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Franchise Myth Seven: Buying a Franchise Means that you will Lower the Cost of Doing Business through the Power of Group Purchasing

By Published On: June 10th, 2013

Part Eight of a Nine Part Series Exposing Franchising Myths.

The myth that owning a franchise guarantees to lower your cost of doing business due to the synergies of group purchasing that will benefit the entire franchise network is, quite sadly, the most recent addition to the Franchising Hall of Shame.  I didn’t even recognize franchisor abuses with respect to suppliers as a distinct and separate issue when my book, The Franchise Fraud, was first published in 1994Twenty years later, the failure of franchisors to deliver on the promise of group purchasing—indeed, the frequent abuse of the supplier process to actually increase and inflate a franchisee’s cost of doing business—has risen to become my personal ‘enemy number one’ among franchise abuses.

Twenty years ago the top two franchisee complaints were the lack of promised support and the lack of market protection. Today by far the most frequent complaints received at the AAFD deal in some fashion with a franchisor abusing its ability to dictate suppliers to the franchisee’s significant detriment.  Some examples (by no means a comprehensive list) include:

  • Most often, and most damning, the franchisor has leveraged its ability to dictate suppliers to charge excessive wholesale prices to its franchisees, sometimes forcing franchisees to pay more for some products that are available for less ‘at retail’ around the corner.
  • Franchisors that leverage their ability to deliver captive buyers forcing suppliers to pay exorbitant commissions and rebates, which, in turn, pressures suppliers to pass these fees onto their captive purchasers, the franchisees
  • Dictating a sole source of service or support, such as a uniform POS system, that eliminates the advantage of a competitive market
  • Requiring a distant supplier to service a need that is available at a lower cost locally
  • Requiring marketing dollars to be spent nationally without consideration to the effectiveness in the franchisee’s local market

Franchisor abuse of the ability to dictate suppliers has become so rampant in the past 20 years that many franchisee advocates seek to prohibit the right of franchisors to dictate and control the supply chain completely!

And therein lies the rub!  The ability of a franchise system to drive down the cost of doing business should truly be at the top of the list of the most advantageous and admired benefits gained from owning a franchised business.  It isn’t the right to dictate sources of supply that is harmful, but it is the abuse of the right that frequently turns franchising’s greatest advantage into its greatest fault!

Many franchisee groups seek to prohibit the right of franchisors to dictate suppliers, again for a variety of reasons.  But the most successful franchise systems deliver the promise of franchising by delivering a uniform customer experience, which often requires uniform suppliers, marketing, and even pricing! All of the truly great national (or global) brands capitalize on their ability to deliver value by virtue of their enormous buying power.  It should be the dream of every small business person to reap the advantage of the Wal-Mart, McDonald’s, Home Depot, Dell, Apple, KFC or Subway brands to drive down the cost of doing business in order to lower consumer prices and increase unit profits!

The challenge for franchisees, prospective franchisees, and the entire franchising community is to identify and build collaborative cultures in which the benefits that can flow from a large network are cultivated and shared extensively! Indeed, and perhaps surprising to many, some of the most powerful, successful and contented franchise brands operate purchasing and marketing cooperatives that are fully or partly owned by franchisees.  Such cooperatives consistently deliver the promise of group purchasing, fostering advantageous profit margins for franchisees and franchisor alike as a predictable and happy consequence.

For example, Subway, Dunkin’ Donuts, KFC, and Meineke, to name a few, have dramatically improved franchisee profitability through supplier and marketing co-ops.  Among the most glaring comparisons in franchising is between Subway and its largest competitor, Quiznos. While the franchisee controlled Subway co-op has fostered attractive profit margins for franchisees, Quiznos franchisees experience some of the highest franchise store failure rates,  which can be largely attributed to poor profit margins directly relating to a company dictated and controlled supplier network.

How paradoxical it is that franchising’s greatest strength becomes – if not carefully managed – its greatest weakness and a source of unrest and often network failure!

The AAFD focuses its efforts on defining, identifying, building and promoting great collaborative franchise cultures—cultures that work to foster and leverage the collective purchasing power of the brand for mutual advantage and profit.  Such franchise brands are more likely to deliver the full promise of franchising – turning tragic myth into a promised reality.

In the last part of this series, we turn our focus to the franchisee’s single most powerful tool to influence and encourage a collaborative franchise culture – the independent franchisee association.  We will address some myths about franchisee associations along the way, as we attempt to tie our list of common abuses in franchising together in a final revealing truth about how to insure that your individual experience in franchising can be all that you may have dreamed.


The content in this blog post is based in part on Chapter One of The Franchise Fraud, written by Robert Purvin. The Franchise Fraud is available for purchase in print and for the Kindle on Amazon.

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Written by : Robert L. Purvin

Robert Purvin is the Chairman and CEO of the American Association of Franchisees and Dealers, a national non-profit trade association that is dedicated to supporting and protecting the rights of franchise owners. The AAFD's mission is to define, identify and promote Total Quality Franchising practices, and the AAFD supports is mission by: Promoting strong and effective independent franchisee associations as affiliated chapters of the AAFD. The development of the AAFD's Fair Franchising Standards, the most comprehenisve body of negotiated principles of recommended franchise practices in existence. The advocacy of fair and balanced franchise agreements and relationships that respect the legitimate business interests of both franchisors and franchisees for the good of the franchise relationship. The education of franchisees and prospective franchisees by the development and publication of the AAFD Fair Franchising Standards and the promotion of the AAFD Franchisee Bill of Rights.