Why Boycotting Franchises Operating in Russia Might Be Misguided
Confusion over the franchise business model is causing consumers to lash out at several big brands, but the truth is it's complicated.
“I’ll never eat at Burger King again.”
My friend called me out of nowhere, and this was the first thing he said when I answered. I was taken aback, but curious. “Why, what’s wrong with Burger King?” I asked.
“They’re still operating in Russia! Hundreds of locations. Everyone is leaving, even McDonald’s. But BK is still there selling Whoppers. That’s so not cool. I’m done with these guys.”
Because of my work in franchising, I hear from a lot of people with questions, ideas and, in this case, opinions about all things franchise. Often, they’re based on misunderstandings about the facts or on how franchises are structured. That certainly was the case here. My friend was totally misinformed and spreading bad information.
It’s always challenging for companies to navigate an increasingly complicated political and social environment. They’re expected to appease a consumer base while also operating within a set of principles, and frequently have to make tough decisions that impact operations and form public opinion.
Burger King’s parent company, Restaurant Brands International (RBI), does, in fact, want out of Russia. They’d love to shutter all 800 stores. The problem is the restaurants aren’t actually theirs. Not entirely, anyway. As a multinational franchise organization, Burger King has different business arrangements in a multitude of global markets. In the case of Russia, their 15% stake in the operation doesn’t give them the power to unilaterally cease operations. RBI President David Shear explained their dilemma in an open letter to employees:
“We have three joint venture partners in Russia that are controlled by Alexander Kolobov, who has extensive restaurant experience and is responsible for the day-to-day operations and oversight of the 800 restaurants in Russia; Investment Capital Ukraine — one of Ukraine’s largest investment firms; and VTB Capital. VTB Capital, as an affiliate of one of Russia’s biggest banks, has partnered with several other western companies in Russia, including other large QSR brands. We own a minority stake (15%) in the joint venture and none of the partners has a majority share.”
He goes onto to explain that while they’ve demanded the main operator of the Russian locations suspend all operations of Burger King restaurants, he has refused to do so. He’s got a written agreement (and most likely the Russian government) to back him up.
“In the case of RBI, it is only a 15% owner of the joint venture entity, and thus, ceasing operations in the Russian market will take more than just RBI’s vote to do so,” explains Amanda Dempsey, a franchise attorney for PA-based business-law firm Saxton & Stump. “It appears that some of RBI’s joint-venture partners in its Russian operations are Russian citizens and businesspeople. Whether they agree or disagree with Russia’s attacks on Ukraine, they may not agree that it is best that operations in Russia cease. Without sufficient votes, an immediate shut down of the business cannot occur.”
Subway is in a similar situation. Their 450 branded restaurants located in Russia are owned by franchisees. None are corporately owned, which means American brand leadership cannot physically prevent Russian franchisees from operating.
Papa John’s has one international master franchisee (an American) licensed to franchise and oversee 190 restaurants in Russia. They, too, asked him to close his stores, and he has refused. Defending his position to the New York Times, he said, “The best thing I can do as an individual is show compassion for the people, my employees, franchisees and customers without judging them because of the politicians in power.”
Dempsey elaborates on Papa John’s limited authority in this situation: “Because the master franchisee brings such a high level of market expertise to the relationship, and at times invests a significant amount of capital, the international master franchise agreements that are negotiated do not allow the franchisor to unilaterally terminate the relationship, except for in extreme situations.”
Papa John’s International has temporarily ceased corporate operations in the region. Still, many on social media are calling for a boycott of the entire Papa John’s system.
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McDonald’s is also a franchise, but all of their restaurants in Russia are company-owned. That means they can flip off the lights and lock up anytime they want. The restaurants are theirs to do as they please. If the operation was a joint venture, was licensed to a master franchisee or franchised to independent operators, it wouldn’t be so easy. Burger King, Subway and Papa John’s are also free to close the stores they wholly own, but they have less control over those they’ve franchised or licensed out. Simply put, the stores in Russia aren’t theirs and they have no way to close them.
But try explaining that to my friend. Like much of the public, he’s confused by the franchise business model. He sees one brand, one company. He holds the franchisor responsible for everything that’s done under the brand’s name by independent owners. He just wants Restaurant Brands International to stop selling Whoppers in Russia. He wants the McDonald’s Corporation to pay individual restaurant employees more. He essentially wants the corporate entities to dictate to independent owners and operators what they can and can’t do, regardless of what their agreements allow them to do. That’s simply not how a franchise is structured, but people like my friend want it to be and cast judgement accordingly.
In most instances, these international franchise partnerships work well. They allow brands to expand quickly and provide products, services and business opportunities at a global scale. However, in allowing others around the world to operate under their name and likeness with considerable autonomy, they'll occasionally have to contend with how international crises impact perceptions of the larger brand.
To that end, Burger King is doing what it can to exit the Russian market and support Ukraine. While working through the disposition process, they’re giving the profit they make from their Russian venture to the United Nations’ refugee agency (UNHCR). They’re also donating $2 million of free meal coupons to NGOs supporting Ukrainian refugees. Subway is also redirecting profits from Russia to humanitarian efforts and providing meals to Ukrainian refugees. Papa John’s is refusing to accept royalties from the Russian locations.
But those efforts aren’t stopping these brands’ critics from suggesting they’re greedy and amoral. Social media is filled with unfounded criticism and calls for boycotts, some from influential, heavily followed public figures. (I don’t want to give this bad information more internet power by sharing the examples, but they’re not hard to find.) Even established media outlets are running misleading headlines about these companies remaining in operation in Russia. Their articles might explain why for those who take time to read them, but for the masses who spend less time reading and more time scrolling, those headlines may be giving the wrong impression about what’s actually happening.
I was an independent franchisee for 10 years. We served our customers, created jobs and supported local charities. Our corporate office took a 5% royalty on our sales. If someone decided to boycott my store because of something happening at the corporate level, 95% of the punishment was inflicted on me. That wouldn’t enable me to influence our corporate partners to do things differently; it would just put me in desperation mode to find a way to make payroll and keep the doors open. We once suffered from a temporary boycott based entirely on misinformation. I actually supported the cause of the boycotters, but this time they got it wrong and ended up hurting one of their own.
If you support Burger King disengaging from Russia, boycotting your neighborhood location won’t help. If anything, supporting a local Burger King makes it financially easier for RBI to divest. It also does a solid for local owners who have nothing to do with the geopolitical environment, and who may be supporting the same causes you are.
Corporations aren’t the only ones who should demonstrate social responsibility. Anyone participating in the conversation is equally responsible for their words and actions, especially when spreading information. That means going deeper than reading tweets and headlines and educating oneself on the facts before casting judgement. In this case, that means understanding the difference between what a franchise should do and what they can do.