Franchise Supply Chains Under Pressure: How to Stay Ahead of Tariff Fallout

Currently, the business world is abuzz with discussions about the tariffs recently imposed by the Trump administration. Targeting not only hostile countries but also some of the United States’ closest neighbors and trade allies, these tariffs are having a significant impact on businesses and franchises across the nation, both economically and operationally.

Unfortunately, virtually no business is immune to the effects of these tariffs, including franchises. In the US, several restaurant chains have already raised their prices, passing on the costs of the tariffs to their customers. Although franchises might be tempted to hold out in the hopes that the situation will improve, the outlook is not encouraging that the tariff situation will be resolved anytime soon.

How tariffs will impact franchises

One of the most obvious ways franchises will feel the impact of tariffs is in sourcing their ingredients, as many restaurant franchises obtain ingredients, produce, and meat from other countries. Since the Trump administration’s tariffs affect a wide variety of countries, including nearby neighbors like Canada and Mexico, from whom we are large agricultural importers, franchises will undoubtedly feel the pinch of these tariffs.

However, it’s not just ingredients that are affected by tariffs; business leaders must also consider other essential aspects of their business that are imported. Take packaging, for example. Studies have found that food packaging comprises approximately 50% of the total packaging market in China. Considering the amount of packaging consumed by the industry, tariffs could present a significant added expense for franchises.

Business owners and franchisees may also overlook “invisible costs” that arise from issues other than inventory. One of the clearest examples of this is equipment. As one of the foremost producers of machinery and machine parts, many franchises likely depend on China for their operations. If a key piece of equipment breaks and the business has to import a replacement part, it will likely feel the pressure of the tariffs.

What franchises can do to mitigate the effects of the tariffs

Unfortunately, unlike many businesses, such as corporations or independent small businesses, franchises don’t have the level of control to take advantage of some of the solutions to these tariff troubles. Many franchise contracts specify clear restrictions regarding sourcing and quality assurance. Because of this, franchisees may not have the ability to simply switch sourcing partners from one country to another and may be subject to a lengthy approval process from the business they franchise from, if they have any control over their suppliers at all.

As a result, diversification may not be a feasible solution for franchises, so they must build resilience in their supply chain using different strategies. For example, President Trump has “paused” the tariffs multiple times on several countries, presenting an opportunity for franchises to build an inventory buffer so that, once the tariffs are resumed, they can reduce their imports without causing interruption. Although tariffs on China have officially taken effect, the tumultuous nature of the geopolitical situation means that no one knows what will happen tomorrow, much less next week.

It’s essential to note that these tariffs also negatively impact the economies of the countries against which they have been imposed, so franchises may also have the opportunity to negotiate contracts with their suppliers to receive more favorable terms. Additionally, many of these countries face their own economic obstacles, such as China’s current rising consumer inflation (CPI) but falling producer prices (PPI), which could make them more willing to renegotiate rates to ensure continuity in business relationships.

At this point, it’s not a matter of if franchises will be affected by the tariffs but a matter of when. With many of the Trump administration’s tariffs in effect, businesses must find ways to build resilience in their supply chains, wherever possible. For franchises, this may look like building inventory buffers and renegotiating contracts. In doing so, they will be better equipped to navigate the economic challenges of the current landscape.

Laura Dow is the Business Director at CPG Sourcing, a full-sourcing service provider and business advisor operating in China since 1978.