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From often criticised to critical success factor

A common concern by franchisees – and a source of criticism, challenges and opinion within franchise business structures and systems – concerns requirements for franchisees to purchase from either the franchisor or through nominated suppliers.

The criticism usually comes from one or more perceptions by a franchisee; that they can purchase the products cheaper, or that the franchisor is making rebates or margins on products.

Franchisors want harmonious relationships with franchisees, so why do many franchise systems pursue such policies, aware that they can create tension and often suspicion?

It turns out that it can often be a significant competitive advantage for the franchisees themselves and critical to the success of both franchisor and franchisee.

There are four general rules of thumb that would be the guide if compulsory purchasing actually has a role to play in the success of a franchisee or franchise system.

The Franchise has an unique or proprietary product

Many franchise systems have unique products, inputs or processes. They could be covered by patents or have been developed over a long period of time and have an associated development of intellectual property. In these cases there is often no possible substitute.

Consistency of supply

Consistency of product or service is a cornerstone of franchising. Where changes to products or inputs would be noted by a consumer or have an overall impact on the product or service compulsory supply chain arrangements make complete sense.

The classic example, of course, would be your Big Mac and what goes into that, consumers would know if it was not the real deal. But for many systems the ingoing products or components could be less visible to the consumer, but equally critical. Some examples are branded car parts for a vehicle retailer or servicer, or the brand and supply of hair dyes for a franchised hair salon.

Provenance of the products

Knowing where a product or input has come from can be extremely important. Increasingly consumers want traceability of supply chain for either ethical or environmental reasons.

There are also a number of other reasons why this is critical, which could include food or product safety, and even the ability for a brand to market or create a point of difference from being locally sourced, ethically sourced and or supporting a particular community.

The bulk buying power of the group

The most often espoused and not to be under-estimated virtue of compulsory purchasing is in the generation of bulk buying power.

Lower prices create margin for franchisees and a competitive advantage. In some industries or sectors this alone can be the difference between success or failure.

My thoughts are stick with the system

So with the above in mind, is the margin or rebate argument warranted? In my opinion, whilst it cannot be ignored that gauging may sometimes exist, by and large it does not. This is assuming pricing is correctly incorporated and represented in the franchise system and its commercial modelling – it is in “the model” which the franchisee buys into.

Additionally, franchisors do need to be commercially viable and make a profit to stay in business and support the system, and if they have developed a product or process they deserve to be able to commercialise it.

Finally, I would suggest that there are more productive ways for a franchisees to be spending their time and effort than bucking an established supply chain, which is taken care of on their behalf.

Perhaps this year in a high inflationary environment with massive disruptions to supply chains, more franchisees will appreciate the significant competitive advantage that is created for them.

Related: The less appreciated approach to making money in franchising

Nathan Bonney
Nathan Bonney
Director of Iridium Partners. He can be reached at nathan@iridium.net.nz or 0275-393-022

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