QSR Restaurant Brands International Inc

By James Marson 

TOMSK, Russia -- Outside the new McDonald's on Red Army Street in the Siberian town of Tomsk, a billboard throws down a challenge: "KFC. Opening soon."

It is the latest shot in a battle between American fast-food giants fighting for Russian taste buds and rubles more than a thousand miles east of Moscow.

McDonald's Corp. is advancing into new territories such as Siberia, a vast, sparsely populated expanse dominated by forests and swamps and dotted with several large cities.

There, the Golden Arches are encountering familiar rivals such as Yum Brands Inc.'s KFC and Restaurant Brands International Inc. unit Burger King, which have built scores of restaurants in the past few years.

Since opening its first restaurant in Russia in 1990, McDonald's has expanded cautiously as the country's huge size can make logistics formidable, said Khamzat Khazbulatov, chief executive of McDonald's Russia. Now, the company has more than a dozen outlets in Siberian towns, with plans to open more.

"It's not difficult to open more restaurants in towns where we have a presence," Mr. Khazbulatov said. "It's even necessary, in order to optimize operating expenses and logistics costs."

A Yum Brands spokeswoman said KFC is "strong and growing" in Siberia, with 71 restaurants in 17 cities. A spokeswoman for Restaurant Brands International declined to comment on the competition or any expansion plans.

Opportunities for fast-food chains to grow in the U.S. are limited by oversaturation of restaurants. Other problems include high labor costs that have led companies to raise menu prices, leading customers to pull back on spending.

McDonald's has designated Russia, where it has some 600 restaurants, a "high-growth market." An oil boom in the past decade and a half has pumped up average monthly salaries here and across Russia to the equivalent of just under $600. A two-year recession has crimped real wages; but people are still eating out "at least two or three times a week," said Mr. Khazbulatov, adding that McDonald's offers an affordable option, and keeps price rises below inflation.

The expansion comes at a time when Russian and U.S. relations are at their worst since the end of the Cold War. In 2014, Russian authorities temporarily closed a dozen McDonald's restaurants, citing alleged sanitary violations, in what analysts said looked like a political move against a symbol of American economic might. The matter was quickly resolved and the restaurants reopened.

Russian nationalists often rail about what they see as American cultural imperialism, suggesting that the consumption of U.S. fast food is being unpatriotic. The Liberal-Democratic Party of Russia held a small protest in Tomsk when the new restaurant was announced in 2014 calling for McDonald's to be banned.

"We have our own culinary traditions, which we should support rather than leaning toward another culture, which is much poorer," Sergei Bryansky, a regional lawmaker for the party, told a local news website at the time. "Liver pies with cabbage or Siberian pies with cherries are much tastier than a dubious sandwich."

The confrontation doesn't appear to have affected the popularity of the new restaurants. When the McDonald's opened in Tomsk in September, several hundred stood in line, and it served 6,000 customers in the first 24 hours, the company said. McDonald's is trying hard to stress its local commitments: The page to log on to free Wi-Fi touts the company's use of Russian produce.

When McDonald's first came to Russia, it imported 80% of what was sold; now, 85% is produced in Russia, Mr. Khazbulatov said. That helped protect the company from a Russian import ban on some food products from the West in 2014 and a plunge in the value of the ruble.

Breaking from its usual strategy in Russia, McDonald's has teamed with a franchisee in Siberia, a local businessman based in the region with connections, experience and a management team.

Mr. Khazbulatov said working with a partner, who is responsible for capital investments, minimized risks for the company. McDonald's is also altering its business model in China, announcing last week that it is handing over the reins of its China business to a state-owned enterprise and selling an 80% stake.

Siberia's cities range from Tomsk, a university town of a half-million inhabitants known for its intricately designed wooden buildings, to heavily industrialized Novokuznetsk, famous for its metals plants.

KFC has opened three restaurants in Tomsk since 2014; Burger King launched one the same year.

On a recent afternoon, the new McDonald's at Tomsk had a steady stream of customers, a mix of students, teenagers and young families.

Some in Tomsk say the prices, which are somewhat higher than at some local fast-food outlets, mean they can't eat there frequently. But Yevgeny Pavlov, a 31-year-old who runs a coffee kiosk, said he preferred to pay a bit more for reliable quality.

"I've seen how they cook the chickens at the kiosk next to mine," he said.

One local chain has fought back against the newcomer: A cartoon outside a Mr. Tako, an Asian-fusion restaurant, shows an octopus in a boxing ring grabbing Ronald McDonald by the neck with one of its tentacles.

--Julie Jargon in Los Angeles contributed to this article.

Write to James Marson at james.marson@wsj.com

(END) Dow Jones Newswires

January 20, 2017 05:44 ET (10:44 GMT)

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