BUSINESS

THE ‘BIG MAK’ ATTACK

AFTER AN EPIC 13-YEAR STRUGGLE, McDONALD’S HAS OPENED ITS FIRST OUTLET IN THE SOVIET UNION

JOHN DALY February 12 1990
BUSINESS

THE ‘BIG MAK’ ATTACK

AFTER AN EPIC 13-YEAR STRUGGLE, McDONALD’S HAS OPENED ITS FIRST OUTLET IN THE SOVIET UNION

JOHN DALY February 12 1990

In a city where waiting in long lineups for scarce—and poor-quality—goods is a way of life, they began eagerly assembling in Moscow’s Pushkin Square before dawn. They came in anticipation of their first taste of Western-style fast food. And when they passed under the trademark golden arches adorning the former 300-seat Café Lira, housing the first McDonald’s restaurant in the Soviet Union, few of the opening-day customers said that they were disappointed. “It was wonderful,” enthused physician Ludmila Moskova, as she tried to keep a tight grip on her children Kostia, 4, and Vladyk, 5, who were gleefully waving their miniature McDonald’s flags. “We had to line up for more than an hour,” she added, “but the children were so excited they didn’t notice.” Moskova has tasted McDonald’s hamburgers before, on visits to Austria and West Germany, but last week she said: “These tasted the best. And the service—it was so friendly.”

The Moskovas were among an estimated 30,000 Muscovites who were served on opening day last Wednesday after McDonald’s Restaurants of Canada Ltd. president George Cohon cut a red ribbon to open the largest of the 11,300-outlet international chain. Operated as a fifty-fifty joint venture between McDonald’s and Moscow city council’s food service administration, Cohon’s experiment in what he calls “burger diplomacy” is a costly venture for both its backers and its eager customers. The new, 700-seat restaurant charges a hefty 5.5 rubles—more than a third of an average Soviet worker’s daily wage—for a “Big Mak,” kartofel-fries and a koktel. And Cohon—who had been working towards the opening day for more than 13 years—has already invested $50 million of his company's money to get a foothold in a market of 286 million people.

But because the ruble is not yet freely convertible into foreign currency, any profits McDonald’s makes in the Soviet Union cannot be easily used outside the country. Cohon says that, for now, the profits will be reinvested in new Soviet ventures and that he and his Soviet partners plan to open 19 more outlets in the Soviet Union.

As well, other Canadian business activity is burgeoning in many sectors of the Soviet Union, because Soviet law now permits joint ventures with Western companies with virtually no restriction on the level of foreign ownership. Since the law was changed in 1987, 23 joint ventures between Canadian and Soviet companies have been formed, and about 50 more are under discussion. They range from pizza outlets to oil-drilling equipment.

But many North American businessmen, who in the past have only been able to extract profits from the Soviet Union through barter arrangements, are watching for McDonald’s longer-term plan for financing its investment while taking some of its profits out of the Soviet Union. To that end, McDonald’s will begin construction of a special “foreign currency only” store in Moscow in two months. There, foreign customers will be able to pay for their food in hard, or convertible, currency, which most Soviet citizens are not allowed to carry.

Still, last week, as he surveyed the McDonald’s art-deco interior and its miniature models of world landmarks, such as Big Ben and the Eiffel Tower, Cohon did not appear to be worried about profits. Instead, the tireless 52-year-old Chicago native—who has lived in Canada for the past two decades and is now a Canadian citizen—relished the success of opening in Moscow ahead of many of his fastfood rivals. The giant Purchase, N.Y.-based Pepsico Inc. food-and-soft-drink conglomerate, for one, will open two outlets of its Pizza Hut chain in the Soviet Union this July, even though it had hoped to do so by the fall of 1989. Pepsi-Cola was also the first Western soft drink sold in the Soviet Union and the first Western company to open a soft-drink plant there in 1974. And Cohon, who held his first discussions with Soviet officials at the 1976 Olympics in Montreal, also outmanoeuvred executives at McDonald’s world headquarters in Chicago to make it to Moscow first.

Even after he secured Moscow’s permission to open the restaurants, Cohon faced other daunting challenges. McDonald’s had to train the 605 employees they selected from 27.000 applicants to serve their customers with the trademark McDonald’s smile, including a warm “Thank you.” Like all Soviets, the trainees were accustomed to surly service as a matter of course, and assistant manager Sergei Skvortsov, 25, said that he had to repeatedly scold the trainees and force them to maintain eye contact and smile. On opening day, one Soviet customer was so taken aback by the smiling counter staff that he said later he first thought they must be laughing at him.

In order to live up to his promise that a Big Mak in Moscow would taste the same as its namesake in 52 other countries around the world, Cohon was forced to develop a reliable supply of quality-controlled ingredients. They will be produced in a $40-million, 110,000-square-foot plant McDonald’s built in a Moscow suburb to process the required beef, milk, buns, vegetables, sauces and potatoes.

Another challenge: ensuring uniform standards from Soviet farmers and suppliers before the food reaches the plant. To make its french fries, McDonald’s brought in its famous Russet Burbank seedling potatoes from the Netherlands. Pieter Frings, an agronomist with New Brunswick-based McCain Foods Ltd., was one of at least 20 specialists from other companies who worked on the Moscow project with McDonald’s. Frings lived on a Soviet farm for three months, showing farmers how to raise and harvest the potatoes. The result: McDonald’s achieved double the average Soviet potato harvest per acre.

Despite the detailed and expensive preparations, the Moscow plant was still undergoing major construction when Cohon toured it just 10 days before the scheduled opening. Three of the four stairwells were still under construction, and the Finnish work crew left the plant just three days before the restaurant opened.

For Cohon, opening in Moscow was a numbers game. The record number of transactions for an opening day before Moscow was 9,100, when McDonald’s opened in Budapest in April, 1988. Cohon told Maclean’s that, for Moscow, he had set his sights on 20,000 transactions. In the end, he had to keep the restaurant open an extra two hours to serve a total of 30.000 customers. And he has not stopped counting yet.