COVID-19 has brought into focus the importance of business risks due to natural disasters and epidemics

Back in 2018, much before the pandemic began, a businessman I know told me one day that his company was taking up the franchise of Wrangler, the leading international apparel brand and he was setting up a showroom in my hometown. When people look for more choices & one brand doesn’t fit all, I asked him why had he chosen to invest in a single brand & not a multi brand store. He had no answer. What baffled me was when I asked him about his operational costs. Since it could take up to 3 years for a business venture to break even & become profitable I asked him how had he planned to meet his operational costs till he reached break even & if he had ensured he could raise enough money every month. All he could do was to roll his eyes at me. Clearly, he was expecting to make enough sales from the first month itself to meet the expenses. To top this, he had started a slew of footwear shops in shopping malls across the state. The pandemic was an unexpected event but the demonetization fiasco in 2016 had sunk the Indian economy & he had made all the investments in bleak market conditions.

Last week, he called me to tell me that Kontoor Brands India Private Limited, the owners of Wrangler and Lee brands is moving it’s business online and has sent a letter to all it’s franchisees to close their stores. What struck me immediately was, in the franchisee agreement he signed with Kontoor, the ownership of business risk in the case of a large scale disruption may not have been mentioned. Even in rare cases, when a clause for natural disasters such as earthquakes and floods are added, epidemics are never even thought about.

He has invested more than Rs. 1 crore ($135,256) till now and he hasn’t made any profits from the store yet. My home state was hit by devastating floods in consecutive years in 2018 and 2019 and before businesses could recover from them, the pandemic struck. Kontoor is unlikely to pay any compensation or make a very small compensation offer and would argue that loss of business from their own and franchise shops and growing number of customers online due to the pandemic is what has forced them to move their business completely online. His only recourse lies in proving in court that the business agreement he signed with Kontoor Brands is invalid as it is one sided and mentions only about conditions and risks for his company and nothing for Kontoor Brands which throws the validity of the agreement into question. The agreement was signed for a period of 5 years and the franchisees are deprived of the right to cancel the agreement for any reason but this restriction does not apply for Kontoor Brands. The agreement has been written under the assumption that in the 5 years, nothing can or will go wrong with Kontoor Brands. For example, what if, due to financial irregularities, Kontoor Brands goes bankrupt? Do the franchisees have to bear the risk of business issues Kontoor Brands face? Companies use the franchise model to extend the reach of their products into the market and thereby increase their sales and revenue, so if a franchisee store gets damaged by a natural disaster, will the company have or will take complete or partial ownership of the damages? None of these business risks have been mentioned in the agreement. If he had spoken to me before signing the agreement, he may not have signed it at all.

If this issue goes to court, only someone who is a lawyer and has worked as a legal advisor in the corporate sector can clearly argue for the franchisees. But the bigger quagmire is, if Kontoor Brands has to compensate every franchisee for the investments they made, it will go bankrupt. There has to be a middle path and franchisees are going to have to swallow half of their investment or even more as loss.

This is going to be a hard and bitter pill to swallow for all the businesses that ignored diseases and took nature for granted when signing business deals. Natural disasters and epidemics can strike us anytime and business fortunes fluctuate with each passing day. The COVID-19 pandemic has put these aspects into sharp focus. Business risks have to be clearly identified using the PESTEL (Political, Economic, Social, Technological, Environmental, Legal) model and listed out clearly in the business agreements along with the ownership of each business risk. This is going to be the only way forward for companies to do business together amicably.