Western companies that cannot leave Russia

The invasion of Ukraine has led many western brands to move away from Russiabut some still have outlets open in the country and say they can’t close them.

Marks & Spencer, Burger King and hotel groups Marriott and Accor are restricted by complex agreements of franchise that prevent them from leaving.

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Among all, the firms have almost 1,000 points of sale still open in Russia.

M&S has 48 locations, Burger King has 800 restaurants open, while Marriott and Accor have 28 and 57 hotels open, respectively.

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These firms are bound by legal franchise agreements, meaning they have outsourced their Russian businesses to third parties and do not own the operations that bear their name, making it difficult for them to remove their brand from Russia’s high streets and shopping malls.

Many western companies have maintained these types of agreements for decades.

For example, Marks & Spencer stores have been operated by a Turkish company called FiBA, which has held the rights to sell the retailer’s products in Eastern Europe since 1999.

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The retail giant has said it has suspended shipments of its products to FiBA in response to the war.

Meanwhile, Burger King owner Restaurant Brands International also told the BBC that its restaurants are run by franchises.

These “long-standing legal agreements cannot be easily changed in the near future,” he said.

It is believed that the hotel groups Marriott, IHG and the French chain Accor, which has Ibis and Novotel among their brands, they operate in Russia under similar agreements.

Marriott told the BBC that its hotels in Russia were owned by third parties, but said it would “continue to assess the potential for these hotels to remain open,” suggesting it is looking into their franchise deals.

Method to enter other markets

Franchising is a business method of distributing products or services.

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It involves 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 under the franchisor’s name and sell its products.

Graeme Payne, UK and international franchising specialist at law firm Bird&Bird, told the BBC that franchising was useful for Western brands that want to enter markets in different countries, but don’t have the local knowledge, money or ability to do it.

“You as a member of the public… you will think why don’t they close their stores? But just from a purely commercial and contractual perspective, it is very difficult to do it without some legal consequences powerful,” Payne explained.

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Those consequences could serious financial implications for western companiesthat it could be demanded by franchisees if they breach an agreement, which usually lasts 10 years or more.

Victoria Hobbs, a partner at Bird&Bird who deals with franchise disputes, told the BBC that if a franchise owner is found to have ties to Russian President Vladimir Putin or has been sanctioned, then from the UK perspective a deal could be terminated.

M&S has pledged nearly US$2 million to support the refugees. (GettyImages).

However, Hobbs says that while agreements usually have a clause that says “if the franchisee is doing something to damage our reputation, we can terminate it,” the current problem in Russia is that many franchisees themselves are doing nothing wrong.

“It’s quite difficult for them because, from a UK law perspective, they don’t really have the right to end the deal, that’s the problem,” he explains.

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Even if a brand managed to get a UK court ruling against a franchise in Russia, “Russian courts would not enforce it,” says John Pratt, a partner at Europe’s largest franchise law firm.

Support for Ukraine

In the meantime, firms are trying to do what they can to help with the situation and have all announced his support for Ukraine after the invasion From Russia:

• Accor, which has 57 branded hotels in Russia and 3,500 employees there, has suspended all future hotel openings and halted services and distribution to hotels affected by the sanctions.
• Burger King is redirecting its profits from franchised operations in Russia to humanitarian efforts.
• Marriott and IHG hotels and resorts, which each have 28 hotels operating in Russia under their brand, also halted hotel developments and investments and closed their corporate offices – which they own and thus control. in Moscow.
• M&S has pledged close to $2 million to support refugees and is donating 20,000 coats and thermals.

Many Western companies have already stopped operating in Russia. (GettyImages).

However, while many brands are stuck in Russia, Yum Brands, which owns KFC and Pizza Hut, said it was finalizing a deal with its main franchisee to temporarily halt Pizza Hut operations.

Hobbs, a partner at Bird & Bird, said she believed brands were “very concerned” about any potential damage to your reputation if they continued to operate in Russia.

“Obviously they are concerned on a human and moral level about what is happening, but I also think they are concerned as several companies have been threatened with boycotts“.

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Source: Elcomercio