As Aldo has found, shutting down Russian operations is far from simple

Some of the world’s biggest brands have suspended operations in Russia to protest against the country’s invasion of Ukraine. But in an unexpected twist, those that work with franchisees do not have complete control over whether their stores in Russia actually shut down.

Montreal-based footwear retailer The Aldo Group Inc., for example, stopped shipping products to its Russian franchisee or providing any marketing or other financial support on March 2. But while the franchisee has ceased e-commerce operations, Aldo’s seven stores there remain open, and able to sell as long as they have stock.

“I’m furious about it,” said chief executive officer David Bensadoun. “The reality of a franchisee-distributor agreement is that you end up with an ability to cease operations as a franchisor, but it doesn’t mean at that same moment that you cease operations as a brand. And I find that very frustrating.”

Aldo is not the only company dealing with this issue. Several brands face the prospect of franchises going rogue.

Yum! Brands Inc. this week said it was close to an agreement with its Russian franchisee to close its 50 Pizza Hut locations in the country, but could only confirm that its corporate-owned KFC locations would close; that represents just 70 of its 1,000 restaurants there. McDonald’s Corp. announced that it would temporarily close in Russia, where, as of Dec. 31, 84 per cent of its locations were corporate-owned. But the company did not provide details on how it will enforce that decision with the 16 per cent that are franchised.

Toronto-based Restaurant Brands International Inc. pulled its corporate support for its more than 800 Burger King outlets in Russia, but some franchisees have kept locations open. In response to questions about the company’s ability to force them to close, RBI had no comment. The company approves suppliers and negotiates rates in each region for its international franchisees, and Burger King does have some local suppliers.

This raises a question: Could restaurants sling unauthorized burgers under familiar brands if they can secure their own ingredients? And what legal recourse would exist for Western companies to oppose such a move in a jurisdiction currently ostracized by much of the global community?

“There’s a limit to what we can do at the moment,” Mr. Bensadoun said, adding that agreements stipulate that franchisees can sell the company’s own products in Aldo-branded stores only. “… If the stores were corporate-owned and operated, they would have closed on March 2, and employees would be home earning a paycheque.”

Aldo, which has retail operations in 105 countries, moved more quickly than some of the bigger brands, including Amazon, Coca-Cola, Pepsi, Uniqlo and the fast-food giants, which all announced their suspension of Russian operations this week. Just days after the attacks on Ukraine began, Mr. Bensadoun called a meeting with his executive team.

“When you look at more than two million refugees being displaced, and you look at the hate and the propaganda and the violence, it’s just completely contrary to what we’re trying to do as a company. It was a very easy decision,” he said.

There is a further complication for Aldo: The retailer is in creditor protection as it restructures. That process means that until a settlement is reached with creditors, it cannot cancel any existing contracts that create cash flow for the company. It can stop shipments, refuse to take new orders, and end support for marketing or operations in Russia, all of which it has done.

“I do feel that there’s an opportunity here for us to send a message to Russian consumers. It might be a very small piece of the puzzle, but if it can help, then I think it’s worthwhile,” Mr. Bensadoun said. “… We need to be careful not to overstate the impact that we can have. This is a very small something, but it’s something that we can do.”

Mr. Bensadoun has told his management team he does not expect Aldo will have business in Russia in the future. Without a negotiated peace in Ukraine, he added, he has no interest in resuming operations.

“Leave aside whether we’re going to have an influence, or if we might have a small impact on citizens asking questions about their leader,” he said. “How could we do business in a country that’s committing these acts?”

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