McDonald’s (MCD) just can’t catch a break these days.
On top of a food safety scandal that slammed its China sales last month, and chronic sales softness in the U.S., the world’s largest restaurant chain is facing a new threat to its business: a possible mass shutdown of its restaurants in Russia in what appears to be a retaliatory move following U.S. sanctions on the country for its role in stoking the Ukrainian conflict.
Russia’s consumer protection bureau Rospotrebnadzor said Wednesday it would temporarily close four restaurants in prime locations in Moscow after finding violations of sanitary regulations, and several regional authorities followed suit on Thursday, telling local media they would launch mass inspections within days. The news agency Interfax, however, quoted deputy Prime Minister Olga Golodets as saying there was no “total plan” to shut down the company’s 430 outlets in Russia.
So how important is Russia to McDonald’s? A shutdown would not have a major impact on the company, which operates 13,600 stores in 119 countries, after all. And the Russian market contributes less than 5% of total operating profit.
But Russia has been one of McDonald’s few reliably strong markets in Europe, where the hamburger chain generates 40% of its overall sales. So much so that McDonald’s has roughly doubled its Russian store count in the last 5 years.
In each annual report between 2002 and 2013, McDonald’s singled out Russia as a strong market, including a few shootouts in each of the last five years as a “major contributor” to its European results growth, thanks to expansion and soaring sales at existing restaurants. In fact, the only time during the Putin era McDonald’s identified its performance in Russia could be anything but strong was earlier this year when it warned investors that the Russia-Ukraine conflict could hurt sales. (Sure enough, sales declined in Russia in July, after rising in first and second quarters.)
“It’s not enough to move the needle,” R.J. Hottovy told Fortune, in reference to a potential hit to McDonald’s results. “At the same time it’s a growth market and comes on the heels on a bunch of scary things.”
One of the factors mitigating the pain to McDonald’s is that Russia is only one of two markets, including Britain, where most restaurants are company-operated rather than franchised. Such locations are less profitable than franchised ones, where McDonald’s simply gets a cut of the sales, Hottovy said.
The Russian restaurants closed Wednesday include the one just off Pushkinskaya Square, the company’s oldest and busiest branch in the country, whose opening 24 years ago was a symbolic landmark event at the end of the Cold War.
McDonald’s said in a statement that “we are looking at the substance of the allegations to work out what measures are needed to open our restaurants to visitors as soon as possible.” It made no reference to the political backdrop and said “we will continue to take care of our employees and do everything possible to continue our company’s successful work in Russia.” (In July, Russia’s consumer-safety regulator sued McDonald’s, aiming to ban some of its popular burgers and milkshakes, pointing to alleged food-safety violations and mislabeled nutrition information. McDonald’s said authorities had approved the nutritional information and that “certain indicators of micro-organisms” had been corrected immediately.)
Until the contretemps is resolved, McDonald’s, a symbol of American business, finds itself in the crossfire of Russia’s conflict with the West. But business should recover quickly if and when those restaurants ultimately re-open.
“The brand always finds a way to bounce back,” Hottovy said.
