After McDonald's pulled out of Russia when the war in Ukraine started last year, its restaurants were rapidly taken over by a Russian replacement called Vkusno I Tochka ("Tasty, period") that ripped off almost all of the original franchise’s products. The menu is the same; the layout and business model is the same; even the packaging and sauces are the same (except they were white for the first few months as Russia ran out of printing ink, which is mostly imported).
Now the Russian managing company says it is investing in a toy factory so that it can introduce is own version of the “Happy Meal”, the “Kid’s Combo” set, the head of the fast-food chain, Alexander Govor, told the RBC business portal on March 1.
As followed by bne IntelliNews, iconic American food and beverage brands McDonald's, PepsiCo, Coca-Cola and Starbucks stopped sales of their best-known products in Russia and join another 1,000 international brands that have shuttered or sold their businesses in Russia. Some of the new owners of the trademarks had to rebrand in Russia completely, but many of them simply tweaked the original brand to barely indistinguishable logos and names.
The departure of McDonald's was particularly symbolic, as the company was the second Western consumer brand to arrive in what was still Soviet Russia in 1990, when it opened its iconic store on Pushkin Square in the heart of Moscow in 1990 in a deal done under Communist Party chairman Mikhail Gorbachev, who died last year.
The first major consumer brand to enter Russia was Pepsi, as a result of deal struck between US President Richard Nixon and Soviet leader Leonid Brezhnev, and opened its first factory in 1972. When Coca Cola finally arrived after the fall of the Soviet Union in 1991, Pepsi started to lose business as Russians wanted to try the “American cola”, as Pepsi was seen as a Russian brand and which then launched a big PR campaign to remind consumers of its US origin.
The McDonald’s franchise was an immediate success, with Muscovites queuing around the corner to try a taste of Western capitalism. Russia’s first president, Boris Yeltsin, caused chaos in the Pushkin Square branch once when he impulsively ordered his car to stop on the way to the Kremlin, a short drive away, and marched into the restaurant to order some lunch.
McDonald’s initially announced the suspension of its operations in Russia, but kept paying the salaries of its 62,000 staff. Then in May McDonald’s sold its Russian assets to Russian licensee Alexander Guvnor and the rebranded chain regained its fast food market lead as quickly as August.
One year on, the Russian McDonald's successor is expanding in neighbouring Kazakhstan and possibly Belarus, while it has announced relaunching home-grown fast-food menu classics such as the Big Mac.
As for the Happy Meal adaptation, the first toys in the Kids' Combo sets will appear in the second half of 2023, to be either produced in Russia or sourced from China. The factory solely dedicated to producing toys for the chain is aimed to be opened in two years, according to Govor.
Notably, the company had difficulties in prolonging franchise agreements for using toys with cartoon characters that were produced in “unfriendly” countries, and will instead use Russian characters.
The CEO of Vkusno I Tochka told RBC that McDonald's is considered the largest seller of toys in the world due to its sales of Happy Meal, and its Russia successor needs about 2mn toys monthly for its kids’ menus.
From KFC to Rostiks
International fast food firms rushed into the Russian market during the boom years in the noughties. In an attempt to close the gap between paltry public sector wages and those that could be earned in the rapidly expanding private sector, the Kremlin hiked public sector wages by 10% a year for almost a decade. The economy doubled in size and regular Russians started to indulge themselves in capitalism’s create comforts – like fast food.
KFC was another early entrant into Russia but had a single branch on Kutuzovsky Prospect for almost a decade in an experiment that never took off. In the meantime, Russian entrepreneurs had set up a rival chain called Rostiks that blatantly ripped off the KFC model and rolled out a restaurant chain across the country. Following the 2008 crisis Yum!, the US owner of KFC, bought Rostiks out and began to rebrand its outlets as KFC restaurants.
But like McDonald’s, following the start of the war last year Yum! has also pulled out, selling its 70-strong franchise to a large franchisee from Izhevsk "Smart Service” for RUB1.3bn ($4mn), when the value of just the real estate, minus the brand, was estimated at the time to be worth ten times more and was worth 30 times more before the war started. Just the revenues from the business in 2021 amounted to RUB18bn and the net profits to RUB2.4bn.
Unlike the other take overs of international fast food chains, the crispy chicken seller had the luxury of going back to its Rostiks brand, which was already well-known to Russian consumers, and the new owners bought the trademarks Rostic’s and Rostik’s back from Yum! for a pittance as part of the deal.
The founders of the Rostiks group had also established Noi-M, a fast food business that already owned and operated a number of well-known franchises in Russia, including IL Patio, Sushi Planet and T.G.I. Friday's. During the exodus of Western brands Noi-M opportunistically acquired the Pizza Hut franchise from Polish holding AmRest. Pizza Hut in Russia was made famous by an advert featuring Gorbachev eating one its pizzas in a Moscow restaurant. Typically Noi-M rapidly rebranded it as “Pizza N”; ‘N” in Cyrillic is written as “H”.
The new owner received the assets of a small (also about 70 establishments) and unprofitable pizzeria chain without a brand, and therefore cheaply – for RUB300mn. Soon they opened under the ambiguous Pizza N sign.
Making minimum effort to change the brand makes clear sense and has been made possible by the state, which rushed through a law on parallel imports in the first month of the war, which in effect suspends intellectual property rights laws, making it legal to abuse an international company’s brands, logos and services with impunity within Russia.
Spanish brands Zara and Bershka also left the Russian market after the start of the special operation in Ukraine and closed their outlets. However, the chains were bought out and it has been reported that they will reopen in Russia in early 2023 as “Br” and “Z.” The new owners of the business want to keep part of the former name in order to attract customers' attention.
Many of the most famous brand names have simply been bought up by their Russian management that have been running the business for years. Thanks to the parallel imports law, these Russian companies can continue to import the same products via “friendly” transit countries like Turkey. For example, Andrey Yazykov made his first fortune in the 1990s as a trader, importing high-end luxury suitcases before being hired by Samsonite as its country manager. After the US company decided to pull out, Yazykov, who as a trader was known as the “suitcase king”, bought the company out and has set up his own company called “Chemodan”, which is Russian for “suitcase”.
Yazykov says he will continue to import and sell Samsonite suitcases and, unusually, he will offer all the services and product guarantees as the US maker, except the cost of this will be borne by Chemodan, whereas usually the maker of the goods carries these costs as part of their global franchise agreements. MBO takeovers have proved a very popular way for international companies to exit and salvage something of their investments. And many of these deals include a option to buy the business back in five years, as the international multinationals hope that a peace deal will be done and Russia will get back in business.
In the meantime, while the shops had briefly emptied in the first months of the war, bne IntelliNews correspondent in Moscow now reports that all the international products are back and the shelves are full – just that the prices have gone up by some 20% or more.