Exploring procurement strategies and if traditional and co-operative franchise models benefit from marketplaces
The restaurant industry is a highly competitive space, and the operational model that franchisees adopt can make a significant difference in the success of individual units and the brand as a whole. Two prominent franchise structures are the traditional franchise model and the co-operative model, exemplified by organizations like Restaurant Supply Chain Solutions (RSCS), which supports brands such as KFC, Taco Bell, and Pizza Hut. In this post, we explore how these models differ, leveraging specific insights from Larry Pethick, Director of Consumer Experience at Restaurant Supply Chain Solutions (RSCS), a Yum! Brands Company, during the recent ‘Transforming Franchise Procurement: Leveraging Procurement Marketplaces for Strategic Growth‘ webinar, an recent report by McFadyen Digital experts based on a survey of over 300 franchise leaders titled “Franchise Procurement Marketplaces: Maximizing Ecosystem Growth”, and a variety of other sources to understand why some franchise owners are pivoting towards a co-operative approach.
What is a Traditional Franchise Model?
In a traditional franchise structure, franchisees operate largely under a centralized corporate model that dictates purchasing decisions, operational guidelines, and product development. The franchisor maintains substantial control over how the business is run, requiring franchisees to use approved suppliers and specific procurement channels. While this model ensures uniformity and a strong brand identity, it can limit flexibility for franchisees, who might be forced to purchase products at higher prices or with limited supplier options.
Traditional franchisees often have to navigate corporate decisions that might not always align with their specific market needs. For example, Mr. Pethick pointed out during the recent webinar that, “Franchisees in traditional setups often feel limited by the corporate supply chain agreements, which can sometimes lead to higher costs and a lack of flexibility.” This dynamic creates tension as franchisees seek profitability within the parameters set by the franchisor. Additionally, procurement challenges are common, with franchisees sometimes paying premium prices due to limited vendor options and corporate markups.
The Co-operative Model: A New Way of Thinking
In contrast, a co-operative franchise model functions differently, providing more leverage and decision-making power to the franchisees. RSCS is one of the largest franchisee-led supply chain cooperatives in the U.S., and its mission is to negotiate the best possible supply agreements on behalf of its members, who are franchisees themselves. This model aligns the goals of the franchisees with those of the co-op, thereby creating a system that works toward mutual benefit rather than focusing on corporate profits alone.
Larry Pethick emphasized during the recent webinar that, “The power of a co-op is in collective bargaining. When we, as franchisees, come together, we can negotiate much better deals than any one of us could on our own.” He continued to note that, “This model fosters a sense of community where franchisees can share best practices, creating a win-win scenario for all involved.” However, co-operative models are not without procurement challenges—consensus-based decisions can sometimes delay the purchasing process, potentially affecting responsiveness to market shifts.
How Do They Differ?
The main difference between a traditional franchise and a co-operative model like RSCS is in decision-making autonomy and purchasing power. In a traditional model, the franchisor often profits from the sale of goods and services to franchisees, resulting in inherent conflicts of interest. On the other hand, in a co-operative model, franchisees collectively own the supply chain entity, which means that profits, savings, and decisions are all aligned to benefit franchisees directly.
For instance, RSCS leverages its scale to negotiate lower prices for everything from chicken to packaging, ensuring franchisees get the best deal. In contrast, traditional franchise models often restrict franchisees to purchasing from corporate-approved vendors, sometimes at prices that include corporate markups. This has been a point of frustration for many traditional franchisees, as noted in an article by Franchise Times, which highlighted the growing dissatisfaction among franchise owners over escalating operational costs.
Could a Marketplace Model Solve Franchise Procurement Challenges?
Both traditional and co-operative models face unique procurement challenges. In the traditional model, franchisees often struggle with a lack of control and inflated costs due to restricted supplier options. In co-operative models, the challenge lies in achieving consensus on procurement decisions, which can slow down the process and reduce flexibility.
A marketplace procurement model could offer a solution to these issues for both traditional and co-operative franchises. In such a model, franchisees can access a wide array of suppliers through an online marketplace, which fosters competition among vendors, driving down costs and increasing quality. McKinsey & Company has noted that digital marketplaces can enhance transparency and streamline procurement, allowing franchisees to make informed decisions based on real-time pricing and supplier performance metrics.
For traditional franchise models, integrating a procurement marketplace could reduce the dependency on corporate-approved suppliers, giving franchisees more options and potentially lowering costs. In co-operative models, a marketplace could offer an efficient platform for collective procurement, enabling franchisees to benefit from both scale and flexibility without the lengthy consensus processes that typically accompany co-operative decision-making.
Larry Pethick mentioned during the Transforming Franchise Procurement Webinar, “We started looking into how a marketplace could solve our procurement issues, and it quickly became clear that it provided the best of both worlds—scale for better pricing, and the flexibility for franchisees to choose from multiple suppliers.” This model could align particularly well with co-operative frameworks, where collective bargaining already exists but could be enhanced with a more dynamic, competitive supplier environment.
Advantages of the Co-operative Model
The advantages of a co-operative model can be summarized as follows:
- Cost Savings: Because co-operatives negotiate in bulk, they can secure more favorable pricing from suppliers. An analysis by Harvard Business Review showed that franchise co-operatives could achieve an average savings of 12-18% on procurement costs compared to individual franchises.
- Alignment of Interests: In a co-operative model, the supply chain entity is owned by franchisees, which means decisions are made with their interests in mind, rather than prioritizing corporate profits. Larry Pethick noted that, “As a co-op, we can pool resources to invest in areas like technology or sustainability—things that might be out of reach for individual franchisees on their own.”
- Community and Best Practices: Franchisees are more likely to share insights and best practices under a co-operative structure, fostering a sense of community. Bloomberg recently reported that co-operatives often see higher franchisee satisfaction rates due to the shared mission and transparent decision-making processes.
- Risk Mitigation: The power of collective bargaining also translates to risk management. RSCS, for example, has been able to hedge against price volatility in commodities, which is something that individual franchisees under a traditional model might struggle to achieve. As noted in Supply Chain Dive, co-operatives have been more effective in managing supply chain disruptions during global events like the COVID-19 pandemic.
A marketplace procurement model could also enhance these advantages by providing real-time data for risk mitigation, enabling franchisees to make more agile procurement decisions. This could be particularly valuable during periods of supply chain instability.
Co-op Challenges to Consider
However, the co-operative model isn’t without its challenges. Decision-making can be slower because it requires consensus among members. This can be a drawback in a fast-moving market where rapid decisions are necessary. An article in The Wall Street Journal pointed out that while co-operatives have advantages in cost management, they sometimes lag in innovation due to the slower decision-making process.
Moreover, The Franchise Business Review found that some franchisees prefer the traditional model because it allows them to focus entirely on operations without worrying about supply chain intricacies. In a co-operative model, franchisees are more involved in supply chain decisions, which can be a double-edged sword depending on their operational expertise.
A marketplace model could alleviate some of these issues by providing a streamlined procurement process, reducing the need for lengthy discussions while still offering transparency and choice. Franchisees could select from pre-approved vendors through a digital platform, which maintains some level of standardization while providing the flexibility that franchisees desire.
Real-World Co-operative Examples
Several other co-operatives besides RSCS have successfully adopted this model. Dairy Farmers of America (DFA) is a co-operative that manages procurement for its members, who are dairy farmers across the U.S. By pooling resources, they have gained a competitive edge over non-co-operative models. Similarly, ACE Hardware operates as a retailer-owned cooperative, which has allowed it to thrive in the highly competitive home improvement market. The International Co-operative Alliance has found that these models often show higher levels of resilience and member satisfaction compared to corporate-led structures.
Both DFA and ACE Hardware have also begun experimenting with marketplace models to further optimize procurement. For example, ACE Hardware’s digital procurement marketplace has allowed its member stores to source products more flexibly, ensuring availability and competitive pricing even during supply chain disruptions, as noted by Retail Dive.
Conclusion
The co-operative franchise model, as exemplified by RSCS, provides a viable alternative to the traditional franchise structure, especially for franchisees who desire more control, better cost management, and a say in decision-making. While it comes with its own set of challenges, including the need for consensus and increased involvement in supply chain operations, the benefits often outweigh these drawbacks.
Introducing a marketplace procurement model could further enhance both traditional and co-operative structures by adding a layer of flexibility, cost-efficiency, and supplier choice that addresses some of the core procurement challenges each model faces. Larry Pethick summed it up well during the Transforming Franchise Procurement Webinar: “Ultimately, our goal is to create real value for franchisees—those running the day-to-day operations. The co-op model puts power in their hands, and the marketplace approach only amplifies that power, making us faster and more effective.”
The decision between a traditional model and a co-operative one will ultimately depend on the goals, scale, and appetite for involvement of each franchisee, but the growing trend towards co-operatives and marketplace integrations indicates a significant shift in how franchise businesses want to operate moving forward.
If your organization is seeking to modernize their digital procurement strategy or technology, reach out to the digital commerce experts at McFadyen Digital at info@mcfadyen.com.