Like many restaurant executives with business interests in Russia and Ukraine, Rosinter Restaurants’ Richard Snead has been monitoring the news of turmoil in those countries for months.
Protests in Kiev starting in November turned deadly in February, bringing about the ouster of Ukraine’s president in February and this month’s annexation by Russia of the Crimea region, which voted to break away from Ukraine in a referendum contested by the United States and the European Union.
The risks this conflict poses to Western businesses were made more clear to Snead recently, as a Planet Sushi restaurant operated by Rosinter Restaurants a block from Kiev’s Independence Square “got trashed, to the point we couldn’t operate it anymore” in the middle of ongoing protests, he said.
“This is serious,” said Snead, who sits on the board of Rosinter, the Moscow-based franchisee of TGI Fridays, McDonald’s and several other brands. “Russia was on everybody’s ‘go-to’ list, and now it might be on a ‘stay-away’ list.”
Snead has nearly 20 years of experience opening and operating restaurants in the country, notably as the former president and chief executive of Carlson, who took the TGI Fridays brand to Russia in the 1990s.
His current concerns for operating in Russia and Ukraine include the instability of their economies and currencies, as well as their already idiosyncratic labor laws for Western executives that are likely to become more stringent. However, Snead’s biggest concern is what might result from any possible backlash to Western brands as the United States and European Union ratchet up the pressure on Russia through economic sanctions.
Russians, especially younger consumers, have been very open to spending money at brands like TGI Fridays, McDonald’s, KFC and Starbucks in Russia’s major cities, Snead said, but he worries that if their pride in Russia and anger at the West escalate, they might boycott Western brands, refuse to work for those chains or, worse, plan “something more sinister” like the damage wrought to Rosinter’s Kiev restaurant by rioting protestors.
“This is going to be a real interesting test,” Snead said. “It’s a very Western thing those young Russians are doing, drinking Starbucks coffee and spending twice as much as we pay for those same items. They’re in there late at night, smoking cigarettes and drinking coffee while playing on their iPhones, because it’s cool. It will be interesting to see if the Russian-pride factor makes Western brands not cool anymore or makes Russians hostile to them.”
Working with local partners
Russian resentment toward the United States likely would spring from whatever economic sanctions the Obama administration and Congress decide to impose in response to Moscow’s move to annex the Crimea peninsula from Ukraine, observers of the situation said.
President Obama announced new sanctions March 20, including freezing the U.S.-held assets of 20 high-ranking Russian individuals with close ties to Russian President Vladimir Putin, as well as the freezing of assets of Russia’s Bank Rossiya.
The sanctions could undo much of the goodwill built between the United States and Russia in recent years to open up the latter country to Western businesses, Derek Bloom, an employment attorney based in the Moscow office of Marks & Sokolov, said this week during a webinar, “Russia and Ukraine: What Employers Need to Know and Do During Times of Crisis.” Bloom noted that Putin has indicated publicly that Russia would respond “asymmetrically” to sanctions from the United States.
“The threat by Russia is contradictory to a multiyear effort to improve the investment environment in Russia,” Bloom said, “and it could undermine a lot of effort made in the last decade to make it easier for foreigners to work in Russia.”
Historically, it had been difficult to get visas and work authorization for a Western executive to live in Russia to establish and run a brand as well as train Russian staff, but usually the country’s immigration service would not strictly enforce quotas, Bloom said. That is likely to give way to a tougher “no-exceptions” attitude in the current geopolitical climate, he said.
Bloom also noted that brands doing business in Russia should double-check their political-risk insurance and work with their local partners and franchisees to ensure as much compliance as possible with changing Russian labor laws.
Mike Shattuck, president of Focus Brands International, said he and his team are monitoring closely “the tit for tat” that could arise between the United States and Russia, where Focus has 118 Cinnabon units, 11 Auntie Anne’s locations and three Moe’s Southwest Grill restaurants. However, he added, the most important thing Focus or other franchisors with interests in Russia could do right now is work closely with local staff and partners.
“We have a lot of good contacts on the ground there, so we’ll leverage our local network in Russia to keep our finger on the pulse, and that’s what we can do,” Shattuck said.
Like Snead, he worries some about anti-Western backlash: “There could be a retaliation against U.S. brands operating in the market,” he said, “and we’re not low-profile there.”
Beyond keeping its Russian workforce safe, Focus also is developing contingencies for other business disruptions on Shattuck’s radar, such as a theoretical suspension of trade between Russia and Europe, which would make it difficult to supply ingredients to the restaurants, or a scenario in which Russia froze the movement of capital from its restaurants and banks back to the United States.
“The flow of currencies could be a problem, because every remittance made to the U.S. has to be approved,” he said. “That could be a risk to our royalties and franchise fees.”
Snead agreed and added that the decline in the value of the Russian ruble is spiking food costs and the cost of labor, as executives from within Russia or from the United States have reservations about working in an uncertain environment.
Expansion plans on hold
Before the adversarial relationship between Russia and the United States reignited the past few months, Russia had been considered a hot growth market or potential new market for many Western businesses.
According to The NPD Group, the Russian foodservice market experienced a 7-percent increase in traffic in the fourth quarter of 2013. That increase led all the major countries tracked by the market research firm, besting 2-percent growth in traffic in Great Britain and 1-percent traffic growth in Australia, the only other big markets to increase their total restaurant visits during the period, NPD found.
According to data gathered by Euromonitor International for Nation’s Restaurant News’ first International Top 25 report, Russia accounted for slightly more than one-half of total restaurant chain sales in the Eastern Europe region and around one-third of overall foodservice spending in the region. Four of the top five largest foodservice companies in Eastern Europe are based in Russia.
The report found that Russia’s restaurant industry was slower to develop after the fall of communism, which has allowed many Western brands to expand quickly with fewer native chains or independent restaurants as competition.
But now, Snead of Rosinter and Shattuck of Focus Brands said the environment in Russia remains one of a “wait and see” attitude, where their restaurants have plans in place if tensions escalate further but for now are carrying on as usual.
Things are far less stable on the other side of the conflict over Crimea, they said.
Focus has one Cinnabon location in Ukraine, in Kiev, Shattuck said, and the uncertainty in the country has caused a noticeable lack in consumer confidence. Focus had planned some growth in Ukraine this year before the protests metastasized into the current conflict, but those plans are now on hold, Shattuck said.
The situation is more dire in Ukraine than in Russia at Rosinter’s four restaurants in Kiev, because unlike in Russia “there is much more of a fear factor” among the millions of Ukrainians living in and around the capital, Snead said.
“We’re having difficulty keeping the other three [restaurants in Kiev] open intermittently, because either people are afraid to come down there or employees are worried they won’t be able to get home,” he said. “That element is likely to go on for a while.”