The Washington Post – McDonald’s, Starbucks And Coca-Cola Suspend Business In Russia Amid Mounting Public Pressure

A McDonald’s restaurant in Des Moines on April 27. (Charlie Neibergall/AP)

Several major American food and beverage companies announced Tuesday that they would suspend their operations in Russia, a step that comes after days of mounting public pressure on the corporate world to sever ties with the country over the Kremlin’s invasion of Ukraine.

The group included McDonald’s, Starbucks, Coca-Cola and PepsiCo, some of which had operated in Russia for decades and had faced heightened scrutiny in recent days as other companies elected to halt their business dealings there. A veritable naughty-or-nice list, compiled by a Yale University professor, generated headlines by highlighting the companies maintaining normal operations.

McDonald’s chief executive Chris Kempczinski said the global fast food chain would temporarily close its 850 restaurants in the country.

“Our values mean we cannot ignore the needless human suffering unfolding in Ukraine,” he said.

The company said it will continue paying its 62,000 Russian employees while stores are closed.

The decision is a notable shift for a company that has usually shied away from inserting itself into polarizing topics, industry experts say, signifying changes in global culture where corporations are no longer choosing to be neutral on social issues but responsive and declarative about their stances.

McDonald’s, Coca-Cola and Starbucks suspend business in Russia
McDonald’s, Starbucks, Coca-Cola and PepsiCo halted their operations in Russia on March 8, amid mounting public pressure over the Kremlin’s invasion of Ukraine. (Reuters)

Shortly after the McDonald’s announcement, Starbucks, Coca-Cola and PepsiCo announced they would pause services in Russia.

Starbucks’s licensed partner, the Kuwait-based Alshaya Group, which owns and operates 130 stores in Russia, will temporarily shutter locations and “provide support” to its roughly 2,000 local employees, Starbucks CEO Kevin Johnson said in an open letter. The company will also halt all shipments of Starbucks products to the country.

“The invasion and humanitarian impact of this war are devastating and create a ripple effect that is felt throughout the world,” Johnson wrote in a letter last week, as more people demanded that companies take a stance.

Coca-Cola, in a brief statement Tuesday, made a similar announcement and suspended its business in Russia.

And PepsiCo, which has operated in Russia for more than six decades, halted its soda sales, including its eponymous cola and 7UP. But the company said it would continue to manufacture milk, baby formula and baby food, allowing it to keep tens of thousands of workers employed.

“Pepsi-Cola entered the market at the height of the Cold War and helped create common ground between the United States and the Soviet Union,” the company’s chief executive, Ramon Laguarta, wrote in an email to employees.

But after days of remaining in full operation, the company decided to partially pull out “given the horrific events occurring in Ukraine,” Laguarta said.

McDonald’s is in a unique category among businesses that have announced halts and freezes in service or products in Russia. Fast-food brands have largely continued operating because many of their restaurants are owned by franchisees, and corporate brands have limited abilities to control operations at local facilities.

McDonald’s owns more than 80 percent of its Russian locations compared with roughly 5 percent of restaurants that are owned in the United States.

The stores that are company-owned are mainly for testing products and other corporate goals, according to John A. Gordon, an independent restaurant chain expert and founder of Pacific Management Consulting Group.

Gordon said the company owns a lot more stores in Europe because the sales and profits are higher. The closing down of its stores in Russia combined with the decision to continue paying employees will come with a significant financial hit but not one that will bankrupt the company or cause markets to react in a volatile manner.

“We don’t know how long ‘temporarily’ means in terms of closures, but McDonald’s will report an operating loss,” he said. “What will happen now is the Wall Street security analysts will actually lower their earning forecast because of the Russia and Ukraine effect. McDonald’s stock price won’t be arbitrarily affected.”

McDonald’s announcement is also a sign that companies are moving away from antiquated business mentalities that center shareholder interests above all others, Gordon said.

“It’s really about the stakeholders, which is greater world of nations and people,” he said.

Other companies, such as Yum Brands, which owns Pizza Hut and KFC, might find it more difficult to replicate McDonald’s stance as many of the locations are owned by franchisees, who are likely Russians themselves, making it a bit more challenging to just close shop, Gordon said, who counts Yum Brands among his clients.

Yum Brands announced on Tuesday that it is suspending operations of KFC company-owned restaurants in Russia and finalizing an agreement to suspend all Pizza Hut restaurant operations in the country, in partnership with its master franchisee.

“This action builds on our decision to suspend all investment and restaurant development in Russia and redirect all profits from operations in Russia to humanitarian efforts,” the company said in a statement.

Yet McDonald’s expressing global solidarity with Ukraine is among the most bold and decisive moves taken by a restaurant chain of its magnitude, said Aaron Allen, a restaurant analyst and founder of Aaron Allen & Associates.

“This will absolutely be a watershed moment and will reflect a precedent, not just for war but for other causes or means of showing solidarity,” he said. “You’re pretty much closing off your revenue to make a statement. Agreeing to put purpose over profits is an indication that world’s largest restaurant chain taking a leadership stand.”

Jacob Bogage contributed to this report.

Wray Executive Search – Restaurants: The Need to Stay Flexible

by John A. Gordon, Principal and Founder, Pacific Management Consulting Group

 

Triple inflation currently

As an industry, we were hoping to be on the other side of the Pandemic mess by now, but its effects continue in several ways that we are too familiar with: sales variability, supply chain inflation affecting, food, paper, equipment, and building elements; and the labor availability/people effect, ultimately caused by the Pandemic in the first place. As a result, the industry has triple inflation now: COGS, labor, and CAPEX [1]all at the same time. And we have to learn and reorient to changing consumer behavior, and honestly, reeducate our guests, too to what we can do for them to meet their needs.

Added to this mix unfortunately is the current threat of a major land war in mid-Asia which could kick off at any moment as of writing this week. Most of Europe[2] and Central Asia are franchised, but disruptions like this will affect global US franchisors and local national franchisees. This gets us back to my comment last month: what chain restaurant operator would have been planning for a Central Asian War in late 2021? Of course, none. Planning post-Pandemic has to have a faster cycle time, risk-based module included as part of the function.

The necessity of pricing actions and building pricing power

Listening to the Q4 2021 earnings calls to date, the very clear forecasts of 2022 cost inflation are seen. McDonald’s for example noted a 2022 food and paper inflation forecast of 8%. It noted that 2021 store wage rates rose 10%. [3] We will have more earnings this week but casual diners seem to be forecasting food and labor in the mid-single-digit zone each. It’s clear now that supply disruption chain and COGS pressure[4] will continue through 2022 and that pricing actions to protect margins must occur.

The question then reverts to pricing power and what are operators doing to maximize it. Certainly, great product new news does it along with reaching out to the guest in an individualistic way (loyalty, digital) that builds traffic, frequency and ticket. We need only look at Starbucks and Panera’s programs post-2010 and how they dug out of the Great Recession. We are now seeing the same words from McDonald’s in terms of the value of their loyalty program. [5]  Good-looking stores and QSC builds pricing power, too. They built a different guest mix over time.

Every brand has an aspirational guest mix they do not have yet. It takes time and money to get them. With the absolute need to pass on price increases, CEOs have a go signal to begin programming their guests away from silly discounts. In my opinion, there is no need for “Dancing Dollar Kings” [6] or even 20 under $2 menus[7] unless accompanied by a parallel upper-tier menu item in the marketing creative plan.

Lately, there has been a lot of self-expressed admiration of Chipotle and Starbucks ‘ pricing power factor. They have it easier because they never did deep discounting.

Reading SSS and Financial Results in 2022

Staying with our be flexible theme, we financial analysts need it too. So, we have finally lapped over 2020, the worst, most irregular year in restaurant financial history. In 2021, some publicly traded highlighted their financial results in change versus 2019 in commentary and side schedules while the core income statement and balance sheets reflected 2021 v. 2020. Most companies and sell-side analysts talked one year and two-year results.

In analysis going forward, there is a great need to look beyond the simple one-year SSS year over year change. There is no perfect base. 2021 is infinitely better than 2020.  2019 is a good pre Pandemic base. Parts of 2021 were influenced by reopening, which affected casual dining. And government stimulus payments flowed into the economy and restaurants in the spring/summer, causing some sales spikes. The point is, you might well need to refer back to 2019 to test the true trend.

Following is a Restaurant Business/Jonathan Maze article on same and my additional comments via Linked In: https://linkedin.com/john-a-gordon-67569aa/recent/activity/shares

Favorite Investor Question: What Will Happen to the Higher Mix?

Throughout 2021, I got many questions from investors wondering when the surge of additional items per food transaction that all of the QSRs and fast casuals reported in 2020 and 2021 would end. Some were afraid that purchasing behavior would end and those same-store sales will plummet as a result.

Well, we are just rolling out of 2021 and into 2022 and don’t have that many readings yet. One who reports all the sales components we do, however, is Starbucks (SBUX). SBUX reported the larger basket size consistently through 2020 and 2021 as a higher average ticket. In many of those back-year quarters, the average ticket was significantly positive and traffic was significantly negative.

In SBUX FY 22 Q1, in the North American zone, Starbucks stores reported comp sales of plus 18%, driven by a 12% increase in transactions and a 6% increase in the ticket. [8]  So, while the price was taken it seems that most of the prior year mix behavior—the higher number of items sold per transaction—seems to have been built into the base. And transactions were considerably higher albeit over a still recovering Pandemic 2021 base. So, we’ll have to watch it, but it seems we have a winner on our hands and people are repeating their post Pandemic behavior.

About the author:

John A. Gordon is a long-time restaurant industry veteran who loves the unpredictability and never-ending complexities of our business. He has unit-level experience (6 years), 18 years of corporate staff experience, and the last 20 years as a complex situations restaurant analyst and management consultant via his founded firm, Pacific Management Consulting Group. He is a certified MAFF, Master Analyst, Financial Forensics, and works special investigations for investors, new concepts business planning and assessment, proforma development, franchisee support, expert litigation actions, and more. He can be reached anytime at 858 874-6626, email, jgordon@pacificmanagementconsultinggroup.com.

[1]   One good resource to check US construction cost inflation is the R.S. Means Company.

[2]   Except McDonald’s, which has company operated units in Europe.

[3]   But noted this was some form of a “catch up” wage action by franchisees. MCD does not forecast 2022 franchisee wage actions.

[4]   Proteins and paper items most commonly noted. On February 14, the US suspended all Avocado imports from Mexico after a threat to US inspection personnel.

[5]   McD Earnings Call, January 27 2022.

[6]   Burger King US TV feature summer/fall 2021

[7]   Current Del Taco primary marketing feature.

[8]   Starbucks Earnings Call and press Release, February 1 2022.

Wray Executive Search – 2022: Restaurant Viewpoint: Thick Clouds and Poor Visibility

by John A. Gordon, Principal and Founder, Pacific Management Consulting Group

More Questions Than When We Started.

Typically, by this point in mid-January, we would have some idea what the restaurant operating tempo[1] for the year beginning jump-off point is going to be. We would have entered January, always the slowest month in restaurant sales and traffic in the Northern Hemisphere.  We would have good summary indicators through Restaurant Finance and Development Conference (which came off beautifully, live in November) and the ICR Conference (which unfortunately reverted to virtual earlier this month).  Frankly, none of this gave us a warm and fuzzy feeling.

Are Conditions on the Ground Clearer?

Unfortunately, not. Conditions on the ground in the field are quickly changeable. Consider:

Starbucks notifies all of its customers on January 14 electronically that US store hours, openings, business platforms, and product availability are apt to change due to the effects of COVID/supply chain issues.

The FACTEUS FIRST Report on consumer spending showed very gradual transaction count softness in QSR credit card transaction counts and full-service brands following in December and early January. [2]

Two restaurant analysts coming out of ICR mentioned their perception that companies seemed to talk “90% staffing” as the new staffing best point for now. Several companies noted the loss of sales due to closed units/early hour closes.[3]

Per my monitoring of company presentation of company presentations at ICR, I found little talk about supply chain/COGS inflation as “transitory”. [4]

Restaurant Research reported that the all-important sales to investment  ratio have declined (unfavorable movement) as higher construction costs/times to build have more than offset AUV growth. [5]

So after hearing all this, my key January-February watchpoints are (1) supply chain food commodity analysis (2) US social sensitivity/reaction to this new wave  (3) restaurant employment/staffing indicators, units closed early (4) restaurant operator marketing execution (5) unit margin contraction and impacts on franchisee new unit development in 2022-23.

No more hockey sticks please on Unit Development Guidance

I’m mentioning these observations to note that restaurant external communications, planning, and internal control must take on a new dimension this year. The days of spending monstrous blocks of expensive staff and executive time on a theoretical future 3 year/5 year plan are misplaced. The planning function has to be more current-focused and analytical focused on current drivers and then logical flex point options that can be adopted quickly. That is hard enough to get right. What I  recommended is to get the budget year set with detailed operations options and alternatives (including CAPEX, G&A, dividends, etc.) and simply flow 2-3 outyears from the most likely scenario.

For IPOs, new funding rounds, new brands, debt issues, etc.: investors typically focus on how many new units can the brand open and sustain over some time. I get questions from investors all the time about the original S-1 numbers restaurants have stuck with. 2021 has seen some very attractive young new brands go public for example.  But remember these claims of new unit count potential—5000; I just saw two fast-casual publicly-traded brands still backing 6,000 total units—that growth rationale is a tremendous burden to maintain. At the very least, those counts should be qualified as total world count up front in the book running process to allow for some time cushion.

Assessing New Concepts  Post 2020

COVID-19 and March 9 2000 changed everything of course, but business is still business. What’s always been important in this business (good food, good margins—see Gordon Ramsey quote in Time Out, January 14, 2022[6] ). COVID has caused some emphasis shifts as I can describe below:

  1. It is essential to build or bake into the company DNA where staff engagement and involvement at all levels of the company—from the store level to the office of the CEO. This includes franchisees, the ultimate grey zone that is rarely handled well.
  2. Being engineered to be on point with targeted and aspirational guests and the right revenue channels is key to finding the right sites. The hunt for sites is ever-present. The landlord win factor—and outyear rent factors are key to consider.

Management Lessons: Bill Marriott

I admit it: in the late 1980s, I was interested to join the Marriott Corp. in Washington DC. At the time, you recall, they ran several restaurant chains. Another opportunity in DC came up that I took and shortly thereafter, Marriott divested the restaurants. I did continue to follow Bill Marriott. Mr. Marriott is still executive Chair of Marriott and is active on social media, Marriott on the Move. Recently I came about “Bill Marriott’s 12 Rules For Being a Successful Manager” and thought it would be good to cite here. [7]

Several make sense to note here:

Number Five: Do it and do it now. Err on the side of taking action.

Number 6: Communicate by talking to your customers, associates and competitors

Number 7: See and be seen. Get out of the office, walk the talk, make yourself visible.

Number 8: Success is always in the details.

About the author: John A. Gordon is a long-time restaurant industry veteran with 45 plus years in operations, corporate financial planning, and analysis and the last 20 years via his founded firm, Pacific Management Consulting Group. He works complex operations and financial analysis projects as well as strategy assessment reviews for clients. He can be reached throughout at 858 874-6626, email, jgordon@pacificmanagementconsultinggroup.com.

[1]   Or OPTEMPO, a word that represents the pulse of activity of the business.

[2]   https://bit/ly/3fm99uk

[3]   YUM, LOCO, JACK.

[4]    Transitory is a  Wall Street CYA word copied from the Fed Chair, and in my opinion, does not apply to the restaurant space now.

[5]   https://chainrestaurantdata.com/new-unit-investment-2021/

[6]   https://twitter.com/JohnAGordon

[7]   https://skift.com/2014/02/26/bill-marriotts-12=rules-for-being-a-successful-manager/