Closure of Restaurants in Russia Cost McDonald’s $127 Million in First Quarter

People sit on the terrace of a closed McDonald's restaurant in Moscow on Aug. 21, 2014. (Alexander Nemenov/AFP via Getty Images)

The closure of all 850 McDonald’s restaurants in Russia has cost the fast-food chain $127 million in the first quarter of 2022.

The fast-food company announced during its first-quarter earnings report on April 28 that its suspension of operations in Russia cost it $27 million in leases, supplier costs, and employee wages, and another $100 million in unsold inventory for its supply chain.

McDonald’s is losing roughly $55 million a month to pay staff, landlords, and suppliers “for keeping the infrastructure going” for its restaurants in Ukraine and Russia, said Chief Financial Officer Kevin Ozan.

Those losses altogether dragged its earnings down by 13 cents per share in the first three months of the year.

McDonald’s had also temporarily shuttered its 108 locations in Ukraine for safety reasons.

According to McDonald’s, Russia and Ukraine both accounted for roughly 2 percent of its global sales and less than 3 percent of its operating income.

McDonald’s opened its first store in the Soviet Union two months after the fall of the Berlin Wall in 1989.

It was a symbolic moment in the waning years of the Cold War, as the restaurant drew large crowds on its opening day.

After heavy pressure from the Biden administration and activist consumers protesting Russia’s invasion of Ukraine, McDonald’s announced in early March that it would be temporarily closing all of its 850 locations in Russia after more than 30 years in the country.

Since the end of February, more than 750 primarily Western companies have since curtailed operations in Russia.

Rosinter Restaurants Holding PJSC, which operated more than 200 restaurants in Russia including nine McDonald’s locations, said on April 28 that it earned a net profit for fiscal 2021 of 94.8 million rubles versus a loss of 1.83 billion rubles in 2020 at the height of the pandemic.

Starbucks, PepsiCo, and Coca-Cola were among those who suspended their business activities in Russia, along with Yum Brands, which had 1,000 KFC restaurant franchises and 50 Pizza Hut locations in Russia.

It is not known when or if McDonald’s will ever resume its operations in Russia and Ukraine, but the fast-food chain said it is still committed to continuing to pay its employees in both countries.

Excluding costs to support its operations in Russia and Ukraine, as well as other one-time expenses, McDonald’s had earned a profit of $2.28 per share last week, beating earlier estimates of $2.17.

McDonald’s comparable sales in its overseas markets surged nearly 15 percent, despite the draconian CCP (Chinese Communist Party) virus lockdowns in China that have temporarily closed restaurants across the country.

Meanwhile, menu price hikes and a new loyalty program helped the fast-food chain beat estimates for quarterly sales and profit with shares rising 2 percent, despite rising inflation, the war in Ukraine, and pandemic lockdowns in China, announced the company in its report.

Many American restaurant chains have raised prices to offset skyrocketing costs from salaries to ingredients and paper packaging.

Commodities prices for the company have roughly doubled since the fourth quarter in the United States and Europe and are now as much as 14 percent higher for the year, said Ozan.

The 8 percent jump in McDonald’s menu prices in the first quarter versus the prior year did little to dent sales.

The rising cost of gas, rents, and groceries for lower-income customers have caused some to buy cheaper or fewer McDonald’s menu items in certain areas, said Chief Executive Officer Chris Kempczinski to investors.

In “certain parts of the business and in certain geographies, there is a little bit of a trade down that we’re seeing that we’re just keeping an eye on,” he said.

“We need to make sure that we continue to have value be an important part of our proposition.”

McDonald’s will analyze its options in those regions and will try to provide clear direction to investors no later than the end of the current quarter, said Kempczinski.

The CEO had touted the success of the introduction of its digital loyalty program late last year, which now has 26 million subscribers, and has helped increase profits by 3.5 percent in first-quarter comparable sales in its primary U.S. market.

The fast-food chain’s global comparable sales rose in the first quarter to 11.8 percent, above estimates for an 8.2 percent gain.

Total revenue increased 11 percent to $5.67 billion, beating expectations of $5.59 billion.

Reuters contributed to this report.