McDonald's to invest more in Russia, boost local supply

MOSCOW (Reuters) - McDonald's MCD.N plans to increase investment in Russia and open more restaurants this year after a focus on local suppliers and affordable menus helped it to weather an economic crisis.

Russia’s economy, hit by weak oil prices and sanctions over Moscow’s role in the Ukraine crisis, contracted by 3.7 percent in 2015. Economic indicators suggest the slump is far from over and consumers, facing high inflation, may cut spending further.

“The eating-out industry has been stagnating since the beginning of 2015 but we have seen significant growth of our market share as we continued expansion,” said Khamzat Khasbulatov, chief executive of McDonald’s Russia.

The U.S. fast-food chain also picked up customers from other casual dining rivals as it deferred price increases when a slump in the rouble and Moscow’s ban on many Western foodstuff inflated the cost of supplies, he said.

In 2016, it plans to open more than 60 restaurants, compared with 59 in 2015. The cost of investments in new openings and refurbishment of older restaurants will rise to about 9 billion rubles ($113 million) from 8 billion in 2015.

Khasbulatov also said the company had fully recovered from an unprecedented series of regulatory checks in 2014 when it had to temporarily shut many of its restaurants. The closures were viewed broadly as a retaliation by Moscow for Western sanctions.

The company had planned to spend 6 billion rubles in 2015 but exceeded that figure as it opened more restaurants than planned, although its profitability declined. It did not give specific profit figures.

“You cannot immediately offset a hike in (supplier) prices with an increase in menu prices, it’s a long process. Of course it hits profitability... but our profitability remains within acceptable limits,” Khasbulatov told Reuters at the company’s annual news conference.

At a group level, McDonald’s reported better-than-expected quarterly same-restaurant sales as the launch of all-day breakfasts proved a hit with diners in the United States and demand continued to recover in China.

McDonald’s, which has 543 restaurants in Russia, has over the past 26 years increased the share of local suppliers to 85 percent. Khasbulatov said it aimed eventually to source all supplies locally, helping smooth out the impact of currency swings and import restrictions.

“The development of local supply has played a big role in supporting our profitability. But it’s important to localize not only food processing but also production,” he said, adding he hoped to replace potato imports with local supplies after 2017.

Last August, McDonald’s signed its second deal with a Russian franchisee and Khasbulatov said on Monday that more deals would likely follow soon. It has mainly focused on developing its own restaurants in the country.