Despite various economic uncertainties, it’s projected that the franchise industry will continue growing in 2024 with franchise establishments increasing by 1.9% (almost 15,000 units) and total franchise output increasing by 4.1%.
If you’re thinking about joining a franchise, then you should understand that there are different approaches to franchising, one of which is called “product distribution”.
What is Product Distribution Franchising?
“A Product Franchise, which has the highest percentage of total retail sales, represents a supplier-dealer relationship. The franchisor provides the product while the franchisee is given the right to sell that product.” (5 Different Types of Franchises)
Product distribution franchising differs from other types of franchising in that a franchisor provides the product but does not necessarily offer or require the franchisee to use a particular business operating system. However, it does not exclude a franchise from providing a specific business model and operating standards to their franchisees.
Of course, product distribution franchising is best suited for product-oriented businesses, not service-based businesses. They generally supply large items such as cars and car parts, vending machines, computers, appliances, and more. A few examples of a product distribution franchise include:
- GoodYear Tires
- John Deere
- Coca-Cola
3 Types of Product Distribution Franchises
#1 – Manufacturer-Supplied
With this type of product distribution franchise, the manufacturer acts as the franchisor and provides products directly to the franchisees. Key features include:
- Exclusive Distribution Rights
- Extensive Support and Training
- Brand Recognition Benefit
A couple examples of a manufacturer-supplied product franchise include:
- Automotive dealerships where car manufacturers supply vehicles and parts.
- Bottling and distribution franchises where soft drink companies provide the branded product.
#2 – Wholesaler-Supplied
In this case, the franchisor is a wholesaler that sources and distributes products to franchisees. The wholesaler isn’t necessarily the original manufacturer. In fact, they often have a relationship with multiple manufacturers. Key features include:
- Variety of Products
- Cost Efficiency
- Established Supply Chains
- Operational Support
- Flexibility in Inventory Management
A couple examples of a wholesaler-supplied product franchise include:
- Convenience stores where the franchisee sources various products from a central wholesaler.
- Pharmacy and drug store chains that receive a wide range of general goods and health products.
#3 – Retailer-Supplied
In this model, the franchisor acts like a retailer and directly controls the selection and distribution of products to franchisees. Key features include:
- Centralized Supply Chain
- Brand Consistency
- Economies of Scale
- Comprehensive Support
- Standardized Operations
A couple examples of a retailer-supplied product franchise include:
- Fast-food franchises where the franchisor provides proprietary products and packaging to ensure consistency across all locations.
- Clothing brands that supply franchises with branded apparel and accessories.
Pros & Cons to a Product Distribution Franchise Model
Every type of franchise model will have benefits and drawbacks. It’s important to consider all of the factors when deciding which franchise to join.
5 Advantages to a Product Distribution Franchise Model
#1 – Proven Inventory System
Product distribution franchises specialize in providing one or more products. This means that they generally have a well-established inventory system, which streamlines stock management for its franchisees.
#2 – Established Supply Chain
For the same reason a product distribution franchise comes with a proven inventory system, it also generally offers a robust supply chain. This helps franchisees operate efficiently while maintaining consistent quality in the products they offer.
#3 – Territorial Rights
In many cases, a product distribution franchise will provide exclusive territories to its franchisees, which reduces direct competition within the network.
#4 – Cost Savings
Product distribution franchises usually have the ability to purchase products in bulk at a lower price, which leads to higher profit margins for franchisees.
#5 – Quality Assurance
These types of franchises also have the ability to control the consistency in product quality because of centralized purchasing agreements.
5 Challenges to a Product Distribution Franchise Model
#1 – High Initial Costs
Naturally, a product-focused franchise will have higher start-up costs than a service-based franchise due to the expenses for inventory, equipment, and storefronts. The initial franchise fee is typically higher as well.
#2 – Limited Flexibility
With some types of product-based franchises, franchisees must follow the franchisor’s guidelines on product offerings, store layout, operation procedures, and more.
#3 – Reliance on Supply Chain
While having an established supply chain is a benefit to product distribution franchises, the other side of the coin is that the franchisee is dependent on the franchisor for product supply. This presents a risk if the franchisor faces supply chain issues.
#4 – Territory Limitations
The advantage of having exclusive territories also has a flipside, which is limited growth opportunities if the market within the territory becomes saturated.
#5 – Limited Product Range
It’s also possible that franchisees will be restricted to selling the products that the franchisor provides, which would limit their ability to diversify their product offerings.
Interested in Buying a Product Distribution Franchise?
If you think you want to buy a product distribution franchise, or if you’d like to learn about other types of franchises, FranNet is here to help. Our expert franchise consultants will help you find the right opportunity and walk you through the process from start to finish. Schedule your free consultation today to get started!