Investor profile
Company: McDonald’s Corporation — mcdonalds.com
Ukrainian operation: McDonald’s Ukraine Ltd — mcdonalds.ua
Business: Quick-service restaurant chain.
Founded:
- McDonald’s: May 15, 1940 / Richard and Maurice McDonald.
- McDonald’s Corporation: April 15, 1955 / Ray Kroc.
Headquarters: Oak Brook, Chicago, US.
McDonald’s global figures (2016):
- Net asset value: $31.023 billion.
- Revenue: $24.622 billion.
- Net profit: $4.69 billion.
- Restaurants: More than 36,900 in over 120 countries.
- Global workforce: 375,000.
McDonald’s M&A history:
- 1998 — Investment in Chipotle.
- 1999 — Acquisition of Donato’s Pizza.
- 2000 — Acquisition of Boston Market.
- 2003 — Sale of Donato’s Pizza.
- 2005 — Sale of a stake in Redbox to Coinstar, now Outerwall.
- 2006 — Exit from Chipotle through an IPO.
- 2007 — Sale of Boston Market to private equity firm Sun Capital.
- 2009 — Sale of a stake in Redbox to Coinstar.
- 2012 — Sale of Restaurant Technology Services to Xerox.
- 2017 — Sale of McDonald’s Chinese business to the Grand Foods investor consortium, comprising CITIC Securities and Carlyle Group.
McDonald’s in Ukraine:
- Parent companies: GOLDEN ARCHES EUROPEAN HOLDINGS B.V. and GLOBAL RESTAURANT OPERATIONS OF IRELAND LIMITED.
- Market entry: 1996 / first restaurant opened on May 24, 1997, near Lukianivska metro station.
- Investment in Ukraine (2017): More than $225 million.
General Manager of McDonald’s Ukraine: Grzegorz Chmielarski.
Grzegorz Chmielarski joined McDonald’s in 1991, beginning his career as a management trainee at a restaurant in Vienna, Austria. In 1996, he was appointed Franchising Manager and subsequently promoted to Franchising Director for Poland and the Baltic states. In 2008, he became Business Development Director for McDonald’s in Poland, overseeing real estate, construction, equipment and asset management. He has worked in Ukraine since January 1, 2014, when he became CEO of McDonald’s Ukraine Ltd.
Grzegorz Chmielarski — McDonald’s Ukraine.
How has McDonald’s performed in Ukraine in 2017?
We continue to open restaurants in Ukraine. In August, we opened a new restaurant at Lavina Mall. It is one of four restaurants in Kyiv, and in the country overall, where customers can order through self-service kiosks. On average, 11% of customers use kiosks at restaurants where they are available. We will install them in more restaurants this year and next. In Poland, for example, almost all restaurants already have them. I even suggested that our colleagues in the Polish office add Ukrainian to the menu. They employ many Ukrainians and also have a large number of Ukrainian customers. They promised to work on it [laughs]. This service feature is part of one of McDonald’s main corporate priorities, broadly described as “digital.” In some European restaurants, we have introduced another initiative linked to kiosks: an employee brings food and drinks ordered through a kiosk directly to the customer’s table.
During a recent visit to Warsaw, we went to a McDonald’s restaurant with no tills. We had to place our order through a kiosk and then wait for it, although it was not entirely clear where it would appear. It was an interesting experience. Could a similar restaurant open in Ukraine?
That is an experimental restaurant. Kiosks account for 96–98% of its orders. It actually has tills, but they are built into the counter so they do not attract attention. If customers do not know how to use a kiosk, employees help them. We are moving towards these technologies too and will provide more opportunities to order through kiosks in our restaurants. Next year, we want to at least double the number of restaurants with kiosks, extending beyond Kyiv. In the long term, all restaurants will have them. In some locations, installation will coincide with refurbishment and possibly an expansion of the premises.
McDonald’s appears relatively cautious about expansion in Ukraine. Why? Poland already has almost 400 McDonald’s restaurants, while Ukraine is larger but has only 80.
This year, we plan to open four new restaurants in Ukraine. Two are already open: one at Lavina Mall and another that recently opened at 26a Obolonskyi Avenue, near Minska metro station in Kyiv. A McDonald’s restaurant had operated nearby for 18 years, but we closed it when the new location opened.
Why did you make that decision?
A large residential development, Obolon Residences, formerly owned by DUPD, is being built next to the McDonald’s restaurant. We reached an agreement with the developer to relocate the restaurant. It was a complex process from a legal and technical perspective, but an amicable one. Two more restaurants will open in existing shopping centres: Raion in Troieshchyna, at 4 Mykoly Lavrukhina Street, and City Mall in Zaporizhzhia, at 1b Zaporizka Street. Fit-out work has already begun at the latter.
Another restaurant, on Naukova Street in Kharkiv, is undergoing major reconstruction, expanding from 290 to 405 square metres. We plan to reopen it before the end of the year.
In Kharkiv, we have already expanded a restaurant near the central railway station from 307 to 469 square metres this year. We have also remodelled the McDonald’s at the TSUM department store in Dnipro.
By the end of the year, we plan to complete the reconstruction of a restaurant at 116a Dobrovolskoho Avenue in Odesa. Another refurbishment in Odesa, at 2b Shevchenka Avenue, was completed in the summer. There will be five such expansions and refurbishments in total this year. We will continue this work next year.
How much has been invested in developing the chain in 2017?
From the beginning of the year to date, investment in restaurant openings and reconstruction has totalled UAH 136 million. This covers three refurbishments in Odesa, Kharkiv and Dnipro, and two new restaurants in Kyiv, at Lavina Mall and near Minska metro station. That amount will increase by the end of the year.
How many new McDonald’s restaurants will open in 2018?
We plan to open four new restaurants and refurbish four existing locations. Kyiv, Odesa and Lviv will remain our priority cities over the coming years. But I would like to return to the question of our expansion policy in Ukraine. Austria has the highest concentration of our restaurants in Europe, with 200 locations serving a population of just 8 million: one restaurant per 40,000 people. Why such a difference? First, and most importantly, household economic circumstances. Business prospects, including those of McDonald’s, depend heavily on purchasing power. Second, tourism. In Malta, for example, tourists contribute significantly to business growth. Third, transit traffic through a country. Austria benefits from this, as does McDonald’s in Poland. Still, the most important factor is how much money people have left after meeting their basic needs. How often can a family afford a holiday or a weekend away? A customer who is travelling is much more valuable to the business than one staying at home. According to The Economist’s annual Big Mac Index, Ukraine ranks last among 56 countries in terms of the Big Mac’s price in dollar terms. A significant share of investment, in décor and furniture, for example, is virtually identical across countries. In other words, building a restaurant costs roughly the same everywhere. However, payback periods differ because menu prices vary. Our colleagues in Poland are already entering towns with populations of 20,000–40,000 and operating successfully. Unfortunately, towns of that size are not yet viable for us in Ukraine.
Nevertheless, Ukraine’s restaurant market has been developing rapidly. In Kyiv this year, one opening seems to follow another. Many believe that, during the crisis, eating well is the only leisure indulgence Ukrainians can afford. Yet local operators are expanding their chains, while foreign fast-food brands remain cautious. Why?
Our market share, as of 2016, is 11% of all visits to out-of-home food establishments where people can have a meal or a snack, and it is not declining. We maintain that position by opening new restaurants and increasing customer traffic at existing locations. Customer traffic growth over the past 12 months was 5 percentage points.
Has the company considered franchising in Ukraine? McDonald’s expands through franchising in practically every country, including our neighbours. Why is that not the case here?
That is a corporate decision directly linked to the characteristics of the local market. As long as operating directly as a wholly owned McDonald’s subsidiary remains the better option in Ukraine, we will continue with that model. We also have a partnership model: in many cities, we open restaurants in cooperation with real estate partners. This does not involve restaurant management. It involves developing a restaurant and working with a partner from whom we subsequently lease the premises. The arrangements vary: we may lease an existing space, particularly in a shopping centre, or a restaurant built from scratch for McDonald’s.
Tell us about your work with suppliers. Is it true that McDonald’s aims to source as much as possible locally? What share comes from Ukraine?
That approach was introduced many years ago. The US is a large market, so virtually all suppliers there are local, apart from Happy Meal toys, which are manufactured in China or Vietnam. When McDonald’s entered Europe in the early 1970s, it needed to find local suppliers. Once cross-border trade within the EU became easier, the search for local suppliers slowed somewhat, but working with local partners remains strategically important. Every McDonald’s market imports some products. However, local suppliers account for 70–80%. That share can, of course, be lower in smaller markets. In Ukraine, it is around 70%, which is substantial for a relatively small market. One of our main partners is OSI Food Solutions, the Koziatyn meat processing plant, which supplies beef patties made from Ukrainian meat. A small proportion of the meat comes from Lithuania and Poland because of recipe requirements. Bimbo Quick Service Restaurants, formerly East Balt Bakeries, operates a bun bakery in Dnipro. It was recently acquired by global company Grupo Bimbo. Bila Tserkva Dairy Plant supplies dairy mixes for desserts; Lustdorf supplies milk; Chumak supplies ketchup, sauces and pickles; Agrana supplies fruit preparations; Coca-Cola supplies beverage syrups; Ovostar supplies eggs; and Shantyl supplies muffins and cakes for children’s birthday parties. Our lettuce comes from Fino Verde, a Ukrainian business backed by Spanish investment. It operates year-round: in winter, the lettuce is imported and then cut and packed here, while in summer it is grown in Ukraine. We also work with several smaller suppliers. Ukrainian partners provide not only food but also packaging and decorative elements for our restaurants.
We continue to work on increasing the share supplied by Ukrainian companies.
Are Ukrainian suppliers willing to launch production lines specifically to work with you?
Building new lines or capacity is not straightforward. The feasibility and scale of a project need to be assessed. A manufacturer must always consider whether launching a new line makes sense. We enter partnerships with a long-term perspective. We do not want to choose a supplier simply on the strength of initial enthusiasm, only to discover later that it cannot work consistently and responsibly. We generally work with companies that have a good reputation, certified facilities and substantial production volumes. There are, however, examples of successful production line launches. As part of its long-term partnership with McDonald’s, Ovostar became the first company in Ukraine to install specialised equipment for washing and disinfecting eggs.
Could McDonald’s act as a financial partner in purchasing new lines for particular product categories?
No. All our suppliers operate without financial investment from us. They are always legally and financially independent businesses. This philosophy dates back to the company’s founding in 1955. McDonald’s founder wanted to avoid internal competition between different parts of the business. Otherwise, he would have faced the question of whose interests should come first: those of the franchisee or the supplier. We must avoid conflicts of interest.
How do you find suppliers? Through tenders?
If a product category has many competing suppliers, we hold a tender. However, price is not our main criterion. Quality comes first.
How long does your corporation’s certification process take for food manufacturers’ production facilities?
We do not conduct certification. We have an internal product quality and food safety control system. It incorporates international standards recognised by the Global Food Safety Initiative, or GFSI: FSSC 22000, International Food Standard (IFS) and the BRC Global Standard for Food Safety. These are based on HACCP principles. Under our requirements, an independent auditing company assesses a facility’s compliance with the standard it has implemented. McDonald’s also has specific requirements that are not included in any of those standards, such as compliance with McDonald’s product specifications.
Before cooperation begins, we conduct an inspection audit to identify any non-conformities and give the manufacturer time to implement the necessary procedures and demonstrate their effectiveness in production. If a facility fully meets McDonald’s standards and the manufacturer is prepared to demonstrate compliance annually, we are pleased to welcome it into our supplier system.
The most valuable asset we manage as a McDonald’s subsidiary is the brand. The brand carries certain obligations, particularly where food is concerned. Quality is our priority, and we want to maintain high standards. Looking after the brand means looking after our customers.
Who audits production facilities for McDonald’s?
We work with several auditing companies, including SGS, SAI Global, Bureau Veritas and NSF International. McDonald’s has agreements with them at a global level. Our system includes an approval procedure for independent auditing companies. There are actually no more than ten. Manufacturers choose the auditing company themselves to verify that their production meets our requirements.
Can any of McDonald’s Ukrainian suppliers export to your restaurants in other countries?
Distance and logistics costs are often the problem. Ukraine’s position outside the EU does not help either, because tariffs apply to certain products.
Ukrainian suppliers export to Georgia, Moldova and Azerbaijan. For example, OSI Food Solutions supplies beef patties to Georgia and Moldova; Chumak provides ketchup, mayonnaise, cheese sauce and pickles to McDonald’s in Azerbaijan and Georgia; and Shantyl exports baked goods to our restaurants in Moldova. It is currently difficult for our suppliers to enter large markets. After shipments to Russia stopped, EU countries remained an option, but competition there is strong. Expensive logistics add to the cost of Ukrainian goods.
What are the key criteria for choosing a new restaurant location? Which Ukrainian restaurants have the highest customer traffic?
Kyiv has the most restaurants because it is Ukraine’s largest city. However, its restaurants do not necessarily rank highest in average annual sales. The most recent new city where we opened our first restaurant was Kherson, in 2013. The crisis followed in 2014–2015, and the hryvnia’s depreciation had a significant impact on our business. Even then, we did not stop expanding. In 2014, we opened four new restaurants in cities where we already operated. That does not mean we are not considering new cities. When entering a city without a McDonald’s, choosing the right location is important. Finding suitable sites takes time, and we also need to arrange product deliveries to those cities.
How are deliveries to your restaurants organised? Do you have your own logistics centres?
Our partner HAVI handles that. McDonald’s works with the company in several markets. Its task is to provide high-quality logistics services. Some McDonald’s restaurants need deliveries five or six times a week. If something goes wrong with the delivery system, restaurants will stop operating, which is unacceptable to us.
HAVI has five logistics warehouses in Ukraine because the country is large. All goods are delivered to those warehouses and then transported to restaurants in specialised vehicles. Together with HAVI, we have almost completed the implementation of a product barcoding system. It will modernise the delivery process and minimise the risk of errors.
Where does Ukraine rank within McDonald’s overall sales?
Not first, but certainly not last. By the end of 2017, we expect to have 83 restaurants in Ukraine. Our restaurants here attract large numbers of customers, which helps sustain fairly strong sales. Clearly, compared with the US, which has more than 14,000 restaurants, or Canada, Australia, Germany, the UK and France, each with more than 1,000, Ukraine is in a different category. But among Eastern European countries, we are a significant player.
Who finances McDonald’s operations in Ukraine: the parent company, or do you borrow from banks?
That depends on the circumstances in each country. If funding is needed at a particular stage, the parent company can provide support, for example when a market has growth potential and expansion is required. But we can also borrow. McDonald’s Ukraine is currently financing its development from its own funds.
Our main task is to open new restaurants successfully. As we have discussed, Ukraine’s restaurant count remains well below Central European levels. We would like to grow, and to do so we need to demonstrate strong financial performance and good results from new restaurants. We are planning openings for 2018, but we also have strategic plans for 2019 and 2020.
Have you paid dividends to the parent company?
Yes, we have.
How does McDonald’s set its menu prices?
Every business aims to make money. When setting prices, we naturally consider our customers’ purchasing power. But there are also commercial realities: we depend heavily on the cost of ingredients for our suppliers. I am referring to international market prices for meat, milk and grain. Global demand for beef and milk has recently been increasing, while Asian countries, for example, have increased their demand for butter. This affects ingredient costs and, consequently, prices in our restaurants. The second significant factor is employee pay. This year, we increased restaurant employees’ wages by 32%. We plan further increases next year.
How optimistic are you about Ukraine’s prospects?
Ukraine urgently needs investment. The more existing businesses can invest in development, the better.
At the same time, Ukraine is not the world’s only investment destination. There are many others. Central European countries are ahead: many international companies with experience in other markets have already established operations there. Ukraine faces the difficult task of persuading multinational company executives in London or New York to commit additional funds. Everything possible must be done to attract that capital, particularly into new facilities producing high-quality goods. For now, those investments are going to neighbouring countries. Most regrettably, they are also drawing workers away from Ukraine. That makes improving Ukraine’s investment climate an urgent issue.
