Franchising in the Dairy Service Industry

By Oas, Deni; Popejoy, Steven Lance | Journal of Critical Incidents, Annual 2011 | Go to article overview

Franchising in the Dairy Service Industry


Oas, Deni, Popejoy, Steven Lance, Journal of Critical Incidents


In 2009, dairy farms could be found in all fifty states and dairy farming was the number one agricultural business in California, Idaho, Maine, Michigan, New Mexico, New York, Pennsylvania, Vermont and Wisconsin (Dairy Farming Today). However, faced with an overabundant supply of milk, milk processors cut the prices they were willing to pay dairy farmers for their milk, in many cases below what it cost the dairy farmers to produce the milk (Crumb, 2009). Dairy farmers soon discovered that the only way to raise prices was to reduce supply. The most expedient way to do that was to reduce the number of cows. Recognizing that, farmers began slaughtering their cows. It is estimated that as many as 55,000 cows were slaughtered each week (Crumb, 2009). Fewer cows meant less demand for dairy equipment. As a result, dairy equipment manufacturers, like SDF, suddenly found their ability to compete in the industry being tested as never before. SDF's president met with several of his advisors to discuss the situation. They identified several options, including switching their distribution method from independent dealers to franchises. After the meeting, SDF's president asked his legal counsel to identify franchising's potential advantages and disadvantages to SDF from a legal perspective. SDF's legal counsel knew the potential advantages and disadvantages that franchising offered, but wondered which ones would have the most impact on SDF. Furthermore, with the dairy industry in such a state of decline, and the fact that some financial experts predicted that 2009 would see as much as a forty percent reduction in available financing for franchisees (Wilson, 2009), was now the right time for SDF to switch?

SDF

SDF offered a full line of milking equipment as well as feed, hygiene and cleaning solutions. Although it had operations around the world, SDF was a privately held company whose owners valued their privacy. By 2009, they were used to doing business in the United States, but fully aware of the frequency with which lawsuits were filed in the United States they carefully considered the legal implications of every decision they made. They also carefully considered the legal implications of each claim they included in their marketing and advertising literature.

SDF marketed and sold its products through independent dealers who specialized in the sale, installation and maintenance of dairy equipment. The relationship between SDF and its dealers was governed by state dealer protection laws and dealer contracts which set out certain rights and obligations of both parties. The contracts gave the dealers the right to buy SDF products and resell them in a given territory in exchange for which the dealers agreed to meet minimum annual purchase requirements and to provide warranty and maintenance service for SDF products. Although the dealer contracts set forth the terms under which the parties could terminate the contract, state dealer protection laws restricted SDF's right to do so. The dealer contracts also spelled out the terms under which SDF would repurchase a dealer's inventory of SDF products when the contract was terminated. SDF had a good relationship with most of its dealers, but as independently owned and operated companies, SDF could not control them and the dealers managed their businesses as they saw fit. Although sometimes SDF wished it had more control over some of its dealers, SDF knew that the less control it had over its dealers, the less likely SDF would be held liable for the dealer's actions.

Franchising Advantages and Disadvantages

SDF's counsel knew that franchising offered several potential advantages to a party considering franchising, including:

1. Franchisee fees, paid at the creation of the franchise, provided income to the franchisor. The amount of the franchise fee varied depending on the industry and could range from as little as $10,000 to over $100,000 (AllBusiness). …

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