KFC runs out of chicken!

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KFC runs out of chicken!

Our franchise expert is calling on all franchisors to take safeguards against supply chain failures in the wake of ongoing delivery problems at fast food firm KFC.  Gurmeet Jakhu, a director at Emms Gilmore Liberson, advises that franchisors should ensure that suppliers can meet the commitments made by franchisors (to franchisees in their franchise agreements), and where appropriate, take steps to obtain compensation from the suppliers for any and all loss sustained.

A common feature in fast food retail franchising is that the franchisor will, either directly or indirectly, control the supply of food products and ingredients to be used by the franchisee.  This ensures that the end product provided by its franchisees is consistent across the network and that it adheres to the franchisor’s strict quality standards.  Meanwhile, the franchisee will benefit from the economies of scale which are achieved through bulk purchasing by the franchisor.  This is a key control because if franchisees were free to source their own food products it could lead to inconsistencies and even worse reputational damage for the brand should the food independently sourced by a franchisee prove to be defective in any way.

However, recent events have also shown how this can lead to serious business disruption when a franchisor in unable, whether through supplier or logistics issues, to provide a key component.  It has been reported that at one stage, more than two thirds of KFC’s 900 outlets in the UK were shut due to operational issues in the supply of chicken.

Whilst most franchise agreements, will contain page after page of what the franchisee should or should not do, there is very little contractual commitment from the franchisor.  Where a franchisor has committed to supplying or prohibits the franchisee from purchasing its own supplies, it may be possible to argue that the franchisor is in breach of contract or due to its conduct has made it impossible for the franchisee to carry out its end of the bargain.

As such there may be scope for a franchisee to recover damages, to include lost or reduced profits and wasted employee costs.  It will be difficult for a franchisee to mitigate its loss, if it is prohibited from sourcing its own products in the franchise agreement.  A lot will depend on the precise wording of contractual commitments made by the franchisor and the scope of any exclusions or limitations and force majeure clauses in the franchise agreement.

That being said, one would expect that a franchisor would be willing to assist the franchisee with any cash flow issues arising from interruption in the supply of products, by for example suspending any rental payments and royalty payments due whilst such issues remain unresolved.

Where franchisors do have exposure to supply commitments in their franchise agreements, they should make sure that the suppliers are in a position to provide the service and this can be achieved by undertaking pre contractual due diligence and audits.  They should also ensure that adequate contractual safeguards are in place to obtain compensation from the supplier for any losses sustained by it and just as importantly, its franchise network, as such losses are clearly foreseeable in a franchise relationship.

For more information please contact Gurmeet Jakhu

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