MCDONALD'S RUSSIA: MANAGING A CRISIS
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9-503-020
REV: JANUARY 8, 2003
YOUNGME MOON
KERRY HERMAN
McDonald's Russia: Managing a Crisis
It was the end of August 1998 and George Cohon, founder and senior chairman of McDonald’s
Russia, sat huddled with Khamzat Khasbulatov, president of McDonald’s Russia, in a darkened suite
in the historic Metropol Hotel in Moscow. Outside, the country was in a state of emergency. Russia’s
currency, the ruble, had recently plummeted in value, creating massive inflation and widespread
economic disarray. Now the pair faced the difficult challenge of keeping their restaurants open in
this uncertain and volatile business climate.
Cohon had overcome significant challenges in the past, so there was no panic in his voice as he
discussed the situation with Khasbulatov. Back in 1966, Cohon had been a young lawyer practicing
in Chicago when he had met Ray Kroc, the man who eventually transformed a small restaurant chain
named “McDonald’s” into an American household name. Kroc had been so impressed with Cohon
that he had urged Cohon to quit lawyering and get involved with his company, eventually offering
him “exclusive perpetual rights” to McDonald’s in Eastern Canada. Cohon had scraped together the
$70,000 he had needed to get started and had opened his first restaurant in 1968. By 1981, Cohon had
turned McDonald’s into the largest food service organization in Canada.1
But Cohon’s success in Canada had paled in comparison with his accomplishments in Russia.
Cohon had spent 14 years bringing McDonald’s to the former Soviet Union; in the process, he had
been forced to overcome the huge obstacles associated with building a reliable supply chain in a
country with an outdated agricultural infrastructure. When the country’s first McDonald’s restaurant
had finally opened in Moscow in 1990, it had been a major international story, the biggest in
company history. Located in Pushkin Square just blocks from Lenin’s Tomb, the opening had drawn
thousands, and the Soviet militia had been called in to hold back the crowds. The scene had been
almost surreal—more than 30,000 Russians had sampled their first McDonald’s meal that day, as
western journalists like Dan Rather had broadcast the story live to viewers around the world.
1 In 1971, Cohon sold back the license for Eastern Canada to McDonald's and became chairman, president, and CEO of
McDonald's of Eastern Canada. At that time, he became the second-largest company-employed shareholder in the world.
Only Ray Kroc had a larger part of the company. Later that year, the Eastern and Western (Canadian) McDonald's operations
were joined into one company under Cohon's leadership. See Cohon and Macfarlane (1997).
________________________________________________________________________________________________________________
Professor Youngme Moon and Research Associate Kerry Herman prepared this case. In addition to interviews with the case protagonists and
company documents, this case draws on various sources, including George Cohon and David Macfarlane, To Russia with Fries (Toronto:
McClelland & Stewart, Inc., 1997), and “From Russia with Fries,” David Paperny Films and CTV, 1999. HBS cases are developed solely as the
basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective
management.
Copyright © 2002 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,
write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be
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503-020 McDonald's Russia: Managing a Crisis
Now, eight years later, the Russian ruble was in free-fall as a result of a combination of factors,
including a government austerity program, events in the Asian market, and a debt the state could not
afford to service. Before the crisis hit, the original Pushkin Square McDonald’s and the 25 other
McDonald’s restaurants situated throughout Russia had been among the busiest in the world. As a
result of the crisis, however, traffic in all of the restaurants had dropped off to a trickle. Cohon
remarked:
The biggest question we have right now is, how do we bring people back into our
restaurants? No one is eating out right now given the current situation, so we’ve got to get
them to come back. On the other hand, we’ve also got to keep in mind that the main reason
we’ve been successful in the past is we’ve always run this business with a long-term mindset,
so we can’t lose that either. In other words, we don’t want to overreact or do anything that will
create long-term problems for ourselves.
“Hamburger Diplomacy”
The idea to open a McDonald’s in Russia originated in 1976 at the Montreal Olympic Games.
During the Games, Cohon met a group of dignitaries from the Soviet Union and escorted the group
to a nearby McDonald’s for a snack. He recalled:
You’ve got to remember, if you were a Soviet in 1976, a restaurant was either a little hole-in-
the-wall where you were lucky to get a sausage sandwich, or it was a cold, formal dining
room. So when these officials encountered the quality, cheerfulness, and cleanliness of
McDonald’s, they were just blown away. At that point, a light bulb went off in my head and I
turned to the head of the delegation and said, “Do you think that your people would like to see
a McDonald’s in your part of the world? In the Soviet Union?” And the answer was “Da.”
Yes.
This encounter inspired me. At the time, Canada was a country of 26 or 27 million people,
whereas the Soviet Union had 290 million people. Their diet consisted of meat, bread,
potatoes, and milk. We serve meat, bread, potatoes, and milk of the highest quality. So I
thought to myself, “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.” How could I pass that up?
Of course, Cohon knew that bringing McDonald’s to Moscow would be no minor undertaking. In
the mid-1970s, most Russians had no concept of fast food; in fact, there were just two kinds of
restaurant facilities in Moscow, explained Glen Steeves, chairman of McDonald’s Russia and a key
member of the original McDonald’s Russia team. The first type consisted of “formal dining rooms”
operated by the city:
These dining rooms were incredibly rigid. Every restaurant, for example, had a huge coat
check area where you had to hang your coat. You were not allowed into the restaurant unless
you hung up your coat—this formality defined your dining experience. The tables all had
white table cloths and cutlery. In the Soviet Union, everyone ate food with cutlery; no one ate
food with their hands. And the service in these restaurants was inferior; you could sit for two
to three hours at a business lunch, being served typical Russian food by surly waiters.
The second type consisted of small, informal “cafés,” in which the menu consisted primarily of
pelmini (a ravioli-like pastry in a clear broth), served with a glass (not a cup) of coffee with a biscuit
on top. Because cafés only provided small bar tables without seats, patrons stood while they ate.
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Steeves commented, “The cafés were pretty depressing, with people standing around in their coats in
conditions that we would consider unsanitary.”
Given this, it did not take long for Cohon’s team to recognize that “in between these two kinds of
restaurants, there was a massive corridor of opportunity for McDonald’s.” However, in deciding to
pursue the business opportunity, Cohon and his team knew that they were entering uncharted
territory. Partnerships between large Western companies and the Byzantine Soviet bureaucracy were
rare, and economic conditions in the Soviet Union were dismal.2
Nonetheless, Cohon began traveling to the Soviet Union five or six times a year to meet with
Moscow city representatives and Kremlin officials. The maze of bureaucracy he encountered was
overwhelming at times: “You’d go down endless corridors trying to figure out where you were
going, and then you’d go into some room and you’d start to talk about McDonald’s—and they had
no concept, no concept of what we were talking about.” He went on:
We learned to treat frustration and delay like nature’s force of gravity. Remember, this was
the height of the Cold War. It was 1976. Brezhnev was in power. It was the “Evil Empire.” It
was Karl Marx in one corner and Adam Smith in another corner, squaring off. People would
walk quietly. There was no happiness, everything was gloomy. And here we were, wading in.
We—the epitome of capitalism, mother, and apple pie—trying to get into the Soviet Union
during the height of the Cold War.
Three years later, Cohon reached what he thought was an agreement with the Soviets, only to
discover 17 days later that the Politburo’s chief of ideology had called the deal off. Soon after, the
Soviets invaded Afghanistan, leading the West to boycott the 1980 Moscow Olympic Games.
Undaunted, Cohon continued to travel to the Soviet Union to pitch his idea to any government
official who would listen.
Eventually, his patience began to pay off. The early 1980s brought the dawn of the glasnost
(“openness”) era, and in 1985, Soviet President Mikhail Gorbachev introduced the revolutionary idea
of perestroika (“economic restructuring”). Gradually, the Soviet hold on culture and business began to
thaw. Alternative political parties began to spring up, and farmers began to sell their produce on the
open market. Then, in 1987, the Kremlin passed a new law on joint ventures, easing restrictions on
the importation of foreign capital, technology, and expertise. “It was a very heady time,” said Cohon.
“This country had been frozen in ice for decades, and now suddenly there was reason for optimism.”
The breakthrough came in 1988, when—after 12 years of arduous “hamburger diplomacy”—
Cohon finally received official approval to move forward with his plan to bring McDonald’s to
Moscow. Looking back, Cohon commented, “I think during the days of Gorbachev and perestroika
and glasnost, the Soviets wanted to demonstrate that they were moving ahead, and what better
symbol could they have chosen than McDonald’s? It was their way of making a statement to the
world that they were changing, that they were willing to begin embracing the West.”
The signed deal included approval for 20 restaurants to be built in Moscow, as well as a 100,000
square foot processing plant to be built in a Moscow suburb. Cohon added:
The deal stipulated that the city of Moscow would hold 51 percent ownership, and we
would get 49 percent. Ordinarily, we don’t go into partnerships with cities or governments,
but in this case we had no choice. Soviet law stipulated that Moscow city administration
2 As one longtime Soviet Union correspondent noted, by the late 1970s “agriculture occupied an astounding 19 percent of the
work force (in the U.S. the figure was 3 percent), yet even in a good year the country imported millions of tons of grain.” Bill
Keller, “Arise Ye Prisoners of Starvation!” The New York Times, February 23, 2002.
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control all services in the city, including restaurants, utilities, and real estate, so getting them
on board was the only way to make things happen. If we needed land, we knew they could
get us land. If we needed electricity, we knew they could get the Red Army in to put in power
lines.
Operational Hurdles
Negotiating the deal was one thing, opening the first restaurant was another thing altogether.
Despite the fact that Cohon had finally received approval to move forward, almost everyone he
encountered outside the company—industry analysts, competitors, even friends—warned him about
the many hurdles he would encounter along the way. These included:
1. Building a Supply Chain
At the end of the 1980s, most western industry analysts believed that it was impossible to get a
reliable supply chain started in the Soviet Union. The Soviet agricultural system was outdated and
highly inefficient; as one reporter for The New York Times described it, “In farming towns you found
spoiled land, demoralized workers, broken-down equipment, wheat rotting in the open.”3 Thus,
when McDonald’s scouts began trolling the countryside looking for suppliers, “the reactions ranged
from suspicion to ridicule to slack-jawed amazement, as if these guys had come not from McDonald’s
but Mars.”4 Cohon remembered:
We struggled with the simplest things. For example, just getting a potato supplier in Russia
to grow the right kind of potatoes was a huge challenge. We needed a potato that would be
long like an Idaho potato, so we could make long french fries. But the Soviet farmers couldn’t
understand that. They would shake their heads and say, “My grandfather grew potatoes, my
father grew potatoes, and I grow potatoes,” and they’d be reluctant to change anything.
Steeves added:
Part of the problem was that the Soviet farmers had no concept of some of the food we were
trying to make. Take a pickle. How do you describe a pickle? A cucumber? A small fruit? To
the Soviets, pickles were a mystery. They had “marinated cucumbers,” but they had no
experience with the kind of cucumber we made pickles from, and when they first tried
growing them, the yield was just dreadful. They experienced all kinds of mold problems,
infections, and so on.
To address these problems, Cohon’s team decided to tap the vast McDonald’s network, bringing
in some of the company’s top suppliers from around the world to train the Soviets. The McDonald’s
European potato supplier, Dutch cucumber specialist, and German meat supplier were all brought to
the Soviet Union to train their Russian counterparts from the ground up. “We really had to work
with our Russian suppliers at the most basic level in agriculture, right down into the fields,” said
Cohon. “It was very hands-on coaching, simply because there was no other way to do it. We had to
do this for tomatoes, lettuce, everything.” The team also granted their Russian suppliers special loans
to purchase modern farming equipment to boost productivity and quality.
3 Keller (2002).
4 Keller (2002).
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Cohon’s team soon found that, once they overcame their skepticism, the Soviet farmers were
enthusiastic learners. Steeves noted:
It was really a situation in which success bred success. After we started to bring our
specialists over, we were able to increase their yield by 300, 400, sometimes 500 percent. As a
result, many of our suppliers began to build highly successful businesses, which was
extraordinary in the Soviet Union at that time. Once these success stories started to ripple out
to other farmers, everyone started to accept us. This made it easier for us to recruit new
suppliers as time went on.
In fact, by the time the first McDonald’s restaurant opened in Moscow in January 1990, the team
was able to source 30 percent of the restaurant’s supplies from Russian suppliers. By 1998, 75 percent
of the company’s supplies came from close to 100 independent Russian suppliers.
2. Quality Control: Building the McComplex
A second challenge involved creating a tightly controlled food production system within the
crumbling Soviet empire. As Steeves put it, “The product not only had to be the best, it had to be
consistently the best. That was totally nonnegotiable. The Big Mac that we sold in London, Toronto,
and Tokyo had to be same as the one we sold in Moscow. It was the one thing there was absolutely
no flexibility on—the taste and quality of our core products.”
Ultimately, the team decided that the only way to ensure quality control was to construct a food
production facility of their own, something the company had never done. Construction of the
McComplex, located in a Moscow suburb, took two years and cost $45 million. It included a self-
contained bakery, dairy, and meat-cutting operation and employed over 400 people.
Once completed, the McComplex processed 70 tons of food—220,000 buns, 230,000 frozen
hamburger patties, 150,000 pies—every day of the week. Cohon noted: “I don’t know if there’s any
other case in McDonald’s history where so much money had to be spent prior to the sale of the first
hamburger. The $45 million investment was a huge risk. But we knew we couldn’t get the quality
without it.”
3. Hiring and Training Employees
A third challenge had to do with the question of employees. As many industry critics were quick
to point out, Soviet employees—particularly those who worked in restaurants—had a well-earned
reputation for being dour and unmotivated. In contrast, a key part of McDonald’s value proposition
was its cheerful customer service. “There were service standards that we could not afford to
compromise on,” said Steeves. “So the question was, how were we going to find people who would
meet our standards, who would work hard to run clean restaurants, make perfect quality food, and
then say ‘thank you,’ and ‘please come again’ with a smile?”
As it turned out, hiring top-notch employees turned out to be easier than predicted. Cohon
recalled, “We took out one ad in one newspaper one day and got 27,000 written responses. The ad
simply said, ‘We’re McDonald’s. We pay based on productivity, come grow with us.’”5 Steeves
elaborated:
5 Wages were paid in rubles; the average starting wage for a bottom-level crew member was 1.5 rubles an hour, which could
increase to 2 rubles an hour or more, based on productivity. See Jeff Sallot, “McDonald’s expects Muscovites to set records at
new restaurant,” The Toronto Globe and Mail, January 27, 1990, p. B6.
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When these applications started pouring in, we discovered, to our surprise, that lots of
them were from university graduates. We then realized that many applicants viewed this as a
chance to work for a western company. Consequently, we were able to put together an
incredibly educated crew of employees; in fact, our crew in the Pushkin Square McDonald’s
has the highest university graduate percentage of any McDonald’s in the world. One of our
first hires, for example, was a highly trained rocket engineer with a top-level military security
clearance. He came to work for us because he saw this as a step up in his career! Everybody
we hired—the restaurant managers, the cashiers, and so on—ended up being competent
beyond our wildest dreams.
Most of the original crew’s training took place in Moscow, although the four top managers,
including Khasbulatov, were sent for training in Toronto and at Hamburger University, at the
McDonald’s Oak Brook, Illinois, headquarters. Sarah Casanova, senior marketing director and
another core member of the original McDonald’s Russia team, noted, “There was only one way in
which we tailored the company training program for the Russians, and that was that we translated it.
Everything else was exactly the same.”
In addition, a number of Canadian managers were brought in to support the Russian crew. “By
the time we opened our first restaurant, we had 60 expatriates out of the 630-person crew,”
remembered Khasbulatov. “Today, that number is down to just a handful.”
4. The Currency Decision
The final area of skepticism that the McDonald’s team constantly encountered had to do with the
profitability of the enterprise. As Cohon put it, “All of the critics kept telling us, you will never make
money. You will never, ever make money.” In fact, industry analysts estimated that out of the
roughly 1,400 joint-venture deals Moscow had signed with western firms in the late 1980s, only about
100 had a reasonable shot at profitability.6 One reason had to do with the country’s currency
situation. Cohon explained:
In 1990, two types of currency were used in the Soviet Union. Common Soviet citizens
conducted transactions with rubles, a “nonconvertible” currency that was worthless on the
international exchange, whereas westerners [and in some cases, Soviet officials] conducted
transactions with convertible “hard currency,” such as U.S. dollars or German marks. It was
illegal for common Soviet citizens to hold hard currency.
Given this, the biggest and riskiest decision we faced before opening our first restaurant
was, what kind of currency should our restaurant accept? Either way we looked at it, it was a
huge gamble. If we accepted hard currency only, we’d be excluding most of our customer
base. But if we accepted rubles for payment, the currency would have no value outside the
Soviet Union. So I had a lot of people tell me, “George, if you charge rubles, you’ll make
money alright—you’ll have enough rubles to wallpaper the biggest hotels in Moscow. But the
money won’t do you much good for anything else.”
The decision was particularly controversial due to the fact that the currency issue was a source of
intense resentment among the Russians, primarily because of the special privileges accorded to those
who possessed hard currency. In the Soviet Union, most nonessential goods were scarce and could
only be purchased in beriozka (hard currency) shops; these beriozka stores sold items that most citizens
could only dream of. To reinforce their exclusivity, the doors of the beriozka stores bore official brass
6 See “Of Famous Arches, Beeg Meks, and Rubles,” Bill Keller, The New York Times, January 28, 1990.
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plaques with the words “Hard Currency Only” inscribed on them and had covered windows to
prevent “commoners” from peeking inside.
Several other high-profile stores that catered to foreigners and tourists also had “hard currency
only” policies. For example, Baskin & Robbins, the ice cream franchise, had an outlet near Red
Square that accepted hard currency only. Other companies took a dual approach, offering two lines
for payment, one that accepted hard currency and another that accepted rubles. Cohon commented,
“The line for ruble payment would always be a mile long, while westerners could just waltz in and
get what they wanted without waiting.” In fact, western businesspeople were often referred to as
“sharks” by the Russians because of the perception that they cared little about the well-being of the
Russian people.
After intense deliberation, Cohon made his decision: McDonald’s Russia would accept rubles
only. As he explained, his decision was motivated by several considerations:
First, I believed strongly that we had to create a Russian company, with Russian employees,
Russian suppliers, and Russian-sourced product. We were building for the future. This wasn’t
a short-term deal for us. We were going to take the money and reinvest it in the country. We
were going to build a network of restaurants. Second, I believed that there was no way the
ruble was going to stay nonconvertible forever. Of course, I had to convince our boards of
directors about this. I had a U.S. board, a Canadian board, all saying, “How are you going to
get your money out?” And so we talked a lot about barter, believe it or not. I had
conversations with Gorbachev about bartering all kinds of things, phosphorous and whatnot.
It was a bit crazy, but that was the situation. Finally, I knew we had to go with rubles because
our target customer was the Russian consumer. If we couldn’t gain the trust of the Russians,
there was simply no point to the entire enterprise.
Once the decision was made, Cohon ordered his team to place an official brass plaque on the door
of the McDonald’s restaurant being constructed in Pushkin Square. Designed to replicate the look of
the exclusive beriozka plaques, the McDonald’s version read, “Rubles Only” (see Exhibit 1). Needless
to say, the sign garnered significant press and created a wave of affection among the Russian people
even before the restaurant opened.
The Marketing of McDonald’s Russia
Located only blocks from Lenin’s Tomb in the heart of downtown Moscow, the Pushkin Square
restaurant was scheduled to open in January 1990. However, the marketing of the restaurant began
as early as 1988. Peter Beresford—who, as McDonald’s Canada’s vice president of marketing was
typically referred to by the Russian press as the vice president of “Propaganda” because Russians
were unfamiliar with the concept of “marketing”—commented, “The marketing task for us was very
different because we were dealing with a population that had no idea what McDonald’s was, what a
Big Mac was, and couldn’t fathom the idea of eating with their hands.”
Many of the company’s marketing initiatives were rather unorthodox. For example, the company
created a biweekly television show, Flight 910, that took children on “flights” to different countries.
In each episode, the children would inevitably end up in a McDonald’s, and viewers would get a
glimpse of what life was like for McDonald’s employees and patrons around the world. “Remember,
there was only one network in the Soviet Union at the time,” noted Beresford, “so every time our
show ran, we’d get 50, 60 million viewers.” In addition, the team worked hard to create bonds with
members of the Russian media. Beresford said:
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We became great friends with reporters at Tass and Gosteleradio—the state agency for
television and radio. Even before the store opened, we would invite the Russian media inside
to take a peek and sample the food. I remember at one point we had the equipment and
supplies to make french fries, so we cooked up a bunch of fries for everyone. We didn’t have
packaging yet, but we put a huge pile of fries on a big bun tray and let everyone eat while they
interviewed us. We also let them practice with the crew, which they got a big kick out of.
As a result of these efforts, the impending opening received significant coverage in Soviet
television, radio, and newspapers, almost all of which was positive. Meanwhile, as opening day
drew nearer, the team finalized a series of marketing decisions:
! The Menu. The team was unanimous in believing that the core menu had to be exactly like
the ones found in the New York, Toronto, London, Sydney, and Tokyo restaurants. “This was
the one thing we weren’t willing to compromise on,” said Casanova. “We decided not to tailor
anything to Russian tastes. No special menu items. Our menu, after all, is the heart of our
brand. The price of a Big Mac is a universal; The Economist even uses it as an inflation index.”7
Cohon concurred: “We believed 100 percent that McDonald’s had to be the same anywhere in
the world. Even though Russians had no idea what a Big Mac was, we figured we’d teach
them.” (See Exhibit 2 for example of the menu on opening day.)
! Pricing. In terms of pricing, the team decided to use the Soviet cafés as a benchmark. “A café
meal cost about 3 rubles,” said Casanova, “so we decided that a meal at McDonald’s shouldn’t
cost much more.” Thus, prices were set such that a Big Mac, Coke, and fries would cost about
5 rubles, the equivalent of half a day’s salary for the average Russian.8 Because labor costs
were significantly lower in the Soviet Union than in most other McDonald’s countries, these
prices still yielded high margins for the company.
! Store Design. The restaurant itself would seat close to 1,000 people (750 inside, 250 outside)
and have 27 cash register lines, making it one of the largest McDonald’s in the world. In
terms of store design, Casanova explained:
We knew that Russians loved to travel, but most of them had never had the
opportunity. So we designed the store so that, when you walked in, on your left was
South America, with murals of beaches and palm trees sculptures. On your right was a
mini Eiffel Tower and a Tower of London and a Big Ben. Then upstairs, there was a
replica of the Delta Queen riverboat, and then if you went further past that, you were in
Japan. The whole place was air conditioned, and if you walked in, honestly, you would
think you were anywhere in the world. We built a beautiful, modern restaurant, a jewel.
! Rules of Conduct. Finally, the team decided to institute a “no smoking” policy in the
restaurant which, as Casanova put it, “was unheard of. In Russia, you smoked everywhere.”
Similarly, alcohol was banned from the premises, which again was unheard of. There was no
coat check, and most importantly, no special privileges for foreigners in line. “That was
huge,” said Cohon.
7 “. . . The theory of purchasing-power parity [holds] that a dollar should buy the same amount in all countries. Thus in the
long run, the exchange rate between two countries should move towards the rate that equalizes the prices of an identical
basket of goods and services in each country. . . . The Big Mac PPP is the exchange rate that would mean hamburgers cost the
same in America as abroad. Comparing actual exchange rates with PPPs indicates whether a currency is under- or
overvalued.” Economist.com, , accessed September 12, 2002.
8 See “Of Famous Arches, Beeg Meks, and Rubles,” Bill Keller, The New York Times, January 28, 1990.
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Opening Day—After 14 Years!
By the time opening day arrived on January 31, 1990, anticipation in Moscow had peaked. Steeves
recalled, “We had a Disneyland-style line set up, and hours before we opened—in the middle of the
night, really—there were already throngs of people gathering behind the barricades. By the time we
opened our doors, the crowds were unbelievable.”
Because the Russians had no idea how to eat at McDonald’s, on opening day the company handed
out brochures to people waiting in line; the brochures described the various menu items and
instructed customers on what to do inside the restaurant, that is, how to order a meal. The brochures
not only served as useful educational devices, but they also became treasured souvenirs. In fact, tray
slips and packaging items such as plastic cups were specifically designed to be carried out of the
restaurant and taken home (see Exhibit 3). Cohon remarked, “We knew they would want to walk
away with the packaging, so that became a form of advertising for us.”
Still, as Steeves recalled, some cultural habits were deeply embedded:
We discovered that they tended to eat the Big Mac differently than we do. To them, a
sandwich was a piece of bread and a piece of meat and a piece of cheese—open faced. So they
would take a Big Mac, turn it over, take off the bottom with its meat patty, lettuce, cheese—and
eat that as a single sandwich. The club, the part in the middle, with the meat patty and the
lettuce and cheese—that became another sandwich. So when they ordered a Big Mac, they felt
like they were getting two sandwiches, with a bun left over. It was a great deal.
More generally, everything about the restaurant inspired awe. “They’d never seen anything like
it,” Cohon said. “It was all so clean, so sparkling, so cheerful. They’d say, ‘It’s like going to the West
without leaving the country.’ And I remember standing at the back of the restaurant saying ‘Thanks
for coming’ to people—and they would just stare at me because they couldn’t believe how friendly I
was being.” (See Exhibit 4 for views of the restaurant, and Exhibit 5 for photos of the crew at work.)
Some of the opening day customers were Russians who had traveled for miles for the experience.
Cohon recalled:
I remember seeing this woman leaving with two big bags of food, and I asked her, “Where
are you going?” She said, “I’m going back to Siberia, I’m taking this food to my village. I
promised everyone I would get into McDonald’s, so I’ve been waiting for hours in the line.” I
tried to persuade her that she should just take the packaging. “The food will be no good by the
time you get to your village,” I told her. But she insisted, “No, I’m taking it all, I promised I’d
show everyone and this is what I’m doing.”
Russians were not only impressed by the food, the atmosphere, and the employees, but they were
also impressed by how stringently the company enforced the “rubles only” and “no special
privileges” policies. Cohon said:
That first day, I heard someone from the American Embassy talking to a Russian crew
person, saying “I’m from the American Embassy. Where do I get in line?” The crew member
said, “With all due respect, the line’s there and you’ve got to go to the back of it.” The guy
responded, “You don’t understand. I’m from the American Embassy.” And the Russian said,
“No, you don’t understand. We only have one door here, it’s the front door and you’ve got to
go to the back of the line.” And you wouldn’t believe it, but the Russians actually applauded
when we sent this guy to the back of the line. It was amazing to watch.
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503-020 McDonald's Russia: Managing a Crisis
By the end of the day, the Pushkin Square crew had managed to serve over 30,000 people in a
single day, a new world record for McDonald’s. In the process, the opening had created nothing
short of an international media frenzy. The CBS Evening News had opened its broadcast with Dan
Rather standing live in front of the Pushkin Square restaurant. The Today Show, Good Morning
America, and countless other news organizations had also broadcast the story live from the scene.
“The media hit was incredible,” Cohon noted. “We were on The New York Times front page two days
in a row, and we were the lead story on every network news program around the world.” (See
Exhibit 6 for samples of media coverage.)
McDonald’s Russia in the 1990s
Three years later, the Pushkin Square restaurant was still the busiest McDonald’s in the world,
and the Russian team felt confident enough in the long-term viability of the business to open two
more restaurants in Moscow. The first was located just three blocks away from the Pushkin Square
location. The second was located in Arbat, another busy section of Moscow. As Steeves described,
both were equally successful: “Opening night at both locations, it was the same scene all over again,
thousands of people lining up; in fact, we had crowd-control problems. And what was really
surprising was that it didn’t diminish demand at the Pushkin restaurant.”
Meanwhile, the country’s political volatility often created uncertain, even violent, situations. For
example, during the failed coup of August 1991 that resulted in the emergence of Boris Yeltsin as the
new national leader, crowds of angry citizens took to the streets, knocking over cars and destroying
property. McDonald’s, however, was left untouched. “The crowds came right up to our restaurant,”
Cohon recalled. “We were so nervous about what they were going to do, but then someone shouted,
‘Hey, this is a Russian company. These are Russians working here, leave them alone, don’t mess with
them.’ And so no violence was ever directed at us.”
In 1993, President Boris Yeltsin himself arrived to kick off the festivities at the opening of the
second Moscow restaurant. Cohon recounted a conversation he had with Yeltsin during the opening:
Yeltsin was talking to Karina, our restaurant manager, and he said to me, “How much does
she make? What’s her salary?” Now, my first reaction was to try to impress upon him how
long she’d been with the company, how she had worked her way up through the ranks from
crew member, to assistant manager, and now to manager of the restaurant. But Yeltsin wasn’t
interested in any of that. He kept asking, “I want to know how much money she makes.” So I
finally mentioned the amount in rubles. He said, “Say it again.” And so I said it again. And
then he looked me right in the eye and said, “I’m the president of the country. She makes
more money than I do.” And I said, “Well, she’s got a very tough job.”
The company opened its first drive-through restaurant, located on the main road to the airport, in
1996. (By this time, due to a change in Russian law, the original ownership deal struck with Moscow
had been renegotiated to 20 percent Moscow/80 percent McDonald’s.) Cities outside of Moscow
were next in line, with St. Petersburg opening its first restaurant in 1996. None of the Russian
restaurants was franchised, and all restaurants outside of Moscow were 100-percent owned by
McDonald’s Russia. Furthermore, the negotiation process for opening a new restaurant had become
significantly easier, as Khasbulatov described: “Whenever we open a store now, the mayor from the
adjoining city shows up to pitch the idea of opening a McDonald’s in his town because he knows we
bring so much to the table. And it isn’t just the quality of the food, the number of people we employ,
or the taxes we pay—it’s also the prestige factor, which tends to draw other foreign investors.”
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Purchased by SUNG JIN CHOI (bej@kdischool.ac.kr) on September 04, 2012McDonald's Russia: Managing a Crisis 503-020
By 1998, the entire senior management team of McDonald’s Russia—with the exception of a
handful of expatriates—was composed of Russians. Most of these managers had been with the
company since Day One and had worked their way up through the McDonald’s system. As Cohon
noted, employee turnover was low: “These are not high school kids with summer jobs. Even at the
lowest levels, our employees view this as the start of a prosperous career.”
There were now 26 stores in Moscow and St. Petersburg. Customers were evenly split between
male and female; 48 percent were adults 20 to 30 years old, 22 percent were teenagers. Eighty-seven
percent visited with groups; 35 percent of group visits included children. On average, customers
visited 2.35 times over a four-week period, and 40 percent of McDonald’s customers in Russia visited
a restaurant once a week or more. (See Exhibit 7 for customer profile data.)
In 1997, the company had launched its first mass media advertising campaign. The initial
advertisements had been simple and direct; they had featured the Big Mac and had included the
tagline, “Good Times, Great Taste.” A year later, the company was still actively advertising in a
variety of mass media channels, as Casanova explained:
We have two goals with our advertising. First, for many Russians, McDonald’s is still
considered a place for “special occasions.” We want to change that perception and encourage
people to visit us on a regular basis. We plan to open dozens more restaurants next year, so
the focus is on building demand. Second, we want to introduce ourselves to people who have
never been inside a McDonald’s. When you air a commercial on Russian television, you're still
going to reach people who don't know what McDonald’s is.
Khasbulatov, who over the course of eight years had worked his way up from a manager trainee
to president of McDonald’s Russia, added, “In Russia, only 15 percent of the population regularly
dines out. That means we have great potential for growth in the near future.”
The original Pushkin Square McDonald’s was still a bustling location, serving over 7.5 million
customers a year, with annual sales of close to $18 million; the 25 other McDonald’s locations were
also performing extremely well. On the other hand, the initial hysteria had died down—the lines no
longer stretched out the door, and it was often possible to get a meal without waiting for too long. In
addition, by 1998, Russian consumers had more choices when it came to “quick-service restaurants”
(QSRs). Local QSRs included Rosinter, which ran several brands (including a KFC-replica,
“Rostiks”); Russian Bistro, which served Russian-type pies; and Marcon City, which operated hot-
dog kiosks. Other western-based companies had also penetrated the Russian market, such as Pizza
Hut, Subway, KFC, Domino’s Pizza, Baskin & Robbins, and Sbarro. (See Exhibit 8 for a list of
competitors and number of stores.) “Of course, we’ve got to keep this competition in perspective,”
Steeves pointed out. “None of these chains has the kind of penetration we have, so while there is
some competition, it’s not even close to what it’s like in North America.”
The Ruble Crisis (1998)
Back in the Metropol Hotel, the summer evening had faded slowly to dark. Cohon and
Khasbulatov were glad they had decided to meet in the relative quiet of the hotel; the hushed
atmosphere made it easier to focus on the crisis at hand. The Russian ruble had long since become
convertible, much as Cohon had predicted, but just days ago, the country’s liquidity problems had
created a massive run on the currency. Already, the Russian Stock Exchange had been suspended,
the central bank had imposed trading restrictions, and foreign investors were bolting out of the
country, pulling their assets with them.
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Purchased by SUNG JIN CHOI (bej@kdischool.ac.kr) on September 04, 2012503-020 McDonald's Russia: Managing a Crisis
For the Russian people, the hyperinflation was turning lifetime savings into worthless paper.
Unemployment was sky-rocketing. Cohon commented: “Currently, it’s a terrible situation, a total
economic shutdown. Customs are closed, all the banks are closed. I went out on the streets to look
for some laundry detergent, and there is just nothing on the shelves. The Russian attitude right now
is to spend rubles as quickly as possible on nonperishables, before the currency becomes totally
worthless.”
“The worst part is, no one can predict when it will end,” noted Khasbulatov. “The ruble is
spiraling out of control, but the question is, have we seen the worst of it already? Or is this just the
beginning?”
Most foreign companies were laying off local workers, and some were preparing to leave the
country altogether. But for McDonald’s Russia, this was not an option. “We’re a Russian company,
and we’ve made a long-term commitment to building a business here,” said Cohon, “so we’re
determined to survive the crisis without laying anyone off. These are people we’ve trained from the
ground up; in my mind, they’re the best employees in Russia. That’s too valuable an asset to throw
away.”
“At the same time, our restaurant volumes have gone way down,” said Khasbulatov. “People just
aren’t coming in. We’ve worked so hard to build a strong, loyal customer base through our
advertising, our customer service, everything. We can’t afford to let people forget about us now, we
have to make sure they stay in touch with us.”
Fortunately, despite the fact that imports were for the most part frozen, the company’s supply
chain remained largely intact. But if the company was to get store volumes back up, the McDonald’s
Russia team faced two key decisions:
1. Pricing
Given the economic crisis, what should the company do about its prices? Most other businesses
(including restaurants) had already raised their prices roughly 300%. Foreign businesses had been
particularly quick to raise their prices, since they relied heavily on imports; many were posting new
increases daily. (Prior to the crisis, the 1998 price of a Big Mac meal had been about 19 rubles—
roughly the equivalent of $3 U.S.) Cohon remarked:
My guess is that no one will blame us if we match everyone else’s price increases. The
reason companies are raising their prices is they believe this will at least allow them to cover
their costs for the few people they’re continuing to serve. On the other hand, it feels
counterintuitive to me to raise prices at a time like this. Keep in mind, volumes are down
everywhere. The conventional marketing solution to this is to lower prices to increase demand,
not raise them. So maybe that’s what we should be doing instead—working hard to keep our
prices down, or at least at a reasonable level.
“I’m not sure that conventional economic wisdom applies in this case,” Khasbulatov countered.
“If we keep our prices down, it could simply mean that the more successful we are in boosting
volume, the more money we’ll end up losing.”
As the two of them reflected on the situation, Cohon considered whether they should be seeking
more creative solutions to bring volume back up. “Maybe we’ve got to think ‘outside the box’ a
little,” he mused. He decided to take a stab at it: “What if we were to take out a bunch of ads on
national television and guarantee prices for a certain period of time? For example, what if we were to
guarantee that the price of a Big Mac would stay at an advertised rate for the next month?”
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Purchased by SUNG JIN CHOI (bej@kdischool.ac.kr) on September 04, 2012McDonald's Russia: Managing a Crisis 503-020
“There’s no question that the idea is risky,” he went on. “Right now, no one is willing to put a
price on anything. The currency is just too volatile, the future is too unpredictable. In fact, most
businesses have suspended all advertising. So the idea of going on TV and announcing guaranteed
prices on some of our core menu items is pretty radical.”
2. Menu
The second decision had to do with the menu. At the time, the restaurant menu consisted of the
same core items found in McDonald’s everywhere in the world (see Exhibit 9). The company had
recently added Chicken McNuggets and Happy Meals but had never deviated from the belief that the
menu had to remain true to the McDonald’s brand. However, given the current crisis, Cohon was
now toying with the idea of adding Russia-specific items to the menu, at least for the short term.
Options they were considering included simple grilled cheese sandwiches, cabbage salads, burgers
with pork patties, perhaps even soups—chicken or mushroom, all sourced locally.
The advantage of such items was that they were cheaper to produce and could thus be priced very
low, and that they were available locally so costs could be predicted. “If people know that they can
come to our restaurant and still order something for under 20 rubles, even if it’s a cheese sandwich,”
said Khasbulatov, “it might restore some store traffic for us. On the other hand, do we really want
our brand associated with cabbage soup?”
As Cohon considered the various options, he knew the choices were fraught with risk. Untold
years of effort had been invested in getting McDonald’s established and accepted in Russia. To have
everything come unhinged now was hard to contemplate. He noted, “We’ve worked so hard to
make McDonald’s a part of the fabric of this culture. So we have to figure out what we can do in the
current situation that will communicate to our customers, ‘We’re McDonald’s. Come on in.’”
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Purchased by SUNG JIN CHOI (bej@kdischool.ac.kr) on September 04, 2012503-020 McDonald's Russia: Managing a Crisis
Exhibit 1 The Brass “Rubles Only” Sign
Source: McDonald’s Russia.
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Purchased by SUNG JIN CHOI (bej@kdischool.ac.kr) on September 04, 2012McDonald's Russia: Managing a Crisis 503-020
Exhibit 2 Sample Menus from Early 1990s
Source: McDonald’s Russia.
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Purchased by SUNG JIN CHOI (bej@kdischool.ac.kr) on September 04, 2012503-020 McDonald's Russia: Managing a Crisis
Exhibit 3 Use of Brochures on Opening Day
Source: McDonald’s Russia.
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Purchased by SUNG JIN CHOI (bej@kdischool.ac.kr) on September 04, 2012McDonald's Russia: Managing a Crisis 503-020
Exhibit 4 The Moscow McDonald’s Restaurant
Source: McDonald’s Russia.
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Purchased by SUNG JIN CHOI (bej@kdischool.ac.kr) on September 04, 2012503-020 -18-
Exhibit 4 (continued)
Source: McDonald’s Russia.
Purchased by SUNG JIN CHOI (bej@kdischool.ac.kr) on September 04, 2012503-020 -19-
Exhibit 5 Moscow Restaurant Crew Members
Source: McDonald’s Russia.
Purchased by SUNG JIN CHOI (bej@kdischool.ac.kr) on September 04, 2012503-020 -20-
Exhibit 5 (continued)
Source: McDonald’s Russia.
Purchased by SUNG JIN CHOI (bej@kdischool.ac.kr) on September 04, 2012McDonald's Russia: Managing a Crisis 503-020
Exhibit 6 Select News Coverage of Opening of McDonald’s in Moscow
“The Making of McDonald’s, Moscow Style,” The Associated Press, January 23, 1990.
“With a week to go, Moscow’s first McDonald’s gets final preparations,” Los Angeles Times, January
24, 1990.
“Soviets ready for a new line—at McDonald’s,” Chicago Sun Times, January 28, 1990.
“Muscovites get fast food after waiting years for it,” The Dallas Morning News, January 28, 1990.
“McDonald’s Moscow Triumph,” The San Francisco Chronicle, January 29, 1990.
“Bringing fast food to Soviet masses,” The Dallas Morning News, January 29, 1990.
“The Making of McMoscow,” The Financial Post, January 29, 1990.
“Scrounging for Soviet Food, McDonald’s Starts at the Farm,” The Associated Press, January 29, 1990.
“Aiming for long-term fast-food payoff. McDonald’s Moscow opening required 14 years’
groundwork,” The Orange Country Register, January 30, 1990.
“Golden arches grace world’s biggest McDonald’s,” United Press International, January 30, 1990.
“Moscow McDonald’s Breaks Record,” PR Newswire, January 31, 1990.
“A Bolshoi Mac Attack in Moscow as First McDonald’s Opens,” The Associated Press, January 31, 1990.
“‘Beeg Meks Produce Long Lines in Moscow—Grinning Soviets Check out the New McDonald’s,”
The Seattle Times, January 31, 1990.
“McDonald’s Comes to Moscow,” Tass, January 31, 1990.
“Upheaval in the East; Moscow McDonald’s Opens: Milkshakes and Human Kindness,” The New
York Times, January 31, 1990.
“Hammer and Pickle; McDonald’s opens to raves in Moscow,” Newsday, February 1, 1990.
“Muscovites Get First Taste of McDonald’s,” The Baton Rouge Morning Advocate, February 1, 1990.
“Moscovites have big hunger for McDonald’s food,” The Financial Post, February 1, 1990.
“McDonald’s in Moscow; Slow Food,” The Economist, February 3, 1990.
“For the Leninists it’s Mac in U.S.S.R.,” U.S. News and World Report, February 12, 1990.
“Trivial pursuit challenge beefs up McDonald’s,” Marketing, February 15, 1990.
“Letter from the Soviet Union: Back in the U.S.S.R., the times they are slowly a-changing,” The
Toronto Globe and Mail, February 17, 1990.
Numerous documentaries were produced and broadcast January—April 1990, including BBC
Channel 1 (U.K.), Japan National Television, CTV (Canada), Australia News, and Gostelradio
(Moscow).
Source: Casewriter research, McDonald’s Russia.
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Purchased by SUNG JIN CHOI (bej@kdischool.ac.kr) on September 04, 2012503-020 McDonald's Russia: Managing a Crisis
Exhibit 7 Customer Profile Data, 1998
Gender: Age:
Male 50.5% 13–16 yrs 10.2%
Female 49.5% 17–20 14.9%
21–25 18.1%
26–35 34.0%
36–45 17.0%
Frequency of visits: Numbers of people in group:
once a week or more 32.4% Alone 22.6%
2–3 times a month 13.1% 2 44.5%
once a month 16.9% 3 20.6%
once every 2–3 months 7.4% 4 8.2%
less often 4.3% Families 55.0%
first time 25.8%
Source: McDonald’s Russia.
Exhibit 8 QSR Competitors, July 1998
Rostik’s 8 restaurants
Russkoe (Russian) Bistro 23 restaurants
Steff Wagon N/A
Sbarro 2 outlets
Subway 1 restaurant
Pizza Hut 4 outlets (2 in Moscow, 2 in St. Petersburg)
KFC 2 restaurants (1 in Moscow, 1 in St. Petersburg)
Source: McDonald’s Russia.
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Purchased by SUNG JIN CHOI (bej@kdischool.ac.kr) on September 04, 2012McDonald's Russia: Managing a Crisis 503-020
Exhibit 9 Moscow Menu and Prices (Selected Items), Early August 1998
Product Price
(Rubles)
Big Mac 13.00
Filet-O-Fish 11.00
Cheeseburger 7.00
Hamburger 6.00
Royal Cheeseburger 13.50
Double Royal Cheeseburger 18.00
McChicken 14.00
Bacon Double Cheeseburger 15.00
Royal Deluxe 16.00
4 McNuggets 9.00
6 McNuggets 13.00
9 McNuggets 17.00
Large Fry 9.00
Regular Fry 7.00
Child Fries 5.00
Large Drink (32 oz.) 8.50
Medium Drink (22 oz.) 6.00
Small Drink (16 oz.) 5.00
Kid’s Drink (12 oz.) 4.00
Medium Shake (22 oz.) 10.00
Small Shake (16 oz.) 8.00
Kid’s Shake (12 oz.) 7.00
Sundae (5 oz.) 6.00
Big Sundae (8 oz.) 9.00
McFlurry (16 oz.) 11.00
Pie 6.50
Milk 5.00
Tea 5.00
Large Tea 6.00
Coffee 5.00
Large Coffee 6.00
Hot Chocolate 7.00
Cappuccino 8.00
Kid’s Juice (12 oz.) 7.00
Small Juice (16 oz.) 8.00
Ketchup 1.00
Extra Sauce 2.00
Bag 1.00
Happy Meal Toy 6.00
Source: McDonald’s Russia.
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