Buying A Franchise? Don’t Under-Estimate the Importance of Suppliers.

Supplier Performance Affects Everything
When buying a franchise, you expect to gain access to a proven business model with desirable unit economics, an effective brand, and robust resources to help you build/operate your own business. Suppliers of the products/services necessary to serve customers have a greater impact on franchise success than ever before. From construction to opening to technology to raw materials to marketing and beyond, the performance of franchisor’s suppliers can substantially affect profitability (unit economics), rate of growth and innovation. Simply put, informed franchise buyers need to consider the current and recent past performance of any potential franchise system’s suppliers in their go/no-go decision.

Why is franchisee success affected by the performance of a franchisor’s suppliers?

  • How suppliers perform (quality, service, price, consistency) affects unit economics. Sub-par performance creates stress (think staff turnover), and negatively affects customer experience (harms reputation, lowers leads/referrals).
  • What suppliers provide (i.e. systems, services, raw materials, etc.), can be mission-critical, part of the visible image and/or experience you provide to customers. Examples include: POS (point of sale system), all food, any item showing the logo.
  • The strongest, most successful franchise systems have high levels of consistency (uniformity). Imagine coming into contact with any franchise business (food, service, health, retail, etc.) and finding that the offerings of one franchisee are not available from the next franchisee you encounter. When this happens, customers are disappointed, franchisees lose revenue, franchise systems become weakened. Suppliers play a big role ensuring uniformity by deliver the same products/services system-wide, so franchisees don’t face the perils described above.

What You’ll Learn From Examining Suppliers: Ideally, current franchisees perceive franchisor specified suppliers as valued “team members” vs. vendors. At a minimum you need to validate that suppliers are performing effectively, recognizing that perfect performance is rare (minor hiccups are normal). If you learn that franchisor specified supplier(s) are performing sub-par, share this intel with the franchisor so they can satisfactorily address the matter, or you can avoid making a decision you’ll regret.

“Culture Matters”: In all organizations, we hear/read about the importance of a vibrant, healthy culture. It’s true within franchise systems and the relationships they have with suppliers. Just like franchisors, franchisees and their employees, successful suppliers frequently demonstrate that their core values align with those of the franchise system. When they do, working relationships are stronger, communications is effective, problems are resolved promptly. At the highest level of cultural alignment, suppliers are seen as integral team members, sources of valuable intel, innovation and competitive advantage.

Franchisor Specified Suppliers – Defined: There are thousands of franchise concepts, however for the sake of simplicity, I’ll group them into two buckets: “food and “non-food” franchises. For clarity, a supplier is any vendor that a franchisor requires or recommends franchisees use to purchase items needed to build and operate a franchise. Required products/services may include: furniture, fixtures, equipment, operating supplies, retail products, technology, uniforms, signage, digital marketing and so-on. Required products/services are documented by the franchisor – there’s no guess-work.

  • Food outlets: Suppliers are the franchise system’s life-line. Without diminishing the significance of people, process and technology, we must acknowledge that without quality food to serve/sell, the business grinds to a halt. The largest brands/systems/chains (i.e. Dunkin, Subway) require all locations buy supplies through a designated “purchasing” organization. Structure and ownership of these purchasing organizations can vary, but their purpose is the same — to ensure product consistency, competitive pricing, prevent supply chain problems from disrupting local franchise operations, and relieve franchisees of the obligation to manage the supply-chain. In franchise systems with mandated purchasing organizations, franchisees focus all efforts on supporting their teams, serving customers, perfecting processes, leveraging systems to maximize unit economics.
  • Non-food outlets: Franchisees typically are not mandated to purchase all items through a mandated purchasing organization. The initial buy-out of FF&E (furniture, fixtures, equipment), technology (POS systems), branded resale items and signage are typically specified to be purchased through franchisor designated suppliers. For other items, franchisors may designate “preferred” suppliers vs mandated suppliers. Generally speaking, it’s advisable that franchisees use “preferred” suppliers, until and unless insurmountable problems arise. Using non-approved suppliers, if allowed, means the franchisee will need to spend valuable time sourcing product that meets franchisor requirements, and manage the supplier’s performance.

When Problems Arise: Franchisees who have problems with franchisor specified suppliers rarely hesitate to alert the franchisor to their experience. Franchisor’s have a vested interest in resolving any concerns, and usually do. Many franchise systems have franchise advisory councils (comprised of franchisees), where supplier performance can also be addressed.

Supplier performance is crucial to your success. You’re making a substantial investment with long-term implications, when buying a franchise. It’s crucial that you take the time to understand how their required/recommended suppliers perform. Here’s are few tips to help you do so:

– Identify all required products, services, and their associated specs (see the FDD – franchise disclosure document – ask franchisor for more details if not sufficient). Categorize items in two groups: “One-time Purchases” and “On-going Purchases”, then rank-order the items by highest to lowest cost. This will help you prioritize your inquiries – within each group, focus on where the bulk of the purchases will be taking place.

– Ask existing franchisees about supplier performance (quality, service, price), how supplier responds when problems arise.

– Visit multiple existing franchise locations/operations and observe the ease, consistency, effectiveness by which required supplier’s systems, products and services are utilized.

– Ask the franchisor:

  • how they manage, control the supply chain (i.e. via in-house staff or 3rd parties)
  • how they help franchisees resolve any major/persistent supplier problems
  • what they do to monitor suppliers, ensure consistently high levels of performance
  • what’s their criteria for supplier success & how frequently is performance assessed
  • what training is provided to help franchisees realize max value from suppliers
  • what contingency plans are in-place to ensure uninterrupted flow of product/service should unexpected supplier problems arise (i.e. fire, flood, other natural disaster).
  • how are suppliers engaged in helping identify innovation, competitive advantage that will strengthen the franchise system and it’s longer term prospects for success.

How to Use Your Findings: They should figure prominently into your final decision. Hopefully, you’ll have gained confidence in the supply chain and the franchisor’s methods of managing performance. If not, alert the franchisor to your unresolved concerns. If you’re not comfortable with their responses, seek assistance from a trusted advisor (accountant, lawyer, franchise consultant) to help you resolve your concerns or validate them and move-on.

Part of the value you should expect when buying a franchise system is “access” to a well-managed supply chain, offering the right products, services at competitive prices, available consistently at your location. Having confidence in franchisor designated suppliers, and the franchisor’s ability to effectively manage performance (help resolve problems) is vital.

Do your homework, ask questions, make an informed decision that takes the performance of the franchisor’s supply chain into account.

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