Franchise in Russia

The Big Mac that
you pick up at a local McDonald’s restaurant might soon contain meat from an
Orenburg cow processed by an Italian plant in the Moscow region.

It’s all part of Italian businessman Luigi Cremonini’s strategy
to tap into Russia’s “huge potential” by making “huge investments.”

Italy’s Cremonini Group will open a new meat-processing plant in
the Moscow region to produce hamburgers for McDonald’s by year-end as it moves
to build a full production chain in Russia, Cremonini told The Moscow Times.

The founder of the Italian giant, one of the largest food
companies in Europe, is not at all dismayed that the plant will cost twice as
much as expected or that Russia’s cattle population is steadily declining.

“We strongly believe in the prospects of doing business in
Russia, and this is why we decided to make a strong direct investment, 100
million euros [$148 million], to build the meat-processing plant in Odintsovo,”
he said in an interview Wednesday.

“We are already a supplier of beef for McDonald’s restaurants
across Europe and will now make hamburgers for the Russian branch of the
international fast-food chain,” he said.

The Odintsovo plant, which will occupy 25,000 square meters,
will initially produce 25,000 tons of meat products per year and increase in
capacity to 50,000 tons in a few years, he said. Work on the plant started in
2007.

The plant will be operated by Cremonini’s local subsidiary,
Marrusia.

McDonald’s,
which is rapidly expanding worldwide and plans to open 30 new restaurants in
Russia this year, has processed its own food needs but said it needed Cremonini
to keep up with growing demand.

“Due to an extensive McDonald’s expansion in Russia, the
decision was made to outsource the production facilities of ZAO
Moscow-McDonald’s Food Processing Complex,” McDonald’s said in an e-mailed
statement Thursday.

“Marrusia … will ensure production, storage and delivery of meat
products for McDonald’s restaurants,” it said. “Supplies are planned to begin
with the opening of the partner’s facility.”

The plant will provide 10,000 tons of meat to McDonald’s next
year.

Cremonini said he saw the plant as a strategic investment and
was cautious in predicting when it might break even.

“In normal conditions, you would expect to justify your expenses
for a project like this in 10 years, but Russia is a country where it is kind of
difficult to make this kind of precise calculation,” he said.

Cremonini stressed, however, that only major investments work in
Russia and said his company has invested more here than in any other country
outside Italy.

“This is a country with great perspectives, so the logic behind
this is simple: huge potential, huge investments,” he said. “At the beginning,
we of course made a business plan outlining a lot of unpredictable factors, so
we are quite aware of what we got ourselves into.”

Cremonini Group was founded by Cremonini in 1963 and entered the
Soviet market in 1985, supplying meat to the state-owned trade concern
Prodintorg. The company started to target Russian consumers in the late 1980s
and set up Marrusia in 1998. In 2008, the company reported turnover of 133
million euros in Russia, up 5 percent from the previous year. The group’s total
consolidated revenues were 2.2 billion euros, an increase of 6.6 percent.

The new Odintsovo plant will become the final stage of a
full-cycle production chain that the company intends to build over the next few
years, starting with several small slaughterhouses in the Orenburg region.

“Our strong conviction is that if you want to succeed in this
country, you have to produce and to process here. You cannot consider Russia
just as an export market,” Cremonini said.

The businessman would not disclose exact investment figures for
the Orenburg region, saying only that the amount would not be as big as in
Odintsovo.

“Judging by the experience of our Odintsovo project, we prefer
not to disclose figures,” he said. “Initially we planned to invest 45 million to
50 million euros in the Odintsovo project, but the final cost doubled.”

The major challenge during the construction of the plant in
Odintsovo was meeting all official rules and regulations, he said.

“It was an incredible adventure to both meet the timing of the
construction and respect all the formalities,” he said. “In Europe, we sometimes
think that we have the highest construction, hygienic and other standards, but
this is not true. In Russia you have to multiply everything by two.”

The reason the company plans to build several small
slaughterhouses instead of one big enterprise is the relatively low density of
the cattle population in Russia.

He said his company’s principle was to build slaughterhouses no
farther than 500 kilometers from cattle farms in the interest of the humane
treatment of live cattle during shipping. He said he had calculated all the
possible risks of shipping meat from Orenburg to the Moscow region.

“If the trucks can cover the distance from the slaughterhouse to
the plant in two days, there is no problem for us,” he said.

The distance between Orenburg and Moscow is roughly 1,500
kilometers.

Cremonini would not speculate about the possible costs of
highway bribery, a common phenomenon in Russia that poses a serious obstacle for
quick transportation and increases costs.

“Regarding highway bribery, we have never faced this kind of
problem,” he said. “Anyway, if there are some difficulties in this country, they
are absolutely the same in all the other countries of the world.”

During the last decade, meat production has dropped by 55
percent, according to statistics from the Agriculture Ministry. But Cremonini
said “meat” was too general a term, and pork and poultry should be separated
from beef, which requires a more complicated production process.

“Poultry and pork production is now doing pretty well, while
beef production is decreasing,” he said. “In order to organize pork and poultry
production, all you basically need is cereal to transfer fodder into animal
protein — and Russia is rich with cereals — while beef production is more
complicated.”

In January, there were 20.7 million head of cattle in Russia,
down 2 percent from the same month in 2008, according to the State Statistics
Service.

In order to efficiently produce cattle and beef, you have to
“produce” cattle farmers, Cremonini said.

“And this is the problem in Russia — you need people to produce
cattle, and finding such people and stimulating them to grow cattle takes a very
long time,” he said.

“This industry has been destroyed in the last 20 years,” he
said. “It is a very slow and long-term process to rebuild the cattle
population.”