Once the symbols of freedom and democratisation, McDonald’s, Starbucks and Levi’s led the widely mediatised exodus of Western companies from Russia in protest to its invasion of Ukraine starting from February. Flashy headlines were accompanied by haunting pictures of emptied and sealed luxury department stores, boutiques and fast food venues. The departure and divestment of major brand names that associate their host countries with the Western Democratic World, such as Visa and Mastercard, LVMH and Hennes & Mauritz, Mercedes-Benz, Danone and Ikea, have perhaps even more symbolic than economic dimension to them. It publicly denounces the decay of democracy in Russia.
The rushed collective departure of popular fast food, FMCG, automobile, clothing, cosmetics and luxury lifestyle brands, much like the disconnection of Russian banks from the SWIFT international banking system, caught the audience both inside and outside of Russia by surprise. Suspense filled the air in anticipation of the social and political impact that this would have on the conflict resolution efforts. To the dismay of all producers, consumers and far side observers alike, Putin’s offensive progressed further into Ukraine, bombing Kiyv, the capital, and Kharkiv, the second largest city in the country.
Fast Food and Fast Fashion
Reluctant to do so, western companies saw themselves obliged to sell their remaining stocks and premises, thus narrowing the window of opportunity to return. In response to the events that broke out on 24 February, McDonald’s closed its 850 restaurants across the country, but continued operating as a dark kitchen, offering its meals online on the Russian food delivery platform Yandex.Eats. However, the American fast food chain has now announced a definitive exit from the Russian market, where it represents 7% of the fast food market. Since March, the progressive closure process has cost McDonald’s $127 million, including staff costs, payments for leases and supplies, food waste and equipment disposal. The company estimates that costs will continue rising about $50 million a month.
Yet, like any story, that of western companies leaving Russia also has a flip side. The share of the Russian market sales in the Western companies’ total revenues is insignificant. In the same way, the economic contribution of these companies to the Russian economy are insignificant. These factors also explain why the mass brand protest did not affect the socio-political climate in Russia. For comparison, sales from Russia-based venues only made up 9% of McDonald’s total revenue and 3% of its total profit. In turn, the American fast food chain contributed $2.5bn to its host’s economy per annum, including tax payments, purchase of 4,2% locally produced potatoes and 1,8% locally produced cheeses. In the end, the iconic burger brand chose to sell its Russian business to Alexander Govor, who has already been a partner since 2015, operating 25 restaurants in Siberia.
Popular clothing and fast fashion groups Inditex SA, owner of Zara, Massimo Dutti, Bershka, Pull and Bear, and Hennes & Mauritz AB, which include H&M, COS, Arket, & Other Stories, also temporarily stopped all sales in Russia and closed their shops. H&M owned over 150 stores in Russia, while Inditex had 502 across the country, of which 86 were under the Zara brand. Like for McDonald’s, the companies’ revenues from the Russian market were not significant, with Russia accounting for only 8.5% of Inditex’s total earnings before interest and tax, and only about 5% of H&M’s group sales, despite being the company’s sixth-biggest market.
Interestingly, the Japanese basic fashion brand Uniqlo did not initially intend to suspend its sales in Russia, with the CEO famously comparing clothing to a basic human right, ”a necessity of life”. Yet, in the digital age, it is the public opinion voiced on social media that has the last word.
FMCG and Everyday Consumption
Major FMCG multinationals like Unilever, Danone, Nestlé, Carlsberg and Coca-Cola found themselves in a complex dilemma, especially for the likes of Unilever and Procter & Gamble which own brands that have become household names. Most of these conglomerates halted the production of all non-essential goods and stopped investments into marketing campaigns in Russia, but are continuing to provide basic nutrition and hygiene products, such as milk, baby food and diapers. In the digital age, however, public opinion outweighs business concerns. A case in point is Nestlé, which fell under Twitter attack, cornered by Ukraine’s President Zelensky for not taking a firm stand in the conflict and continuing its business activities in the aggressor country. As a result, sweet tooths in Russia can no longer access their favorite consumer goods like KitKat bars and Nesquik chocolate mix.
In a similar way, Russia-based consumers are now limited in their choice of household goods, such as furniture. Ikea suspended its sales and closed all its premises, but pledged to maintain their staff salaries and rent payments at least until the end of August, with a hope for extension. To put matters into perspective, Russia’s market share in Carlsberg is 10%, 6% in Danone, 2.4% in Procter & Gamble, 1.8% in Nestle and 1.4% in Coca Cola.
The foreign cigarette producers are still present and people in Russia can smoke the stress away. Philip Morris seems to not be ready yet to renounce the world’s fourth-largest cigarette market by volume and its second-largest IQOS market. Luckily the loud statements by the Marlboro and IQOS parent company expressing intent to exit Russia were just about enough to appease the ethical concerns of its western consumers…for now. Again, Russian sales only account for 6% of the group’s total revenue, 5% of its profit, but 20% of IQOS sales. Philip Morris has reduced production volumes, stopped marketing campaigns and product launches. Its main competitors, British American Tobacco Plc and Imperial Brands Plc also reassured their consumers with statements of intent to sell their Russian businesses to local partners.
Automobile Industry
Japanese, Korean, European and American car manufacturers also announced the suspension of production, sales and any import/export deals with Russia. The French Renault sold its 68% controlling stake in the Russian manufacturer AvtoVAZ to the Russian state institute for auto research NAMI…for 1 RUB, which at the time was equivalent to about $0.01. And yet, hope dies last as Renault requests to include a 6-year buyback option in the sale agreement. On the other hand, in light of Putin’s threat to seize all Russian assets of the companies that choose to exit the market, this could be considered as a generous offer.
A rare case is the German car parts supplier Continental AG, which resumed tyre production at its plant in Kaluga, presenting this decision as a measure to protect its employees from criminal charges, without ever explaining how the interruption of production activity would put the furloughed employees under the risk of prosecution.
At the same time, foreign automobile companies cutting ties with Russia caused shortages in cars and spare parts across Central Asia and the Caucasus. In these somewhat satellite regions, the local automotive markets also rely on exports and on the production of western cars and spare parts from Russia. In this way, not only the consumer in Saratov faces less choice when buying a new car or spare parts replacement for his existing automobile, but also the consumer in Kazakhstan. At the same time, the western players are also suffering costs and shortages. Russia produces about 40% of the world’s raw palladium, used to clean vehicle exhaust, as well as nickel, used in electric vehicle batteries, which the leavers no longer have access to, until further notice.
Luxury Lifestyle sector
Once the first sanction packages were imposed, Bloomberg published an article suggesting that wealthy Russians were investing in luxury jewelry and watches to preserve their savings from the crashing ruble. As a defense, luxury retail groups such as LVMH, Richemont and Kering announced they will donate profit from their proceedings to humanitarian groups in Ukraine, but social media users pushed the luxury brands to take a firmer stance in response to the conflict. As a result, to avoid public backlash, the luxury conglomerates started closing the stores that they directly operate in Russia. Emphasis is on ‘directly operated’.
Richemont (Cartier, Hermes, Van Cleef & Arpels) went first,LVMH (Tiffany&Co, Louis Vuitton, Moet Hennessy), Kering (Gucci, Saint Laurent, Balenciaga) and Chanel followed. By contrast, the Swatch group that also owns Omega, Longines, Harry Winston and Tissot, only suspended exports from Russia at first and kept its boutiques open for sales. Shortly after, the Swiss watchmaker and jewelry group succumbed to the social pressure and suspended its sales operations too.
At a closer look however, while Russian wealth is a great contributor to the luxury lifestyle industry, sales from Russia make less than 5% of the world’s luxury sector total revenue. Richemont’s financial performance for the year to 31 March 2022 shows how minimal the withdrawal effect was on its sales. Having spent $177m on exit expenses, the Swiss luxury mob leader still doubled its profits.
The luxury department stores of Russia wow-ed social media users with images of closed, taped off stores, and naked mannequins. At the same time, some of the stock of popular high end fashion can still be purchased in brand named boutiques operated by Bosco di Ciliegi and the Mercury group. Two of Russia’s largest retailers in the ultra-convenience segment, together represent all of the brands owned by LVMH, Richemont, Chanel, Kering and more. For instance, Gucci only operates 13 stores in Russia, but the Russian consumer can still buy Gucci branded items in Bosco stores.
The departure of western brands has given rise to the domestic fashion market, from high end to fast fashion. The same influencers who were the most favored clients of Louis Vuitton, Bottega Veneta and Hermes are now actively promoting the young designers and their friends, also designers, to their audience. In this way, the already established Russian fashion designers Alena Akhmadullina, Valentin Yudashkin, Gosha Rubchinskiy and Ulyana Sergeenko are now being joined by brands such as Vika Gazinskaya, 12STOREEZ, Yulia Yadryshnikova and Walk of Shame, amongst others.
Closing Thoughts
All in all, the impact of foreign brands leaving Russia in socio-political protest is more symbolic than numeric. The withdrawal of Western and Japanese brands producing household, fashion, luxury and automobile goods was in a major part pushed and encouraged by the non-Russia based consumers of these brands through social media posts and comments. In this way, the unprecedented unity in strategic shift, albeit calculated in a way to minimise the financial costs of leaving, and thus showed the power of conscious consumerism on business and production, however big it may be. Yet, it seems that the same cannot be said about the effect of business and public stance on foreign policy and military strategy. In the end, with Russian multi-brand retailer groups and domestic brands filling the void, combined with the strengthened Russian Rouble, the exodus of western companies would only have a negative effect on Russian consumer sentiment in the long run.
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