Papa Johns International Inc., Subway and Domino's on Wednesday joined the growing number of U.S.-based restaurant chains to take action in Russia, but the move illustrates the challenges of franchising overseas at times when shifting global tensions ignite public outrage.
The Louisville, Ky.-based Papa Johns said it has suspended all corporate operations in Russia, cutting off all operational, marketing and business support to, and engagement with, the Russian market, and the company is no longer receiving royalties. A master franchisee — an American named Christopher Wynne, president 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 for ingredients.
Because of that relationship, however, the Papa Johns units in Russia are likely still open and there’s very 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 relations that can upend business agreements, said Alan Greenfield, an attorney with Greenberg Traurig LLP in Chicago, who specializes in international franchising.
But it also shows how the different models for international franchising can prove both an obstacle — and a buffer — for American companies facing intense public pressure to take a political stand.
“Unfortunately, when you’re dealing with international franchise expansion, circumstances change. It’s more unpredictable than the domestic market,” said Greenfield. “As there are regime changes and different policies and administrations, even in the U.S. government, a franchisor will have to be nimble.”
With outrage growing over the violent invasion of Ukraine, U.S. brands of all types have faced public pressure to stop economic 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 under company control.
Starbucks, which has 130 licensed locations in Russia, also said Tuesday it has suspended all business activity in the region, including shipment of products. The licensing partner agreed to immediately pause store operations in Russia.
Other franchisors are doing what they can within the limitations 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 she did not mention any efforts to cease operations.
“We are committed to supporting those impacted 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 any profits from operations in Russia to humanitarian efforts supporting Ukrainians who have been affected by the war.”
Domino’s has 189 units in Russia (40% of which are sub-franchised) that are independently owned franchise stores under contract with a publicly traded master franchisee based in Turkey, with stores in multiple markets.
Ritch Allison, Domino's CEO, said in a statement that the franchisor cannot legally suspend the operations of the business in Russia, which sources its ingredients from independent suppliers. But all royalties from Russia operations will be redirected to humanitarian efforts "for the foreseeable future." In addition, the Domino’s Partners Foundation will donate $1 million to employees of Domino’s 63 franchise units in Ukraine.
Domino’s master franchisees in Germany, Poland, Romania and Slovakia have also offered support — from food to housing and employment — to refugees in those markets, Allison said.
Both 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 there, are also redirecting profits to humanitarian efforts and taking steps to feed the millions of Ukrainian refugees that have fled to other parts of Europe to escape the violence.
Other franchisors with Russian locations declined to comment or did not immediately respond to requests, including Focus Brands — which has Cinnabon and Auntie Anne’s units in Russia — Carl’s Jr. and Hardee’s parent CKE Restaurants Holdings Inc., and TGI Friday’s. CKE, for example, in August announced a master franchising agreement with Nevada Russia Franchising Company LLC to expand Carl's Jr. in Russia, with plans to develop 300 plus restaurants there.
Wall Street analysts say the financial exposure is moderate for the public restaurant chains with Russian units.
In a filing with the Securities and Exchange Commission, for example, Papa Johns said it may take one-time, non-cash hit of up to $15.2 million related mostly to a loan associated with the master franchisee, but 2021 royalties from the Russia operation represented less than 1% of total revenue and about 1% of operating income.
Greenfield notes that most companies so far are taking temporary action. The sanctions against Russia target individuals and government figures, so there are no restrictions preventing franchisees of U.S.-based brands from operating, but the risk is more about the public pressure faced by American brands.
Some franchisors may even want to see their brands shut down in Russia, but it’s just not that simple.
For franchisors working directly with single- or multi-unit franchise operators in Russia, agreements will likely include provisions that would give the brand an exit ramp, such as a force majeure or the inability of the franchisee to make payment. Those 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 region and it’s extremely difficult to enforce a debranding to force the restaurants to stop operating, Greenfield said.
But in the current situation, companies are not rushing to terminate their agreements, they’re suspending them, he said.
“Why? Because in a situation like this, the franchisor has more brand protection by maintaining an agreement in place that addresses use of trademarks,” Greenfield said.
So unless there is another reason why the franchisor may want to terminate the relationship, he continued, “they are probably just not enforcing their agreement and leaving it in place until they see what happens.”
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 shut down restaurants if they operate company units, he said.
What's not clear is how long the conflict in Ukraine will last and how the geopolitical landscape will ultimately shift.
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 restaurant franchisors across Eastern Europe, the more immediate challenge from the Russia invasion of Ukraine is supply disruption, which is impacting restaurants in Uzbekistan, Pakistan, Georgia and other nearby countries that likely rely on suppliers and distribution centers in Russia, Greenfield said.
“Even if their product is manufactured in the Netherlands, they probably have a supplier or distribution center in Russia that supplied that region,” he said. “They’re running into all types of issues there in terms of being able to obtain product.”
UPDATE: This article has been updated with new information from Domino's.
Contact Lisa Jennings at [email protected]
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