Burger King parent company to pull out of Russia after franchisee refused request to close restaurants

Burger King parent company to pull out of Russia after franchisee refused request to close restaurants

A Burger King restaurant in Moscow on Sept. 15, 2015.MAXIM ZMEYEV/Reuters

Burger King’s parent company is planning to sell its 15-per-cent stake in its Russian business, after its local partner has refused a request to close the restaurants after Russia’s invasion of Ukraine.

Toronto-based Restaurant Brands International Inc. released an open letter on Thursday detailing its plans for the Russian market, where Burger King has done business for 10 years. Recently, many of the world’s biggest brands have suspended operations in Russia, including McDonald’s Corp., Starbucks Corp., Coca-Cola Co., PepsiCo Inc. and packaged-goods giant Unilever PLC.

But those with franchise-operated businesses have discovered that shutting their doors there is not necessarily straightforward. In an interview with The Globe and Mail last week, David Bensadoun, chief executive officer of Montreal-based footwear retailer Aldo Group Inc., said he was “furious” that the company’s franchisee in Russia was keeping its stores open.

RBI has said in recent weeks that it was pulling corporate support for its Russian operations and redirecting any profits from that business to the United Nations’ refugee agency. But on Thursday, the company said that it had not been successful in closing the restaurants. Even if RBI successfully sells its stake, under its current contract Burger King could continue to operate in Russia for the foreseeable future.

“We contacted the main operator of the business and demanded the suspension of Burger King restaurant operations in Russia. He has refused to do so,” the president of RBI’s international business, David Shear, wrote in the open letter.

RBI operates more than 800 Burger Kings in Russia through three joint-venture partnerships – a common business structure for the company’s operations overseas – in which RBI has a 15-per-cent stake. All three of those partnerships are controlled by Alexander Kolobov, who handles the operations; Ukrainian investment firm Investment Capital Ukraine; and VTB Capital, an affiliate of Russia’s second-largest bank, VTB.

According to RBI, VTB also partners with other Western companies in Russia, including other fast-food chains. VTB is among the firms on which Canada and other countries have imposed sanctions. In the letter, Mr. Shear wrote that RBI is in compliance with all sanctions.

“We started the process to dispose our ownership stake in the business. While we would like to do this immediately, it is clear that it will take some time to do so based on the terms of our existing joint venture agreement,” Mr. Shear wrote.

He added that the company has faced questions about why it is unable to force Burger King restaurants to close. Mr. Shear wrote that the contracts for master franchise agreements and joint ventures that RBI has signed in Russia do not include legal clauses allowing a partner to change or overturn the agreement.

“No serious investor in any industry in the world would agree to a long-term business relationship with flimsy termination clauses. This is exactly why we say it’s a complicated legal process when we are asked why we can’t just unilaterally shut down the business,” Mr. Shear wrote. “Any current attempt to enforce our contract would ultimately require the support of Russian authorities on the ground and we know that will not practically happen anytime soon.”

He added that this also explains why other Western brands may continue to operate in Russia. Last week, Yum! Brands Inc. said it would close its 70 corporate-owned KFC locations in Russia, but did not specify whether more than 900 other franchised locations would also close; the company said it was working toward an agreement with its Russian franchisee to close its 50 Pizza Hut locations in the country. This week, the franchise operator in Russia for pizza chain Papa John’s told The New York Times he would not close the 190 restaurants his company controls there.

RBI faces a similar issue, Mr. Shear wrote.

“Would we like to suspend all Burger King operations immediately in Russia? Yes. Are we able to enforce a suspension of operations today? No,” he wrote. “But we want to be transparent with our actions and explain the steps we have taken to stand with the international business community in response to Russia’s attack on Ukraine and its people.”

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