When you’re looking for the best franchise opportunity, one of the differences you’ll notice among franchisors is the question of suppliers. Some franchises get great rates from vendors through group purchasing arrangements, some have rules about which companies franchisees can buy from, and some sell directly to franchisees.
You probably won’t be surprised to learn that a large corporation which provides a good percentage of a vendor’s income will get a better price on goods and services than a small company that makes small orders. A small catering business may have to buy some of their food and paper goods at retail prices from a grocery store, and a local tailor might buy supplies from an online fabric shop at the same price as a home sewer. The cost to handle a small order is the same for a business or for a private individual, so there is little motivation for a vendor to discount to a small business.
A larger business can benefit from economies of scale. Handling one order for a thousand units is much less expensive than handling 100 orders for ten units each. What’s more, the security of getting steady orders of 1000 units for a large company is valuable in and of itself. So you can expect that you’ll get a better deal through your franchisor’s network than you could negotiate for yourself.
Franchisors also want to make sure that customers throughout their market get a consistent experience: that’s part of protecting their brand. That means that its in their best interests to encourage franchisees to get their raw materials from the same sellers. This motivates them to provide appealing arrangements for group purchasing, or even to provide supplies directly.
There are also franchises that produce the goods sold by their franchisees. Jenny Craig is the only source of Jenny Craig foods, and the franchisees have no other options. The right to sell products manufactured by the franchisor can be part of what a franchisee is buying with their franchise fees.
All of this seems reasonable enough, but franchisees aren’t always happy with the situation. One large health supplement franchise had complaints from franchisees that their prices were too high, and some franchisees broke the rule against buying from third parties. With large numbers of franchisees joining in “as an act of rebellion,” the company saw some significant drops in revenue.
The franchisor in that case made some changes and marketed more to its franchisees, but there were eventually some court cases as well. As always, the contract was the most important document in the legal cases. If franchisees signed an agreement that clearly required them to buy directly from the franchisor, they can’t usually come back later and change the agreement.
The best plan is to make sure you understand the rules. Ask questions about vendors and alternatives before you sign, and make sure that you understand both the advantages and the disadvantages. Then use that understanding to choose the best franchising option for you.
