UK: Clucking Mad – What Can Franchise Businesses Learn From KFC's Supply Chain Issues?

Last Updated: 14 March 2018
Article by Gordon Drakes and Tim Rickard

In February this year, the press in the UK took a break from Brexit for a few days and led with a story about KFC's supply chain crisis, which saw almost two thirds of its 900 + stores in the UK close due to a lack of chickens.

The majority of these stores are franchised and the resulting loss of revenue and negative PR could not have come at a worse time given the current pressures that all businesses in this sector are facing.

The story helps shine a light on the importance of supply chain management and also how the different parties which rely on it need to protect themselves from a contractual and legal point of view. 

Who "fowled" up?

The root cause of the closures appears to have been operational issues under a new chicken supply contract between KFC and DHL.

In November 2016, Yum Brands-owned KFC revamped its supply chain in the UK by ending its relationship with delivery company Bidvest and entering into a three-way partnership with DHL and Quick Service Logistics (QSL).

Whilst it is not thought that trying to stuff chickens into brown jiffy bags was the issue(!), it has been reported that DHL only uses a single depot from which to deliver all of the KFC ingredients to its stores across the UK, and deliveries were compromised by a new and malfunctioning IT system. Poor planning and risk/contingency mitigation also exacerbated the problems.

What can franchisors learn from this?

In most franchise supply chains, the franchisor or its nominated supplier will supply certain key products to the franchise network. Where the franchisor is the supplier, the terms of supply will often be set out either in the franchise agreement itself or in the Manual or in a separate set of standard supply terms. In our opinion, the third option is the best for the franchisor as it enables a franchisor to update supply terms from time to time and ensures that the network is supplied on uniform terms. In an international context, franchisors and its developers or master franchisees may enter into a supply agreement for that particular market.

It is not clear in the KFC example whether KFC is the de facto supplier to its franchisees, or DHL and QSL enter into their own supply terms with each franchisee. For the purposes of this article we have assumed that KFC is the contractual supplier to its franchise network.

Managing Supplier Liability

Where the fulfilment of the supply is outsourced to a third party, a franchisor should ensure that it has in place a robust agreement covering the following key aspects:

  • A clear set of service levels with sanctions for failure to meet them.
  • Clear guidelines and a clear process on what happens when something goes wrong and time is of the essence. This should cover issues like defective products, product recalls and failure to supply.
  • Warranties which set clear expectations in respect of the goods and services provided.
  • Indemnities to ensure the appropriate allocation of risk under a contract. An indemnity is a promise to pay money on the happening of a specified event. If drafted with care and precision, they can have a number of advantages over a simple claim for damages for breach of contract; indemnities are not necessarily subject to a duty to mitigate loss, they do not need to be limited by causation or the remoteness of the losses, they can require payment without proof of loss and they are useful if the loss continues over a period of time. In the context of KFC, indemnities for the failure to supply, reputational damages and any "downstream" liability from the franchise network would have been advisable.
  • Penalties – Following the Supreme Court joint judgment in the cases of Cavendish Square Holding BV v Talal El Makdessi and ParkingEye Ltd v Beavis, there is now more flexibility for a party to impose contractual penalties where they are protecting a "legitimate interest". Financial penalties may therefore form part of the approach to risk allocation.
  • Limitations and exclusions of liability - it is not uncommon for a supplier to limit or exclude their liability for certain losses. It is therefore important to check these clauses carefully to ensure that they do not neutralise other aspects of the agreement, such as indemnities or breach of warranty.
  • Insurance and guarantees – the overall allocation of risk and financial liability of the parties is not worth the paper it is written on if the defaulting party is unable to meet those liabilities. The party looking to enforce its rights should ensure from the outset that adequate insurance cover is in place and it may also be worth exploring whether it is possible to secure some form of fiscal guarantee, such as a bank guarantee, letter of credit or parent company guarantor.

Due Diligence, Contingency Planning and Managing Reputational Damage

Clearly, putting all of its eggs on one basket with a new supplier operating from a centralised warehouse was a gamble KFC would not take with the benefit of hindsight. Using a "hub and spoke" warehousing and distribution model would have mitigated the impact.

Franchisors should also ensure that they have in place contingency plans and protocols for when something as potentially serious as a failure to supply occurs. KFC turned to Stowga, a warehouse on-demand start-up service (think Airbnb for warehouses). KFC's property consultants contacted Stowga who bid for and secured 8 warehouse spaces within minutes and within days these sites were operational. This flexible model could be the future for a number of businesses, and not just as a contingency measure.

Contingency plans should also include clear guidance for how franchisees can best mitigate their losses, as well as a public relations strategy to minimise damage to the brand and customer goodwill. KFC did respond to this crisis with an advert that has been hailed a "masterclass" in PR crisis management. The full-page image on the back cover of London's Metro newspaper showed an empty bargain bucket with the company's logo rearranged to read "FCK", with an apology to customers and thanks to its staff and franchises.

Managing Franchisee Liability

Franchisors should keep under regular review review their template franchise agreement, the Manual and any separate terms of supply. Franchisors should consider the following points:

  • Are there any supply terms and if so, are they comprehensive enough and do they reflect actual practice?
  • If the supply terms are not contained within the franchise agreement, are they validly incorporated into the transactional process?
  • Do they expose the franchisor to any onerous commitments or liabilities which the franchisor is not covered for, either by its own insurance cover and/or by appropriate indemnities in its upstream agreements?
  • How regularly are the supply terms reviewed and updated to take account of legal developments (such as modern slavery reporting) and best practice? How are the updates communicated to the franchise network?
  • Do they strike an appropriate balance between, on one hand, the need for the franchisor to operate an efficient supply chain across the network and on the other hand, the need for a franchisee to have a degree of certainty over its ability to respond to a crisis?

Ultimately, supply chain management is a significant but often neglected aspect of a franchisor's business. If a franchisor mismanages the types of risks highlighted by the KFC crisis or other issues such as franchisee credit, it may very quickly be faced with an existential crisis.

What can franchisees learn from this?

Given the standardised nature of most franchise agreements and any related supply terms, franchisees may not have much recourse against their franchisor for failure to provide products. Nevertheless, franchisees should consider the following points:

  • What, if anything, do the supply terms say about the obligation to deliver products and what happens if delivery is delayed for any reason?
  • Is a franchise entitled to source products from alternative suppliers when there is a temporary interruption to supply?
  • How are risks allocated under the contract, and what does it say in respect of limitations and exclusions of liability? For standard form contracts, franchisees may be able to challenge particularly onerous clauses as unreasonable and therefore enforceable under the Unfair Contract Terms Act 1977.
  • What does the franchise agreement say in relation to supply and consequent allocation of risk and liability? In the event of a failure to supply, a franchisee may have some form of claim for breach of contract and depending on the gravity and effect on their business, there may also be grounds for claiming a repudiatory breach of contract, which would also entitle a franchisee to terminate the franchise agreement and claim damages.
  • Does the Manual include any guidance on supply and contingency plans? In any event, franchisees should ensure that they are able to mitigate their own losses, particularly in relation to the management of their employees during periods of forced closures or limited operations.

Finally, whilst a single franchisee (unless it is a substantial operator with multiple units) is unlikely to be able to influence changes to the supply chain and the terms which govern it, if the franchise system has a franchise council, this would be the appropriate forum for engaging with the franchisor to ensure that when these types of events occur, their interests are adequately protected.


They say that out of every crisis comes an opportunity. The opportunity for franchise businesses is to look again at the management and procurement of their supply chains and the terms which govern the upstream relationships with third party manufacturers and suppliers and the downstream relationships with franchisees.

The obvious starting point is to carry out a risk analysis of the template franchise agreement, the Manual and any separate terms of supply and associated policies and procedures.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Gordon Drakes
In association with
Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions