Papa John’s International Inc. joined the growing number of US-based restaurant chains in taking action in Russia on Wednesday, but the move illustrates the challenges of franchising overseas at a time of shifting global tensions sparking outrage public.
The Louisville, Ky.-based pizza franchisor said it has suspended all company operations in Russia, cutting all operational, marketing and sales support and engagement with the Russian market, and the company no longer collects Royalties. A master franchisee – an American named Christopher Wynne, chairman and CEO of PJ Western, who took over the chain’s Russian operations in 2008 – operates or sub-franchises 188 restaurants there, and also owns and operates the supply chain ingredients.
Because of this relationship, however, Papa John’s units in Russia are likely still open and there is little the franchisor can do about it.
The situation illustrates the ever-present challenge of international franchising, which faces the risk of shifts in global relationships that can upend business deals, said Alan Greenfield, an attorney at Greenberg Traurig LLP in Chicago who specializes in international franchising.
But it also shows how different international franchise models can prove both a hindrance — and a buffer — for U.S. companies facing intense public pressure to take a political stand.
“Unfortunately, when it comes to expanding an international franchise, circumstances change. It’s more unpredictable than the domestic market,” Greenfield said. “As there are regime changes and different policies and administrations, even within the US government, a franchisor will need to be nimble.”
With growing outrage over the violent invasion of Ukraine, American brands of all types have faced public pressure to shut down business activity in Russia.
For companies like McDonald’s, which owned and operated most of its 850 restaurants in Russia, the decision to temporarily cease operations was within the company’s control.
Starbucks, which has 130 licensed outlets in Russia, also said on Tuesday it had suspended all business activity in the region, including shipping products. The licensing partner agreed to immediately suspend store operations in Russia.
Other franchisors do what they can within the limits of franchise agreements.
Subway, for example, has about 450 restaurants in Russia that are independently owned and operated by local franchisees and managed by a master franchisee, a company spokesperson said Wednesday. Profits from those stores will be diverted to humanitarian efforts, she said, but no efforts to suspend operations were disclosed.
“We are committed to supporting those affected by the tragic events in the region,” the Subway spokesperson said. “In addition to working with our franchisees across Europe to provide meals to refugees, we will redirect all profits from operations in Russia to humanitarian efforts supporting Ukrainians who have been affected by the war.”
Restaurant Brands International, whose franchise system includes about 800 Burger King locations in Russia, and Yum Brands Inc., which franchises or licenses about 1,000 KFC restaurants and 50 Pizza Hut locations, are also redirecting their profits to humanitarian efforts and taking measures to feed the millions of Ukrainian refugees who have fled to other parts of Europe to escape the violence.
Domino’s, meanwhile, declined to respond to requests for comment. Andy Barish, equity research analyst at Jefferies, said in a note on Tuesday that Domino’s master franchisee, DP Eurasia, owns nearly 200 Domino Russian units, of which about 40% are sub-franchised. There are also 64 Domino’s units in Ukraine.
Other Russian-based franchisors declined to comment or did not immediately respond to inquiries, including Focus Brands – which owns Cinnabon and Auntie Anne’s units in Russia – Carl’s Jr. and Hardee’s parent company, CKE Restaurant Holdings. Inc., and TGI Friday’s.
Wall Street analysts say financial exposure is moderate for state-owned restaurant chains with Russian units.
In a filing with the Securities and Exchange Commission, for example, Papa John’s said it could take up to $15.2 million in cash, mostly related to a loan associated with the master franchisee, but royalties from 2021 of operation in Russia. accounted for less than 1% of total sales and approximately 1% of operating profit.
Greenfield notes that most companies are taking temporary measures so far. Sanctions against Russia target individuals and government figures, so there are no restrictions preventing franchisees of US-based brands from operating, but the risk is more related to the public pressure faced by American brands.
Some franchisors may even want to see their brands closed in Russia, but it’s not that simple.
For franchisors working directly with single and multi-unit franchise operators in Russia, agreements will likely include provisions that would give the brand an exit ramp, such as force majeure or the franchisee’s inability to make payment. . These could allow a franchisor to terminate a franchise agreement, he said.
Franchisors have the least control when using a master franchisee structure. In a way, the master franchisee becomes the franchisor in the area, and it’s extremely difficult to force a rebrand to force restaurants out of business, Greenfield said.
But in the current situation, companies are not rushing to terminate their agreements, they are suspending them, he said.
“Why? Because in a situation like this, the franchisor gets more brand protection by keeping an agreement in place that deals with the use of the brands,” Greenfield said.
So unless there’s some other reason the franchisor may want to end the relationship, he continued, “they probably don’t enforce their agreement and leave it in place until what they see is happening”.
In a way, the master franchisee structure allows franchisors to distance themselves more quickly from a potentially brand-damaging situation and they avoid the pain of having to close restaurants if they operate units of the business. , did he declare.
What is unclear is how long the conflict in Ukraine will last and how the geopolitical landscape will eventually change.
Greenfield compared the situation in Russia to that of Venezuela, which has been under U.S. sanctions since 2019. Many U.S.-based restaurants still operate there, but they don’t collect royalties, he said.
For Eastern European restaurant franchisors, the most immediate challenge of the Russian invasion of Ukraine is the disruption of supply, which is affecting restaurants in Uzbekistan, Pakistan, Georgia and other countries. other neighboring countries that likely depend on suppliers and fulfillment centers in Russia, Greenfield said.
“Even if their product is made in the Netherlands, they probably have a supplier or distribution center in Russia that supplies that region,” he said. “They have all kinds of problems there in terms of being able to get products.”
Contact Lisa Jennings at [email protected]
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