Posted on 03/17/2005 3:52:29 PM PST by srm913
McDonald's Commands a Real Estate Empire in Russia By ERIN E. ARVEDLUND
MOSCOW, March 16 - The busiest McDonald's restaurant in the world is not in America but thousands of miles away in Pushkin Square. The store serves 30,000 customers a day, as busy as on opening day, Jan. 31, 1990. The menu is essentially the same as in the United States, with the addition of cabbage pie among other traditional Russian food items.
The Pushkin Square restaurant is important as well because it is the jewel in a growing real estate empire that ranks McDonald's among the largest corporate landowners in Russia.
Other big companies have begun to follow its lead and are getting their foot in the door by becoming real estate developers. Still, the practice is not without its pitfalls: three of McDonald's office buildings in downtown Moscow have been for sale for well over a year.
McDonald's real estate venture began in the early 1990's, when it had no way to convert the rubles that customers paid for its hamburgers and milkshakes into another currency. The company spent the rubles to buy farmland and put up office towers, a distribution center and a factory in the Moscow suburbs - which became known as McComplex. In 1993, the company built its first office building, just two blocks from the Kremlin. Tenants like Coca-Cola and Upjohn moved in.
More property was added as McDonald's opened new restaurants, buying many of the restaurant properties because loans are not easily available in Russia to run small businesses, including the franchises that McDonald's sells in other countries.
The chain now employs 17,000 Russians in 37 cities and plans to open 25 restaurants this year, mostly in Moscow and St. Petersburg, and 75 more by 2007.
Today, buying land in central Moscow is nearly impossible, and McDonald's prevailed by getting in early and working closely with the city. "We had a great relationship with the city of Moscow," and the mayor at the time agreed to sell McDonald's the central property, recalled George Cohon, head of McDonald's Canada, who persuaded Soviet officials to open the restaurant in Pushkin Square.
Real estate analysts and industry experts here conservatively value McDonald's 127 Russian restaurants, plus its land, storage warehouses and distribution centers at $115 million, although that figure could be much higher if the company succeeds in selling the office towers and leasing back the space for its own use. Revenue in Russia last year totaled $310 million.
In central Paris and London, "we do long-term leases, but we were able to buy more here," Russ Smyth, McDonald's president for Europe, said in an interview on the Pushkin Square store's 15th anniversary. He declined to put a value on the Russian real estate portfolio, but added, "It's definitely a hidden asset."
McDonald's early lock on top locations is helping it stand up against other corporations seeking a toehold in Russia, including coffee giants like Starbucks, which has yet to enter the country. And in some stores, like the one at the Old Arbat pedestrian tourist mall, it has added side cafes with soft lights and a dessert menu. Perhaps as a pre-emptive strike, McDonald's is also starting to serve stronger coffee.
Other multinationals have mimicked its developer tactics. In 2002, Ikea opened a 2.1 million-square-foot mall between Moscow's main airport, Sheremetyevo, and downtown, and a second giant mall began operations recently. Last year, Ikea opened its first store in Kazan, in the Tatar region, and plans stores in 10 other cities with populations of more than a million.
The French supermarket chain Auchan operates at least three stores, and Wal-Mart is expected as well. It is said to have looked at locations in St. Petersburg.
"All the multinationals have had to develop their own real estate," an agent representing these clients said. "It shows that a lot of the foreign direct investment in Russia is going into property ownership."
Russia is now one of McDonald's fastest-growing markets, along with Western Europe and China.
"They're contending with desperate times in America since there's no room to build new restaurants," said Richard Adams of the Franchise Equity Group, an advocate for McDonald's franchise owners. "Their growth is the beast they must contend with. So they are looking to foreign markets to satisfy Wall Street and keep investors happy."
Real estate agents say the three office buildings in central Moscow that McDonald's is having trouble selling have appreciated 40 percent in the last decade and could fetch $45 million. That is in part because high-quality office space in Moscow is in short supply. In 2004, office rents were up 30 percent on average from those in 2003, according to the real estate firm Noble Gibbons.
But the three properties were "built very early and the quality may not have been so good," said Ekaterina Konstantinova, an analyst with the Troika Dialog commercial real estate fund. "After five years, a building loses its shine."
One of the three is next to a building damaged by fire late last year, and an early buyer backed out. Worse, at an office tower two blocks from the Kremlin, "there's no parking," a necessity in a traffic-clogged city with millions of people, said Oleg Myshkin of Colliers International. "The systems in the building are worn out, and there's a lot of deferred maintenance at the location."
But McDonald's here has been able to avoid some problems that have troubled it in the West.
The "Super Size Me" controversy, and accusations that fast-food chains like McDonald's promote obesity, are not issues for Russians, some of whom demand mayonnaise with 40 percent fat content. Nor does McDonald's low pay seem to bother many here - Russian wages average $250 a month.
Some even argue that McDonald's is identified in the public mind with glasnost and perestroika, the policies of openness and restructuring under Mikhail S. Gorbachev in the final years of the Soviet Union.
"There was no food in the stores," recalled Vladimir Malyshkov, deputy mayor of Moscow who helped broker the original deal for the Pushkin Square restaurant. "I was under investigation for allocating meat to McDonald's."
Now, looking back, he said, "It was the first precursor of a free life."
That's amazing!
It's like a taste of home with a local twist.
I particularly like getting a decent espresso when in Europe. Additionally, the availability of a Heineken on tap or a bottle of wine is strong evidence of European cultural superiority
I shudder to think what was involved in that business deal.
"Additionally, the availability of a Heineken on tap or a bottle of wine is strong evidence of European cultural superiority"
Cultural superiority? No!
Culinary superiority? Maybe!
Years ago, Ray Kroc commented that McDonald's is not in the food business, it's in the real estate business.
They do some things better in Europe. Highway food is way better.
Gotta lose the squat toilets though.
Here in New England the second wealthiest family owned business, after Fidelity Corp, is the DeMoulas chain of supermarkets.
Their wealth is in prime real estate, not in the peddling of cereal.
? Walmart (China) Commands a Real Estate Empire in Russia?
Give me 3 orders of Cabbage pie we are having a fartin contest tonight.
It's not uncommon to see one DeMoulas market just steps from another and they are all raking it in!
I know nothing about the supermarket business, but they appear to be really well run.
I hear the department managers talking with each other about how many tens of thousands a department, or hundreds of thousands a store worth of business they did on such and such a day.
I happened to be in one today and the manager had her short hair a bright green. I thought that was a little much!
Oh, my goodness!
I visited the 2nd busiest, which serves 25,000 a day. It's in Hong Kong, near the Star Ferry Pier. It was quite an institution.
The interesting part is that in foreign countries, people go to McDonald's because they LIKE it. Here, we only go when in a terrible rush, or because the kids want a happy meal.
Well, in Hong Kong, I'd probably prefer the devil I knew to the devil I didn't. I don't have the coordination to eat food that is walking across my plate. :O)
"I wonder if you have to wait 7 hours for the Cabbage pie to cool down to a mortal mans heat tolerance."
LOL! I've always wondered why there hasn't been a lawsuit over those lava-filled fruit pies they used to sell. (Do they still sell them?) Great Googly Moogly, you could've heated an entire home on the heat put out by one of those pie-things. Ouch!
If I could only break my addiction to the Filet-o-Fish, I would be Home Free...alas, I am weak. They are so good, and yet so bad for me. (Kinda like my current husband, LOL!)
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