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RUSSIA TAKES THE FAT OUT OF MCDONALDS, AS ANTI-AMERICAN RETALIATION ENDORSED BY HALF THE POPULATION

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By John Helmer, Moscow

It is easier to know what’s inside a McDonald’s hamburger than inside the corporation’s financial accounts. That’s because the type font on the internet version of the corporation’s financial reports is so small, a magnifying-glass is required at the computer screen to decipher the text; even then computer programming by McDonald’s prevents copying the text. But a magnifying-glass cannot uncover the current financial condition of McDonald’s in Russia. Those numbers are entirely hidden, and McDonald’s spokesmen refuse to say what the company’s Russian sales revenues are, and how fast they are falling.

For this reason, it’s not possible to estimate the financial damage the corporation will suffer if the Russian government closes down a large fraction of the McDonald’s outlets currently under investigation by the public health authorities. As for the McDonald’s claim that the trouble the restaurant chain is in Russia risks no more than 1 US cent per share, or $9.8 million, that’s a lie. In the circumstances, a fat lie.

A press release issued by McDonalds from its Illinois headquarters on October 21 reported “a significant decline” in worldwide revenues for the third quarter, as well as falls in operating income, bottom-line profit, and earnings per share. This is how the press release tabulated the decline globally for the corporation:

MCDONALD’S FINANCIAL REPORT FOR WORLDWIDE OPERATIONS, 3RD QUARTER 2014

Безымянный
Source: http://phx.corporate-ir.net [1]

Without giving precise figures, McDonald’s says its third-quarter comparable sales in Europe declined 1.4%, and its operating income in Europe decreased 2% . The company admits that “consumer confidence and other issues related to the operating environment in Russia and Ukraine and ongoing weakness in Germany negatively impacted the segment’s quarterly results”.

The press release adds that it estimates financial damage of “$0.01 per share due to the estimated impact of temporary store closures in Russia and Ukraine.” There are 981.93 million McDonald’s shares on issue, so this calculation appears to indicate a “loss” or “impact” of just $9.8 million from “temporary closures” in Russia and Ukraine: http://news.mcdonalds.com/Corporate/Press-Releases/Financial-Release?xmlreleaseid=123057 [2]

Khamzat KhasbulatovWill McDonald’s say this is correct? The company, headed by Khamzat Khasbulatov (right), refuses to say.

According to the minuscule print on page 10 of McDonald’s financial report [3] for 2013, Russian restaurant sales are counted in the company’s Europe division, which reported revenues for the year of $8.1 billion; that amounted to 40% of the corporation’s global revenues. Russia, France, Germany and the UK altogether account for 67% of this aggregate, the report says. Nothing more precise is reported for Russia. A spokesman for McDonald’s Russia said the company does not “provide such financial data on open access.” What he means is that neither the US parent corporation nor the Russian division of the company release the data. These have to be extracted from limited-access Russian company filings.

When business was booming in Russia, McDonald’s Russia was more outgoing with sales and profit figures. Two Russian subsidiaries, ZAO Moscow-McDonald’s, which owns and operates the city’s restaurant, and OOO McDonald’s, which owns the regional restaurant network outside Moscow, reported revenues in 2012 of Rb12.9 billion and Rb42.5 billion, respectively; the aggregate was equivalent to $1.78 billion. Net profit for the two subsidiaries in 2012 came to Rb1.1 billion and Rb4.7 billion; about $187 million. Costs of supplies were rising that year; these slowed the rate of growth reported for both revenues and profits. The restaurant count in Russia in 2012 was 314. The company claimed to be spending Rb5 billion ($161 million) per annum on expansion of the network.

In 2013, the operating results continued to gain, but at a decelerating rate of growth. The Moscow company reported revenues of Rb13.2 billion, the regional company Rb50.1 billion; an aggregate of about $2 billion [4]. Profit for 2013 is reported to have been Rb5.4 billion ($169 million). By the year’s end the restaurant count was 422.

In May of this year there were 423 McDonald’s restaurants in Russia, with another 70 planned for opening by December. At the moment, the count is 451. Depending on how many of these are targeted by Russian government inspection, how many are closed, and for how long, McDonald’s revenue losses for this year may be half or more of last year’s $2 billion figure. An Izvestia report in July projected potential losses of Rb20 billion [5] ($500 million).

Press reports from Crimea indicate that McDonald’s took the initiative to close three outlets following Russian accession in March. At least one of them has been replaced by a Russian-owned chain called Rusburger.

Rburger

The Russian government agency responsible for food and consumer safety is the Federal Service for Supervision of Consumer Rights Protection and Human Welfare (Rospotrebnadzor, RPN). According to releases from regional branches of RPN and McDonald’s in Moscow, at present there are inspections or audits under way at about 200 McDonald’s restaurants around the country. In Moscow 10 have been closed [6], including the well-known Pushkin Square restaurant, which was the first to open.

Company documents indicate that all but one of the restaurants are owned by the US corporation; just one, at Pulkovo Airport in St.Petersburg, is owned by a Russian franchisee. Elsewhere in the world, especially in the US, franchisees own and operate the restaurants, and pay McDonald’s for the privilege. For these franchises McDonald’s requires an initial capital investment of between $1 million and $2 million [7]; an annual contract fee of $45,000; and a monthly royalty charge against revenues of 12.5%.

In Moscow, a spokesman for Anna Popova (below, left), head of RPN, said she is planning to publish an extensive press interview to explain what is happening, later this week. Until she does, RPN is not going to answer questions about the future of McDonald’s in Russia. Popova, a physician by profession, replaced Gennady Onishchenko (right) a year ago. For Onishchenko’s controversial record, read this archive [8].

Medvedev_Onischenko

Consumer dissatisfaction with the quality of McDonald’s food is nothing new in Russia. Nor are RPN sanctions. RPN cases [9], court and press records indicate that in the past McDonald’s has been charged with improper or inadequate protein, energy and fat standards; mislabelling of products; refrigeration and other equipment failures; sanitary violations; E. coli and Staphylococcus infections. Until now the cases have resulted in fines of up to Rb300,000, rectification inspections, and product bans or modifications [10]. Restaurant closures have been rare until now [5].

As of last week, the closure of 10 McDonald’s outlets in Moscow has been termed temporary in the court orders obtained by RPN. An October 22 statement [11] by McDonald’s Russia says: “we disagree with the court’s decision and will appeal it in accordance with the law to a higher court. About 200 checks of McDonald’s have been initiated at present. The main priority of McDonald’s is to assure high quality and safe products for customers and care of employees. We will do everything possible for continuation of the successful activity of our company in Russia.”

An anonymous McDonald’s source in Moscow is reported as telling the media that the McDonald’s management believes it may be hit with closures. “This is a typical approach, and you can see that they are determined to finish the job.”

Public opinion polling among Russian consumers has found that since April of this year the number who favour the permanent shutdown of the restaurant chain has been rising steadily. A survey of 1,600 conducted on October 18 and 19 found that 49% support countrywide closure. 53% of those who have never been to a McDonald’s restaurant are in favour; 44% of McDonald’s customers. The poll revealed too that 47% believe the RPN inspections are a form of retaliation by the Russian government against US sanctions against Russia, which commenced in March. Much smaller percentages said they believe product quality is the reason for the McDonald’s campaign, or government protection for Russian-owned fast-food businesses [12].

The growth in general Russian hostility towards the US has been dramatic. At the end of September the Levada polling centre in Moscow reported [13] that Russian antagonism towards the US has reached 79% of the samples surveyed: that is the highest level recorded since the polling was first undertaken twenty years ago. Only 8% of the respondents said they regard the US and the European Union countries as sharing common interests with Russia. According to the Levada poll, the number of Russians who now believe that the outcome of the Ukrainian crisis will be a new round of cold war has reached a record level of 40%. No major military confrontation over the past fifteen years – Kosovo, Iraq, Chechnya – has caused such negative Russian sentiment.