In today’s Finshots, we explain why companies like Burger King are struggling to exit their operations in Russia
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The Story
“Stop selling Whoppers, Burger King!!!”
Okay, there’s nothing wrong with Whopper burgers. In fact, people love it. They just don’t want Burger King to sell Whoppers in Russia anymore. On Twitter and other social media, angry Burger King loyalists are calling for the international burger chain to shutter its doors in the country. And you know why — the Russian invasion!
Over the past weeks, western companies have left Russia in droves. McDonald’s has shut over 800 stores. Starbucks has suspended operations in 130 locations. Others like Nestlé are only selling “essentials” like milk and formulations for babies. So if the Russians are in the mood for some KitKat wafers or fancy San Pellegrino bottled water, hard luck.
But Burger King is still sticking around. Its stores are serving up hot burgers and fries and it’s getting a lot of hate from western quarters — you just have to look up #BoycottBurgerKing and you’ll see what I mean. It really makes one wonder — why doesn’t Burger King just pack up and leave like the others.
Well, the matter is actually a little more complicated than what the hashtags may suggest. You see, Burger King doesn’t quite own or operate its restaurants in Russia. Rather, it runs the 800 stores through a relationship it forged with Russian businessman Alexander Kolobov and two other partners. Everything they do in Russia is based on the franchise model.
And in case you have trouble understanding what the franchise model entails, don’t worry, we have you covered.
Take Burger King for instance. They enter into an agreement with another partner/person and they offer this individual the exclusive right to use the brand name and sell Burger King products. In return, the partner may be obligated to pay a royalty income and/or profits.
It’s one of the easiest ways for a Western brand to establish a presence in another country without risking a lot. The brand doesn’t need to start from scratch. They don’t have to worry about local tastes and preferences. All they have to do is find a partner with experience and money and voila — the stores will be up and running in no time.
The flipside however is that franchise agreements are long term contracts with strict stipulations. For instance, Burger King can’t just shut its stores and terminate these contracts. If they did, they’d probably invite a lawsuit. The only way to cease operations is to work with Kolobov and figure out a compromise. However, it seems Kolobov isn’t cooperating right now, and Burger King is in a bit of a pickle.
And it’s not just unique to Burger King.
Subway — another popular quick-service restaurant chain is in the same boat as Burger King. They don’t own any of the 450 stores they operate in Russia and have struggled to tear up the franchise agreement. Pizza chain Papa John’s also has a primary franchise partner who has refused to shut their store in Russia. And the kicker? This partner is actually an American!
On the other hand, Starbucks — a company that operates on a similar model could easily shut shop because it had a willing partner in Kuwait-based Alshaya Group — who agreed to co-operate. McDonald’s meanwhile probably had the easiest exit of them all. They own 84% of their stores and could easily stop operations without being dependent on anyone.
So yeah, obviously there’s a lot of pressure on Western Brands to exit Russia altogether. However, a good chunk of these brands seem to have deep-rooted ties with partners in the country and it’s now coming to bite them back.
Until then..
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