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Russia’s Fast Food Establishments and their Challenges
27.09.14The following article is based on an article that originally appeared in Russian in The Village. That article was translated by Sophia Rehm, an intern at The School of Russian and Asian Studies, a partner of Alinga Consulting. The article has been expanded and reformatted by the professionals at Alinga Consulting.
The first Russian McDonald’s (the biggest in the world at the time) - opened on Pushkinskaya Square in Moscow in 1990. It was visited by thirty thousand people on opening day, which was a record for the chain.
The Russian branches are controlled by ZAO Moscow-McDonald’s and OOO McDonald’s, subsidiaries of the American company. The first restaurants in Moscow opened at a rental rate of one ruble per year, and the contracts were signed effective up to 2041, sparking a rumor that half of the Russian chain would belong to the city hall. Mosrestoranservis, a government-controlled enterprize, was, in fact, a co-founder and registered co-owner of McDonald’s in Russia. In 2010, the Moscow City Government tried to challenge the conditions and raise the rental rate to at least 1000 rubles, but the court sided with the chain. A system for franchising McDonald's restaurants in Russia came into practice only in April 2012, after Subway had outstripped McDonald’s in the number of Moscow locations.
Last year, McDonald's revenue rose by 19.6%, to 55.4 billion rubles, while the year before, it rose by 24.8%. The company's growth has decelerated over the past years.
McDonald’s biggest opponents in Russia are former Chief Sanitary Inspector Gennadiy Onishchenko and State Duma deputy Vladimir Zhirinovsky. The latter has simply strongly decried the burger at various points in his life, but Onishchenko has power over the Rospotrebnadzor (Federal Service for Supervision of Consumer Rights Protection and Human Well-Being) and has repeatedly spoken out against fatty and caloric foods and fast food in general. He has directly attacked the American chain several times.
In 2008, Onishchenko urged the same limits that are applied to advertising for alcohol and cigarettes to be applied McDonald’s advertising, since burgers, according to the sanitary doctor, pose just as much danger. As a result, the chain began to give out a calorie table to every customer. In 2010, experts from Rospotrebnadzor found cadmium in the paint on MacDonald’s branded cups. Onishchenko once again made incriminating remarks: “Cadmium is not polonium, and licking the cup once or twice won’t poison you. But what is inside the cups? What are the hamburgers made out of? No one has given us any guarantee that the food we are buying is suitable to eat - it’s just a matter of luck.”
In 2011, the fast food chain was again under examination by Rospotrebnadzor, and a rumor got out on the Internet that that Onishchenko had succeeded, and all McDonald’s were about to close. But the identified violations were addressed and everything turned out alright.
In 2013 Onishchenko left his post, but his cause lives on. In late 2014, as the sanctions war heated up between Russia and the West, various Russian government organs found various problems in several individual Russian McDonald's locations. Several have closed for several months, including the historic Pushkinskaya location. Several others have closed temporarily while they were quite dramatically inspected, but later left to remain operational.
Subway began to develop actively in Russia in 2004, when its first restaurant opened on Nevsky Prospekt in St. Petersburg. Today, it is the only restaurant chain to have spread to the Russian Far East. The master-franchise is owned by the American company Subway Russia Franchising Company. Its owners are U.S. citizens, and the chain’s business in Russia is monitored by a representative in Moscow.
In 2005, Rostik Group and Yum! Brands, which owns KFC, signed a cooperation agreement, which involved the formation of the new amalgamated brand Rostik’s-KFC. Rostiks was controlled by Rosinter (which also owns the Russian chains Il Patio, Planet Sushi, and TGI Friday’s franchises). Rostik’s was a local chain that closely resembled and originally competed with KFC. KFC had made previous attempts to enter the Russian market, but had failed twice, in large part due to supply chain complications. In 2011, KFC bought out Rostiks and reinstated the name KFC. KFC is now successfully operating in Russia with plans for rapid growth. In 2013, there were 245 locations in Russia. The management plans to have 450 restaurants operating in Russia and the Commonwealth of Independent States (CIS) by 2015.
The first Burger King opened in Russia in the beginning of 2010, in the Metropolis Shopping Center in Moscow. The second opened in the Europe Shopping Center. Today, there are 220 branches of the restaurant in Russia, of which 121 are in Moscow and the Moscow region.
In Russia, Burger King operates through a franchise run by Burger Rus LLC, a joint venture company of Burger King Europe, Alexander Kolobov (the owner of the Shokoladnitsa chain of coffee houses), and VTB Capital. By 2016, the chain plans to increase the number of its locations in Russia to 500. The current locations of the Coffee House chain, which was absorbed by its competitor, Shokoladnitsa, may be turned into Burger Kings. If this happens, Burger King will surpass McDonald’s in number of restaurants.
In 1992 the Russian businessman Sergey Shikharev bought up meat and meat products in Denmark. There, he noticed the many small food stalls offering delicious hot dogs. There was nothing of the kind in Moscow, so he returned to Russia with the idea to create a similar chain. Shikharev made an agreement with the company Steff Houlberg, and soon the first kiosk, branded "Steff," appeared in the center of the city. By the end of the nineties there were hundreds of stalls, but during the financial crisis of the late 90's, the business went into decline and lost its partnership with Steff Houlberg. They decided to give up the name "Steff," and replaced it with the name "Stop Top."
In 2004 the company went through another rebranding, taking the name "Stardog!s." It now has 702 branches, selling in sixteen of Russia's regions. Most of its locations are open around the clock. The French hot dog (stuffed into a round roll rather than wrapped in a hinged bun) is as big a hit as it was ten years ago.
This chain suffered more than any other from mayor Sergey Sobyanin’s war with street vending, in which many of Moscow's street kiosks were closed. In 2010, half of Stardog!s 150 vendors were closed, with the company’s losses estimated at at least 25 million rubles. The company tried unsuccessfully to take the mayor and prefecture to court. Now representatives in the company claim that they have recovered from the blow, have made up the number of locations in Moscow, and have even grown in the region.
Kroshka Kartoshka (Little Potato)
In 1998, Andrey Kononchuk and Vitali Naumenko registered a company called "Technology and Nutrition" (Технология и питание). In August of that year, they opened the first location of Kroshka Kartoshka chain in Moscow. Their prime product was a whole, stuffed baked potato in foil (with fillings of cheese, meat, or various salads). For some time the chain operated in the form of street stalls, and in 2003 it appeared in the food courts of shopping malls and now also operates small, enclosed cafes, many of which opened apparently in response to the 2010 "war of kiosks" that so affected the Stardog!s chain.
According to 2012 data, Kroshka Kartoshka now includes more than 300 establishments, including 76 cafes in Moscow. The chain is well positioned in Russian cities with populations of more than one million. It also ranks among the five largest players in the market.
One challenge faced by the chain is that, in 2000, the young Kroshka Kartoshka chain was one of the first companies to offer market franchises: for a small initial fee and monthly payments, partners from other cities received the technology to prepare the company's stuffed baked potatoes. The agreement, however, did not protect the rights of the Moscow chain to the idea and execution, so franchisees held their agreements for six months, learned how to produce and sell the product, and then changed their signs and refused to pay royalties. Thus, a number of Kroshka Kartoshka clones have appeared in Russia. The company has unsuccessfully tried to sue them.
Russian restaurateur Mikhail Zelman, creator of Goodman Steak Houses and the upscale restaurant Filimonov and Yankel, brought Wendy's to Russia. The first Wendy’s opened in 2011 in the Capitol Mall on Vernadsky Propekt, near Moscow State University. The second opened the same year on Old Arbat Street. Zelman always had ambitions to feed Russians cheap, high-quality fast food. In 2005, he was going to buy the chain Russian Bistro from the Moscow authorities, but could not agree with the Mayor on a price. Then Zelman’s restaurant holding company Arpikom tried to become a supplier of Russian Railways, to cook hot meals for the dining cars. In 2013, the restaurateur left for London to develop the concept for another restaurant, Burger and Lobster. He quickly lost interest in Russia, put his holding up for sale, and now, without active management, the Wendy’s chain decided to close in Russia. The American owners of the brand and franchise announced that they would not seek another partner in Russia: the climate had changed, and they were no longer interested in the Russian market.
In the late nineties, businessman Mikhail Goncharov developed a plan to create food kiosks selling national food, specifically Russian blini (pancakes) with filling. The first Teremok opened in Moscow in 1999 in the Aeroport Metro Station in Moscow. Over time, the company became the fourth largest fast-food chain in Russia, and opened Teremok restaurants as well. Today, the company has 231 locations in Moscow and St. Petersburg and plans to have 270 total locations by the year's end. By 2016, the company plans to open in several more Russian cities in European Russia and Siberia, bringing its total market footprint to 400 locations. This year, it was also reported that Goncharov plans to open sites in America, starting with New York. In 2013, the company served 30,000,000 orders and turnover amounted to 2.65 billion rubles in St. Petersburg alone.
While the chain is obviously doing well, like any rapidly expanding chain, it will face challenges in maintaining its supply lines and quality standards over the next several years.
Chainaya Lozhka (Teaspoon)
The idea for a Russian-style bistro belonged to Petersburg restaurateurs Boris Krupkin and Mikhail Avgustin, who had previously founded 69, the first gay club in the city. In the year of the financial crisis they decided to take over lower price dining, assuring that their average prices would be lower than McDonald’s. Fifty-five cafes opened in St. Petersburg, and in 2009, the first restaurant opened in Klaipeda, Lithuania. They have plans to expand further in Russia as well. The company specializes in blini, but also deffertiates itself from Teremok by additionally specializing in tea, offering several types of fresh, hot, loose-leaf tea. The company has now also secured private investment, with 24% of the stock owned by Neva-Rus,a Russian investment company, and 19% by private shareholders.
Aleksey Gisak worked as a copywriter in the BBDO Group and came up with advertising campaigns for Pepsi and Mars, until he decided to become a businessman. In 2008 he returned from a trip to Amsterdam with the idea for pan-Asian food, which Moscow did not yet have. Gisak registered the company with his friends: 70% belonged to Aleksey himself, and 20% and 10% each to Daniil Ostrovsky and Inna Petrova, his colleagues in the advertising market. Participating in food festivals helped with business: in one day of work at the Afisha Picnic festival they sold about a thousand servings. Word of mouth then spread, and they did not even have to spend money on advertising.
Wokker first worked as a Wok delivery service throughout the city, and then sites appeared in food courts in shopping malls. Today they are also growing in Moscow's city parks. In 2012, the first of these affordably-priced pan-Asian restaurants opened. After another year, earnings grew to 35 million rubles a month, while another of Gisak’s projects, Soup Culture, was only at 2.5 million. Now Wokker, like its rivals, is expanding its chain into a franchise.
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