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McDonald's (MCD) to Undergo Further Scrutiny in Russia

Zacks Equity Research

McDonald's Corp.'s (MCD) rocky relations with Russia continue as Russian authorities have reportedly launched a nationwide inspection of McDonald's restaurants. These inspections closely follow the closure of four immensely popular restaurants in Moscow per the orders of a Russian consumer-safety agency, Rospotrebnadzor, on account of multiple violations of sanitary rules. (Read: McDonald's Closes 4 Moscow Outlets on Russian Agency Orders.)

Rospotrebnadzor has expanded its inspection outside Moscow, including Central Russia and the Urals. Last week, the 17 McDonald's restaurant in the Republic of Tatarstan  were inspected. Tatarstan has the highest concentration of McDonald's restaurants in Russia after Moscow and St Petersburg. However, Rospotrebnadzor announced that it does not intend to close down McDonald's business in this region.

Also, the Russian consumer-safety watchdog conducted unscheduled checks at two McDonald's restaurants in the Penza region. Reportedly, 9 out of the 31 McDonald products inspected did not meet the regulatory requirements. Media reports also indicate that Rospotrebnadzor plans to begin inspections in the North-West Leningrad region recently.

Some analysts believe that these stringent inspections come in the wake of intense tension between Moscow and Washington. They are of the opinion that restrictions imposed by the U.S. on Russia that hit the nation’s largest oil producer, Rosneft, and other energy, financial and defense firms could have prompted these inspections by Russia.

In fact, it was apparent from last month’s lawsuit that McDonald's was under heightened scrutiny by the Russian state. In July, the Russian consumer protection agency filed a lawsuit against the restaurateur in a Moscow court stating that its food items contain more fat and carbohydrates than the permissible standards in Russia. (Read more: Will Russia & China Issues Weigh on McDonald's Sales?)

Meanwhile, earlier this month, Russia banned all meat, fish, dairy, fruit and vegetable imports from the U.S., the European Union, Norway, Canada and Australia for a year in response to the sanctions imposed by these countries over Ukraine. However, some of these restrictions were eased later.

We note that McDonald's has been facing a number of issues for quite some time now. In July, Shanghai Husi Food Co., a supplier of meat for McDonald’s, was accused of reusing meat that had fallen on the factory floor and mixing fresh and expired meat. This incident enraged the food regulators, but the company reportedly apologized and announced a change in meat suppliers.

We believe that this latest setback could adversely affect McDonald’s’ international sales especially when constrained consumer spending due to a sluggishly recovering U.S. economy is affecting comparable sales in the country.

McDonald’s currently carries a Zacks Rank #4 (Sell). Better-ranked stocks in the same industry include BJ's Restaurants, Inc. (BJRI), Chipotle Mexican Grill, Inc. (CMG) and Jamba, Inc. (JMBA). All these stocks sport a Zacks Rank #1 (Strong Buy).

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