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: Franchisees still operating in Russia have generated backlash. Here’s why restaurant chains still favor this business model.

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Papa John’s International Inc. announced a deal on Thursday with Sun Holdings, one of the pizza chain’s largest franchising partners, in which Sun Holdings will take control of 90 locations in Texas.

It was only a couple of weeks ago that Papa John’s
PZZA,
-0.23%

was making headlines with a franchisee continuing to operate nearly 200 locations in Russia despite that country’s brutal attack on Ukraine and the company’s own decision to suspend operations in Russia.

Even with the possibility of controversy and any other issues that may arise, franchising is a popular business model for restaurant chains. Other restaurant companies with franchise operations include Taco Bell parent Yum Brands Inc.
YUM,
-0.05%
,
Wendy’s Co.
WEN,
-3.09%

and IHOP parent Dine Brands Inc.
DIN,
-3.10%
.
McDonald’s Corp.
MCD,
+0.68%

owns more than 800 restaurants in Russia, according to the New York Times, but franchises other locations there and elsewhere.

Franchising has proven itself to be a risk worth taking through the COVID-19 pandemic, according to experts.

“As the pandemic hit, franchises adjusted accordingly, pivoting to delivery, managing costs, and attracting and maintaining labor — a demonstration of their resilience and dynamism,” wrote Rabobank analyst Tom Bailey in a note published Friday.

“The franchisors focused on ensuring consistency across their brands, investing in technology to support efficiency, and providing financial support as needed (such as deferred rent and royalty payments). Meanwhile, franchisees focused on keeping the doors open, adjusting health and safety protocols as needed, and being as efficient as possible.”

See: Burger King franchisor reduces number of nuggets in meals to 8 from 10 in effort to combat inflation

Also: Yale professor monitoring companies still doing business in Russia ups the ante by highlighting those that are now ‘digging in’

These efficiencies include operating with fewer workers, adding or beefing up delivery service, and more.

“Compared to the April 2020 outlook, many franchise restaurants did very well,” the report said.

Rabobank prices the typical cost to start a franchise at $2 million to $4 million, plus the ongoing costs to keep the franchise going. This steep price tag makes it increasingly an endeavor for deep-pocketed investors, like private equity.

But there’s a growing amount of money being generated for the investment. Franchising as a portion of U.S. food-service sales has been up 4% per year since 2015.

Franchising actually offers a certain amount of security, according to Mark Kalinowski, a veteran fast-food analyst and chief executive of Kalinowski Equity Research. Franchisors collect royalties without the operational concerns of running each individual location, for example. Kalinowski calls it “a much easier business, much higher-margin business” that Wall Street has generally been in favor of over the years.

True, franchisees running their restaurants in a way that generates bad press and worse commentary on social media isn’t a good thing. But Kalinowski says the Russia-Ukraine conflict is not the norm.

“It’s like a Wild West situation when you have a country go off the rails in terms of acting like a nice neighbor,” he said. “It’s not as easy as closing the doors. Other people have the keys.”

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Both Kalinowski and Rabobank said that international franchising is big now and will be into the future. Twice the number of units were developed in the rest of the world versus North America between 2016 and 2021, according to data provided by Rabobank.

David Bloom, the chief development officer for the Capriotti’s Sandwich Shop and Wing Zone chains, said the importance of having the “right partner” overseas is exponentially higher because of all the responsibility that the franchisee is assuming, from real estate to supply chain. He has overseen operations across 33 countries.

There may be a lot at stake, but the Papa John’s situation in Russia is an aberration, he said. More often than not, franchisors and franchisees work as partners where the success of one is highly dependent on the success of the other.

“Groups that go overseas but don’t find the right partners often fail,” Bloom said. “They end up having to put their own resources into the fact that they have the wrong partner.”

Companies have put strategies in place to avoid this fate.

“Often, franchisors will establish a limited number of restaurants in an overseas market, manage them directly, and then gradually hand off subsequent development deals to proven, trusted, local franchisees who know the market,” Rabobank said.

Despite headwinds, including ongoing supply-chain and pandemic concerns, franchising is poised to grow, according to Rabobank. In the U.S., technological advancements and the smart use of limited-time offers will help franchisors reap rewards though the results may not be as strong as they have been over the last five years.

“While American franchises work to maintain the American dream at home, the overseas market is calling,” Rabobank wrote. “There’s significant growth potential from Europe to Asia.”

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