In Russia, McDonald’s uses burger-dollars for real estate

By Erin E. Arvedlund The New York Times

Friday, March 18, 2005

The busiest McDonald’s restaurant in the world is not in the United States but thousands of kilometers away in Pushkin Square.

The store serves 30,000 customers a day, as busy as on its opening day on Jan. 31, 1990. The menu is mostly the same as in the United States, with the addition of cabbage pies and a few 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 a foot in the door by becoming real estate developers. Still, the practice is not without its pitfalls: Three of McDonald’s office buildings in central Moscow have been up for sale for well over a year.

McDonald’s real estate venture began in the early 1990s, when it had no way to convert the rubles that customers paid for its hamburgers and milkshakes into another currency. So it spent the rubles to buy farmland and build office towers, a distribution center and a factory in the Moscow suburbs – which became known as McComplex – and in 1993 the company built its first office building, just two blocks from the Kremlin. Tenants including Coca-Cola and Upjohn moved in.

More property was added as McDonald’s opened new restaurants, buying many restaurant properties because business 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 more restaurants this year, mostly in Moscow and St. Petersburg, and 75 by 2007.

Buying land in central Moscow now is nearly impossible, but 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, said 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 the 127 McDonald’s restaurants in Russia, 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. Its 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, the 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.”

The company’s early lock on top locations is helping it stand up against other corporations seeking a toehold in Russia, including the coffee giant Starbucks, which has yet to enter the country. In some stores, like the one at the Old Arbat pedestrian tourist mall, it has added cafés 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. The furniture retailer Ikea in 2002 opened a 195,000-square-meter, or 2.1 million-square-foot, mall between Moscow’s main airport, Sheremetyevo, and the city center, and a second big 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 stores in Russia, and Wal-Mart Stores is expected to open stores as well; it is said to have looked at locations in St. Petersburg.

Russia is now one of the fastest-growing McDonald’s 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 Franchise Equity Group, an advocate for McDonald’s franchise owners.

Real estate agents say the three office buildings in central Moscow that McDonald’s is having trouble selling have appreciated 40 percent in the past 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 rose an average 30 percent, 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.

McDonald’s has been able to avoid some problems here that have troubled it in the West. The controversy surrounding “Super Size Me,” a film about a man’s monthlong experiment eating at McDonald’s three times a day, 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 the use by McDonald’s of low-paid migrant workers seem to bother many – 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 Gorbachev in the final years of the Soviet Union.

“There was no food in the stores,” recalled Vladimir Malyshkov, the 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.”