Suppliers for franchising in Mexico: agreeing supply arrangements

When you franchise a business in Mexico, sourcing the same supplies for every outlet stops being a routine task and becomes a promise you must be able to keep. Before adding new outlets to your franchise network, you need to define who supplies them, on what terms and what happens when a delivery fails. This guide explains how to turn your existing purchasing arrangements into an agreed supply system that can be checked and monitored.

1. Separate essential supplies from flexible purchases

Not everything you buy needs to come from the same supplier. Start by classifying supplies according to their impact on the customer experience, safety and your business identity.

• Essential for consistency: signature ingredients, exclusive components or packaging where variations would affect the product. These may require a specific supplier or strict specifications.
• Suitable for approved alternatives: items that different suppliers can produce to an equivalent standard, provided they meet defined tests and criteria.
• Suitable for local purchasing: general supplies whose origin does not alter the brand offering, subject to basic quality requirements.

For each item, record its characteristics, format, storage requirements, shelf life where relevant and rejection criteria. Avoid descriptions such as ‘superior quality’: use verifiable properties and justified tolerances.

Next, check whether your current supplier can serve more outlets. Ask about geographical coverage, capacity, minimum orders, production lead times and availability during periods of high demand. An excellent trading relationship with your own outlet does not, in itself, demonstrate the capacity to supply a franchise network.

2. Put supply rules into the contract

Mexico has specific franchise legislation. Article 245 of the Federal Law for the Protection of Industrial Property (Ley Federal de Protección a la Propiedad Industrial) links franchising to a written licence to use a trade mark and the transfer of technical knowledge or provision of technical assistance to ensure consistent operations.

Article 246 requires the agreement to be in writing. Section III covers inventory policies and provisions relating to the supply of goods and arrangements with suppliers, where applicable. Purchasing obligations should therefore not be left solely in emails or informal instructions.

The agreement and its schedules should set out the following, subject to legal review:

• Which purchases are mandatory and which allow alternatives.
• Whether the franchisor sells directly, acts as an intermediary or simply approves suppliers.
• Who places orders, issues invoices, transports goods and takes responsibility for shortages or defects.
• How changes to prices, product ranges or delivery terms are communicated.
• The procedure for approving substitutions and resolving supply shortages.

Distinguish operational updates from changes to contractual obligations. A supplier list should not be used to impose financial burdens unilaterally that are incompatible with the agreed terms.

The Federal Economic Competition Law (Ley Federal de Competencia Económica) also applies. Purchasing restrictions or exclusive arrangements are not automatically unlawful, but may require assessment depending on their nature and effects. Justify each restriction by genuine quality or operational needs, and seek specialist advice where it significantly limits the franchisee’s alternatives.

3. Calculate the true cost of supplying each outlet

The list price does not reflect the full cost. Before offering your franchise, put together a representative basket of supplies and calculate the cost of receiving it at the locations you plan to serve.

Include transport, storage, wastage, insurance where appropriate and capital tied up by minimum orders. Show applicable taxes separately so that comparisons are consistent. A volume discount may lose its benefit if it means storing goods that expire before they can be sold.

Also document who receives any rebates or discounts negotiated for the network. If the franchisor earns income from reselling supplies or from supplier commissions, explain the arrangement transparently and check that it is consistent with the pre-contractual information and the agreement.

Do not promise fixed prices if they depend on third parties. Define how price changes will be communicated and managed, without confusing supply prices with resale prices charged to consumers. The latter also need to be reviewed from a competition law perspective.

4. Prepare alternatives before the first disruption

The supply plan must also work when the usual supplier fails to deliver. Identify the items whose absence would prevent an outlet from operating, and establish alternatives that have been assessed in advance.

To approve a replacement supplier, use an assessment record covering reviewed samples, test results, health and hygiene documentation where applicable, and authorisation from the designated person responsible. Set a response deadline for requests and retain evidence of the decision.

For example, if packaging is in short supply, the alternative must meet the applicable functional and health requirements; looking similar is not enough. Record how long it may be used and how to return to the usual supply arrangement.

Finally, agree on straightforward performance measures: complete deliveries, punctuality, rejected goods and resolution times. Review your own co-ordination obligations too, rather than focusing only on the franchisee’s compliance.

Practical takeaway: before franchising, have a supplies matrix, contractual purchasing terms and a substitution procedure ready. If an outlet cannot work out what to order, how much it will cost and what to do in the event of a shortage, the supply system still needs work.