Out-Law / Your Daily Need-To-Know

Out-Law News 2 min. read

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

Western brands struggling to extricate themselves from complicated franchise agreements in Russia must be proactive to protect their reputations, according to one legal expert.

It comes amid widespread condemnation of Russia’s ongoing invasion of Ukraine, which has forced more than a million refugees to flee to neighbouring nations and has displaced an unknown number of people within 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 Hundreds of companies have now suspended or withdrawn their operations in Russia, including Apple, Disney, Ikea, BP, Exxon, Shell, Airbus and Boeing.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 firms being prevented from withdrawing by complex franchise deals with local partners along with hotel groups Marriott and Accor - which owns the Ibis, Novotel and Pullman brands – according to the BBC. Together the four firms have almost a thousand outlets still open in the country.

Scott Oxley of Pinsent Masons said: “Notwithstanding the fact that they may be hamstrung by the restrictions in their franchise agreements – they will certainly need to have conversations with franchisees to see if there is a commercial deal that can be quietly struck that enables them to cease operations in Russia and maintain the reputation of their brand. In the meantime, it is essential for brands to minimise and mitigate brand damage from continued operation."

Companies often use franchises to grow their brands and expand their business abroad using an ‘asset lite’ model. Under a franchise, a franchisee will trade as their own business, using their own property and assets, under the brand of the franchisor, while sticking to a proven business model. The franchisor grants the franchisee a licence to do this and will provide the franchisee with necessary information and systems to enable the franchisee to operate the branded business.

Danielle Clifford of Pinsent Masons said such agreements can “represent an especially attractive option for a brand wanting to break into a new territory overseas – where they can partner with someone who has the local expertise and knowledge. But the franchisor and franchisee’s relationship is governed by a complex agreement which - among other things - will limit each party’s ability to extract themselves from the arrangement.”

Clifford added: “A well-drafted agreement will include the option for the franchisor to terminate the agreement in circumstances where the brand may face reputational damage as a result of the actions of the franchisee, but the situation in Russia is different. There, it is the actions of the government, not the franchisee, that are leading to potential reputational damage. This means that the ability for the franchisor to terminate is limited and if the franchisor was to terminate without proper cause, the franchisor could find itself in breach of the agreement.”

Some franchised brands, including McDonalds, have, however, managed to extract themselves from their operations in Russia. McDonalds already owned 84% of its 847 restaurant locations in Russia, meaning that - at least for these outlets – it could suspend its operations quickly. Clifford said: “It may be that the company came to some sort of commercial arrangement with its franchisors to close the remaining restaurants. In doing so, McDonalds will have considered the global reputational damage of continuing operations in Russia against the economic costs of the temporary closures.”

She added: “Some brands struggling to withdraw from Russia have made public statements confirming that they have made donations to aid agencies, and some hotel operators have chosen to distance themselves from operations there in ways that are less restricted.”

Russia-Ukraine crisis
Russia's invasion of Ukraine in February 2022 shocked the world and had immediate economic and political consequences. We track and analyse the implications of the situation as it develops.
Russia-Ukraine crisis
We are processing your request. \n Thank you for your patience. An error occurred. This could be due to inactivity on the page - please try again.