Subway chain returns to Russia

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By VLADIMIR MERKUSHEV / The Russia Journal

Subway, the U.S. fast-food sandwich chain with more than 14,000 stores worldwide, has opened its third Moscow restaurant, this one in a Ramstore hypermarket, and the company said it expects to open three more stores in the city before the year's end.

And, apparently, the company is not stopping there. The franchisee involved said that his company would open several more Subway outlets in Moscow next year.

The move marks a new drive by the chain to expand in the Russian market. An initial effort failed in the mid-1990s because of a conflict with a partner in St. Petersburg.

Subway works through franchising agreements, with independent partners opening and operating stores while the chain controls quality and provides training. Each franchisee pays $10,000 per year plus 8 percent of revenues to Subway.

"The overall cost of opening the restaurant in Ramstore was about $80,000," said Victor Novochenko, a director with Russky Proyekt, the company that operates the restaurant in the Ramstore on Sheremetevskya in northern Moscow. He added that the new restaurant was opened in the existing Ramstore food court, so there was no spending on furniture.

Novochenko said that Russky Proyekt, a group that specializes in equipment and design for supermarkets and restaurants, plans to open at least five Subway stores within a year.

According to Novochenko, the next restaurant will be in the Moscow city center. "This will take more investments, but it will also be more profitable," he said.

In addition to the Russky Proyekt outlets, Subway expects that three more stores will be opened before the year's end, said Gennady Kochetkov, a franchise development director with the Subway Russia Franchising Co. One outlet is expected to open in one of Moscow's movie theaters by the end of October.

Many Russian medium-sized companies such as Russky Proyekt are now seeking to diversify activities into the food business, Kochetkov said.

He added that before 1998, Subway received many calls from Moscow and regional companies looking to obtain franchising agreements, but last year's financial crisis stalled the expansion process.

Expansion was also hampered by a dispute with a St. Petersburg franchisee, officials said.

In 1994, Subway invested about $1 million in a project with a Russian partner in the reconstruction of the Minutka cafe in St. Petersburg's city center. The new store was furnished under standard Subway interior and works on Subway equipment.

The new venture quickly generated revenue of about $10,000 a day, five times that of the average Subway restaurant, Kochetkov said. But soon the Russian partner decided that he could operate the restaurant alone, and refused to share profits with the U.S. firm, according to Kochetkov.

After years of court battles, Subway proved its right to participate in the restaurant's operations, but the Russian partner nevertheless refused to let the company back into business, Kochetkov said.

"Sometimes, the case looked like absolute nonsense. The court officer had lost all documents and then it took time to renew them. This case clearly demonstrates that the Russian legal system is not able to protect investor rights," Kochetkov said.

The company settled a second business venture - purely franchising this time - in the spring of 1998. The restaurant was open by Gorizont Co. at a gasoline station on the road to Moscow's Sheremetyevo international airport.

Another restaurant, the second in Moscow, is operated by a private Russian investor in a student hostel at the Baumansky technical university.

Another company, Rosinter, recently closed its submarine sandwich chain in Moscow. Kombi's, a network of several sandwich stores, stopped operation this year.

McDonald's, the world biggest fast-food chain with more than 24,000 stores, has 51 restaurants in Russia. Burger King, another global chain with more than 10,500 outlets worldwide, is not currently in Russia.