Mandatory Sourcing and Stock Costs: What to Check Before Buying a Franchise in Japan

When joining a franchise network in Japan, it is important to check not just what you will sell, but where you must buy products and ingredients, and on what terms. Even with a well-known brand, running a stable business can be difficult if sourcing requirements and stock costs do not suit the size of your outlet. This article explains how to investigate purchasing terms before signing and what to clarify with the franchisor.

1. Clarify what mandatory sourcing covers and why it is required

Mandatory sourcing means purchasing products, ingredients, packaging and other supplies from the franchisor or its designated suppliers. It helps standardise quality and hygiene management and maintain trust in the brand. However, it may also limit your freedom to choose suppliers and order quantities.

Start by asking the franchisor to classify items into three categories: those that must be sourced as specified, those for which alternatives require prior approval, and those you may source freely. Check not only core products but also cleaning products, uniforms, promotional materials and takeaway bags. Look for requirements set out in operating manuals or ordering systems, rather than in the contract itself.

Ask the franchisor the following questions, referring to specific products:

• Is the sourcing requirement intended to ensure quality, hygiene or continuity of supply?
• Can you use a local supplier whose products meet equivalent quality standards?
• What are the assessment criteria, required documents and steps for obtaining a decision on an alternative product?
• If a designated supplier runs out of stock, whose approval is needed to source elsewhere?

A statement such as ‘purchases should, in principle, be made through the franchisor’ does not make the scope of any exceptions clear. If you want to sell local products, for example, check whether this is permitted while choosing a brand. Do not assume that permission will be granted if you raise the matter after signing.

2. Understand pre-contract disclosure and competition law

Japan does not have a single, comprehensive law governing all franchises. However, Article 11 of the Small and Medium-sized Retail Business Promotion Act is important for disclosure. Franchisors whose operations qualify as a ‘specified chain business’ under the Act must provide prospective franchisees with prescribed information in writing and explain it before a contract is concluded.

The scope includes certain retail and food-service franchises, but the business label alone does not determine whether the rules apply. This depends on whether the arrangement meets statutory requirements, such as primarily serving small and medium-sized retailers, providing ongoing sales or arrangements for the supply of goods and management guidance under standardised contracts, and stipulating the use of trade marks and payments on joining. The required disclosures include information on the terms under which goods are sold.

The Japan Fair Trade Commission’s guidelines on franchise systems under the Antimonopoly Act also explain how that Act applies to franchises generally, not just retail and food-service businesses. Distinguish between information the guidelines recommend disclosing before a contract is signed and conduct that may raise concerns in transactions between franchisors and franchisees. Not every disclosure recommended by the guidelines is subject to the written disclosure obligation under Article 11 of the Small and Medium-sized Retail Business Promotion Act.

Franchisees are independent businesses, not employees or branches of the franchisor. Mandatory sourcing is not automatically unlawful. However, restrictions on suppliers that go beyond what is necessary, or unfairly compelling purchases by exploiting a superior bargaining position, may raise issues under the Antimonopoly Act, depending on the circumstances. The Civil Code and other laws also affect contractual rights and obligations, so seek professional advice on any questionable clauses before signing.

3. Compare the total delivered cost, not just the unit price

Even if a product’s unit price looks low, delivery charges and minimum order quantities can change the actual cost. When comparing potential brands, obtain quotations for delivery to your proposed location, using the same sales volumes and ordering frequency. Standard projections intended for nationwide use may not fully reflect costs such as delivery to remote areas.

At a minimum, request the following documents from the franchisor:

Document	Points to check
Current product and ingredient price list	Whether prices include tax, when they apply, and any differences between outlets
Delivery and ordering terms	Delivery charges, chilled and frozen delivery fees, minimum order quantities, and delivery frequency
Payment terms	Billing cut-off dates, payment due dates, advance payments, and purchasing security deposits
Price-change rules	How changes are notified, when they take effect, and how existing orders are treated
Itemised initial delivery	Mandatory and optional stock, and whether quantities can be changed

Compare the total purchase cost, including delivery, storage and expected disposal costs. A bulk discount is not necessarily an advantage if unsold goods end up being discarded. Run the same calculation for periods of low sales as well as normal trading.

Record initial stock and purchasing security deposits separately as part of your start-up funding needs. If you plan to borrow, show the lender what the quotations cover and when payments are due. Check whether any amounts must be paid from your own funds before the loan is released.

4. Check who bears the cost of unsold stock and supply disruptions

You cannot assess your stock-related liabilities simply by asking whether returns are allowed. Different terms may apply to ordinary unsold stock, goods that are faulty on delivery, damage in transit, discontinued products and the end of franchisor-led promotions.

Who decides order quantities is particularly important when introducing seasonal or new products. Clarify whether quantities are recommendations from the franchisor or contractual requirements, and whether the outlet can adjust automated orders. Even where returns are permitted, deadlines, unopened-packaging requirements, handling fees and return delivery charges may leave you with costs to bear.

Ask the franchisor to explain how it would handle scenarios such as these:

• A new product sells less well than expected and is approaching its best-before date.
• A change to the franchisor’s specifications means products in the old packaging can no longer be used.
• Delivery delays leave the outlet without ingredients needed to operate.
• A product recall requires stock disposal and customer support.

For each scenario, confirm whom to contact, the deadlines for action, whether alternative sourcing is permitted, and who pays. A clause stating that matters will be ‘discussed on a case-by-case basis’ is not a promise of full reimbursement. Decide whether you need additional storage facilities or cash reserves, allowing for the possibility that some costs will not be covered.

5. Verify explanations against both the documents and day-to-day practice

Before signing, compare the disclosure document, draft contract, purchasing terms, manuals and price lists side by side. Record each document’s date and version, and establish which takes precedence if their contents conflict. If changes to a manual could expand your purchasing obligations, check the procedure for making those changes too.

Do not rely solely on a sales representative’s verbal explanations of important exceptions or measures to reduce your costs or obligations. Ask whether these can be incorporated into the contract or a separate written agreement. If that is not possible, at least retain a written response from someone with the appropriate authority. Bear in mind, however, that a written response does not necessarily amend the contract’s terms.

Where possible, also speak to existing franchisees with outlets of a similar size and in comparable locations. Respect their consent and confidentiality obligations while asking how delivery reliability, price-rise notifications, returns and adjustments to recommended order quantities work in practice. Do not treat one outlet’s experience as representative of the whole network; compare several accounts.

Practical takeaway: Before signing, prepare a one-page summary covering ‘mandatory sourcing requirements’, ‘total delivered costs’ and ‘responsibility for stock and shortages’. If important fields remain blank, do not rush your decision. First obtain the supporting documents and answers you need.