The Importance of Designated Purchases and Vendors to Create Franchise Uniformity

The Importance of Designated Purchases and Vendors to Create Franchise Uniformity

Uniformity of product and service offerings is essential to maintaining a uniform franchise system. By using unauthorized products and/or suppliers in providing the products and services at the franchised business, franchisees will start to break away from the uniform system standards set by the franchisor, which will then lead to the problems discussed below.

First, many franchisors spend years building up the goodwill associated with their system and trademarks only to have their franchisees ruin it by following by their own rules while operating under the franchisor’s brand.  If franchisees veer off the course set by franchisors by, for example, selling an unauthorized product at their franchised business, then it is more likely that the franchise brand’s image will be tarnished or at least disassociated with the system.  Also, by extension, consumers of franchised businesses tend to expect a certain experience and return to the franchise because of that experience.  If franchisees are not operating by the same system standards, then the consumers will not get that uniform experience to which they have grown accustomed. The more established the franchise, the more ingrained the customer’s expectations.  All franchisees need to be on the same page in their operations in order to maintain the brand that the franchisor and franchisees have built together over the years.

Another problem that arises when franchisees use unauthorized products and/or suppliers is that franchisees may be given the impression that the franchisor finds the franchisees’ actions acceptable and that the franchisor has waived its right to enforce its system standards.  Regardless of whether the franchise agreement provisions would allow for this waiver to occur, at some point, the franchisee may believe that its actions have been approved by the franchisor, which then may lead to the franchisee taking even more steps outside of the boundaries set by the franchisor.   If you give a franchisee an inch, they may take a mile, or more.

But loss of control within the system is not the only issue with unauthorized purchases.  Franchisors may also lose money when franchisees choose outside vendors. In systems where franchisors earn money through franchisees’ purchases, the franchisor may lose income base on rogue purchases. The amount of the loss depends on how much the franchisor was supposed to earn and how many franchisees insist on purchasing their goods elsewhere.  To avoid losing out on this revenue stream, the franchisor must ensure that all required purchases are being made from the required vendors.

Lastly, another problem caused by franchisees purchasing unauthorized products or products from unauthorized vendors is that the franchisor is deprived of its ability to assure quality and safety, and will be less able to track issues associated with the problematic franchisees’ purchases.  For example, if the franchisor has certain vendors for meat, then an issue with sick customers can easily be traced to such vendors, if not prevented in the first place.  But, if the franchisee has been purchasing its meat from an entirely different vendor, then health and sanitation cannot be as easily tracked, managed and resolved.  The knowledge of authorized vendors means that the franchisor and franchise system can quickly resolve an issue such as with sanitary conditions.  Indeed, an approved vendor has every incentive to abide by the franchisor’s quality standards, lest it lose its considerable revenues from the franchise system should it fail to comply with such standards.

Without a strong set of system standards that the franchisor ensures all franchisees follow, the franchisor is setting the system up for dissatisfied customers and, ultimately, failure.  In order to prevent and, if necessary, correct the above-described issues, the franchisor should incorporate the applicable franchise agreement terms requiring the franchisees to purchase the designated items and/or from the designated suppliers, spend time monitoring the franchisees’ purchases to ensure compliance, issuing defaults for franchisees that fail to comply, and using more drastic measures such as injunctions and termination in extreme cases of non-compliance.