In Short
- Exclusive Dealing: Franchisors often require franchisees to purchase from nominated suppliers to maintain consistency, control quality, and protect the brand.
- Flexibility Exists: Many franchise agreements allow franchisees to use alternative suppliers with the franchisor’s approval.
- Regulatory Oversight: The ACCC ensures compliance with franchising laws and can issue penalties for breaches.
Tips for Businesses
Review exclusive dealing clauses carefully to ensure they align with your business goals. Understand your rights to request supplier flexibility and consult a legal expert if terms seem restrictive. Staying compliant with the ACCC and understanding its role can help you avoid penalties and protect your business operations.
Welcome to part two of Franchisee Obligations and Exclusive Dealing. We have already discussed the types of exclusive dealing arrangements that franchisors try to impose on their franchisees and their legal limitations. An important takeaway from Part One is that these kinds of arrangements should never reduce competition and should be mutually beneficial to both franchisor and franchisee.
When bringing on board new franchisees, it is important to negotiate agreements that strike a balance. This factsheet explains how.
Volume Margins
It is common practice for franchisors to require their franchisees to buy their products and services from a nominated supplier. This may seem restrictive or even unfair. However, the truth is that both parties can benefit from having the franchisees purchase from the same supplier. This arrangement is typical in most successful franchise systems.
As with most businesses, the ability to buy goods and services at reduced rates depends largely on the volume you can buy. The volume of products, however, depends on demand and what is required to operate the franchise business. Buying from the same supplier is much cheaper in an extensive franchise system with hundreds of franchisees. These higher volume margins will give the franchisees a competitive edge.
Quality Control
Franchised outlets within a franchise are characteristically alike, meaning they share the same products and marketing for the most part. Having franchisees purchase from a nominated supplier ensures that the quality of the products is identical throughout the franchise network.
Continue reading this article below the formBrand Protection
Much time and effort will have been invested into the franchise to develop a recognisable and reputable brand throughout its network of franchisees. The franchisor will understandably want to maintain the good reputation it has built over time. One effective way to ensure this happens is to provide franchisees buy from the same supplier.
By controlling the supply chain, franchisors can better manage potential risks to the brand. They can ensure that all products meet necessary safety standards, comply with relevant regulations, and align with the franchise’s ethical and sustainability commitments. This level of control also allows franchisors to respond quickly to any quality issues or product recalls, protecting the brand’s reputation and customers’ well-being.
Flexibility for Exclusive Dealing
While exclusive dealing clauses are standard in franchise agreements, it is essential to note that they are not common across franchise systems. While many franchise agreements include such provisions, there is significant variation in how these clauses are structured and implemented.
Many franchise agreements incorporate flexibility within their exclusive dealing arrangements. For example, franchisees may be permitted to use their suppliers or sell their products and services, provided they obtain the franchisor’s consent. This approach balances maintaining brand consistency and allowing franchisees some autonomy in their business operations.
The consent process typically involves the franchisee submitting a formal written request detailing the proposed alternative supplier or product to the franchisor. The franchisor then evaluates this request based on factors such as:
- quality standards;
- pricing; and
- potential impact on the brand.
If approved, the franchisee can diversify its supply chain or product offerings while operating within the franchise framework.
This flexibility can be particularly beneficial in cases where local market conditions or customer preferences differ from the franchise norm, allowing franchisees to serve their specific customer base better. However, it is crucial for franchisees to carefully review the terms of these consent provisions, as they may include certain conditions or limitations.
The Australian Competition and Consumer Commission
The Australian Competition and Consumer Commission (ACCC) is the national regulator of the franchising industry in Australia. Its primary role is to ensure that both franchisors and franchisees comply with the Franchising Code of Conduct (the Code) and the Australian Consumer Law (ACL). When breaches of the Code or ACL occur, the ACCC has the authority to take enforcement action to ensure compliance or penalise non-compliance.
The ACCC’s powers extend beyond reactive measures. It has the authority to conduct proactive audits of franchisors to verify compliance with the Code.
Recent amendments to the Code have significantly strengthened the ACCC’s enforcement capabilities. The commission now has the power to issue substantial infringement notices to companies without needing a court order. For more serious breaches, the ACCC can pursue civil penalties through the courts, with maximum penalties set at a level designed to serve as a strong deterrent against non-compliance.
Key Takeaways
Many franchisors require their franchisees to purchase their products from the same supplier. This is for various reasons, including volume margins, quality control and brand protection. In some cases, however, the franchisor will impose unfair conditions that reduce competition. These practices are known as exclusive dealing, including third-line and full-line forces.
As part of our LegalVision membership, our experienced franchise lawyers can advise you about your franchise. You will have unlimited access to lawyers who can answer your questions and draft and review your documents. Call us today at 1300 544 755 or visit our membership page.
Frequently Asked Questions
Exclusive dealing refers to arrangements where franchisors require franchisees to purchase products or services exclusively from specified suppliers. While these arrangements are common in franchise agreements, they must not reduce competition and should be mutually beneficial.
Yes, exclusive dealing clauses are common in franchise agreements, but the terms and implementation can vary. Some agreements allow franchisees flexibility, such as seeking consent to use alternative suppliers, provided certain conditions are met.
We appreciate your feedback – your submission has been successfully received.
