Latest / Franchise Conversations with Fexingo: Buying, Running, and Scaling Franchise Businesses / Why Franchisees Are Investing in Brand-Owned Supply Chains
Transcript
- Lucas: There's this moment in every franchisee discovery day where the franchisor hands you a list of approved suppliers. And the message is: you have to buy from these vendors. The prices are non-negotiable. And most people nod and move on. Luna: Because you're excited about the brand, the training, the turnkey model. The supply chain feels like a detail. Lucas: Right. But in 2026, that detail is becoming a flashpoint. We're seeing franchisees across multiple brands challenge the very structure of franchisor-controlled supply chains. And it's not just about price — it's about control, transparency, and whether the franchise model is genuinely a partnership. Luna: So what changed? Franchisees have been buying from the franchisor's suppliers for decades. Lucas: A few things. First, margins got squeezed — labor costs up, food costs up, rent up. Suddenly that 10 to 15 percent markup on supplies is the difference between a profitable location and a money pit. Second, franchisees got smarter. They started doing the math. Luna: Walk me through that math. Give me a concrete example. Lucas: Sure. Take a typical fast-food franchise. Let's say your annual cost of goods sold — ingredients, packaging, paper goods — is around $350,000. If the franchisor's approved supplier charges a 12 percent premium over market price, that's $42,000 a year. On a location doing $1.2 million in revenue with a 10 percent net margin, that premium eats up more than a third of your profit. Luna: Ouch. So franchisees start asking: why can't I buy my own chicken, my own buns, my own napkins? Lucas: Exactly. And the franchisor's answer is usually: quality control, brand consistency, food safety. Those are legitimate reasons. But franchisees have begun to suspect that the real reason is profit. For many franchisors, supply chain revenue is a significant income stream — sometimes larger than royalty fees. Luna: Let's talk about the poster child for this fight. Subway. Lucas: Subway is the most dramatic example. For years, franchisees had to buy from the Subway-approved distributor — and they paid above-market prices for bread, meat, even the paper boats their sandwiches come in. In 2021, a group of franchisees filed a lawsuit alleging that Subway's supply chain was a 'hidden royalty' that violated franchise laws. The case was settled in 2023, but the terms were confidential. Luna: Did anything actually change for Subway franchisees? Lucas: Partially. Subway did open up its approved-supplier list to include more vendors. But many franchisees say the new vendors still aren't competitive on price. And the real structural issue — that the franchisor controls the supply chain and profits from it — remains unresolved. Luna: And Subway isn't alone. I've been reading about similar fights at Dunkin' and Burger King. Lucas: Burger King franchisees formed a purchasing cooperative in 2023 called the National Franchisee Association. They negotiated directly with suppliers and cut their cost of goods by about 8 percent. The franchisor initially resisted — said it would hurt quality — but eventually allowed it. That co-op now covers over 4,000 locations. Luna: So the cooperative model seems to work. Why don't more franchisees do it? Lucas: It's hard. You need scale, legal expertise, and a unified group. And many franchise agreements explicitly forbid franchisees from forming buying groups or sourcing outside the approved list. Some franchisors include a clause that says any savings from alternative suppliers must be shared with the franchisor. Luna: Which defeats the purpose entirely. Lucas: Right. So the battle is shifting from the supply shed to the courtroom. We've seen a spike in franchisee lawsuits challenging these clauses, especially under state franchise laws in California, Minnesota, and Wisconsin. In 2025, a Wisconsin court ruled that a franchisor's supply chain markup could violate the state's franchise relationship act if it's deemed 'unreasonable.' Luna: That's a big deal. What qualifies as unreasonable? Lucas: The court didn't set a hard number, but the plaintiff's expert argued that any markup above 5 percent over wholesale was presumptively unreasonable when the franchisor isn't taking inventory risk. The case is still moving through appeals, but it's already changing how franchisors think about pricing. Luna: Interesting. Meanwhile, some franchisees are taking a different approach: they're building their own supply chains from scratch. Lucas: That's rare, but it's happening. There's a group of 7-Eleven franchisees in Texas that started a cooperative warehouse in 2024. They buy dry goods in bulk and distribute to each other. They claim they're saving 15 to 20 percent on items like cups, lids, and candy. But they had to do it quietly because their franchise agreement technically prohibits it. Luna: Which creates this underground economy within franchising. It feels unsustainable. Lucas: It is. And that's why some forward-thinking franchisors are voluntarily reforming their supply chains. Instead of fighting, they're offering franchisees a choice: buy from the brand's distribution arm at a set price, or source your own as long as you meet spec. Inspire Brands, which owns Dunkin' and Buffalo Wild Wings, piloted that model in 2025. Luna: How's it going so far? Lucas: Early data suggests about 30 percent of franchisees opted for self-sourcing. The ones who did saved an average of 6 percent on costs. The ones who stayed with the brand's supply chain cited convenience and fear of audits. But the brand also saved money — they reduced their own warehousing footprint. Luna: So it's a win-win when done right. But the default in the industry is still the old model. Lucas: Absolutely. And here's the angle I find most interesting: the food safety and insurance argument is getting stronger. After several high-profile outbreaks at franchise chains — Chipotle had its issues years ago, but more recently a listeria scare at a large sandwich chain — insurers are requiring more supply chain oversight. Some franchisees are voluntarily opting into the brand's supply chain because it helps them get liability coverage. Luna: So the franchisor can say: if you buy outside our system, your insurance premium goes up or you can't get coverage at all. Lucas: Exactly. And that's a legitimate constraint. It's not just a power play. So the debate isn't black and white. There are real trade-offs between cost savings and risk management. Luna: Which brings us back to the discovery day question. What should a prospective franchisee ask? Lucas: Three specific questions. One: 'What is the average markup on approved-supplier goods versus market price?' Two: 'Can I source my own supplies if I meet spec?' And three: 'Is the franchisor's supply chain a profit center, and if so, how much did it contribute to the franchisor's revenue last year?' Luna: Those are uncomfortable questions. Most franchisors won't answer them directly. Lucas: Then that's your answer. If they dodge, you know the supply chain is a hidden cost you'll have to absorb. And that might change your decision entirely. Luna: You know, it's conversations like this that remind me why we keep this show ad-free. We don't have to tiptoe around a sponsor who might be a franchise supplier. Lucas: That's exactly the point. If you value hearing the real numbers and the real tensions — without someone paying us to soften the message — there's a simple way to support that. It's buy me a coffee dot com slash fexingo. Just a small way to keep this independent. Luna: And it genuinely makes a difference. Every contribution helps us spend time on stories like this one. Lucas: So back to the supply chain question. There's one more trend I want to flag: legislation. In 2026, several states are considering bills that would require franchisors to disclose supply chain markups and allow franchisees to form purchasing cooperatives. Minnesota's bill is the furthest along. Luna: If that passes, it could be a model for other states. And it would fundamentally change the economics of franchising. Lucas: It could. And it would also accelerate the shift we're already seeing — where franchisees become more like independent business owners and less like captive customers. Luna: Which, honestly, was the original promise of franchising. You get the brand, but you run your own business. Lucas: Right. The supply chain fight is really about whether that promise holds. And it's far from settled.