In a recent article appearing on Yahoo! (The Amazing Facts About Domino’s Dough), it was reported that more than half of Domino’s annual revenues are derived from the supply of ingredients and goods to its restaurants, the majority of which are franchised. This model varies from the model utilized by other large restaurant franchisors (McDonalds, Yum Brands and Burger King); a more common model in which the majority of the franchisor’s revenues are derived from royalties collected from franchisees.
However, Domino’s is not alone in profitably supplying goods to its franchisees. Many other franchisors, including Papa John’s, Krispy Kreme and franchisors represented by this firm provide their franchisees with goods. Franchisor control over the supply of goods may benefit franchisees. Franchisees may be provided with a superior quality of goods at lower prices and/or through a better and more efficient supply chain. On the other hand, franchisor control over supply can be detrimental to franchisees if the franchisor’s goods are of an inferior quality, are overpriced or are not delivered in a timely manner.
In 2007, a class action lawsuit was brought by Quiznos’ franchisees against the franchisor. The lawsuit claimed, among other things, that Quiznos forced franchisees to purchase goods and services from mandated suppliers (including affiliates) at excessive prices. Brunet et al. v. Quizno’s Franchise Co. LLC et al., No. 1:07-cv-01717-EWN-KLM, complaint filed (D. Colo. Aug. 14, 2007). The parties settled the lawsuit. The settlement agreement required Quiznos to pay approximately $95 million to Quiznos’ franchisees and required Quiznos to retain an independent third party to annually review the cost of food, paper and other supplies sold to Quiznos’ franchisees by suppliers mandated by Quiznos.
Anyone interested in buying a franchised business must be sure to do their due diligence in this regard. Ask your franchise attorney to examine Item 8 in the FDD and explain if there are required suppliers.
A franchisor that currently does not supply goods to its franchisees may want to consider doing so if providing goods to franchisees will improve the franchised system. As shown by Domino’s, it can also be a significant revenue generator.