The invasion of Ukraine has caused many western brands to avoid Russia, but some still have branches open in the country and say they are unable to close them.
Marks and Spencer, Burger King, and hotel groups Marriott and Accor are constrained by complex franchise deals that prevent them from pulling out
The companies have outsourced Russian operations to third parties and do not own the operations that bear their names.
Together, the companies have opened almost a thousand more branches in Russia.
M&S has 48 stores and Burger King still has 800 restaurants open, while Marriott and Accor have 28 and 57 hotels open, respectively.
The BBC understands the brands are tied to legal franchise agreements, making it difficult for them to remove their name from Russia’s high streets and shopping malls.
Many Western companies have had such agreements for decades. For example, since 1999, Marks and Spencer stores have been operated by a Turkish company called FiBA, which owns the rights to sell the retailer’s products throughout Eastern Europe. The retail giant said it suspended shipping its goods to FiBA in response to the war.
Meanwhile, Burger King’s owner Restaurant Brands International has told the BBC that its restaurants are franchised. These “long-standing legal agreements cannot easily be changed in the foreseeable future,” it said.
Hotel groups Marriott, IHG and the French chain Accor, whose brands include Ibis and Novotel, are believed to all be engaged in similar deals in Russia.
Marriott told the BBC that its hotels in Russia were owned by third parties, but said it would “continue to evaluate whether these hotels can remain open” and suggested it look at its franchise agreements.
Franchising is a business method of selling a product or service. They are a franchisor, a company that has established the brand name, and a franchisee, a company that pays a fee for the right to do business and sell its products under the franchisor’s name.
Graeme Payne, a specialist in UK and international franchising at law firm Bird&Bird, said BBC franchising is useful for western brands that want to enter markets in different countries but don’t have local knowledge, money or the ability to get a foothold there to understand.
- More and more companies are withdrawing from Russia
“You would think as a member of the public…why don’t they just shut down their businesses? But just from a purely business and contractual perspective, it’s very difficult to do so without far-reaching legal ramifications,” said Mr. Payne.
These consequences could have serious financial consequences for Western companies, who could be sued by franchisees if they breach an agreement that often lasts 10 years or more.
Victoria Hobbs, a partner at Bird&Bird who deals with franchise disputes, told the BBC if a franchise owner is found to have ties to Russian President Vladimir Putin or has been sanctioned, then from a British perspective a deal could be terminated.
However, Ms Hobbs said although agreements often include a clause that says “if the franchisee does something that tarnishes our reputation, we can terminate”, the problem in Russia at the moment is that many franchisees themselves are doing nothing wrong.
“It’s quite a challenge for them because from an English law perspective they don’t really have the right to end the agreement – that’s the problem,” she said.
Even if a brand were able to get a British court ruling against a franchise in Russia, “the Russian courts wouldn’t enforce it,” according to John Pratt, partner on the largest team of specialist franchise lawyers in Europe.
Meanwhile, the companies are trying to do whatever they can to help the situation, and all have announced their support for Ukraine after the Russian invasion.
- Accor, which has 57 branded hotels and 3,500 employees in Russia, has suspended all future hotel openings and bookings for sanctioned individuals
- Burger King is diverting its profits from franchise operations in Russia to humanitarian efforts
- Marriott and IHG Hotels & Resorts, each of which operates 28 hotels in Russia under its own brand, have also halted hotel development and investment and closed their corporate offices in Moscow, which they own and thus control
- M&S has pledged more than £1.5million to support refugees, donating 20,000 coats and thermos
But while many brands are stuck in Russia, Yum Brands, which owns KFC and Pizza Hut, said it is finalizing an agreement with its main franchisee to temporarily halt Pizza Hut operations.
Ms Hobbs, a partner at law firm Bird&Bird, said she believes brands are “very concerned” about possible reputational damage if they continue to operate in Russia.
“They’re obviously concerned on a human and moral level about what’s happening, but I think they’re worried too [that] several companies have been threatened with boycotts.”
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