The Burger King name appears in Russian outside a Burger King fast food restaurant in Moscow, Russia, on Friday, April 5, 2013.

Bloomberg | Getty Images

Ukrainian President Volodymyr Zelelnskyy, in his address to the US Congress on Wednesday, reiterated the call for all global brands to leave Russia – a market “flooded with [Ukrainian] blood” – as part of the ongoing effort to put economic pressure on the pariah state.

According to a list compiled by Yale School of Management, more than 400 companies have announced their withdrawal from Russia since the launch of the invasion of Ukraine on Feb. 24.

However, for some brands, a clean break is easier said than done.

Fast food giants Burger King and Subway, British retailer Marks & Spencer and hotel chains Accor and Marriott are among a number of companies banned from withdrawing due to complicated franchise agreements.

“Unlike a company-owned company, a franchise company entering an international market enters into a binding, long-term contractual relationship with a sophisticated counterparty, usually a franchisee or licensee,” Dean Fournaris, partner in Wiggin and Dana’s franchise and distribution practice, told CNBC.

Business-only brands are better positioned to close locations quickly.

Earsa Jackson

Member of Clark Hill’s Franchise and Licensing Team

Under such contracts, a company — called a franchisor — outsources its brand to a counterparty — a franchisee — who then owns and operates the brand in a specific location. Companies looking to expand their footprint in a particular market may find such agreements to make sense from an operational or financial standpoint. But as legally binding contracts, once signed, they can leave little wiggle room.

That has complicated the efforts of some Western brands to step back from Russia – even as many colleagues have paused their operations or left the market entirely due to their rejection of the Moscow invasion and the logistical challenges it brought. Have originated.

“Business-only brands are better positioned to close locations quickly because they don’t have to deal with the franchise relationship layer,” said Earsa Jackson, a member of Clark Hill’s franchise and licensing team.

Stop business support

Burger King, which is owned by Restaurant Brands International, announced last week that it had discontinued business support for its more than 800 franchised restaurants in Russia and would deny approval for any expansion. However, the outlets will continue to operate under a local master franchisee.

Subway also has no business locations in Russia, but the approximately 450 independent franchise restaurants remain in the country. That while competitors such as McDonald’s, which owns the majority of its restaurants in Russia, said it would temporarily close 850 of its restaurants in the country, at an estimated loss of $50 million a month.

The name Subway appears in Russian on a sign outside a Subway fast food restaurant in Moscow, Russia, on Sunday, April 7, 2013.

Bloomberg | Getty Images

“We have no direct control over these independent franchisees and their restaurants and have limited visibility into their day-to-day operations,” Subway said in a statement.

Retailer Marks & Spencer, which has 48 stores in Russia, told CNBC it has stopped supplying products to its franchisor, the Turkish company FiBA, but the two remain “in discussions” about continuing the brand’s business there. .

Hotel chains Accor and Marriott have both suspended the opening of new locations in Russia, but their existing locations remain in use by third parties.

A legal battlefield

While all of these companies have expressed their dismay at the war and made various pledges to funnel Russian profits or make separate donations to Ukrainian refugees, their continued presence on Russia’s high streets remains largely at the discretion of their franchisors.

“Some franchisees don’t want to shut down because they claim that the Russian people are not the problem and that the brand should continue to serve its customers,” said Craig Tractenberg, partner at law firm Fox Rothschild.

And since most franchisors have made significant investments and remain committed to their local outlets, a move on their part to cease operations seems unlikely.

Franchise companies and their brands find themselves in a difficult position when it comes to Russia.

Dean Fournaris

Partner at Wiggin and Dana

“If the franchisee remains ready and willing to perform, a franchisor’s unilateral decision to close a location could lead to lawsuits due to the franchisee’s missed business opportunity,” Clark Hill’s Jackson said.

That puts many Western brands in a predicament over how to manage their legal duties while protecting their brands in a global landscape overwhelmingly opposed to the war in Russia.

Franchise companies and their brands are in a difficult position when it comes to Russia. On the one hand, there is a growing public and government sense in the West that all non-essential business with and within Russia must be halted pending an uncertain future .” such as a ceasefire or Russia’s withdrawal from Ukraine,” Fournaris said.

“At the same time, a market withdrawal from Russia would be viewed very differently by the Russian government and, most importantly, its people,” he added.

Manage brand reputation

A tightening of Western sanctions and further disruptions to supply chains could offer franchisors some hope of a contractual escape, as franchise brands may no longer have the resources to operate.

“Some agreements contain an excuse for performance language that could benefit franchise brands. For example, if supply chain problems make it impossible to perform, franchisors can claim the performance is excused,” Jackson said.

A visitor walks past the entrance of a Marks & Spencer PLC store in the Afimall City shopping and entertainment complex in the “Moscow City” business center in Moscow, Russia, on Friday, May 17, 2013.

Bloomberg | Getty Images

But companies are more likely to weigh the legal and financial implications of terminating their contract against the longer life of their brand.

“This business decision can overlap with a moral decision. Ultimately, the question is which decision best protects the brand,” Tractenberg said.

Meanwhile, the fallout could mark a new era for franchise agreements, with future participants perhaps more likely to make provisions for conflict risks such as “civil unrest, insurgency and related events.”

“The trademark provisions could be argued to support closure where the brand would be compromised by continued exploitation or aiding and inciting criminal activity,” Tractenberg added.


This post Western brands in Russian franchise deals was original published at “https://www.cnbc.com/2022/03/18/burger-king-subway-ms-western-brands-in-russian-franchise-deals.html”

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