Franchise Purchasing Costs in China: Agree Approved Suppliers and Price Adjustment Terms Before Signing

When choosing a franchise brand, do not compare franchise fees alone. The same turnover can produce very different profits once mark-ups on materials, freight, minimum orders and wastage are taken into account. In China’s franchise market, centralised purchasing can help maintain consistent quality. Before signing, however, franchisees should establish who they must buy from, how prices can change and who is responsible if supply problems arise.

1. Define the scope of mandatory purchasing

Ask the franchisor for a purchasing schedule to be attached to the contract. For each item, it should specify the product name, specification, supplier and whether purchasing from that source is mandatory or merely recommended. Avoid accepting vague wording such as “all operating supplies must be purchased in accordance with head office requirements”.

Review the schedule in three categories:

• Core materials: For proprietary ingredients, for example, focus on quality standards, shelf life and the supplier’s ability to provide a reliable supply.
• General consumables: For items such as packaging bags and cleaning products, ask whether you may buy from local suppliers that meet the required standards.
• Equipment and systems: Confirm whether you must buy or lease specified equipment, and whether subsequent repairs, software renewals and replacement parts attract additional charges.

Franchising in China is specifically governed by the Regulations on the Administration of Commercial Franchising. These require franchise contracts to include quality and standard requirements for products or services, together with measures to ensure compliance. They also require franchisors to provide ongoing operational guidance, technical support and business training as agreed. This does not give head office unlimited scope to expand mandatory purchasing requirements; specific purchasing obligations still need to be clearly agreed.

The Measures for the Administration of Information Disclosure in Commercial Franchising also require disclosure of prices, terms and other information relating to the provision of products, services and equipment. This includes whether purchases must be made from the franchisor or its affiliated parties, as well as information about designated suppliers. For franchisees, the key is to turn these commercial terms into an enforceable purchasing schedule, rather than relying on verbal explanations from franchise sales staff.

2. Use delivered costs to calculate your true gross margin

A supplier’s quoted price is not the same as the outlet’s actual cost. Ask the franchisor for a complete quotation based on your proposed location. It should state whether tax is included, who pays for transport, whether cold-chain delivery or remote locations incur surcharges, and who pays the freight for returns and exchanges.

You can use the following calculation:

Material cost per saleable unit = total expenditure on the relevant materials, transport and other related costs ÷ actual saleable quantity.

The “actual saleable quantity” should allow for processing losses, expired stock and reasonable quantities used for samples or trials, rather than simply using the quantity purchased. When calculating gross profit on sales, also deduct packaging and other costs incurred with each sale. To assess whether the outlet can make a profit, you must then account for rent, staff, platform fees, taxes and other expenses.

Check these three easily overlooked items separately:

1. Minimum order quantities: Will full-case or minimum-delivery requirements force you to buy more stock than you can sell within its shelf life?
2. Rebate thresholds: Are rebates paid in cash, credited against purchases or supplied as free goods? If you miss the target, do you lose the entire rebate?
3. Advance payments for stock: Can unused balances be refunded? Are there restrictions on the account? Must funds remain tied up for long periods?

Run separate calculations for conservative, normal and peak-season sales. Do not count rebates as profit before you have met the conditions for receiving them. Even if gross margins look attractive, advance payments and excess stock can leave an outlet without enough cash to pay wages and rent.

3. Replace open-ended pricing powers with a clear adjustment mechanism

A clause stating that “head office may adjust prices at any time according to market conditions” makes costs difficult to predict. A more workable contract should explain when prices may change, how notice will be given, how much notice is required and which price applies to orders already confirmed or paid for.

During negotiations, seek to include the following arrangements:

• Written notice specifying the affected products, the reasons for the adjustment and its effective date;
• Confirmed orders to be fulfilled, in principle, at the price agreed when they were confirmed, with any exceptions clearly listed;
• Consultation under an agreed procedure before new mandatory purchasing categories are added or specifications are substantially changed;
• A process for both parties to review quotations and discuss alternatives when costs change significantly.

These are negotiable contractual arrangements, not statutory price adjustment caps or notice periods that apply across the board. If the franchisor promises “uniform nationwide supply prices”, also check whether freight charges, discounts and rebates are consistent across regions.

The Civil Code of the People’s Republic of China sets clear requirements for standard terms. The party supplying those terms must allocate rights and obligations fairly, and draw attention to and explain terms that materially affect the other party’s interests. Standard terms that unreasonably exempt the supplier of the terms from liability, increase the other party’s liability or restrict the other party’s principal rights may be invalid. This does not mean that every unilateral price adjustment clause is automatically invalid; its specific wording and how it is applied must still be considered.

4. Agree how supply interruptions, defects and stock will be handled

Purchasing obligations should not stop at “the franchisee must pay on time”. The contract should specify the supplier’s delivery deadlines, stock shortage notifications, delivery inspection procedures and process for handling quality complaints. For short-shelf-life products, it should also set a minimum remaining shelf life on delivery, so that head office cannot deliver nearly expired stock and leave the outlet to bear all the losses.

If the actual supplier is not the company signing the franchise contract, confirm who receives payment, who issues invoices and who is responsible for product quality. A franchisor’s designation of a supplier does not automatically make it liable for every breach by that supplier. If head office is expected to coordinate a response or accept particular responsibilities, put this directly into the contract.

Two types of remedy deserve particular attention. First, where shortages persist, temporary purchases from alternative sources could be permitted following written confirmation. Second, separate rules should cover returns, exchanges, credits and freight costs where products are defective, head office changes the packaging or a material is discontinued. For food and other goods subject to safety requirements, allocating responsibilities in the contract does not remove the outlet’s statutory responsibilities.

Agree in advance what happens to remaining stock when you leave the franchise: which goods in good condition are eligible for buy-back, how they will be priced, and what shelf-life and packaging conditions must be met. Do not assume that head office must buy back all stock when the franchise ends.

Practical takeaway: Before signing, agree at least a purchasing schedule, a complete delivered-cost quotation and a set of supply responsibility clauses. You can compare brands more reliably only when purchasing costs are clear, price changes follow agreed rules and there is a procedure for dealing with supply interruptions.