How foreign brands are returning to the Russian market by changing owners and resuming their operations.

Most foreign companies have put their activities on hold in the Russian market since the start of 2022 due to various circumstances, primarily the tightening of sanctions against Russia. This has affected around 1,000 successful foreign brands that operate within the country. In response, some companies temporarily suspended their operations, including Nike, Coca-Cola, and Apple, while others declared bankruptcy or completely withdrew from the market.

However, some companies left with certain reservations. They exited the market under their original brand name but transferred their assets to new owners for continued operations. This trend was observed across many foreign brands.

To gain insight into the current situation and understand why most foreign companies have restricted their activities due to sanctions in Russia, QB Agency experts conducted an investigation.

McDonald’s New Version in Russia. Vkusno & Tochka (Tasty and That’s It)

In Russia, McDonald’s was one of the first companies to resume operations under a new name. On March 14, 2022, the brand’s owners decided to close all restaurants in the country. Later, on May 16, they announced the sale of the chain, which had 718 outlets in Russia, to their licensee Alexander Govor, and reserved the option to repurchase the business within 15 years. However, a complete rebranding of the chain was required as a prerequisite for resuming operations in Russia.

Consequently, the first “Vkusno & Tochka” (Tasty and That’s It) fast food restaurants were reopened under the management of the new owner on June 12, 2022, in Moscow and on June 22, 2022, in St. Petersburg and the Leningrad region. The company plans to reopen all its outlets by September 2022.

The emergence of a new brand on the market has yielded only positive outcomes. Firstly, McDonald’s retained the option to return to Russia in the future. Secondly, the new management, armed with the resources of the previous owner, including a sizable loyal customer base, is focused on advancing further in the market.

As evident in the case of “Vkusno & Tochka” (Tasty and That’s It), experts expect other brands that were previously owned by foreign companies to surface in the market.

Who Else?

Following the transfer of ownership of McDonald’s to Russian owners, the European company Reebok has expressed its intention to sell its business. As per Kommersant’s report on May 12, 2022, the brand’s management struck a deal with Turkish holding FLO Retailing. Consequently, the new owner of Reebok obtained the right to manufacture products across 12 countries, with over 100 outlets in Russia. However, the stores are expected to undergo a name change, while the brand’s core values are maintained as much as possible.

It’s worth mentioning that FLO Retailing has been working towards expansion in Russia for a few years now. Since 2021, the company has independently promoted five key brands (U.S. Polo Assn, Lumberjack, Nine West, Polaris, and Kinetix) in the Russian market. Therefore, Reebok’s acquisition is another step towards strengthening its position in the region.

Furthermore, another Turkish owner successfully acquired Russian assets, Arcelik, the leading home appliance market leader in its home region. On June 28, the company bought Indesit International JSC and Whirlpool Rus LLC, previously owned by American Whirlpool EMEA S.p.A. This purchase has provided Arcelik with production resources in the Lipetsk region, capable of producing 2.8 million refrigerators and washing machines annually. Additionally, the company has factories in Kyrgyzstan, Tajikistan, Turkmenistan, Uzbekistan, Armenia, Georgia, Azerbaijan, Kazakhstan, Belarus, and Mongolia. This deal is highly lucrative for the Turkish company, as the revenue of Whirlpool Rus and Indesit International amounted to approximately 40 billion rubles and 29.1 billion rubles, respectively, in 2021 (Comment: Interfax referring to the SPARK-Interfax system data).

On the flip side, the quicker a company resumes production (which was halted due to logistical issues, etc.), the faster it can become a leader in the home appliance market, given that most other brands are still constrained in their operations. At the beginning of June, major retailers in this sector reported a reduction in their product offerings. In an interview with RBC, Alexey Pogudalov, the commercial director of the refrigerator chain stores Holodilnik.ru, explained that the highest reduction occurred in categories where European, Korean, and American brands held the largest market share: dishwashers, ovens and cooktops, built-in refrigerators, televisions, smartphones, and certain segments in vacuum cleaners. Major brands like Bosch, Electrolux, Samsung, Miele, Dyson, and Apple experienced significant reductions in their product offerings.

Therefore, the deal between Arcelik and Whirlpool EMEA S.p.A. in Russia has proven to be one of the most successful during the sanctions period. The former company obtained the right to operate in Russia and the opportunity to take a leading position in the market, while the latter has not suffered any losses due to production downtime since the start of 2022. Moreover, the owners of Whirlpool did not request any name changes or rebranding.

However, the case was somewhat different for L’Occitane. While the company’s name remained the same after the transfer of ownership rights to new investors, it is now written in Russian. On June 16, 2022, Rostislav Kovalenko (who owns 31% of the shares), the company’s CEO, and three leading top managers Olga Sabirova, Alexey Shumov, and Natalia Milekhina became the new owners of the chain of French cosmetics and perfumery stores L’Occitane.

It should be mentioned that the L’Occitane brand has a strong presence in major cities of Russia, including Moscow, St. Petersburg, and Kazan, with a total of 112 retail stores and an existing online store. On April 15, 2022, L’Occitane completely ceased operations in Russia, but at the end of May, they re-opened under the Russian name “Л’Окситан” (L’Occitane Rus).

In addition to the aforementioned brands, several other foreign companies also found new owners in Russia, including the Finnish brand Fazer (now owned by the Moscow Bakery and Confectionery Plant “Kolomenskiy”), OBI (now owned by MAX Group), and Valio (now owned by GC “Velkom”). As a result, other foreign companies are now considering selling or transferring their assets in Russia.

They intend to transfer ownership.

On March 7, 2022, PVH halted the operations of all its brands in Russia and Belarus, including Tommy Hilfiger, Calvin Klein, Pierre Cardin, Trussardi, and US Polo Assn stores. Presently, these stores are still closed to Russian customers, but the owners are contemplating selling assets to Turkish entrepreneurs. Meanwhile, Inditex, the company’s primary rival, plans to resume operations in Russia in June of this year with brands such as Massimo Dutti, Zara, Bershka, and Oysho.

Another prospective deal involving the sale of assets might occur soon with American brand Starbucks, as reported by the company’s employees to Vedomosti. Anton Pinsky, the founder of Pinskiy &Co, may be the new leader of the brand. He will have the right to lease all of the brand’s coffee shops on the condition of complete rebranding, without the ability to use Starbucks’ products and technologies. This deal differs significantly from the “Tasty – and that’s it” case because the new owner must not only rename the brand but also completely overhaul the company’s production and products. Therefore, experts have varying opinions on the prospects of this transaction.

In an interview with Vedomosti, Irina Kozina, the director of Knight Frank, suggests that the main benefit for Pinsky in acquiring Starbucks would be obtaining long-term lease agreements for prime locations frequented by business and progressive customers, which could potentially compete with other trendy coffee shops such as ABC Coffee, Surf Coffee, and Doubleby. On the other hand, Mikhail Burmistrov, CEO of INFOLine IA-Analytics, sees the acquisition of the large chain as an ambitious project that could make a significant impact on the market.

Regardless, the Starbucks brand as known by Russian consumers will undoubtedly change under new ownership. However, Pinsky may have promising prospects for developing his own projects in the prime locations previously occupied by the American chain. Pinsky already has a number of successful brands, including Pinskiy&Co, Avocado Queen, Medusa Cheese Factory, Magadan, Simach, Height 5642, some of which are co-managed with partner Arkady Novikov.

IKEA Hype

The Swedish furniture giant IKEA’s suspension of work in Russia on March 3, 2022, has created an interesting situation in the Russian market. This decision was a significant blow to Russian consumers, who have been successfully buying IKEA products for several years. In 2021, Ikea Dom LLC’s revenue grew by 27.8% to 157.3 million rubles, making it the best year for IKEA in Russia. However, the brand failed to overcome the sanctions in 2022, and it announced that it would sell all 4 of its productions in Russia in June of the current year. Despite this, IKEA’s management plans to retain the business related to the operation of the Mega shopping mall, which continues to operate in 11 Russian cities.

Several competitors have expressed interest in acquiring IKEA’s assets. Russian Hoff’s CEO announced that the company would consider purchasing the Swedish retailer’s assets, given a relevant proposal, as it fits the company’s strategy of developing and opening new Hoff outlets. AFK Sistema, an industrial holding, also expressed an interest in acquiring the brand’s assets, as it sees potential for synergy between its controlled companies. Additionally, the Russian furniture chain Tvoi Dom is interested in obtaining IKEA’s assets, particularly products that have been in high demand for decades.

In other words, IKEA’s departure from Russia has become a promising investment for many Russian companies to expand their activities on the market. Furthermore, some brands are using this opportunity to their advantage. For example, the furniture manufacturer Mr.Doodrs is offering a 10% discount to all customers who have an IKEA customer card.

Left to Get Back

Experts have indicated that it was inevitable for foreign brands to leave Russia due to geopolitical changes in the world. These changes would result in a loss of sales volumes in European regions, which are a key source of income for these companies. Furthermore, problems with logistics chains and supply have caused production failures.

To maintain their presence in the market, companies use legal maneuvers and moves. For instance, they may transfer the brand license through a sublicensee or register as a management company. This way, even though physically, they remain the same people, de jure, they are a different entity. In case of external management, the rollback process is easier as compared to selling, which is a more challenging approach. The decision to choose a specific approach depends on individual corporations and the lawyers who work with them. They make decisions about what actions will be necessary to avoid disclosing the location of the head offices. Yakov Adamov, Managing Partner of Union Media Group, explained this in an interview with Delovoy Peterburg.

Despite the challenges faced by foreign brands in Russia, many companies are hesitant to leave the market as it would mean losing the investment and resources they have put into development and promotion. While Russia may not be a key market for premium and luxury European brands, it remains a significant player in the mass market, with its population of 145 million people. Thus, many companies are likely to try to maintain a presence in the region by changing ownership or appointing local representatives to management positions.

“Leaving the market may not be difficult, but returning would be extremely challenging, particularly if a company has invested significant resources in winning market share or entering the market in the first place. This is especially true for companies focused on the mass market, such as AUCHAN and Leroy Merlin, who cater to 90% of our population and have enjoyed strong sales. I believe that if the situation were to normalize, 9 out of 10 companies would want to return as soon as possible,” stated Artem Golubev, director of the Economics program at NWIU RANEPA, in an interview with Business Petersburg.

In Conclusion

Despite facing sanctions and challenges while working in Russia, foreign companies have not rushed to leave the market. However, they have adopted different approaches to handle the situation. Some have sold shares to Russian investors, while others have transferred ownership rights to foreign holdings. This indicates that the Russian market is still seen as a promising region for product development and sales, particularly in the mass market segment. Leaving the market hastily may not be the solution to the current political situation, but a serious strategic error that could result in significant losses for the company in the future.

However, it is important to note that marketing in Russia requires a robust strategy that considers various socio-demographic factors, communication channels, and other factors. QB Agency experts can assist in selecting the most appropriate and effective methods to promote a brand and strengthen its position in the Russian market.