Russia Has Been A Growth Target For Several Restaurant Chains. Now, The Future Is Unclear.

Food & Drink

With mounting pressure and deafening calls for boycotts, several U.S.-based restaurant companies announced next steps for their Russian operations on Tuesday and Wednesday, as the country’s attacks on Ukraine continue into week three.

The wave of announcements began with Yum Brands, which initially said it would pause investments and unit development in Russia while continuing to “assess additional options.” The company has since updated its stance, announcing the suspension of KFC company-owned restaurants in Russia and finalizing an agreement to suspend all Pizza Hut operations in partnership with its master franchisee in the market.

The company counts about 1,000 KFCs and 50 Pizza Huts in Russia, nearly all of which are operated under license or franchise agreements.

McDonald’s and Starbucks also announced unit closures. In an email sent to McDonald’s employees and franchisees, CEO Chris Kempczinski wrote the company, “has decided to temporarily close all of our restaurants in Russia and pause all operations in the market.”

McDonald’s has 850 restaurants in Russia, most of which are company-owned. The market generates just 3% of McDonald’s operating income, but 9% of its annual revenues.

“As we move forward, McDonald’s will continue to assess the situation and determine if any additional measures are required,” Kempczinski wrote. “At this juncture, it’s impossible to predict when we might be able to reopen our restaurants in Russia.”

He notes the company will continue to pay all McDonald’s 62,000 employees in the country.

Starbucks CEO Kevin Johnson also sent a systemwide email announcing the company is suspending all business activity in Russia, including shipment of its consumer-packaged goods products. Further, Starbucks’ licensed partner, which owns 130 stores in the market, is suspending its store operations and the company will continue supporting the nearly 2,000 employees affected.

This morning, Papa John’s jumped into the fray, announcing it will no longer provide “operational, marketing or business support to the Russian market.” The company notes all restaurants are operated by independent franchisees, while a master franchisee controls operations and supplies.

“Papa John’s International is not currently receiving any royalties from these franchised stores in Russia. Papa John’s International does not own or operate any restaurants in Russia,” the company states.

During Papa John’s recent Q4 earnings call, CEO Rob Lynch said there are about 185 restaurants in Russia and he doesn’t expect the conflict to have a big impact “on our operating situation or commensurately in financials.”

Restaurant Business International, which operates Burger King, Popeyes and Tim Hortons, released a statement that led with its support of Ukraine refugees, including a $3 million commitment. To cover that commitment, the company is redirecting its profits from franchised operations in Russia to humanitarian efforts.

Russia has been a target market for Burger King’s expansion as the brand doubled its international store count since 2012.

“In these three markets [China, France and Russia] alone, since 2012, we have built nearly 2,400 restaurants and created nearly $3 billion of annual systemwide sales,” RBI COO Joshua Kobza said during the company’s Q3 2021 call. “In Russia, for example, through a partnership with both a financial partner and a local entrepreneur, we’ve grown the Burger King store count from just a handful of restaurants in 2011 to nearly 800 today, almost matching the market leader.”

In fact, leading up to this conflict, the market’s potential has been clear for several chains looking to tap into Russia’s $1.5 trillion economy. In Q3 2021, for instance, McDonald’s identified Russia as a particularly successful market for its Famous Orders campaign.

Russia has also been a unit growth target for KFC International and the brand opened nearly 430 net new units during Q2 2021 with “significant builds” in Russia, along with China, India, Latin America and Thailand, CFO Chris Turner said during that earnings call.

Notably, it’s not just major (or public) chains that have been diving into the market, either. CKE signed a master franchise agreement in August to expand Carl’s Jr. in Russia. The plan was to develop more than 300 restaurants throughout Russia during the “initial term of the agreement,” which was not disclosed.

Currently, CKE has 15 franchised restaurants in Russia. In a statement, the company said, “As the situation continues to escalate, we are evaluating continued operations in the country.”

Little Caesars just recently opened its first restaurants in Russia and has identified the market for international growth, though a release calling for franchisees in the market no longer exists. Little Caesars did not respond to a request for a comment.

The end game for businesses here is as unpredictable as the conflict itself. For now, the operating impact seems nominal (or at least the ), but the potential for commodity inflation and other risks is high–a major concern given the inflationary pressures that already exist. We’re beginning to see pain at the gas pump from this conflict, for instance, and McDonald’s acknowledges it is experiencing “disruptions to its supply chain along with other operational impacts.”

Fitch Ratings notes a “lengthy war and its ramifications, including sanctions, have the potential to exacerbate cost pressures and dampen demand, which could lead to weaker-than-expected cash flow and leverage metrics.”

Fitch predicts U.S. consumer price inflation to peak around 8%, but warns the conflict raises the risk that such inflation could remain elevated for a sustained period. If that is the case, Americans’ discretionary spending at restaurants could be compromised and the business effects of this conflict will hit much closer to home.

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