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. Last Updated: 07/27/2016

From Small Beginnings to Diner Dominance

At about 6 a.m. one morning back in January, Shawn McKenna was sitting in the nearly deserted, newly opened Starlite Diner near Mayakovskaya metro, eating a waffle. Suddenly it hit him that what started out as an idea four years ago had finally become a reality.


McKenna said that was the only time he has ever stopped to reflect on his success. He said most of the time he is too busy with the day-to-day operations of running a flourishing business in Moscow to stop and think.


With Starlite 2 now open near Oktyabrskaya Ploshchad and more diners on the drawing board, opportunities to reflect are few and far between.


McKenna and his partner Paul O'Brien are the driving force behind a rapidly growing set of business ventures that include the two Starlite diners, the Moscow Beach Club in the Lenkom Theater near Pushkin Square and Uncle Guilly's restaurant. Some may marvel at their success and wonder how they have managed to secure locations, money and reliable Russian partners. But McKenna and O'Brien said it is all about good ideas and simple business principles, with a little luck thrown in.


The two said they met "cruising the halls" of the Radisson Slavjanskaya Hotel back in early 1991. O'Brien had come over from the United States to take a job as assistant general manager of the Radisson, where McKenna was staying while doing food-and-beverage distribution for Procter & Gamble.


McKenna and O'Brien quickly saw the vast opportunities of the restaurant business in Moscow and started brainstorming, concluding that an American-style diner would be a sure hit.


"A diner represents a niche that exists in all marketplaces, but was not being serviced here," McKenna said. "That niche was, pricewise, casual dining above a McDonald's but below a white-tablecloth operation."


The start-up costs for the diner were high, so they decided to put the idea on hold and begin with a smaller project -- the Uncle Guilly's bar and restaurant near Tverskaya Ploshchad. O'Brien, who was the point man on the project, said they used Uncle Guilly's as sort of a test run, to prove to themselves and to investors that they could run their own business in Russia.


The two said starting out small was a key to their success. McKenna noted that the capital investment for the restaurant, which opened in June 1994, was manageable. "We didn't spend our lunch money doing it. If it failed, O.K., it failed, next try," he said.


With one project under their belt, they pressed on with plans for a diner, but took a small detour by launching the Moscow Beach Club gym in early 1995.


"We had a restaurant, were putting on weight and we wanted a place to work out," joked O'Brien. "It's not our core business." But the Beach Club enhanced their reputation, he said, making it easier to raise money for the first diner, which opened in the yard of the Mossoviet Theater just 10 months ago.


Exactly how McKenna and O'Brien have raised the capital for their projects remains a bit of a mystery. They said some of the money was their own, and the rest came from a handful of Russian and foreign backers.


"We've established a network of Russian and American investors that are reliable when it comes to raising capital," McKenna said, declining to say who was involved.


From a distance, Starlite 1 appears to be a gold mine. But McKenna and O'Brien said they have incredible overheads, such as high taxes, import duties and the costs of staying open 24 hours a day. They said whatever profits they earn go toward paying off debt or are reinvested in new projects. "If we had to live off of what we earned in Russia, we would not have been able to do the diners," McKenna said, explaining that they both have other sources of income. They said Uncle Guilly's is their only business that currently makes a clear profit.


Although they would not reveal the volume of turnover at Starlite 1, McKenna said it is doing "a lot better" than the average U.S. diner, which he said would do anywhere between $1.2 million to $1.6 million in sales annually.


One of Starlite's calling cards, at least for homesick U.S. expats, is the lineup of U.S. brand-name products: Most of these, McKenna said, are distributed by Quality Products International.


McKenna and O'Brien said they had set up three independent companies, including Starlite Development Overseas Ltd., which is their vehicle for operating the diners. McKenna said the companies are registered in the names of their Russian partners, with whom they have worked closely for five years. They said they had found "good Russian partners," which they said was an essential element to doing business here.


"We did not get bogged down in all kinds of joint-venture relationships," McKenna said.


"We concluded a long time ago that if we are going to do business in Russia, we would be a Russian company, we would hire Russian people and staff ourselves with Russian management," he said. Their strategy, they said, is to train Russian employees and actively promote from within. They have even made the Russian general manager of Uncle Guilly's, whose name they did not want to disclose, into a partner.


"Our company philosophy is to make our employees owners, not just custodians," McKenna said. The focus on developing a solid Russian staff and management structure has in some ways held them back. "We could have 10 diners, but we wouldn't have the human resources to manage them," O'Brien said.


"The money actually outpaces the people," McKenna added.


The opening of the second diner was delayed in part for this very reason. The new staff at Starlite 2 went through several weeks of training, including written tests on the menu, in order to perfect the quick service that a diner needs to produce a high turnover. Every day for nearly a week, they invited in friends to dine on the house and act as guinea pigs for the wait staff. Young women dressed in Starlite's quasi-cheerleading outfit uniforms nervously waited on tables and tried their hardest in broken English to answer questions like: "What exactly is a Hickory Burger?"


McKenna said the diner's clientele is now more than 50 percent Russian. But they make pains to make members of the expat community feel comfortable by giving their waitstaff English lessons.


"We prefer to hire people without restaurant experience," said JoJo Massimiani, who orchestrated Starlite 2's mock training sessions. "It takes longer, but the end result is better." She said they interviewed 400 applicants for jobs at the new diner and hired about 120.


Some may wonder about the wisdom of putting so much time and resources into training in what is a volatile local labor market. But Massimiani said the first Starlite had retained nearly 90 percent of its staff since opening in January.


While keeping employees does not appear to be a problem, there is a considerable number of other challenges.


One difficulty is finding a good location. Their main criteria is to get properties near utilities such as electricity and water. For Starlite 2, they had to tiptoe around the underground electricity grid and then dig under the street to hook into water that was 200 meters away.


How they find their properties is not exactly clear. "With the last diner, people came to us" and offered property leases, McKenna said.


"We're really careful about who we lease from," he said. Their reluctance to discuss the specifics of their investment and real estate deals could be seen as a sign of how dangerous it is to do business here. McKenna and O'Brien said they "managed" their risks in part by picking properties near militia posts and employing security people, including off-duty militia.


McKenna said former first deputy mayor Viktor Korobchonko had pointed them in the right direction by encouraging them to "give back to the community" and "align" themselves with "city structures," such as theaters.


As an example, O'Brien said their lease for the Moscow Beach Club was through the Lenkom Theater, which he said uses the lease money to pay bills. "It's a perfect fit," he said. The property for Starlite 1 in Aquarium Park is leased through the Mossoviet Theater.


McKenna said they had not received special treatment from city authorities.


"We don't ask for favors," he said, pointing out that they were forced to delay the opening of the first diner for more than three months because of utility problems. Despite the difficulties, McKenna and O'Brien said it is still easier to ship a diner than deal with the hassles of reconstructing an existing site.


Nevertheless, transporting a diner from the Unites States is a Herculean task. The diners are built in modular pieces by the Starlite Diner company in Florida, shipped to Finland and then driven by oversized vehicles to Moscow. According to McKenna, an actual diner costs about $500,000, but total start-up costs, including transportation and insurance, are more than twice that amount.


Lining up financing to launch new diners is getting easier, they said. Funding is already in place for their third diner in Russia.


"We'll probably do three diners in the next few months," McKenna said. Two will be in Russia and one will be somewhere in Europe, possibly in Spain or Portugal, he said. They have secured the rights to distribute Starlite diners worldwide, with the exception of the United States, and are planning to develop an international chain.


"No one was interested in doing diners internationally because of the difficulty," said Bob Lorenz, who helps run Starlite's operations in Moscow. He said they were considering doing as many as 20 diners, including franchises, by 1998.


Starlite is a small private company for now, but McKenna said they were thinking about going public at some point in the future. "Some day it could be great. I would like to come back here in a reduced role and visit a profitable chain of restaurants," he said. But he noted that it is important to retain a sense of humility. "We haven't made it yet."