McDonald's Looks Beyond Moscow

JURA VOLKOV, clad in a long white coat and cloth cap, leans over the steamy opening of a large, stainless steel vessel and dips a small plastic square into the brown sauce bubbling inside. Carefully, he carries the square across the room to the window, peering closely to compare the color of the sauce with that of the plastic.

Three years ago Mr. Volkov was repairing jet engines at Moscow's Vnukovo airport. Today he is monitoring production of caramel sundae toppings at McComplex, a modern food processing plant set up by McDonald's in this Moscow suburb.

"It's a prestigious company," Volkov says in reply to how an aviation mechanic ended up in the sauce and toppings department. Also, "the pay is better."

Almost from the moment McDonald's opened its doors in Moscow, the fast-food eatery has been a magnet for both would-be employees and hungry Russians. The restaurant serves between 40,000 and 50,000 customers a day, making it the busiest McDonald's in the world. The neat interior, smiling help, and what one Moscow official calls "excellent food," have made it a must-see tourist location for Russians visiting from the provinces. New restaurant locations

In early June, McDonald's opened its second restaurant, in a new office building the company built a stone's throw from the Kremlin. And on July 3, a third location will begin business on the busy pedestrian mall in the historic Arbat district.

From the spit-polish cleanliness of the floors to the constant movement of its workers, the McDonald's factory is as much a contrast to the sloven idleness of the average Russian plant as the McDonald's restaurant is to a Russian eatery. The supply, production, and distribution operation which the company has had to create to support its restaurants is in many ways its most striking accomplishment.

McDonald's now purchases 90 percent of its supplies within the former Soviet Union, with a network of 150 suppliers. They range from iceberg lettuce growers in Sochi on the Black Sea to the providers of tomato paste and dried onions from Uzbekistan in Central Asia. McDonald's has its own fleet of trucks to get around the tangled and often dysfunctional distribution system.

Most of the supplies are raw product, such as fresh milk and beef quarters, which are then processed at the modern Solntsevo plant. With a work force of more than 520 Muscovites, the plant churns out hamburger patties, pasteurized milk, buns, frozen french fries, apple pies, and a number of other products. Its capacity is enough to supply the three restaurants and more. Reliable suppliers

But McDonald's future expansion - including to other cities in Russia such as St. Petersburg, as well as other former republics such as Ukraine - depends on the company's efforts to turn its raw-material producers into full-scale producers and subcontractors.

The struggle to find reliable suppliers, and to encourage them to become modern producers, provides a rare example of how foreign investment in production can help transform the former Soviet republics into market economies. It is, the company proclaims, "a success story," but it is not one without its problems.

The decision to set up a processing plant - a $45 million investment - was an admission that doing business here is different. Other McDonald's around the world rely on subcontractors.

"This is the only place in the world where we manage the supplier operation," says Glen Steeves, director of the production and distribution complex. To set this up, McDonald's Restaurants of Canada, the partner in this venture with the Moscow City Government, had to call in its suppliers from around the world to help set up the factory and to evaluate potential suppliers here.

For example, McCains, the Canadian potato company which supplies McDonald's there, sent agronomists to go to collective farms and negotiate with directors about planting specially imported Russett Burbank seed for the potatoes. The potato-planting operations have expanded from 200 hectares to 700 hectare, with 10,000 tons being harvested annually on eight collective farms.

In many cases, McDonald's personnel have become involved in changing the work habits of their suppliers to meet their standards. At the dairy which supplies the milk, "we went in and showed them how to clean the cows," says Purchasing Director Mikhail Kurbanov-Osipov, one of the many Russian managers who have come up through the ranks to replace most of the original Canadian staff. Economic reforms

Relationships with suppliers have been aided by rapid reforms in Russia since last year, including privatization of state-run industry and price liberalization. "After the release of price controls a year and half ago, we had suppliers calling us," Mr. Steeves says. McDonald's has had to cope with inflation running at more than 2,000 percent a year. But economic reforms have given it the freedom to make direct deals with collective farms, slaughterhouses, and the like.

McDonald's management has sorted out the entrepreneurial types among its suppliers and encouraged them to gradually take on production tasks. An example is Anatoly Revyakin, a former deputy director of a Moscow area "sovkhoz" (state farm) supplying vegetables to the Kremlin elite, who now dreams of becoming the Heinz of Russia.

McDonald's met Mr. Revyakin four years ago when it purchased cucumbers from his state farm. "About a year ago, when it became clear that McDonald's was expanding and would need additional production, I rented out premises from the sovkhoz and started an independent enterprise," Revyakin says. Buying the cucumbers from the farm, Revyakin now pickles them for McDonald's.

"The first thing it was necessary to teach was how to clean the floor and clean hands, then standard production, then consistency of quality," says Mikhail Oleisker, a former bakery manager who runs the effort to transform raw product suppliers to processors. "In Russian enterprises if the product is different, it's nothing because the market is able to take anything. Then we had to teach him how to spend his money better, how to keep books, how to set prices."

The pickle operation has come far enough for McDonald's to send a batch for testing for possible use in McDonald's restaurants in Central Europe and Germany.

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