Russian Revolutionary

 
Since returning to his Russian roots in the 1980s, Rostislav Ordovsky-Tanaevsky Blanco has made a remarkable contribution to the restaurant scene in Moscow, St. Petersburg and other major cities. As founder and president of Rostik Restaurants Group (Rosinter), he has helped create several new concepts in quickservice and casual dining sectors as well as spreading international franchises like TGI Friday's and Benihana. In building Russia's second largest restaurant business (after McDonald's) he has provided the country's fledgling foodservice industry with a positive example in terms of professional management and business conduct. Interview by Bruce Whitehall.
 
www.rosinter.ru
 

 
How did you come to be involved in the Russian market?
Rostislav Ordovsky-Tanaevsky Blanco: I first came to Russia, from Venezuela, in 1984. I was impressed by many things but two findings in particular suggested commercial opportunities. Firstly, I found it very difficult to buy and process rolls of film. At that time, I had a joint venture distribution arrangement with Kodak in Venezuela and they were supportive of my developing interests elsewhere. So I talked to them about Russia and in 1988, they asked me to join them and take over all their commercial and retail projects in Russia.
 
Secondly, I could not find a place to eat. At that time, there was no private ownership in the Soviet Union. Everything was state-owned and that included restaurants as well as hairdressing shops, laundries, jewellery stores, bookstores, taxis and so on. Everything had one big owner - the government. There were few restaurants and those that existed frequently had funny signs on their doors, like 'closed for lunch', 'closed for sanitation', 'closed for administrative purposes' or simply 'no seats available'. So I could see opportunities.
 
Did you have foodservice experience?
O-T B: I contacted the most important restaurateur in South America - David Epelbaum, who had a big chain of restaurants in Venezuela called Tropi-Burger. He was (and still is) a leading entrepreneur and he came with me to the Soviet Union. When he saw the magnitude of the opportunity he concluded that we needed a big brand and he got Burger King interested. By 1988, we were getting ready to launch units under licence but, after two years of hard work, site selection and all the other processes, Burger King got cold feet and decided not to proceed. They felt it was too risky.
 
Did that discourage you?
O-T B: By that time I was representing Kodak in the Russian market and had started to operate the country's first modern film processing business, trading in roubles. We had the rights to sell various goods but biggest demand was for film processing and I found out that a restaurant could be classified as a production facility, which would enable us to sell our own products in hard currency.
 
In my work on the Burger King project, I had received a great many proposals for sites and one in particular interested me: convert half the lobby of the Hotel Moscow, close to Red Square, into a restaurant. That led to the opening of my first restaurant in July 1991. It was called Spanish Corner and was a Spanish tasca-style restaurant.
 
What inspired the choice?
O-T B: I thought: what do I know best? My mother is Spanish and my father is Russian so if I open a Spanish tasca restaurant in Moscow I will kill two birds with one stone. It will get me started in the restaurant business and I will honour my parents.
 
I started it as an entrepreneurial opportunity and as a way of generating more income in dollars. But within six months that restaurant became very profitable and I quickly started looking for a second. In November 1992, I opened a Swiss restaurant called Le Chalet, which was the first of its kind in the Soviet Union to serve dishes like raclettes, Caesar salad, fondue and steak tartare. It was a fine dining restaurant and, while it probably could not have been able to compete with one in the West, it had the biggest wine list in this part of the world.
 
Then came Patio Pizza and Rostik's (casual dining and quickservice respectively) and they are now our main vehicles of growth. Rostik's sells classic fried chicken and french fries but the menu is otherwise very different from American fast-food in having genuine Slavonic popular dishes like home-made soups, puffs and patties. The menu also includes shish kebab, a wrap style prod-uct called Giant, pelmeni (Russia's popular ravioli-style dumplings with beef and pork fillings). Bread is baked off on site. We think that Rostik's can become the Russian national brand in quickservice. Patio Pizza is Italian casual dining.
 
How much competition do they have?
O-T B: We don't have the competition from mom and pop Italian restaurants you see in other countries. In terms of chains, there is Pizza Hut but we see them as closer to quickservice whereas we can provide guests with a full menu of pastas, mussels, etc, as well as a gourmet range of pizzas.
 
Sbarro, which is franchised here, has done a good job and gained a slice of the Italian food market but they are more selfservice fast casual with a price range between quickservice and casual dining. We also have Domino's with about six units. I think they have a chance to become leaders in pizza delivery. They have been doing it some time here, with good management.
 
How is the market changing in terms of service formats?
O-T B: Our combined Patio Pizza and Rostik's unit on the main road in from Moscow airport is our first self-standing building on classic US roadside lines and we expect to build many more even though it is quite difficult - and expensive - to develop this kind of site.
 
There are not many available and a lot of competition from other players. But they benefit from the growing mobility of the population. The Rostik's in this unit is our first with drive-thru as well as eat-in and take-out. There are currently only about 25 drive-thrus in the whole of Russia and some McDonald's units with drive-thru are now getting 40% of their business through that channel.
 
Home-delivery is tiny as yet but people's habits are steadily changing and delivery revenue is now up to 22% for some of our Patio Pizza restaurants in the suburbs. We give a discount to the delivery company and they deliver at standard restaurant prices.
 
Why, fundamentally, is the market growing?
O-T B: When we first started, our customers were mostly non-Russians. There were elite people about with a lot of dollars but times were difficult for the masses. So we went into fine dining. But we have found since then that the real vehicle for growth is casual dining and quickservice. Now we only do fine dining restaurants as opportunistic and one-off projects. If we find the right chef-partner, we do it, but it's not our speciality.
 
In the old Soviet days, you would go to a restaurant only 2-3 times a year, if at all. Now, there is a growing trend for people, especially younger generation maturing and getting more money, to eat out more. They don't have the limitations of the past and going to a restaurant is now becoming a normal activity, a regular part of people's lives.
 
What determines your locations?
O-T B: We have 105 sites all over Russia and the former Soviet states. We have a lot in the centre of major cities but are also now attacking the suburbs quite heavily. We are also looking outside of Russia and have trial operations in Prague, Budapest, Bratislava and Vienna.
 
Developing in a Western direction is promising but it has not been easy, especially in Vienna. We definitely cannot understand how the Viennese restaurants operate because with $120-140,000 sales per month - which is not a lot although it is more than many Austrian restaurants generate - we have $80,000 of labour costs (i.e. 60-70% which is a lot higher than we have in Russia, where it is between 14 and 20%, with 20% the maximum).
 
So there is something which we are not doing properly. We have reduced labour to the bare minimum so maybe it is the way we are paying our people. We have the feeling that you just need to be a little bit creative in the way you declare your revenues in Western Europe, especially with a one-off restaurant. We declare all our revenues and pay all our taxes but it does not look to be a smart way to survive.
 
Does franchising offer an expansion route?
O-T B: Franchising has been important to our growth with our TGI Friday's license from the US group Carlson. In February this year we opened the first branch of the international Benihana of Tokyo franchise, as also operated in London. We ourselves have also become franchisors, principally at the moment with the Rostik's brand.
 
We started franchising eight years ago but it was an unusual arrangement where we owned 51% of the company outside of Moscow and that company franchised from us. It was a testing process. Now we are doing schemes where the franchise is 100% owned by a different entity. We have about 15-20 franchisees.
 
In terms of costing your operations as competitively as possible, what are the biggest challenges?
O-T B: Bureaucracy is still a big factor. Our overhead used to be 12% of sales - now we have managed, because of size, to reduce it closer to 7%. That's a good reduction but in Western Europe you could not afford to pay a 7% plus overhead.
 
The overhead is coming down because of the efficiency of critical mass. When you have a few restaurants, you are involved in costs to obtain permits. When you have 100 restaurants, you need one person for every ten. And you also create systems of automation and better procedures.
 
Russian accounting is a complete nightmare. We need to have two lots of accountants, one to do Russian accounting, the other to do standard Western-style accounting. The two things are as different as going to an Italian and a Japanese restaurant. So that again requires a big overhead. But when you are growing a larger business, you may need to add one quarter of an accountant for the next ten restaurants - so the costs come down as you gain critical mass.
 
Rosinter has introduced notable innovations in customer loyalty. How important is brand advertising?
O-T B: Marketing becomes an easier job as you open more restaurants and it's increasingly understood in Russia that effective promotion makes a difference. McDonald's has been investing in TV advertising for 3-4 years and we tried doing some in 1998 but after the crash in August that year we had to stop everything. Now we are going to re-launch TV advertising in September this year.
 
What other effects did Russia's financial crash in 1998 have on the business?
O-T B: The impact was massive and it took us three years to recover. We had a 50% drop in dollar sales. Thank god, we did not have to close any units because of the crisis - but we struggled. McDonald's and Rosinter are the only restaurant groups which fully declare their revenues - we don't do 'black cash' which is widespread among independent operators.
 
The market is still fragmented. We don't yet have big players in the contract catering market and we don't have big brewers or other manufacturers owning their outlets - but it could happen.
 
How do you obtain your food supplies?
O-T B: We work with an APL (approved product list) and the suppliers we choose supply all the restaurants. But when we started there was nothing. No warehousing, no distribution, no nothing. We had to create everything. So we verticalised the entire operation. We created our own importation, warehousing and distribution unit from scratch. Also, we faced big staffing challenges. There were no experienced restaurant directors and no chefs and I had to bring them in from other countries. But Russians are very smart and the business developed. By 1997 we could handle everything with local people.
 
As we were struggling to develop our systems we had several approaches from western countries and Emborg Foods A/S, who are a major player in the Danish food industry and a big distributor of Coke, got involved. We sold them 50% of the distribution company and they developed Emborg Russia (in which we hold 40%). They are now the major delivered wholesaler in Russia.
 
A lot of the food products we buy are imported but where possible we use local alternatives. For example, mozzarella cheese was at one time entirely imported but now we buy from a Russian company.
 
How do you see the business expanding?
O-T B: The two biggest constraints are human resources and capital. The financial situation is soluble but HR still presents the biggest challenge. But we hope we will be able to grow at a rate of 30-40% for the next couple of years.
 
What family connections do you have with Russia?
O-T B: On my father's side, we are White Russians and by that I mean anti-communist Russians. My great grandfather escaped in 1917 - he was the last governor of a big Siberian region called the Tobolsk region. My father stayed on but after the Second World War he emigrated to Venezuela. There he met and married my mother, who had left Spain after the Civil War looking for opportunities in the New World. I was born in Caracas.
 
How did you come to return to Russia?
O-T B: By 1984, I had built up interests in film in Venezuela and I got an invitation to a film festival in the Soviet Union; they wanted me to buy copyrights for some Soviet movies. I checked it out and it appeared safe to go. So I made a visit and found interesting opportunities.
 
Who in the world do you most admire?
O-T B: I admire people that always have an ethical behaviour and act in agreement with his or her conscience. Jesus Christ is the top example. Keeping the proper distance, I would also mention Simón Bolívar, the South American leader who led the independence movement.
 
What foodservice industry figures have inspired you most?
O-T B: Top of the list is Ray Kroc of McDonald's. His biography is always a source of knowledge and inspiration. Rich Melman, the founder and current owner of 'Lettuce Entertain You' is also a person I much admire. I would also mention Richard Snead from TGI Friday's and Steve Finn from Leeann Chin. Their experience, knowledge and ethical behaviour have been an example and source of knowledge for me.
 
What are your favourite foods?
O-T B: Fondue, raclette and Japanese food.
 
Which Russian restaurant do you like best?
O-T B: I would have to say that the best restaurant is home. Second to my wife's cuisine is Cafe Pushkin and also the many Georgian restaurants that you can find in Moscow.
 
What are the biggest challenges facing foodservice chains in Russia?
O-T B: With the country new to private enterprise and the market economy, we started at zero and had to do everything from scratch. But while we are the biggest operator in Russia we are still very, very small. That requires continuous focus on creation and development, which I love. On the minus side, tremendous effort is required for even basic things to be accomplished.
 
Today almost all operators are still in the entrepreneurial stage and maturing to the next stage is needed - soon. For foreign operators considering business in Russia, the biggest challenge is to be adaptable to changes in the market and in the country.
 

 
| 21 August 2003 |