McDonald’s Pulling Out of Russia: Takeaways for Global Franchisors

Recently, McDonald’s has received a lot of attention for its closure of restaurants in Russia due to Russia’s aggression against Ukraine. As part of the coverage, the media reported on some of the underlying infrastructure McDonald’s has invested in as part of its drive to expand into Russia. As reported in The Washington Post, as part of its expansion into Russia, McDonald’s:

  • Built a factory outside Moscow to process beef, produce sauces and test quality control.

  • Brought in agronomists to help Russian farmers grow non-native potatoes.

  • Brought in bakers from Canada, USA and Europe to develop baking systems for the line.

  • Brought in meat experts to help Russian herders raise their cattle.

  • Modified its menu to suit local palates.

Whether expanding internationally through franchising or master franchising, McDonald’s initiatives highlight some of the complexities brands face when expanding into overseas markets. If a US franchisor does not properly address supply chain issues in its franchise agreement or master franchise agreement, the franchisor may find itself in immediate litigation over the supply of needed products.

While most brands won’t have the resources that McDonald’s has to address supply chain issues, every franchisor must consider the challenges and barriers to offering their products and services in a foreign jurisdiction. before sell a franchise or master franchise. Once these challenges have been assessed, the franchisor must then determine whether its franchisees or master-franchisees will be responsible for sourcing products and resolving supply chain issues.

Additionally, as with McDonald’s, every U.S. franchisor considering overseas expansion must also review its products and services and determine:

  • Whether its products and services can adapt well to the overseas market, and if not,

  • What changes and modifications (if any) can be made to products and services to be more competitive in each respective foreign market.

When drafting international franchise or master franchise agreements, franchise companies have no problem focusing on key business terms such as upfront fees, royalties, development timelines, and more. It’s easy to overlook basic fundamentals, such as supply chain issues. However, if the liability of the respective parties is not clearly spelled out in the agreement with respect to supply chain issues, it is highly likely that a court or arbitrator will find the US franchisor liable for any shortcomings in the supply chain.

COPYRIGHT © 2022, STARK & STARKNational Law Review, Volume XII, Number 173

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