Franchise Procurement in China: Agree Supply Requirements, Price Changes and Liability Before Signing

When joining a franchise network, centralised purchasing can help outlets maintain consistent quality, but it can also leave franchisees dependent on a single supply channel over the long term. Do not just ask about the franchise fee. Before signing, establish who you will pay for each order, how prices may change and who will be responsible if supplies fail. This guide focuses on procurement arrangements in franchise contracts in mainland China.

1. Establish what you must buy and from whom

Ask the franchisor for a mandatory purchasing list that distinguishes between goods you must buy from head office, goods you must buy from designated suppliers and goods you may source independently. Ingredients, packaging and cleaning supplies should be listed separately, rather than bundled under a broad phrase such as “all operating supplies”.

Check each supplier’s registered company name, relevant licences and qualifications, and relationship with the franchisor. Confirm which legal entity takes orders, receives payment, issues invoices and handles after-sales responsibilities. If you pay head office, receive an invoice from a different company and have to approach a third company for returns, holding the right party accountable can become more difficult.

Mainland China has specific Regulations on the Administration of Commercial Franchising. These require relevant information to be disclosed in writing, and the contract text to be provided, at least 30 days before signing. The disclosure must include the prices and terms for products, services and equipment supplied to franchisees. The Measures for the Administration of Information Disclosure in Commercial Franchising set out further requirements concerning designated suppliers, purchasing terms and related matters. Do not settle for a franchise recruitment price sheet: obtain purchasing terms that clearly identify the relevant supplying entity.

2. Calculate the full cost of getting supplies to your outlet

When comparing brands, select items you expect to use in significant quantities and request their specifications, pricing units, tax treatment and a complete breakdown of charges. Beyond the purchase price, factor in freight, cold-chain transport, loading and unloading, packaging and normal wastage. Products with different specifications cannot be compared directly. Ideally, convert prices into the actual consumables cost per finished product or service delivered.

Pay particular attention to minimum order values, full-case ordering requirements and free-delivery thresholds. A low unit price that requires you to hold large quantities of stock may increase spoilage losses and tie up cash. Ask existing franchisees about their usual order volumes, delivery cycles and the remaining shelf life of goods on arrival. Avoid basing your estimates solely on the ideal sales figures presented by head office.

The price adjustment mechanism should also be put in writing: who gives notice, how much notice is required, whether confirmed orders retain their original prices and whether substitute products can be negotiated following exceptional price rises. A clause stating that “head office reserves the right to adjust prices” does not make supply costs predictable. You can seek to agree the basis for price changes and a consultation process following major adjustments, but these are contractual terms to negotiate, not a uniform statutory price cap.

3. Set out clear procedures for delivery, inspection and supply disruption

The procurement schedule to the contract should cover at least the following:

• Delivery times: When an order becomes binding, delivery lead times during normal and peak periods, and how stock shortages will be notified.
• Inspection criteria: How quantities, specifications, packaging, temperature control and minimum remaining shelf life will be checked.
• Complaints and remedies: Who should receive reports of damage, missing goods or quality issues, and when replacement stock, refunds or exchanges will be provided.
• Supply disruption: When backup supply arrangements are triggered, approval deadlines, standards for substitutes and responsibility for reasonable additional costs.

Signing for a delivery should not automatically be treated as confirmation that there are no quality defects. The contract should distinguish checks of appearance and quantity from quality problems that are difficult to detect during a normal inspection. When receiving goods, retain orders, batch details, transport records and photographs where necessary.

Centralised purchasing is not inherently unlawful, nor do franchisees automatically have an unrestricted right to buy elsewhere. If you negotiate an emergency alternative sourcing mechanism, also specify quality standards, approval procedures and the conditions under which use of alternative supplies must stop. A shortage does not justify ignoring applicable requirements, including food safety rules.

4. Define the separate responsibilities of head office and suppliers

If head office signs the franchise agreement but a designated supplier signs the purchasing contract, do not assume head office will automatically be liable for every breach by that supplier. You can ask head office to commit to supply coordination, alternative supply channels and clear response times. If you want it to provide compensation or accept other liability, secure an explicit contractual commitment.

Also check for conflicts between the two contracts. For example, the supplier’s contract might permit delayed delivery while head office’s agreement penalises outlets for running out of stock. Agree how the cause of a shortage arising from designated supply channels will be established, how outlet performance assessments will be handled and how losses will be mitigated.

Performance of purchasing contracts is also governed by general legislation, including the Civil Code of the People’s Republic of China. If supplies are disrupted, promptly issue a written demand for performance and retain evidence of orders, payments, communications and losses. Do not stop paying all franchise fees without first assessing your position. Whether you can terminate the contract or claim compensation depends on the seriousness of the breach, the contractual terms and the actual losses incurred.

Practical takeaway: before signing, check the purchasing list, complete price list and supply responsibilities schedule together. You can only properly assess this long-term cost when there are clear answers to four questions: what must you buy, how much will it cost, when will it arrive and who will deal with problems?