McDonald’s decision to temporarily close its restaurants in Russia will likely cost the company $50 million a month to pay wages and rent, CFO Kevin Ozan said on Wednesday.
Speaking to investors at the UBS Conference, Ozan also reiterated the company’s hope that the closures the brand announced Tuesday would not be permanent. “We expect this to be temporary,” Ozan said, according to a transcript on the financial services site Sentieo. “And we certainly don’t take this decision lightly.”
McDonald’s announcement Tuesday that it would close its restaurants in Russia in response to the country’s invasion of Ukraine was soon followed by several other major chains—ultimately encompassing some of the industry’s largest and most well-known global brands.
Starbucks said it convinced its licensee in the country to close its 130 locations there. Yum Brands, the owner of KFC that just earlier in the day said it would stop expanding in Russia, took its vow a step further by saying it would close company locations, as well as all 50 of its Pizza Hut units. Burger King later vowed to provide $3 million in relief funds and meal vouchers to help refugees. Subway said it would direct profits from the country to relief efforts and would work with operators in Europe to provide meals for refugees.
On Wednesday, Papa Johns followed suit by saying it would stop providing support for its 188 Russian locations, overseen by a master franchisee there, in the process likely writing off some $15.2 million in loans to the operator.
Other brands can be expected to take similar steps in the coming days, given the incredible speed with which U.S. companies are retreating from the market. More than 300 companies have withdrawn from Russia, according to the Yale School of Management, up from 200 a day earlier.
The result has been a swift backtracking from a market that had become a bright symbol of the spread of western fast-food chains into countries that had once eschewed capitalism in all forms. More than that, however, it has been a legitimate growth market. While not quite on par with China, it was certainly a market to be reckoned with.
McDonald’s first opened in what was then the Soviet Union in 1990, just as the country began opening itself up to Western companies. The brand’s growth there in subsequent years became such a symbol of the spread of capitalism that the New York Times columnist Thomas Friedman once theorized that two countries with a McDonald’s would not go to war with one another, a theory clearly proven false with Russia's invasion of Ukraine.
Yet Russia has also been a successful market for many of these large-scale brands. KFC operates more than 1,000 locations there. Burger King has 800 units in the country. Subway has about 450.
McDonald’s has 847 restaurants there, but that number has been growing. Unit count in Russia has grown by 60% since 2017, including the addition of 62 locations in 2021. Its rate of growth in recent years was exhibiting all signs of accelerating.
McDonald's restaurants in Russia
Source: SEC filings
While the country does not offer the type of allure of China and its 1.4 billion people, it has nevertheless been attractive. It has 142 million people, making it the ninth biggest country in the world by population. In 2001, a Goldman Sachs economist included it along with Brazil, India and China as a group of “big four” countries expected to eventually dominate the global economy.
In a sign of just how much the country meant to McDonald’s, most of its restaurants in Russia remained company-operated even though the company itself has made steps in recent years to divest itself from restaurant ownership. Brands often opt to keep markets in company hands when they view them with a certain level of significance.
But that also gave McDonald’s more of an ability to close its restaurants than, say, KFC, Burger King or Subway, which are either completely or largely franchised in the country, and where closing restaurants isn’t up to the brands.
Subway confirmed the challenge of shuttering restaurants in the country on Tuesday. “Our restaurants in Russia are independently owned and operated by local franchisees and managed by an independent master franchisee,” the company said. “We don’t directly control these independent franchisees and their restaurants.”
McDonald’s, on the other hand, could close its restaurants—which it had already done in Ukraine. “This is a really challenging and complex situation for a global brand like us,” Ozan said. “We’ve been doing business in Russia for decades. We’re certainly a part of the communities throughout the country where we feed and support a lot of people.”
To be sure, the market was likely headed for major economic problems, anyway, as a result of sanctions, and probably would have become a financial burden one way or the other. McDonald’s decision to keep paying its 62,000 workers in the country could be seen as a sign of goodwill, while also giving the company an ability to more easily ramp up operations if and when it can reopen the restaurants.
Still, it’s uncertain how long the invasion will last, or when or if the company can reopen the restaurants. “It’s impossible to predict when we might be able to open our restaurants in Russia,” CEO Chris Kempczinski said in a message to employees and franchisees.