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Burger King Says Russia Operator 'Refused' To Shutter Restaurants; Wall Street Cuts McDonald's Profit Estimates On Russia Costs

Published on Mar 22 2022 3:30 PM in Restaurant tagged: Burger King / McDonald's / Restaurant Brands International / Restaurant Brands

Burger King Says Russia Operator 'Refused' To Shutter Restaurants; Wall Street Cuts McDonald's Profit Estimates On Russia Costs

Burger King's parent company has said that it has not been able to close its 800 restaurants in Russia because its independent operator there "refused" to do so.

Restaurant Brands International Inc QSR.TO said that to enforce its contracts with the partner, Alexander Kolobov, it would need the help of the Russian government, but "we know that will not practically happen anytime soon," according to a letter to employees from David Shear, president, international, of the company.

Kolobov said in a statement to Reuters that he does not have the authority or power to decide whether to suspend restaurant operations.

Shear's long letter and Kolobov's response highlight the many complications bedeviling some American fast-food brands as they try to halt operations in Russia following Moscow's invasion of Ukraine.

It also exposes what can become a point of weakness in international franchising, which is how most American restaurant brands expand overseas: the relationships with their independent operators.

On 8 March, Starbucks Corp SBUX.O and a wave of other companies followed McDonald's Corp MCD.N in saying that they would suspend or limit operations in Russia.

Like Burger King, Starbucks does not own or operate its more than 100 cafes there.

But unlike Burger King, it had a willing partner - Kuwait-based Alshaya Group - that immediately agreed to shut its Starbucks' locations in Russia and support its 2,000 employees.

Restaurant Brands entered Russia a decade ago through a joint venture partnership with three entities: Kolobov, who controls day-to-day operations, private equity and asset management firm Investment Capital Ukraine, and Russia's state-owned VTB Bank VTBR.MM, which has been hit by Western sanctions.

Restaurant Brands has started the process to dispose of its 15% ownership stake in the joint venture. It wants to do so immediately, Shear said, but it will take "some time" based on the terms of the agreement.

There are "no legal clauses that allow us to unilaterally change the contract or allow any one of the partners to simply walk away or overturn the entire agreement," 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?" he wrote. "No."

Kolobov said he has never had control of operations since the joint venture formed in 2012. He controls 30% of the partnership and said the decision to suspend operations "must be taken by all shareholders considering the impact it may have" on approximately 25,000 employees.

Wall Street Cuts McDonald's Profit Estimates On Russia Costs

The above news followed news that Wall Street analysts have slashed their forecasts for McDonald's Corp's MCD.N 2022 and 2023 profit, the latest sign that some western companies stand to take a financial hit as the costs of Russia's invasion of Ukraine grow.

Morgan Stanley said that it now expects net profit from the fast food company of $9.25 a share for this year and $10.62 for 2023, reductions of 8% and 3%, respectively, from its prior view.

Earlier, the research firm Gordon Haskett cut its estimate by 5% in 2022 to $9.75 a share and by 3% for 2023 to $10.66 a share.

McDonald's declined to comment on the moves.

The American burger chain - among the first to open in Moscow in the post-Soviet era - is paying for leases and wages for its 62,000 employees in Russia, despite starting to close 847 restaurants there, most of which it owns and operates. It is also paying wages for its Ukraine staff.

The cost is expected to be $50 million a month, or at least $450 million through the end of this year.

Stores in Russia and Ukraine - which are now shuttered - would normally generate operating profit of roughly $310 million annually, according to Gordon Haskett.

The Chicago-based company also faces potential hits to the value of its assets in Russia, whether through a mark down, sale to a local owner or government seizure, according to Morgan Stanley, which did not factor those into its lowered profit estimates.

The bank still finds McDonald's shares attractive because they can hold up in uncertain consumer environments.

McDonald's has more exposure to Russia than other global fast-food chains. It entered the country in 1990 and owns 84% of its restaurants there.

Other brands including Starbucks Corp SBUX.O and Burger King QSR.TO are less exposed in Russia. Their restaurants are largely owned by independent operators under joint ventures and master franchisee agreements.

After McDonald's, Yum Brands Inc YUM.N, parent to KFC and Pizza Hut, is most exposed. Russia and Ukraine account for about 3% of its consolidated operating income, Gordon Haskett analysts said. That is about $64 million based on 2021 figures, according to a Reuters analysis of Refinitiv data.

Morningstar analysts have not changed their forecasts for McDonald's or Yum. But on March 8, said they are concerned about higher fuel prices related to the war and the impact on consumer spending and restaurant margins.

McDonald's global operating income reached $10.4 billion in 2021, Refinitiv data showed.

While McDonald's has said the Russia closures are temporary, Gordon Haskett analysts said they believe the stores in Russia with the iconic golden arches will remain shuttered into 2023.

Restaurant Brands Says No Legal Clause To Shut Burger King Ops In Russia

All of the above news follows news that Restaurant Brands International Inc QSR.TO said on Thursday 17 March that there were no legal clauses that allowed the company to unilaterally shut its Burger King fast-food chain's operations in Russia.

The main operator of Burger King in Russia has refused to suspend the restaurant's operations, David Shear, international president of the company, said in a letter to employees.

News by Reuters, edited by Hospitality Ireland. Click subscribe to sign up for the Hospitality Ireland print edition.

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