Mandatory Sourcing in Hong Kong Franchises: Clarify Prices, Shortages and Alternative Purchasing Rights Before Signing

When investing in a Hong Kong franchise, look beyond the franchise fee and ask who you will have to buy supplies from. If ingredients, packaging and cleaning products must come from designated suppliers, their prices and ability to deliver will directly affect day-to-day operations. Consistent brand quality and franchisee protection need not be at odds. The key is to agree both the purchasing restrictions and the corresponding responsibilities before signing.

1. Distinguish between specified standards and designated suppliers

The Intellectual Property Department’s practical guide for intellectual property managers states that a typical franchise agreement should include product or service quality requirements, standards and safeguards. However, requiring products to meet brand standards does not necessarily mean that every item must be bought from head office.

Ask the franchisor for a complete purchasing list, divided into three categories: items that must be bought from head office, items that must be bought from approved suppliers, and items that may be sourced independently provided they meet the required specifications. For each category, check whether the restrictions also cover alternative models, seasonal supplies and locally sourced items.

Above all, establish who the actual seller is. If the franchise agreement is signed by the franchisor but another company sells the goods, the franchisor may not be the party responsible for supplying them. Obtain the supply agreement, ordering terms and supplier details. Check which entity issues invoices, receives payment, delivers goods and handles after-sales matters. Do not assume it is safe to pay simply because the companies belong to the same group.

2. Assess costs using the full ordering terms

Looking only at a quotation can lead you to underestimate the cost of mandatory sourcing. Before signing, request the current price list, past price adjustments, minimum order quantities, delivery charges, payment terms and the minimum remaining shelf life of goods on arrival. Historical information can inform your assessment, but it is not a guarantee of future prices.

Build a spreadsheet for a normal ordering cycle, including:

• The minimum order quantity for each item, and whether different items can be combined to meet it.
• Transport, cold-chain, storage and any applicable import handling costs.
• Working capital tied up between advance payment and receipt of the goods.
• Expected losses from short shelf lives, damage and slow-moving stock.

Then ask the franchisor to explain how prices are adjusted: who decides, how much notice is given and whether confirmed orders retain their original prices. If suppliers can raise prices at any time but franchisees cannot cancel orders awaiting dispatch or source elsewhere, the outlet bears the bulk of the cost risk. You could negotiate a consultation process for significant price changes, but do not treat assurances that “head office will look after franchisees” as enforceable price protection.

3. Set out clear procedures for shortages and non-conforming goods

A supplier’s assurance that goods are “usually in stock” is not enough to support your business. Ask when an order is considered accepted, how delivery lead times are calculated, and how you will be notified of partial deliveries, delays or discontinued products.

Alternative sourcing rights need a workable procedure, not simply a statement that “head office approval is required”. For example, you could agree that if a designated item cannot be supplied within the agreed time, the franchisee may propose an alternative that meets the specifications. Head office must respond within an agreed period, specifying any testing requirements and giving reasons for rejection. Keep written records of any temporary purchasing arrangements, and do not assume that silence from head office means consent.

Inspection terms must also reflect practical realities. Short deliveries or damage to outer packaging can be recorded on receipt, but hidden quality defects may not be immediately apparent. Set out separate requirements for notification, photographic or batch evidence, returns and replacements, and deadlines for refunds or replacement deliveries. Where safety is involved, establish who is responsible for issuing notifications, isolating affected goods and co-ordinating recalls.

Finally, link supply obligations to operating requirements. If a shortage of a designated ingredient forces you to stop selling a menu item temporarily, will that count as a breach of menu or quality requirements? Any exemptions and remedies must be expressly agreed. Do not assume a shortage automatically excuses non-compliance.

4. Understand Hong Kong’s legal baseline, then negotiate contractual protection

Hong Kong currently has no franchise-specific legislation, general franchise registration scheme, statutory requirement for a franchise disclosure document or mandatory franchise code of conduct. Do not assume that a franchisor is legally required to volunteer all supply prices and purchasing restrictions. Request this information before paying, and incorporate key commitments into the formal documents.

Mandatory sourcing arrangements are primarily governed by general contract law and relevant legislation. Where applicable, the Sale of Goods Ordinance (Cap. 26) implies terms concerning matters such as correspondence with description, quality and fitness for purpose. The validity of any exclusion or limitation of liability must also be assessed under applicable rules, including the Control of Exemption Clauses Ordinance (Cap. 71), rather than simply by reading what the supplier has printed on an order form.

The Competition Ordinance (Cap. 619) may also apply. Mandatory sourcing is not automatically unlawful, but nor is it necessarily lawful simply because it appears in a franchise agreement. Its purpose, effects and market context must be considered. If you have concerns about a restriction, seek a review by a lawyer familiar with Hong Kong commercial and competition law rather than unilaterally refusing to comply.

Your next practical step is to review the purchasing list, full quotation, supply terms and alternative sourcing procedure together before signing. If you are obliged to buy but have no corresponding commitments on delivery, quality or remedies for shortages, negotiate those protections before deciding whether to join the franchise.