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McDonald's Russia: Managing a Crisis

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arlette granados

on 30 November 2010

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Transcript of McDonald's Russia: Managing a Crisis

McDonald's start in Russia During the Montreal Olympic Games, the idea of introducing McDonald's to Russia was first contemplated At the time, in Russia there were only two kinds of restaurants: "formal dinning rooms", and small informal "cafés". "Here's a market that is bigger than the United States, where the people are proud to eat the kind of food that we sell". Hamburger Diplomacy Cohon began traveling to the Soviet Union and meeting with city representatives. The bureaucracy he encountered was overwhelming at times. During this time, the Cold War conflict was at its peak It was the "Evil Empire". Karl Markx vs. Adam Smith. In 1979, Cohon reached the agreement with the soviets, but it was called off 17 days later. Despite the militar conflicts that arised by the Cold War, Cohon wasn't discouraged. In the 1980's glasnnot was the start of the "opennes era" in the Soviet Union. Gorbachev introduced the revolutionary idea of perestroika. In 1987, the Kremlin passed a new law on joined ventures, easing restrictions. So, the soviets accepted McDonald's as a demonstration of their political change. McDonald's First Steps McDonald's achieved a deal wich included the approval for 20 restaurants to be built in Moscow, as well as a 100,000 square foot processing plant. Russia's government would hold 51% ownership, and McDonlad's 49% Operational Hurdles Stablishing McDonald's inplied other difficulties such as: Building a Supply Chain. Quality control: building the McComplex. Hiring and training employees. The currency decision. It was believed that it was impossible to get a realiable supply chain started in the Soviet Union The soviet agricultural system was outdated and highly inefficient When they started the search for suppliers, the reaction ranged from suspicion, to ridicule, to amazement. Problems within the Supply Chain: Potatoes supply Unknown ingredients: pickles Solutions: Bringing in some of the company's top suppliers from around the world to train the soviets. Loans for financing modern equipment to boost productivity and quality. Success bred succes "The product not only had to be the best, it had to be consistently the best" The only way to ensure quality control was to construct a food production facility of their own, enterprise that had never been done Construction of the McComplex. Greenfield operation Soviet employees: dour and unmotivated. McDonalds employees: cheerful. Surprisingly, hiring top-notch employees turned out to be easier than predicted. Lots of them were university graduates. Most of the original crew's training took place in Moscow. There were two types of currency in the Soviet Union: nonconvertible currency and "hard currency". It was illegal for common Soviet citizens to hold "hard currency" The currency issue was a source of intense resentment among the russians Dilemma If accepted hard currency only, it'll be excluding most of their costumer base. If accepted rubles for payment, the currency would have no value outside the Soviet Union Or a dual approach, offering two lines for payment. Decision McDonald's Russia would accept rubles only for these three reasons: Creation of a Russian company, with a longterm vision. Sooner or later, the ruble will be convertible. The target customer was the russian consumer. The Marketing of McDonald's Russia Began in 1988 The russians were unfamiliar with the concept of "marketing" and had no idea what McDonald's was. The company created a biweekly show, Flight 910. Getting 50, 60 million viewers because there was only one network in the S.U. at the time. Created bonds with member for the russian media. Became friends with reporters Result: the impending opening received significant coverage in soviet television, radio and newspapers. Marketing decisions The menu Pricing Store design Rules of conduct The Menu: not to tailor anything to russian tastes, no special items because the menu is the heart of the brand. Pricing: use the soviet cafe's as a benchmark, a big Mac, Coke and fries would cost about five rubles, the equivalent of half a day's salary for the russian average. Store Design: it would seat close to 1,000 people and have 27 cash register lines. The wall was painted with landscapes of many countries. Rules of Conduct: institute a "no smoking" policy, alcohol was banned, no special privileges for foreigners in line. Opening Day January 31, 1900 in Moscow. The company handed out brochures to people waiting in line. Cultural habits: One Big Mac= two sandwiches. "Going to the West without leaving the country". "it was so clean, sparkling, so cheerful". Russians were impressed by the food, atmosphere, employees, also by the "rubles only" and "no special privileges" policies. By the end of the day, had managed to serve over 30,000 people. The opening had created nothing short of an international media frenzy. McDonald's Russia in the 1990's By 1998, russian customers had more chices when it came to "quick-service restaurants". But the competition in Russia was not even close to what it was like North America. Fisrt mover advantages. McDonald's was left untouched. in 1993, President Boris Yeltsin arrived to kick off festivities at the opening of the second Moscow reataurant. "i'm the president of the country. She makes more money than i do". The company opened its first drive-through restaurant in 1996. By this time, the original ownership deal struck with Moscow had been renegotiated to 20% Moscow/ 80% McDonald's- St. Petersbourg opening its first restaurant in 1996. None of the russian restaurants was franchised and all restaurants outside of Moscow were 100% owned by McDonald's Russia. Furthermore, the negotiation process of opening a new restaurant had become easier. The prestige factor: tends to draw other foreign investors. By the 1998, the entire senior managment team of McDonald's Russia was composed of russians. There were now 26 stores in Moscow and St. Petersburgo. Customers visited 2.35 times over a four-week period and 40% of McDonald's customers in Russia visited a restaurant once a week or more. in 1997, the company had launched its first mass media advertising campaign. Two goals with the advertising: 1)McDonald's was considered a place of "special ocasions", so they wanted to change this perception and encourage people to visit them on a regular basis. 11) They want to introduce themselves to people who have never been inside a McDonald's. in Russia, only 15% of the population regularly dines out, so there was potential for growth. The Ruble Crisis 1998 The russian ruble had become convertible, but the country's liquidity problems had created a massive run on the currency. The russian stock exchange had been suspended. The central bank had imposed trading restrictions. Foreign investors were imposed trading restrictions. The hyperinflation was turning savings into worthless paper. Unemployment was sky-rocketing. The russian attitude was to spend rubles as quickly as possible on nonperishables. Most foreign companies were laying off local workers and preparing to leave the country. For McDonald's Russia, this was not a option: 1) They're a russian company and have made a long-term commitment.
11) Had to survive the crisis without laying anyone off, the employees were an asset too valuable to throw away. The volume restaurant had gone way down. But the company's supply chain remained largely intect Two key decisions Pricing:
1) Most other businesses has already raised their prices roughly 300%. But it feels counterintuitive to raise prices at this time, the conventional marketing solution to this is to lower prices to increase demand. But it was not sure that conventional economic wisdom applied in this case. So they decided to guarantee that the price of Big Mac would stay at an advertised rate for a month. This was very risky because the currency was too volatile. Menu: 1) Toying with the idea of adding Russia-specific items to the menu. The advantage was that they were cheaper to produce and could be priced very low, the cost could be predicted. McDonald's Russia: Managing a Crisis Arlette Granados
ZhongQi Liang
Raymundo Sicardo
Abigail Ramirez
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