Fast-food chain Burger King has not been able to close 800 of its franchise locations since Russia’s invasion of Ukraine. Part of the problem is the complexity of its joint-venture-style master franchise agreement.
Fast-food chain Burger King has not been able to close 800 of its franchise locations since Russia’s invasion of Ukraine. Part of the problem is the complexity of its joint-venture-style master franchise agreement.
For at least a decade, Burger King’s formula for European expansion has relied on a joint venture partnership, including a master franchise, to open and operate new locations.
But now there is a problem in Russia for the fast-food chain. This is Russia’s February. has not been able to exit its partnership or close its approximately 800 franchise locations after invasion of ukraine,
Burger King halted corporate support for its Russia locations in March. Parent company Restaurant Brands International Inc (RBI), which was formed in 2014 when Burger King merged with Tim Hortons, said on March 17 that it was looking to sell its stake in the joint venture.
still open for business
However, restaurants remain open and thriving in places such as central Moscow where queues have become the norm. Demand has been helped by rival McDonald’s is currently being closed before reopening under the new branding later this month.
“I usually go to Burger King, I don’t care about McDonald’s,” said 37-year-old university teacher Elena Alexandrova as she picked up a Whopper and a soda on Friday at Burger King in an underground shopping mall just outside the Kremlin.
McDonald’s last month struck a deal to sell its Russian business to one of its local franchisees, retaining the option to buy back the business within 15 years. Burger King’s exit is proving to be more difficult.
Current sanctions by Western countries against Russia sharply limit the pool of potential buyers, said a person familiar with the matter. Reuters could not determine the status of any talks.
complicity in agreement
Part of the problem, lawyers said this week, is the complexity of its joint-venture-style master franchise agreement, which allows Burger King to profit from the sale of Whopper Burgers without the risk of using its capital.
Unlike rival McDonald’s Corp., which owns most of its locations in Russia, Burger King’s Toronto-based parent doesn’t have any restaurants of its own in Russia. “There’s a really complicated contractual and legal environment right now that isn’t giving franchisees and franchisors any good options in Russia,” said Liz Dillon, partner at Lathrop GPM in Minneapolis.
According to an open letter dated March 17 to the employees of RBI International Chairman David Shearer, RBI holds 15% stake in Burger King Russia Ltd., a Russian joint venture.
Additional partners are Russia’s state-owned bank VTB, which has been sanctioned by the United States and the European Union, and Kyiv-based private equity and asset management firm Investment Capital Ukraine (ICU), Shearer’s letter said.
And Alexander Kolobov, Burger King’s master franchisee in Russia, owns 30% of the joint venture, Kolobov told Reuters in an email in March.
According to Shearer’s letter, the RBI blamed Kolobov for refusing to close the restaurant. But Kolobov told Reuters at the time that he never had full operational control and lacked the right to close the restaurant without the agreement of all joint venture partners.
A spokesman for Kolobov said via email that he declined to comment on whether he was in talks to buy an RBI stake in the joint venture. The RBI cited Shearer’s letter to Reuters. VTB could not be reached for comment.
Court trouble
A franchisor “cannot physically or legally prevent a franchisee from operating” if they choose to do so, said Lee Plow, a franchise attorney for Plow Coach plc in Virginia. “The legal remedies available take time, and even when you pursue them, you still end up in a Russian court having to enforce an injunction, which is an unlikely possibility at the moment. “
To be sure, some lawyers told Reuters that forcing franchises to close their locations is unfair to regular Russians who had nothing to do with the government’s decision to invade Ukraine. “Franchises in Russia are not going to wage war on Ukraine. The customers who go to those stores are not waging war,” said Beta Croukas, a franchise attorney from Greensfelder in Chicago.
Leaving Russia potentially exposes companies to a new law moving forward that Allow the government to seize local assets of western companies That exit – putting pressure on companies to stay.
new american law
Burger King’s parent and other US-based companies will soon be subject to a new rule from the Biden administration – effective June 7 – that limits their ability to provide “management consulting services” to anyone in Russia. Is.
Some lawyers believe that the rules may be read to cover services that brands typically provide to franchisees, including sourcing products, management techniques, inventory control, site selection, operations manuals, and more. Even including calling to get advice.
“It puts a lot of pressure on these companies,” said Eric Wolf, a partner at DLA Piper in Washington that specializes in franchise law for global consumer product, clothing and footwear companies.
“What is likely to happen in many of these situations is that the US partner will be bought out,” Wolf said. “At that point, it’s a distressed sale.”