Franchise Purchasing Costs in Taiwan: Checking Mandatory Supply, Price Increase and Stock Shortage Clauses

When choosing a franchise in Taiwan, comparing franchise fees alone is not enough. Ingredients, packaging, equipment consumables and mandatory delivery charges can squeeze margins throughout the contract term. Before joining a franchise network, treat the franchisor’s supply arrangements as a long-term purchasing commitment. Do not just ask, “What does it cost today?” Ask, “Who can change the price later, who is responsible for shortages, and who bears the cost of slow-moving stock?”

1. Understand the distinction: mandatory purchasing is not necessarily unlawful

Taiwan does not have a single, comprehensive franchise law, but it does have administrative guidelines specifically addressing franchising practices. The Fair Trade Commission has issued its Guidelines on the Business Practices of Franchisors, and relevant conduct is also governed by the Fair Trade Act. Questions about performance of supply obligations, liability for breach and damages must be assessed under the Civil Code and the individual contract.

Under the guidelines, material franchise information includes operating-period charges and restrictions such as requirements to buy from the franchisor or designated parties, specified brands and specifications, and the items and minimum quantities required for each order. In principle, this information should be provided ten days before a franchise or preliminary franchise relationship is established, or within a reasonable period determined for the particular case or a period agreed by both parties.

Mandatory purchasing can help maintain quality and food safety. A price being higher than elsewhere does not, on its own, make the arrangement unlawful. However, a franchisor’s failure, without proper justification, to disclose material information in advance may breach Article 25 of the Fair Trade Act if it amounts to obviously unfair conduct capable of affecting trading order. Whether the restrictions themselves improperly restrict competition must still be assessed on the facts.

Franchise transactions are generally not consumer transactions, so do not assume that you can rely on the Consumer Protection Act to return goods or cancel a transaction. Understanding costs and restrictions is the starting point for negotiation and assessment; it does not mean the law guarantees reasonable purchasing prices.

2. Recalculate the cost per serving using actual delivery records

Ask the franchisor for a dated supply price list, product specifications, pack quantities, delivery charges and payment terms. Then ask them to demonstrate the quantities needed for key products, distinguishing the purchase price per case from the cost per saleable serving.

Build a purchasing checklist covering at least the following:

• Goods costs: Whether prices include tax, the quantity in each case, the number of saleable servings, and the conditions attached to free goods or discounts.
• Delivery costs: Whether ambient and cold-chain deliveries are charged separately, and whether surcharges apply to remote locations, urgent orders or small orders.
• Wastage costs: Shelf life, usable life after opening, preparation losses and restrictions on returns or exchanges.
• Associated expenses: Whether specified cup lids, cleaning products, filter cartridges or equipment parts must also be bought from designated suppliers.

As an initial estimate, calculate the purchasing cost per serving by adding the batch purchase price, delivery charges and necessary consumables, then dividing by the number of saleable servings after allowing for reasonable wastage. This is still not a net profit calculation: rent, staffing, utilities, royalties and other expenses must be accounted for separately.

Do not rely solely on the best-case usage figures from a demonstration outlet. With their consent, speak to existing franchisees to check routine ordering frequency, actual stock write-offs and delivery reliability. If they are willing to share anonymised delivery notes or monthly statements, these can help reveal costs that do not appear on the price list. This is your own due diligence, not an entitlement to obtain every franchisee’s accounts from the franchisor.

3. Include minimum orders and price adjustment rights in your cash flow tests

A low unit price does not necessarily mean a low financial burden. If you must buy large quantities each time, unsold stock ties up cash and may increase your refrigeration and storage requirements. Clarify each condition: does the minimum apply to an individual product, a full case or the order as a whole? Can different flavours be mixed in one case? Are purchases of new products and promotional materials compulsory?

Model three scenarios: normal sales, slower sales and rising purchase prices. Use your own estimates rather than adopting the brand’s claimed payback period. For each scenario, record payment dates, expected sell-through times and stock likely to reach its expiry date. Check whether you will need to pay for the next order before recovering the cost of the previous one through sales.

Read price adjustment clauses particularly carefully. Seek written terms specifying how advance notice will be given, when new prices take effect, whether confirmed orders retain the old price, and how the parties will negotiate substantial increases. If the franchisor can raise supply prices at any time while also restricting retail prices or requiring participation in discount campaigns, you may be unable to pass the extra costs on to customers.

When arranging finance, do not budget only for fit-out and equipment. Include opening stock, replenishment cycles and any supplier-required advance payments in your working capital needs. Compare loan repayment dates with cash flow under your conservative scenario, too, to avoid relying on short-term borrowing to support slow-moving stock over the long term.

4. Turn shortages, defects and alternative sourcing into workable contract terms

“The franchisor will help resolve the issue” is not enough to allocate supply risk. The contract or purchasing schedule should clearly identify the companies receiving payment and supplying the goods, and state who handles complaints. If the franchisor merely designates the supplier, confirm whether it accepts any responsibility for co-ordination or fulfilment.

Focus negotiations on four areas:

• Delivery: When an order becomes binding, normal lead times, deadlines for notifying shortages, and the conditions for cancelling undelivered orders.
• Acceptance checks: Procedures for reporting short deliveries, damage, temperature irregularities or insufficient remaining shelf life, along with responsibility for return delivery charges and refund deadlines.
• Substitutes: Whether compliant alternatives may be used temporarily when designated goods are unavailable, who approves them and how quickly they must respond.
• Exit: How unopened stock, dedicated packaging and advance payments will be settled when the contract ends. Do not assume that the franchisor must buy stock back.

These are contractual protections worth negotiating, not rights automatically granted by law. If a schedule allows the franchisor to amend the purchasing manual unilaterally, check whether that power could effectively override protections you have already negotiated.

If a dispute arises, retain versions of price lists, orders, payment records, photographs of delivered goods and correspondence. A lawyer familiar with Taiwanese franchise contracts can then assess your options. Reporting potentially unfair trading practices to the Fair Trade Commission and pursuing a civil claim for losses are separate procedures. Do not stop paying for goods or switch suppliers without first assessing the implications.

Practical takeaway: Before choosing a brand, prepare a total purchasing cost worksheet and a supply risk checklist. Getting prices, order quantities, price adjustment rules and responsibility for supply interruptions into writing makes it easier to judge whether the franchise relationship is affordable.