Companies with operations in Ukraine and Russia are shutting down facilities and anticipating economic aftereffects as the invasion unfolds and sanctions bear down on the region.
Food processor ADM shut down its facilities in Ukraine, and Mondelēz International’s CEO told Reuters Wednesday—before the first explosions in Ukraine—that the Oreo maker would do the same if tensions became “too dangerous.”
McDonald’s is perhaps the most exposed to anti-American sentiment, its golden arches a beacon of the West. It has about 850 locations in Russia—which Morningstar analyst Sean Dunlop estimates comprise 2% to 3% of the company’s revenue—and more locations in Ukraine.
Russia’s invasion of Ukraine is an aggression unlike any the world has seen in 80 years, and its toll is expected to reach far and wide. The first explosions in Ukraine came late Wednesday night, and markets reflected the turmoil throughout the day Thursday. McDonald’s stock price fell 1.1% and Mondelēz, which has facilities in Russia and Ukraine, fell 2.5%.
Experts say companies around the globe must fortify their cybersecurity measures, and be prepared for rising costs of commodities like oil and wheat as Western sanctions hit Russia. U.S. consumers can expect to see costs rise at the pump, and the prices of plane tickets and utility bills to skyrocket. Food costs, already high from the pandemic-triggered inflation, will also likely rise.
At least one company is pausing marketing activities in the U.S. in order to avoid looking insensitive: Grill maker Weber Grills announced on social media it would delay the start of its "70 years of Weber grilling" anniversary celebration, citing the loss of life in Ukraine and "uncertainty around the recent events in Europe."
The impact also extended to ad agencies, especially those with offices in Russia and Ukraine. During an earnings call Thursday, WPP CEO Mark Read acknowledged the situation in Ukraine, as well as rising inflation, which could have “global implications.” He referred to the company’s 200 staff in Kyiv, saying “we will provide whatever support we can,” but added that WPP's Russian revenue represented a “relatively small percentage” of the holding company's whole.
Ukraine and Russia are two of the world’s largest exporters of wheat, so from a manufacturing and costs perspective, food companies will be hit particularly hard. The region also represents one of largest areas of growth for packaged food giants.
Mondelēz, for example, tracks sales of its snack foods in Russia in its emerging markets category. Organic revenue in emerging markets grew 12% last fiscal year, compared to 2% everywhere else, according to its most recent annual filing with the U.S. Securities and Exchange Commission.
Biotechnology giant Abbott Laboratories is in a similar situation. It owns a holding company that operates a pharmaceutical plant in Russia, and sells diabetes care products in Russia and Ukraine. Established pharmaceutical sales in emerging markets, which include Russia, increased nearly 12% in 2021, according to its most recent annual filing. Sales in emerging markets represent about 35% of total company sales.
As the conflict unfolds an ocean away, U.S.-based companies will be faced with the decision to sacrifice profits from operating in a growing region or continue doing business with Russia.
“They need to be questioning on a moral level and long-term reputation level what relationship they want with Vladimir Putin, now that they’ve seen what the government is capable of and the kind of global insecurity they’ve created,” said Cécile Shea, a nonresident senior fellow at the Chicago Council on Global Affairs.
For some, the choice will not be theirs, as sanctions could stop them from importing goods into the country. They could also face retaliation from the Russian government, and anti-American sentiment.
Companies’ priority should be getting their expatriate employees out of Ukraine, and supporting their Ukrainian workers, Shea said.
ADM employs more than 650 people in the country. It operates a trading office in Kyiv, an oilseed crushing plant in the Ukrainian city of Chornomorsk, a grain terminal in the port of Odessa, five silos inland and one on a river. The company is “actively monitoring” the situation there, said spokeswoman Jackie Anderson.
“Our first concern is the health and welfare of our employees and their families, and their safety is our top priority,” she said in a statement. “Our facilities in Ukraine are not operating, following security protocols and government guidelines. ADM will use the full breadth of our global and integrated supply chain to support the needs of our customers around the world as we manage through this difficult situation.”
McDonald’s did not return requests for comment on Thursday, but the world's largest restaurant company is undoubtedly exposed to the turmoil.
It’s unclear exactly how many of the McDonald’s locations in Russia are company-owned versus franchised. Russia is part of the fast-food giant’s international operated markets segment, which is about 84% franchised, according to a filing. That’s more company ownership than in the U.S., where 95% of locations are franchised.
“For some franchised operators, it's possible that life goes on, business as usual,” said Dunlop from Morningstar. “Many brands do a solid job adapting to local markets, and consumers treat them as if they were homegrown.”
But remitting royalties will be tricky, as it could become difficult to exchange Russian rubles on the open market, he said. McDonald’s could deconsolidate Russia, removing the stores from its unit count, systemwide sales, operating cash flow and other financials. That would be the extreme case, though, Dunlop said.
“Firms are loath to deconsolidate segments,” he said. “It pretty much only happens when there's a loss of operational control—lack of a market economy, suspended rule of law, inability to repatriate income. The crazy thing, of course, is that that's a genuine, if remote, possibility.”
Oil prices have risen from $75 to $100 since Christmas, which changes the economics of air travel. Fuel is the second-biggest expense for airlines.
“Increases in the price of crude will mean increases in ticket prices, which should reduce demand,” says Burkett Huey, an analyst at Morningstar.
Ticket prices have been impacted less by the recent spike in inflation, which has been closely correlated to effects of the COVID-19 outbreak on factory output and transportation. Airfares rose about 5% over the past 12 months, compared with a 7.5% increase for the overall economy.
The surge in oil prices comes at a tough time for airlines, such as United, which are struggling to recover from the pandemic’s steep toll on travel. Leisure travelers are the strongest part of air travel, but they’re the most price sensitive. Airlines like United told Wall Street they expected to be profitable in the current quarter.
“It’s another stumbling block to get to profitability,” Huey says.
The invasion of Ukraine also sent natural gas futures substantially higher, particularly over the longer-term time horizon that previously hadn’t been as subject to short-term price pressures in evidence for months.
Ally Marotti is a reporter for Crain's Chicago Business. CCB's Katherine Davis, John Pletz, A.D. Quig and Steve Daniels contributed to this story. Ad Age also contributed to this story.
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