Money Growing: A Taste of Road Dust

Along Russian roads both traditional expensive restaurants, intended for those with fat wallets, and cheap, small snack bars that are simple and without large menus and provide just what is needed, or a bite to eat in the car if you get stuck in a traffic jam on Leningradskoye shosse, are opening.

Eating American style

According to an estimation by Euromonitor, in 2004 to 2006 in Moscow the public catering sphere grew 16 per cent, and in Russia grew 10 per cent. As newspaper International Herald Tribune (IHT) writes, the abundance of restaurants in Moscow is evident, many of them work all day and night. On average the newspaper estimates an evening gathering in a Moscow restaurant at more than $100 per person (without alcohol, as those who drive don’t drink). In more simple places it is possible to spend $8-$35 on food, notes IHT.

Numerous inexpensive enterprises can be allocated to the sphere of so-called fast food. Street food (kiosks, booths, vans, trailers, etc.) s a type of fast food. Experts also place casual food restaurants in this popular segment. As a matter of fact, this is the medium between fast food and luxury restaurants. Fast-food establishments intended for the mass audience, including people preferring to drive rather then walk, have confidently conquered Russia. As for the rest of the world it is possible to say that they were conquered a long time ago.

Why does fast food win despite all the attacks from critics? First of all, experts say, it is owing to its cheapness, speed and accuracy of service, and also as a result of aggressive marketing and a successful choice of location - on the busiest roads. The first taste of western fast food culture was brought to Russia by McDonald's, which opened its first restaurant in 1990 on Pushkinskaya Ploshchad in Moscow. Now, as confirmed by the press service of the company, in Russia there are 183 McDonald's restaurants serving 500,000 visitors daily. Russians also like the МcAvto (Drive-thru) version. Currently in Russia, 69 "МcAvto" McDonald drive-thrus are in operation. The prices are the same as in usual McDonald's. All over the world McDonald drive thrus are busy. For example, in Kuwait, the day the McDonald’s drive-thru opened the queue of cars, according to the website www.slowfood.com, was more than 10 km long.

Another giant in public catering covering the fast food segment is Rostik Group (includes the Rostik’s-KFC chain of fast food restaurants and Rossinter restaurants holding, which in turn includes, in particular, the Il Patio and Planeta Sushi chains of restaurants). The Rostik’s-KFC chain, says Valeriya Silina, PR director for Rostik Group, is represented in Russia by 136 enterprises (89 of which are franchised). Rostik’s-KFC serves visitors in 14 cities of Russia and the CIS, including Moscow, St. Petersburg, Novosibirsk, Yekaterinburg, Tyumen, Samara, Kazan, Izhevsk, Nizhny Novgorod, Surgut, Krasnodar and Perm. This year it plans to open 70 more fast food enterprises in Russia and CIS countries. In the Moscow region the company has 124 restaurants.

Russian company Markon (the Stardog!s chain) is also actively developing. It is setting up small booths, or as they are called by the company "mini-units" in the busiest places, including at metro station. But it also has cafés. In total the company has 230 enterprises of various type.

American chain Subway is expanding its influence in Russia. It currently has outlets, for example, in Mega-Khimki and Mega-Tyoply Stan shopping centers. The average bill, according to Gennady Kochetkov, vice president for the development of business at Subway, is only 150 rubles in all 16 cities of Russia, although the chain’s franchises establish their own prices on products offered for sale. In the Moscow region in 2006 there were four Subway outlets, in 2007 there were 10, now there are 12, and by the end of this year the chain intends to have up to 20 outlets in Moscow and the Moscow region. In St. Petersburg there are currently nine outlets of the chain, and by the end of this year five more are planned to open. In the whole country there are currently 40 subway outlets. By the end of this year there will be no less than 70.

In the cheapest fast food outlets the average bill, according to the estimations of experts, varies from 65 to 120 rubles. At casual food restaurants the average bill varies from 250 to 400 rubles.

A region with wings

Recently the displacement of attention on fast-food establishments from Moscow to the Moscow region has been noticeable. Just recently, as the press service of the government of the Moscow region notes, the Moscow suburbs in this respect have been conquered. As of the beginning of this year in the Moscow region there were 25 McDonalds restaurants and more than 20 Rostiks restaurants. The number of brands attracted to the Moscow suburbs, increases not by the day but by the hour. In Lyubertsy and Odintsovo Il Patio restaurants have opened. This year two more will open in Zhukovsky and Balashikha, and a little later in Podolsk. Rostik Restaurants has plans for development in towns close to Moscow such as Reutov, Korolev, Ramenskoye, Orekhovo-Zuyevo, Dmitrov, Mytishchi, Sergiev Posad, Pavlovsk Posad, Serpukhov, Kolomna, Elektrostal and Klin. In total Rostik Group intends to open in 40 restaurants in the Moscow region. As notes Silina, demand for restaurant services in places situated near Moscow is no less than in the dormitory suburbs of Moscow.

Markon (the Stardog!s chain) has no intention of being left behind, actively developing franchising. By the end of this year there will be 15 Stardog!s outlets, and in 2009 more are planned to open. As Sergei Fedotov, the general director of Маrkon, explains, to open a shop only a grill and a refrigerator for the meat and salads are required. To fully equip an outlet, including renovation of the premises, about $5,000 is required. Another $4,000 goes on the stimulation of administrations of markets or shopping centers, security, etc.

Location is crucially important

The rental payments for a stationary cafe are rather low - within the limits of $700, equal to the returns from 2-3 days. And if the outlet is not stationary, it is not necessary to pay rent, as it is considered that the one who trades from wheels (even if it’s been located on the same spot for five years), can move at any moment. There is no need for planning permission for a stall on wheels. Now, says Sergey Rak, director of development at Маrkon, it is possible to say with confidence that the market of the Moscow suburbs is ready for various formats of public catering outlets to successfully work on the streets. Silina gives several reasons for the noticed increasing demand in the Moscow suburbs for fast and good quality food: an increase in the population’s spending ability, the development of the culture of eating outside the home, a growth in the demand for restaurant services. At the same time, in her opinion, large mega cities are gradually becoming saturated with supply."

"Though we are still far from other world capitals by segmentation and saturation of the market, large players are already trying to go to regions. The development of the restaurant business is also being promoted by the active blossoming of retail trade, i.е. the occurrence of large shopping centers enabled us to use new sites and new niches. Recently Rosinter united with Whitbread, which manages the international chain of coffee houses Costa Coffee.

The coffee house operates under the classical format popular all over the world. There is no table service and no expanded menu, everything is concentrated on drinks and snacks. Such coffee houses can be built in shopping centers, airports, stations and in shops." she says. Silina also pays attention to the steady growth in the number of offices, shopping centers and markets near the MKAD and close to the Moscow suburbs, which inevitably cause the need for fast food.

Rosinter Restaurant Holding is opening restaurants of various formats. They may be in detached buildings, located in apartment buildings, and also a combination of two restaurants under one roof. In 2007 Rosinter Restaurant Holding signed an agreement with Pulkovo, according to which it now operates almost 20 enterprises on the territory of Pulkovo-1 and Pulkovo-2 airports. The company also has outlets in Sheremetyevo under the T.G.I. Fridays trademark. "On average, investments in one chain restaurant located in Moscow, are from $450,000 to $600,000 depending on the area and format. Recoupment takes approximately three years. The average bill in one of our family restaurants is $14.5-$20," says Silina.

To be at the wheel

In search of the most profitable niches and the maximum scope for all levels of the population, chains began to offer services previously unknown in Russia. For example, different types of food outlets at petrol stations or in immediate proximity to them. The first to open cafes and shops at petrol stations in the Moscow region was the UK’s British Petroleum in 1996. Russian companies followed their interesting example. For example, Grand (bought recently by Lukoil), which manages a chain of 95 petrol stations in the Moscow region, has opened seven cafes at its stations.

Rostik Group and Subway also have outlets at petrol stations and in immediate proximity to them. Incidentally, Subway is the world leader in the sphere of catering services at petrol stations. In total the chain has 3,000 food outlets at petrol stations around the world. However, at the moment in Russia it has opened only two: One in the Moscow region, and another in Krasnoyarsk airport. As Kochetkov notes, transport infrastructure is a sphere that the Subway chain pays particular attention to and the company has serious intentions.

Markon also works in this segment. hot dishes from "Stardog!s" in Moscow and the Moscow suburbs can be tasted in cafes at TNK petrol stations. "We have taken the Scandinavian model as a base,” says Rak. “In Denmark and Sweden at practically every petrol station outside a city you can buy a hotdog. It needs just a little space and equipment, the main things for success are to observe standards, the popularity of the brand and the interest of the personnel. It is indicative, that where there is the best quality of service at TNK and Rosneft (formerly Yukos petrol stations) petrol stations outside the MKAD the sales volumes are almost the same as in the center of Moscow." In total in the Moscow region there are 63 mini-units of the Stardog!s chain established at petrol stations.

Food that is prepared and sold at petrol stations and near to them is intended especially for drivers and should not only be tasty, but also convenient. The food should not collapse in your hands, leak, melt, burn, etc. Clearly, if a driver (or its passengers) gets his interior or hands dirty it is obvious that he won’t buy such products anymore, and will probably look for another petrol station. That is why in this delicate segment only solid food that doesn’t cause any trouble while in the car, in particular classic sausages in rolls, are sold.

According to experts, eating points located at petrol stations or near them, generally do not differ in profitability from enterprises in any busy place. A successful location itself is already a key to success and a basis of profitability. Busy roads are, of course, particularly interesting in this respect. At the moment, according to Olga Shirokova, head of the consulting, analytics and research department at Blackwood, there is huge demand for roadside sites. This is connected with the fact that the profitability of restaurants on highways considerably exceeds the profitability of similar establishments in other areas. Deals on such projects are closed, as a rule, by way of the sale/purchase of land, rather than as commercial real estate. The expert believes that in the long term the number of roadside restaurants will grow together with the development of toll roads - investors will have the opportunity to lease land plots along roads under construction. For Rostik Group, says Silina, premises on large highways in the MKAD area are interesting, as here there is a huge stream of cars and plenty of petrol stations with few quality restaurants/snack bars.

Shirokova notes that on the MKAD both food outlets intended for people with average and high levels of income (Taboo, Pekhorka, Moi Dvor), and cafes/snack bars focused on a wide audience are concentrated. Alexander Lenshin, general director of Europe-Engineering, in turn, divides food outlets at petrol stations and near them into two groups: cafeterias and café/canteens.

Cafeterias at petrol stations, by definition, are specially equipped premises in the same building as the operator of the petrol station, and a shop selling groceries, etc., and will also have several tables for clients. On the menu there should be tea, coffee, prepared baked goods and microwavable semi-finished items and disposable utensils. The expert approves that cafeterias have lower requirements from inspection authorities, they can be organized on an insignificant area, they do not demand large investments and make returns rather quickly.

Russian companies have a lot to work on. According to Douglas Consulting, in western countries where there is strong competition between petrol stations, huge value is given to attracting clients. At petrol stations all kinds of additional services in the form of shops, cafes, restaurants and bars are offered. Some people go even further. For example, in Canada on the Toronto - Montreal highway there is a petrol station that adjoins a small zoo. As a result of such dexterous marketing almost all parents with children go there to refuel. And near another station on the same highway a magnificent bakery offers a huge assortment of tasty apple pies, rolls and cakes. The sign on this petrol station is a huge apple and is visible to motorists from far away.

According to Euromonitor, in five years (from 1999 to 2004) profit from food and drinks sold through adjacent shops annually increased in Canada by 7 per cent and 4.6 per cent. The most dynamic were the sales of sweets: the annual growth of their sales was 13.8 per cent. In western countries about 60 per cent of the income of petrol stations is from adjoining shops and additional services, including cafe/snack bars, and fuel approximately 40 per cent.

Big bureaucrat and small business

In the seemingly triumphant procession of public catering around the country, in particular the fast food sector, actually everything is not so simple. Somewhere on a road in the Moscow suburbs you can come across a good restaurant or cafe where the food is good and cheap. But this doesn’t mean anything. Because it is not known whether the owner pays taxes (more often than not, it is a 100 per cent “shadow” business and the owner only pays for its "roof"). Quite probably, it didn’t even get permission for the development of a specific land plot or site as a food outlet; the client will probably never know.

Large western and Russian companies/chains work, or at least try to work, in a legal way, paying taxes and developing territories legally, with the consent of the health and safety authorities. They are legal and real businesses. They should feed people with quality products and have legally received real documents (instead of fictitious ones or in some cases none at all). These outlets must win an unequal competitive fight with numerous “shadow” companies, but this is a separate issue (both in the newspaper, and in the Criminal Code of Russia). Challenges especially arise for small and average businesses. Despite talks "at the highest levels" about supporting small business real steps towards this are clearly insufficient.

Kochetkov says: Subway works only by franchises. All 40 outlets operating in Russia belong to small Russian businesses. Therefore our development depends on two major factors: the role and place of small businesses in the national economy and the development of franchises. As is known, the reception/purchase of commercial real estate for small businesses is almost a national problem today.

Last year the prices for real estate were artificially increased around the country. This year there is a new wave of inflating the cost/rent of real estate. Moscow, for example, dazzles with "to let" signs, however small businesses cannot afford the new prices. Rak says: "As with all operators of the market, we meet difficulties in development. For example, for the development of our street food business (in total we and our partners have 110 kiosks) the basic problems are in receiving and preparing workplaces. There are also difficulties connected with electricity. The official cost of connecting to power supplies at one address for one company from 2008 is 100,000 rubles per KW. Without going into detail, I will note that the cost of connection is more than the cost of the kiosk and the equipment within it. And the risks of losing capital investments are there. There are no guarantees."

Among other obstacles for the development of business he names high rental rates for pavilions, complexities in getting permission to open new outlets, and also problems in choosing loyal partners. According to him, all over the world street food is developing on the basis of franchising. But in a view of the present problems in Russia only the very courageous or assured administratively resourced businessmen are engaged in it.

"If we are only talking about mobile street trade,” Rak continues, “the government of Moscow in 2006 accepted a program of development enterprises in the consumer market in which the provision has been made for the annual reduction by 20 per cent of street food outlets, in other words retail trade.

Therefore in autumn last year we cleaned all kiosks from national highways. This lost us 10 per cent of our chain and, of course, we had fewer outlets. As a result of conditions which have developed in the market, some corporations/chains and individual enterprises, and now even Stardog!s, have started to actively develop in shopping centers. It is, of course necessary to invest more money in this niche, but you don’t have to depend on the mood of officials."