Revisiting supply chains: considerations for franchisors navigating tariffs amid global tensions and legal uncertainty

There continues to be significant uncertainty at this stage, with Trump announcing tariffs of 30% on Mexico and the European Union last week.

However, despite this volatility, there are things that franchise businesses can consider in order to mitigate the risk in their supply chains.

Background and impact on franchised businesses

There has been wide felt disruption since Trump's administration imposed aggressive tariffs, including an original 145% (now 30%) duty on Chinese imports and a baseline 10% tariff on goods from other nations. These actions have had an immediate impact on a variety of sectors – for example, there was a 45% drop in container bookings at U.S. ports, leading to potential shortages in the U.S. for electronics, apparel, and home goods reliant on Chinese manufacturing[1].

In response, many countries have discussed and/or imposed retaliatory tariffs. As a result, some U.S. exporters are considering relocating their production to third countries – such as those that are not subject to EU tariffs where the exporters are reliant on exports to the EU, but this is not always possible or effective (see an insight into this here[2]).   

Franchise businesses where either the franchisor or franchisee are based in the U.S. do not need to be concerned that the U.S. tariffs directly impact their cross-border franchise agreements, as they currently only apply to tangible goods and are not applicable for intangible intellectual property licences which are granted under franchise agreements. However, there are indirect ways that the U.S. (and other global) tariffs do impact franchise networks.

The key impact is on supply chains, which are often managed or controlled by franchisors, at least in respect of core products and equipment that are essential to maintaining the common identity and reputation of the franchise network.

Uniformity is a core component of franchising and franchised brands aim to ensure a consistent customer service and product availability to ensure customer satisfaction and loyalty. Where there are delays and shortages in products, components and packaging, this has a direct impact on the uniformity of the service.

Increased costs of equipment, supply and products have a significant impact – whether the costs are absorbed by the brand or passed on to franchisees or end consumers. This is already having an immediate effect, particularly for brands and franchisees that operate on thin margins.

Consumers as well as brands are following the news carefully and where end prices go up in any sector, this can shift consumer behaviour in relation to their risk and appetite for spending, especially in tandem with other economic difficulties, which will particularly impact certain sectors like retail and food & beverage.

Industry adaptations and strategies

Franchised businesses and retailers more generally are making changes to their business models to adapt to the uncertainties surrounding tariffs.

In the U.S., brands have had to make a number of decisions as to how they are going to deal with the latest U.S. tariffs. Some retailers like Walmart have decided to absorb extra tariff costs to maintain product availability, but other retailers like Target have decided to diversify their supply chain, reducing their reliance on Chinese imports from 60% to 30% over recent years. In response to unstable U.S. trade policy, Apple is now sourcing most of its U.S. targeted iPhones from India, while leveraging Vietnam for other products like iPads and Mac devices.[3]

In general, some of the types of strategies being adopted across franchised brands include:

• Diversification: diversifying supply chain locations to enhance resilience – including relying on other group companies based outside of the U.S. where necessary
• Domestic sourcing: where possible, franchised brands are looking at local sourcing to avoid global tariffs
• Reshoring: exploring production reshoring to mitigate tariff-related disruptions
• Contracts: ensuring there are sufficient rights and protections within long terms agreements to shift the burden of tariff payments  
• Monitoring: monitoring factors like consumer price indexes and other market conditions, bearing in mind consumer behaviour and appetite to pay increased prices
• Legal compliance: engaging legal advice to stay on top of compliance with changes and knock-on impacts. Franchisors need to be aware that they may need to update disclosure documents where there are obligations to disclose significant financial impacts to avoid potential disputes
• Communication: ensuring transparency and clear communication across the network and with end customers about cost changes

Final thoughts

The recent ruling against Trump's tariffs underscores the unpredictability at the heart of current U.S. trade policy, forcing franchised brands to explore adaptive strategies.

Legal uncertainty emphasises the importance of resilience and preparedness in operational planning.

While some brands may try to pass a significant burden of the tariffs onto franchisees, this can lead to difficulties where franchisees have no way of offsetting the financial burden, which could lead to closures and potential insolvencies.

Franchised brands should take this opportunity to carry out an assessment of their supply chains to stay on top of disruptions and also look towards potential opportunities for exclusions from tariffs.

This article was co-authored by trainee Steve Zhang.