Western franchisors stuck in Russia must act to ‘minimize brand damage’

It comes amid widespread condemnation of Russia’s continued invasion of Ukraine, which has forced more than a million refugees to flee to neighboring countries and displaced an unknown number of people inside. from the country. Hundreds of companies have now suspended or withdrawn their operations in Russia, including Apple, Disney, Ikea, BP, Exxon, Shell, Airbus and Boeing.

But British and American giants Marks and Spencer and Burger King are among a number of companies prevented from pulling out by complex franchise agreements with local partners as well as hotel groups Marriott and Accor – which owns the Ibis brands. , Novotel and Pullman – according to the BBC. . Together, the four companies have almost a thousand outlets still open in the country.

Scott Oxley of Pinsent Masons said: “Notwithstanding that they may be crippled by the restrictions of their franchise agreements – they will certainly have to have conversations with the franchisees to see if there is a business agreement that can be quietly entered into that allows them to go out of business in Russia and maintain their brand reputation. In the meantime, it is critical for brands to minimize and mitigate brand damage from continued exploitation.”

Companies often use franchises to grow their brands and expand their business overseas using an “asset lite” model. Under a franchise, a franchisee will trade as their own business, using their own property and assets, branded as the franchisor, while sticking to a proven business model. The Franchisor grants the Franchisee a license to do so and will provide the Franchisee with the necessary information and systems to enable it to operate the Branded Business.

Danielle Clifford of Pinsent Masons said such deals can “represent a particularly attractive option for a brand wishing to enter new territory overseas – where they can partner with someone who has the local expertise and knowledge. But the relationship between franchisor and franchisee is governed by a complex agreement that – among other things – will limit each party’s ability to exit the arrangement.

Clifford added: “A well-drafted agreement will include the ability for the franchisor to terminate the agreement in circumstances where the brand may suffer reputational damage as a result of the franchisee’s actions, but the situation in Russia is different. In this case, it is the actions of the government, not the franchisee, that cause potential reputational damage. This means that the franchisor’s ability to terminate is limited and if the franchisor were to terminate without cause, the franchisor could be in breach of the agreement.

Some franchise brands, including McDonalds, have however managed to extract themselves from their operations in Russia. McDonalds already owned 84% of its 847 restaurants in Russia, which means – at least for these outlets – it could suspend operations quickly. Clifford said: ‘The company may have entered into some sort of commercial arrangement with its franchisors to close the remaining restaurants. In doing so, McDonalds will have weighed the damage to global reputation of continuing operations in Russia against the economic costs of temporary closures. »

She added: “Some brands struggling to pull out of Russia have made public statements confirming they have made donations to aid agencies, and some hoteliers have chosen to distance themselves from operations there in less restraint.”

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