Advantages and disadvantages exist for entering into exclusivity agreements with vendors. For the most part, it depends on your franchise concept and where you see such agreements working in your franchise system for you and your franchisees.
What is an Exclusivity Agreement?
An exclusivity agreement is an arrangement that one party will purchase goods only from a vendor selling those products for an agreed upon amount of time. In this case, the franchisor would not purchase or seek to purchase those same goods from a different vendor during that time period.
How Exclusivity Agreements Can Work
As you conduct your business planning, you will have to decide where a vendor exclusivity agreement works best in your franchise system. For example, because consistency is paramount in franchising, an exclusivity agreement for something like a point-of-sale system makes sense. You will want each franchise unit to use the same POS system so that consumers will have the same experience no matter which location they visit. Training franchisees on the POS system will also be uniform across the franchise system. Therefore, you can rely on an exclusivity agreement with the POS system vendor because it typically isn’t something that defines a franchise concept. The product you sell is, though.
However, vendor exclusivity agreements may not work for other parts of your franchise concept. Take restaurants, for example, where you will need multiple vendors to supply your franchise system with food and ingredients to make their products every day. If you sell fruit smoothies, let’s say, you will need more than one supplier for each fruit in case your primary vendor can’t deliver due to a variety of reasons: poor crop in the part of the country where that vendor gets their fruit, disease, the farm fails, etc. Similar potential situations exist for other smoothie ingredients, such as dairy.
A situation like this can halt business if you are locked into an exclusivity agreement with that one vendor. Most restaurant franchises use a primary vendor, but also utilize other vendors who can be a secondary source of products.
Once you determine what parts of your franchise are well-suited for an exclusivity agreement, you should weigh the advantages and disadvantages of signing onto the arrangement.
- It’s a Profitable Opportunity – The relationship between vendor and franchisor is an opportunity for both companies to increase revenue and brand awareness. First, exclusivity agreements allow the franchisor to negotiate a discount since they are limiting their ability to buy from other vendors selling the same product. In retail, if the vendor’s product is being sold to consumers, and it is a prestigious brand, the units in the franchise system benefit by being identified as sellers of the vendor’s product. In retail, the franchise can set the price points to avoid being undersold by competitors in the area. For the vendor, the agreement ensures a stream of income for the time set forth in the agreement. The vendor can also boast about being the supplier if the retail brand is prominent.
- You Have More Time for Franchise Development – Since you don’t have numerous vendor relationships to manage – which can be quite time-consuming – you have more time to award franchises, improve operations or delve into other areas of the business. You can also develop a strong business relationship with your vendor, which may benefit you down the road.
- Chance of Lost Opportunities – If you discover a better opportunity with another vendor after you enter the agreement, your hands are tied. You will not be able to take advantage of it.
- The Possibility the Vendor Can’t Deliver – If your vendor can’t live up to its obligations stated in the exclusivity agreement, it can thwart your franchise’s growth. You will have to scramble to find a new vendor to take its place.
- You Become Out of Touch – By dealing with just one vendor, you risk missing out on what’s going on in your industry – especially if your vendor isn’t aware of trends or developments to begin with.
Legal Trouble to Watch Out For
Exclusivity agreements also heighten competition, which is healthy and legal. However, if your exclusivity agreement with a vendor cuts off supplies to competitors in the marketplace or prevents consumers from receiving those products, you violate anti-trust laws and become a monopolist.
In addition to determining how best vendor exclusivity agreements will work for your franchise, you must also weigh the effect they will have on the marketplace and consumers.
With 30 years of franchising experience and more than 800 franchise owners representing over 1,200 locations for five brands, Winmark Franchise Partners can help emerging and established franchisors determine how vendor exclusivity agreements will affect their franchise systems. Contact us here or at (844) 452-4600.