Many franchisors receive rebates from franchise suppliers, which can provide a range of benefits for franchisees, yet this is an area where conflict sometimes can arise.
While it may be argued that franchisors are responsible for establishing supply chains on behalf of their franchisee from the royalties paid by franchisees, many franchisors also receive rebates from franchise suppliers.
What is a franchise rebate?
A rebate is a payment to the franchisor based on the purchases made by its franchisees from suppliers.
Potential for franchise conflict around rebates
Rebates can be a source of conflict in franchise relationships if the franchisee feels the franchisor is ‘double-dipping’, by charging both a royalty and also profiting from rebates.
Franchisors often feel the rebate income is an appropriate acknowledgement for the time and resources expended in making an efficient and effective supply chain available to franchisees, which delivers goods or services at a lower cost than the franchisees themselves could achieve.
Franchise regulatory requirements around franchise rebates
The Franchising Code of Conduct has identified rebates as a source of potential conflict in franchise relationships and was amended in March 2008 to require franchisors to disclose a list of suppliers who pay rebates to the franchisor based on franchisee purchases.
Where a franchisee benefits from an effective and efficient supply chain that delivers goods at a lower price than they could source themselves, a small rebate is unlikely to spark conflict.
However, when supply chains and rebates appear to inflate the cost of goods to franchisees such that they could find better deals themselves elsewhere, it inevitably follows that franchisees will attempt to switch supply chains and conflict with the franchisor will often follow.
Potential benefits of franchise rebates for franchisees
In some systems, rebates are not paid into the franchisor’s general revenue which contributes to their profit, but are instead allocated to specific activities to benefit all franchisees, such as the central marketing fund, research and development, or the conference fund.
You can find out more about managing supply chains in the Franchise Business Management Essentials eClasses – designed to equip franchisees with the business skills to enhance their success.