywhere in the World. Consequently the core menu tasting exactly likes the core menu in New York, Toronto or London. So McDonald’s should the core menu have left the heart of the brand unchanged.

The second decision concerned the pricing. These were around this one compared with the Russian cafés to fix. A meal of McDonald’s should not cost like meal in a coffee any more. The costs for one Big Mac, a Coke and fries were therefore a half day income one for the average Russian.

Another decision was taken with regard to the rules of conduct. One became established a non smoker agreement. Moreover, no alcohol was allowed to be distributed and no foreign guest was allowed to have privileges opposite the Russian peoples.

The last decision of the marketing strategies is the store design. The first McDonald’s restaurant was divided into differently country zones like Paris or London or South America. This measure gives the Russian the Impression to travel without leaving their country. Further the restaurant would seat close to one thousand consumers, it has 27 cash register lines and the whole place was air conditioned.

2.3 Marks admission strategies

The next step to create the fast food chain in Russia is the consideration of the different marks admission strategies. Prerequisite for a successful market entry is the development of a fundamental, cross border action conception which builds on competitive advantages which are necessary or useful for foreign activities of the enterprise. Part of this internationalization strategy is the marks admission strategy besides the market choice and the time [13]. Potential marks admission strategies for the enterprise in Russia could be the export, licence award, franchising, joint venture, subsidiary company and fusion. Differentiating and categorizing can, one this with the step model of the internationalization how figure 2-1 clarifies.

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Figure 2-1: Internationalization steps into dependence of capital and management performances in domestic and abroad

The left axis of the graph represents the domestic capital and management performance. The lower axis of the graphic represents the capital and management performance in abroad.

A spatial separation exists between production and sales at the export. After the service preparation in domestic the product is sold in strange economy areas [14]. The export exists in two forms, the indirect and direct export. However, this is not given further treatment in this thesis. On the one hand, the advantages of the export lie in the low capital requirements, how also figure 2-1 clarified as well as on the other hand at a low risk.

The disadvantages are that at this form of marks admission strategies the market assessment is very difficult and that one of the services only limited is possible.

The second form of marks admission strategies is the licence award. At this the domestic licenser provides a foreign licensee with assets against a licence fee for patents, trademarks, count copyrights, registered design and know-how licences. Many different forms of the payment, such as flat licence fee or regular licence fees, exist. Advantageous to judge are the sinking carriage and the resources hardly required. Limited control over licensees and the possible know-how drain have to be mentioned adversely.

The franchising represents duration contractual obligations between the domestic franchiser and the foreign franchisee. How the franchising fits in with marks admission strategies, can be looked at in figure 2-2. A more detailed description is in the following chapter 2.4.

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Figure 2-2: Categorisation of the franchising and subdivision of the marks admission strategies

One speaks about a joint venture at the creation of a new, common business of independent enterprises with a legal personality of one's own. Two of the best known expressions are contractual joint venture and equity joint venture, however, these are not further described in this thesis in. The faster market access applies to this form as advantage and the high conflict potential by restriction of the independence as a disadvantage.

An enterprise, a so named parent company, sets up new, legally independent units abroad at the subsidiary company. The way of the internal growth is this construction of new units that is a reestablishment. The extensive capital and management resources are negative as in figure 2-1 can be seen. This one is positive strong influence on all business activities abroad and the possibilities to prevent the know-how drain.

A domestic one combines with a foreign, two economically and legally independent, business, described as a „cross-border-merger" at an international fusion also. By this union they give up her independence. The advantages are power profit compared with customers and suppliers as well as rise of prestige and reputation. Disadvantages are the restrictions by cartel authorities and the problems of the corporate governance in the integration phase.

By examinations of the step model of internationalization model and further strategic considerations went the franchising in favour of the decision.

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