Many U.S. restaurant brands still operate in Russia
For U.S. restaurant brands, breaking up with Russia is just a matter of will and cash, according to Yale School of Management's Jeffrey Sonnenfeld, who argues that companies should seek to buy out master franchisees that decline to suspend operations.
What to know: Big U.S. chains often sell long-term, master franchise rights in foreign countries. The franchisee pays for the privilege, including a percentage of profit, in exchange for the brand and a variety of support services (e.g., marketing, training, etc.).
- Some of these agreements also include supply chain help, from napkins to food ingredients, although many foreign franchisees source all of their own materials. Dunkin, for example, says its still-open Russian franchisees are self-sufficient.
- PJ Western, a Papa John's franchisee in Russia that's actually based in Denver and backed by PE firms CapMan and Baring Vostok, even built its own dough-making facilities.
Behind the scenes: McDonald's was able to largely exit Russia because most of its stores there were company owned, but chains like Burger King, Yum Brands and Subway each have said that franchisee agreements make it legally impossible for them to completely exit (but that they have stopped support services and investment in the country).
- Sonnenfeld, who has the ear of many top American CEOs, views that as a cop-out, believing the brands should offer their Russian franchisees a price they can't refuse. He adds that some franchisees might welcome the chance to exit, since patronizing Western brands soon could be deemed unpatriotic by Russian officials.
- He also had little sympathy for the PJ Western argument that it's unfair to deny ordinary Russian workers a job or ordinary Russian customers a meal. "It's been said that the only thing necessary for the triumph of evil is for good men to do nothing. In this case, complacency of their dough-loving pizzaheads is the source of the problem."
It appears that Starbucks may have followed Sonnenfeld's advice, as its licensed partner for Russia (which is based in the Middle East) agreed to suspend operations while continuing to pay employees. A Starbucks spokesperson declined to say if the company is paying to enable the closures and/or the employee compensation.
- Dunkin' declined to say if it offered cash to close its stores, although a source says its situation is particularly complicated because the master franchisee is in Russian bankruptcy court. Subway and Burger King's parent company didn't return requests for comment.
Look ahead: Rep. Carolyn Maloney (D-N.Y.) yesterday introduced legislation that would require U.S. companies with franchises in Russia to either close those stores or suspend distribution of products or services, in order to maintain federal contracts. It would not, however, require buyout efforts.