The Role of Buying Groups and Purchasing Cooperatives in Franchising - dummies

The Role of Buying Groups and Purchasing Cooperatives in Franchising

By Michael H. Seid, Joyce Mazero

Several franchise systems use buying groups or cooperatives to collectively purchase products, marketing, advertising, insurance, leasing, credit, and other goods or services. This sharing of responsibility can be a powerful advantage to franchisees and franchisors when structured properly.

The approach to buying groups and cooperatives is by no means uniform in how they function and who they represent. Many are started by franchisees, and the franchisor is not part of the buying group. Other cooperatives include both company-owned and franchisee-owned locations. Still others represent members from several franchise systems.

Many franchisors actively support cooperatives formed by their franchisees because it helps support and strengthen the growth of the overall brand. A buying group or cooperative is normally a separate legal entity with members made up of the franchisees who have committed to make all their purchases of certain items through the buying group or cooperative. The buying entity will negotiate the supplier arrangements and facilitate its members’ purchases on generally uniform terms.

Generally, cooperatives are set up to take advantage of certain tax benefits and are controlled by the members on a one-member, one-vote basis with officers, directors, policies, and procedures established for the cooperative’s operation. A cooperative may have employees or outsource certain functions.

Cooperative members may also have the opportunity to participate in patronage dividends, which, similar to stock dividends, are financial distributions of the cooperative — only patronage dividends are generally based on the amount you purchase from the cooperative (the more you buy, the more you get back), whereas stock dividends are based on the number of shares you own.

Of course, cooperative must meet the standards and specifications of the franchisor and the cooperative will only be able to sell approved products and services through approved suppliers. There are cooperatives in nearly every industry, especially within the fast food and restaurant markets, including popular brands like Burger King, Subway, Taco Bell, IHOP, Applebee’s, Arby’s, Ace Hardware, and Dunkin’ Donuts. Some also provides information technology (IT) infrastructure services for the chain.

In 2009, IHOP and Applebee’s created a franchisee purchasing cooperative for the benefit of both brands. In the 2014 annual report of DineEquity, the parent company of IHOP and Applebee’s, CEO Julia Stewart stated that the franchisee-owned and -operated cooperative “has enabled our franchisees to realize approximately $215 million in total net savings and cost avoidance since its inception in 2009.”

Receiving merchandise for your franchise

If you own any business, you have to figure out how to manage your receipt of merchandise. You must properly check, log in, and store all the goods, supplies, ingredients, and other merchandise entering the store. Even if you negotiate lower prices for your merchandise, you won’t save any money if you don’t notice unacceptable quality or shortages in shipments.

To avoid these losses, you or the store manager must establish a regular receiving routine for your store. Having a routine helps to monitor vendors and reduces the chance of shortage. If your franchisor provides you with a list of recommendations and procedures for maintaining your inventory, follow it.

Having suppliers make their delivery through your front door during your busiest hours is going to be disruptive. Make certain you select suppliers that work with you on their hours of delivery, frequency of delivery, and how they deliver to your business.

Many reputable companies offer what’s called key drop delivery. The vendor has a key and makes a delivery during off hours, such as at night or early in the morning. Often the business will have a refrigeration unit accessible from the outside back of the location where deliveries are made. When the delivery is made, and in situations where refrigerated or frozen product are delivered, they are placed in the middle of the cooler or freezer with the dry goods placed in middle of the stockroom floor.

In the morning, the merchandise is checked in, and if there is a disagreement a call is made and, where appropriate, a credit is issued. This type of delivery is frequently offered at a lower cost for delivery because it allows the driver to travel when there is limited traffic, allowing the driver to make his deliveries faster. In some cities there may be restrictions on the size of truck that can be making deliveries in the retail and business districts during the normal business hours.

Receiving deliveries for your franchise

Suppose you have just purchased a convenience-store franchise. The new site has been built, and you’re standing inside your brand-new building. The only problem is that the shelves are empty. Soon you will need to begin scheduling and receiving deliveries. Follow these general tips for receiving merchandise at any type of franchise:

  • Make sure suppliers schedule their deliveries in advance. Accept deliveries only during specified hours. When the location is open and operating, you want the merchandise to come during off-peak hours so that you can concentrate on accepting the delivery.
  • Don’t let vendors park in front. Require vendors to park in an out-of-the-way spot. The front of your business is for customers.
  • Have the delivery driver bring all products into the building before you check the items. Some systems want their own employees to bring merchandise into the store.
  • Confirm that the merchandise you receive is for your business.
  • Check all vendors in and out. Be sure you physically see every item — don’t take the driver’s word. Check all cartons and boxes when the vendor is leaving to make sure they are empty and no merchandise is being carried out of the store. Unless absolutely necessary, vendor check-in should be done away from that vendor’s display and away from merchandise on hand. Don’t allow a vendor to both stock shelves and remove boxes unless you check both before the vendor leaves.
  • Watch helpers. Some vendors have “helpers” whose main job is to distract you during the check-in process.
  • Immediately put away all perishable products.
  • Check use and expiration dates. Sometime vendors have relationships with other customers where merchandise that isn’t past the expiration date is removed before that date. If you receive that merchandise, the time available to you will be shorter than you need or want.

Checking the goods after they are in your franchise location

A truck pulls up at the back door of your franchise, and a flurry of activity follows. Suddenly, you’re surrounded by boxes. The driver is completing the paperwork for your signature. This situation does not have to be scary if you know what to do. Check the quality and condition of the merchandise before accepting it. Here are some additional tips:

  • Examine every box for signs of damage. Look for things like tears, broken or crushed cardboard, signs of tampering, rattles, damp or wet cardboard, bad odors, dented cans, and substitutions of standard items.
  • Before signing for the boxes, open any cartons that have been opened and resealed or that you suspect have internal damage. Note any damages on the receiving record.
  • Always check the date code on the product when it is delivered. Make sure the product is within the code and that you can reasonably expect to sell it before the code expires.

Verifying invoices

Attending to paperwork may be the least entertaining part of business ownership, but in the case of delivery receipts, it can prove rewarding. Avoid financial losses by ensuring you get what you pay for. Check out these tips:

  • Before accepting delivery, check each item on the delivery receipt against the product that has been delivered and compare against the product ordered. Check quantities received against quantities ordered. Count the number of cartons delivered and compare this number to the number on the driver’s record or freight bill. Never sign for more cartons than you receive. Note any discrepancies on the freight bill or receiving record, or correct the errors before the vendor leaves the store.
  • Never give the delivery receipt back to the vendor. Obtain the delivery receipt when the vendor walks in and under no circumstances return it to the vendor. Manipulating the delivery receipt is one of the most common ways that some vendors steal from franchise locations.
  • If the vendor made a substitution, call your franchisor’s field consultant to verify that the substitution is valid and acceptable. Inform the driver and note on the invoice that substitutions not approved by your franchisor are subject to return for full credit.
  • If you don’t receive an item appearing on the delivery receipt, have the driver clearly mark the item “Short” along with the quantity not received. The driver should sign the delivery receipt before you sign it.