Franchising in Hong Kong: Setting Clear Rules for Required Purchasing and Supply Disruptions

Smooth purchasing at existing outlets does not mean the supply arrangements are ready to support multiple franchised outlets. As order volumes grow, minimum order quantities, delivery constraints and shortage risks may change. Building trust across a franchise network takes more than requiring franchisees to “buy only from specified suppliers”. Before recruiting franchisees, the franchisor should document the reasons for purchasing restrictions, each party’s responsibilities and the options available if supplies are disrupted.

1. Decide which supplies require a specified source

Start by reviewing the purchasing lists for existing outlets and classifying items by their importance to brand quality and their supply risk. Do not simply make every existing supplier compulsory.

• Core supplies: Items such as proprietary formulations or bespoke packaging may justify a specified source, but the link to consistent quality should be explained.
• Supplies defined by specification: For items such as cleaning products or general consumables, set performance, safety and compatibility requirements, allowing franchisees to choose from approved suppliers.
• General supplies: Consider allowing franchisees to buy office supplies that do not affect brand standards independently, to avoid unnecessary costs.

Every purchasing restriction should have a clear rationale. If alternatives of an equivalent specification meet the requirements, the franchisor should assess whether restricting the source is necessary, rather than relying solely on “ease of management” as a justification.

Hong Kong has no franchise-specific legislation, nor a dedicated mandatory franchise disclosure, filing or statutory code of conduct regime. Franchise relationships are governed mainly by common law contract principles and applicable legislation, including the Misrepresentation Ordinance. Required purchasing arrangements may also engage the Competition Ordinance: exclusive supply or tying arrangements are not automatically unlawful, but must be assessed against their purpose, effects and market context. Including an arrangement in a franchise agreement does not, in itself, make it compliant. Where goods are sold, the Sale of Goods Ordinance and relevant product safety requirements must also be considered.

2. Document supply roles and actual costs

The franchisor should first answer a basic question: who is the franchisee buying from? Reselling goods directly, placing centralised orders on behalf of franchisees and merely introducing approved suppliers are different arrangements.

If the franchisor resells goods, the supply terms should allocate responsibility for payment, delivery, inspection and acceptance, and claims. If franchisees trade directly with suppliers, the documents should explain what coordination support the franchisor provides and which supply commitments it does not undertake. The paperwork must reflect actual practice. A franchisor should not promise reliable supplies to franchisees, then disclaim all responsibility on the grounds that an issue is “the supplier’s problem”.

The franchise agreement and supply schedule should cover:

• Ordering channels, cut-off times, minimum order quantities and standard delivery arrangements;
• Whether prices include delivery, and any additional charges for urgent or small orders;
• How price changes will be notified, when they take effect and how confirmed orders will be treated;
• When ownership and risk pass to the buyer, and the procedure for reporting short deliveries, damage or goods that do not meet specifications.

If the franchisor receives supplier commissions, rebates or other benefits arising from franchisee purchases, it is good practice to explain before signing what those benefits are, who receives them and whether they will be used to reduce supply costs. This is a practical way to reduce conflicts of interest, not a disclosure obligation under any Hong Kong franchise-specific legislation. Any recruitment claim that “centralised purchasing is always cheaper” should also be supported by evidence. An opportunity to negotiate better prices is not a price guarantee.

3. Test the full ordering cycle at existing outlets

Before offering franchises, use existing outlets to simulate independent ordering by franchisees. Have store managers submit orders through the formal channels, suppliers deliver under the proposed terms, and outlets inspect deliveries and resolve discrepancies. Do not let founders conceal weaknesses in the process by privately chasing deliveries or advancing funds at short notice.

Record order confirmation times, deviations from agreed delivery arrangements, out-of-stock items, actual delivery costs and the time needed to process returns or exchanges. Also check whether minimum order quantities leave smaller outlets with excess stock, and whether storage requirements, shelf life and the amount of working capital tied up are reasonable.

For example, an existing outlet may have a large warehouse, while planned franchised outlets have limited storage. Using the same order quantities may not be workable. The franchisor should discuss split deliveries or different pack sizes with suppliers before finalising its franchise offer, rather than leaving franchisees to solve the problem after opening.

Use the trial results to revise the supply schedule and ordering guidance. If a supplier has not committed to a particular delivery capability, the franchisor should not present it as confirmed franchise support.

4. Plan alternative purchasing procedures for shortages

Without an exception mechanism, a single supply disruption could force franchisees to stop selling affected products or buy supplies independently in breach of brand rules. The franchisor should define in advance when alternative arrangements can be activated—for example, when a supplier confirms it cannot deliver, or when stocks of a core item are insufficient for normal trading.

The procedure should specify who issues the shortage notice, the deadline for the franchisor’s response and what information franchisees must submit about proposed alternatives. This may include specifications, samples, sources and relevant safety documentation. For food or other regulated products, urgency does not remove statutory requirements.

Approval for alternative purchasing should specify the outlets, items, quantities or period covered, with records retained of sources and batches. Silence from the franchisor should not be treated as automatic approval. A safer approach is to identify backup suppliers and emergency contacts in advance.

Finally, the agreement should address price differences for substitutes, express delivery charges, advance payments and undelivered orders. Avoid blanket provisions making franchisees bear every cost, but do not promise that the franchisor will compensate every loss caused by a shortage either. Allocate responsibility according to each party’s supply role, the cause of the disruption and what each party can control, and have the arrangements reviewed by a Hong Kong lawyer.

Practical takeaway: Choose the core item most vulnerable to supply disruption and test the full sequence: ordering, shortage notification, approval of alternatives, delivery and acceptance. Extend the arrangements to the full franchise purchasing list only once it is clear who decides, who pays and when action must be taken.