The name Burger King appears in Russian outside a Burger King fast food restaurant in Moscow, Russia on Friday, April 5, 2013.
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Ukrainian President Volodymyr Zelensky, in his address to the US Congress on Wednesday, repeated calls for all global brands to leave Russia, a market “filled with [Ukrainian] blood” – as part of an ongoing effort to put economic pressure on the rogue state.
According to a list compiled by the Yale School of Management, more than 400 companies have announced their withdrawal from Russia since its February 24 invasion of Ukraine.
However, for some brands, it’s easier said than done.
Fast food giants Burger King and Subway, British retailer Marks & Spencer and hotel chains Accor and Marriott are among the companies barred from pulling out due to complicated franchise agreements.
“Unlike company-owned operations, a franchise company entering the international market is committed to a long-term contract with an experienced counterparty, usually a franchisee or licensee,” said Dean Furnari, Wiggin and Dana’s franchise and distribution partner. practice, told CNBC.
Brands that are solely owned by the company are more likely to close outlets quickly.
Ersa Jackson
Member of the Clark Hill Franchising and Licensing Group.
Under such contracts, a company, known as a franchisor, transfers its brand to a counterparty, known as a franchisee, who then owns and operates the brand at a specific location. Companies looking to expand their footprint in a particular market may find such arrangements operationally or financially beneficial. But, being legally binding contracts, once signed, they leave no room for maneuver.
This has made it more difficult for some Western brands to back away from Russia, even as many of their counterparts have suspended operations or exited the market entirely due to their opposition to Moscow’s incursion and the resulting logistical problems.
“Company-owned brands are more likely to close outlets quickly because they don’t have to deal with the level of franchise relationships,” says Ersa Jackson, a member of Clark Hill’s franchising and licensing team.
Termination of corporate support
Burger King, owned by Restaurant Brands International, announced last week that it was ending corporate support for its more than 800 franchised restaurants in Russia and refusing to approve any expansion. However, the outlets continue to operate under the local main franchisee.
Similarly, Subway has no corporate outlets in Russia, but its approximately 450 independent franchised restaurants continue to operate in the country. This comes as competitors such as McDonald’s, which owns most of its restaurants in Russia, have said they will temporarily close 850 of their restaurants in the country, at an estimated loss of $50 million per month.
The name Subway in Russian appeared on a sign outside a Subway fast food restaurant in Moscow, Russia on Sunday, April 7, 2013.
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“We do not directly control these independent franchisees and their restaurants and have limited understanding of their day-to-day operations,” Subway said in a statement.
Meanwhile, retailer Marks & Spencer, which has 48 stores in Russia, told CNBC that it has stopped deliveries to its Turkish franchisor FiBA, but they continue to “discuss” the brand’s continued presence in Russia.
Hotel chains Accor and Marriott have also suspended the opening of new locations in Russia, but their existing locations continue to be used by third parties.
Legal battlefield
While all of these companies have expressed concerns about the war and have made various commitments to divert profits from Russia or make individual donations to Ukrainian refugees, their continued presence on Russia’s main streets remains largely at the discretion of their rights holders.
“Some franchisees are reluctant to stop because they argue that Russian people are not a problem and the brand should continue to serve its customers,” said Craig Traktenberg, partner at law firm Fox Rothschild.
And since most franchisors have invested heavily in their local outlets and continue to support them, any action on their part to close operations seems unlikely.
Franchise companies and their brands are in a very difficult position when it comes to Russia.
Dean Furnari
Wiggin and Dana partner
“If the franchisee is still ready and willing to operate, a franchisor’s unilateral decision to close a location could result in litigation due to a lost business opportunity for the franchisee,” Clark Hill’s Jackson said.
This puts many Western brands in a difficult position as to how to fulfill their legal obligations to protect their brands in a global landscape that is overwhelmingly opposed to Russia’s war.
“Franchise companies and their brands are in a really difficult position when it comes to Russia. On the one hand, there is a growing public and government opinion in the West that all non-essential business dealings with and within Russia should be terminated in anticipation of some uncertain future. events such as a ceasefire or the withdrawal of Russian troops from Ukraine,” Furnari said.
“At the same time, leaving the market from Russia will be perceived very differently by the Russian government and, more importantly, by its people,” he added.
Brand reputation management
Heightening Western sanctions and further supply chain disruptions could give franchisors some hope for a contract release as franchised brands may no longer have the funds to operate.
“Some agreements contain performance justification language that can benefit franchised brands. For example, if supply chain issues make performance impossible, franchisors can argue that performance is justified,” Jackson said.
A visitor walks past the entrance to the Marks & Spencer Plcstore store in the Afimall City shopping and entertainment complex in the Moscow City business center in Moscow, Russia, Friday, May 17, 2013.
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But most likely, companies will have to weigh the legal and financial implications of terminating a contract with a longer lifespan for their brand.
“This business decision may overlap with a moral decision. Ultimately, the question is which solution best protects the brand,” Traktenberg said.
Meanwhile, the fallout could usher in a new era for franchising arrangements where participants may be more likely to anticipate risks of conflict in the future, such as “civil unrest, uprisings and related events.”
“It could be argued that trademark provisions support closure if a brand is tainted by continued operation or aiding and abetting criminal activity,” Traktenberg added.