The arrival of the global fast-food giant McDonald’s in Kazakhstan, which has been delayed for at least two years, will finally happen in March with the opening of the first outlet in Astana. But McDonald’s will start serving burgers in an atmosphere of economic gloom and falling incomes, while its global rivals KFC and Burger King are already firmly established as a feature of Kazakh city high streets and shopping malls.
According to reports that emerged in March 2014, McDonald’s was supposed to set up shop in Almaty and Astana in May and June 2014 respectively. But in November 2014 the company announced it would open its first outlets in Kazakhstan in “the second half of 2015”.
“The first McDonald’s restaurant in Kazakhstan will open in March 2016 in Astana,” a spokesperson for McDonald’s tells bne IntelliNews, adding that the fast food giant is “committed” to entering new markets where it sees development potential. “Kazakhstan offers much development and growth potential and we are excited to continue to build our brand and open our 39th market in our Europe region this year.”
The two-storey outlet with over 200 seats will be situated in the centre of Astana. “Our customers will enjoy modern design as well as various service concepts like drive-thru and self-ordering kiosks,” according to the spokesperson. McDonald’s plans to open the next restaurant in Almaty “in the first half of 2016”.
The golden arches were initially supposed to appear in the commercial capital and largest city of Almaty, but a change in plan may have been prompted by pressure from the authorities, which are eager to promote the new capital of Astana – President Nursultan Nazarbayev’s pet project – at the expense of the former capital. Others speculate that Kazakh businessman Kairat Boranbayev, “in conjunction with” whom McDonald’s is set to run its business in Kazakhstan, must have decided to please his presidential in-law: Boranbayev’s daughter Alima got married with the president’s grandson Aysultan, the youngest son of Deputy Prime Minister Dariga Nazarbayeva, in 2013.
Food for thought
Despite robust growth in the restaurant and catering industry over the last year, McDonald’s timing is unfortunate. It is entering the Kazakh market at a time when the oil-rich nation is experiencing its worst crisis since the 1990s, as a double whammy of the low price of oil and economic difficulties in its main trading partners – Russia, China and the EU – takes its toll.
According to the State Statistics Committee, the restaurant and catering industry increased by 15.5% y/y to KZT296.6bn in 2015. However, the nearly 50% depreciation of the tenge after the authorities were forced to let it trade freely in August means that the size of the market in dollar terms fell from $1.41bn in 2014 to $871mn in 2015. The statistics agency does not provide figures for the fast food segment of the restaurant and catering market, but before the August 2015 devaluation industry experts estimated its size at between $150mn and $200mn a year.
Rivals readying for the fight
The falling living standards of the Kazakh population means McDonald’s will face fierce competition in the shrinking market from its global rivals – Burger King and KFC (with its burger brand Hardee’s) – which have the advantage of having entered the country several years earlier. The US fast food giant will also compete with local burger chains and independent burger joints, as well as outlets selling Turkish doner kebabs and meat, cheese and chicken pies known as samsa.
Publicly at least, both KFC and Burger King hail the arrival of McDonald’s as “progress” in the development of the fast food industry in Kazakhstan and say it will improve the quality of services and products, helping expand the market further and attract new customers. “The arrival of such major brands like McDonald’s will surely increase competition in the market, offering a wider choice and diversity of products for clients,” a spokesperson for QSR, which operates the Burger King brand in Kazakhstan, tells bne IntelliNews. “We welcome competition because it leads to progress and positive changes in the sector and to innovations.”
Burger King, which came to Kazakhstan in 2012, now operates 26 outlets, including drive-thru’s, in Almaty, Astana and the oil cities of Aktobe and Atyrau in the country’s west.
Yuri Babich, franchising director Russia and the Commonwealth of Independent States (CIS) for Yum! Brands, which represents KFC, also praises “healthy competition” for improving service and creating new products. “The presence of many strong players… attracts a greater numbers of customers to our segment of the market,” he says.
A spokesperson for The Caspian International Restaurants Company, which operates the KFC and Hardee’s brands in Kazakhstan, warns that his brands enjoy a “significant time advantage” over both Burger King and McDonald’s, as they arrived in Kazakhstan as early as in 2007. Since then the company has opened 29 KFC and 13 Hardee’s outlets in Almaty, Astana and the industrial hub of Karaganda. The company plans to open a KFC and Hardee’s outlets in another industrial city of Pavlodar in the near future.
Like the global brands, local independent burger chain Gippo.kz and doner and samsa outlets are also aware of McDonald’s entry to Kazakhstan but, unlike KFC or Burger King, some are not that upbeat about this latest development. “We do fear competition from another big burger company, because when KFC and later Burger King opened up we could see our sales drop,” Mehmet, a Turkish national who has run a doner kebab shop on one of Almaty’s high streets for the past seven years, complains to bne IntelliNews. “But our competitive advantage is that we use local quality meat in our products.”
Mariam, a manager at a Gippo.kz burger outlet, cites the quality of minced meat as the main competitive disadvantage of McDonald’s, as the population has refined tastes when it comes to meat: the traditionally nomadic Kazakhs tend to prefer to eat the meat of free-range animals from sheep and cattle to camels and horses. “We are not afraid of competition from McDonald’s because we source our products locally and we know local tastes better,” she brags to bne IntelliNews.
McDonald’s will enter the Kazakh market at a time when the income and purchasing power of the local population are dramatically falling as the rapidly depreciating national currency is resulting in higher tenge costs of imports. The official inflation rate stood at 13.6% in 2015, while real incomes fell by 2.2% year on year in October and 5% in November.
A spokesperson for Burger King admitted that sales slowed in the fourth quarter of 2015 and “this trend is continuing” in 2016. The company was still compiling its financials for 2015 when this article went to press, but the brand’s sales topped $10mn and same-store sales growth exceeded 30% in 2014, servicing over 4mn people.
The timing of the fast-food giant’s interest in the Kazakh market raises questions as to whether McDonald’s has been trying to secure its position in Kazakhstan by seeking to find local partners from among strongman President Nazarbayev’s inner circles.
To Central Asia watchers, McDonald’s partnership with the autocratic president’s relation by marriage recalls a previous business alliance in Central Asia between a US food and drinks industry giant and a ruling family. Coca-Cola secured a monopoly over cola-type drinks in neighbouring Uzbekistan in 1991 with a partnership with Mansour Maqsudi, then the son-in-law of President Islam Karimov. He was married to Karimov’s eldest daughter Gulnara, who retained control over the business after their acrimonious divorce in 2001. But after she fell from grace amid a welter of corruption allegations and was placed under house arrest in 2013, Coca-Cola soon lost its monopoly when Tashkent allowed rival PepsiCo in.
This cautionary tale illustrates how connections to a ruling family, which may seem advantageous at the time, can prove fraught with risk in the volatile world of Central Asian politics. Even if Boranbayev manages to stay on Nazarbayev’s good side, the danger of a major redistribution of assets in post-Nazarbayev Kazakhstan remains a real possibility.