The role of the franchisor in the supply chain

Supply of product as a driver to franchise

Many franchisors start franchising to distribute a product they developed or that they are licensed to sell, however   it’s important that the business model is not solely dependent on that product.  Circumstances may change, the economy could deteriorate and technological developments could render the original product obsolete.  At Franchising Plus we always refer to the franchisee’s “basket” or the range of products and services that make up the franchise offering.

Testing the viability and sustainability of this basket is critical prior to franchising it.

The difference between the franchise and supply relationship

As a supplier, the franchisor is selling product to the franchisee as a customer who is buying product on certain terms.  Payment terms, delivery agreements and parameters of after sales service dictate the relationship.

In a franchise relationship, the franchisor should provide training and support to ensure that the franchisee is maintaining standards while maximising profit in his/her area.

Franchise fees versus mark-ups and the franchisor’s income

The potential conflict between a franchisor and franchisee when it comes to the supply relationship is often exacerbated by the franchisor charging a mark-up on product only or a mark-up and a low fixed management service fee/royalty.  The franchisees can often perceive this as income derived from charging exorbitant margins on product supply.  If this perception is true, it threatens the continued existence of the franchise as franchisees cannot compete when paying excessive prices for their product.  Naturally, they will look for alternative supply and the franchisor will lose income which may threaten the continued existence of the franchisor.

Franchisors should derive their income from ongoing management fees that are based on a percentage of the franchisee’s sales.  By charging a variable royalty, the franchisor is motivated to help franchisees to maximise their income.  Here, the advantage to the franchisor is that a franchisee pays a percentage of their sales regardless of where they purchased goods and what they purchased.

When charging a mark-up on product supply, it’s important that this mark-up is market related and competitive.  If the franchisor can no longer supply at market related rates, they should investigate their own supply and look for alternatives.  One example of this is when the supply chain becomes too long, for example the franchisor supplies product under license, the original licensor supplies at a margin, the franchisor has to pass on the margin to franchisees and the franchisees then price accordingly.

Having company owned outlets as a franchisor is a good way to supplement franchisor income.  Instead of a percentage of sales, the franchisor derives 100% of the profit in these stores.  This is provided that they are well managed and close to the head office for control purposes.  Another benefit of company owned stores is that they may be used as a testing ground for new products or methods and also as a base for training franchisees and staff.

The impact of the economy on supply to franchisees

Another aspect to consider when supplying franchisees is the impact of the economy.  Our depreciating currency is having a negative effect on the price of imported goods.  The prices of imported equipment and other products have risen considerably.  This results in higher set-up and ongoing operational costs for franchisees.  Franchisors should investigate local sourcing of products and equipment to counter this as it doesn’t seem that the Rand will recover much in the foreseeable future.

Relevance of the offering

While supplying at the right price is important, franchisors should also continue to supply the right product.  Changes in lifestyles, technology and the economy necessitate a frequent review of the product and service range to ensure that the franchise offering stays relevant.  An example of this is the changes in entertainment and related technology which is making the traditional video/DVD rental store obsolete.

Legal implications

Franchisors should be mindful of various possible legal implications in terms of the Consumer Protection Act when being a supplier and/or a franchisor.

Conclusion

Supplying franchisees is fine as long as the franchisor is actively focused on sourcing of the most relevant products at the best possible prices.  The principles of ethical, fair treatment of franchisees should always prevail as the success of a franchise group is dependent on a mutually beneficial relationship between franchisor and franchisee.