Franchise or buying group: What's the difference?

September 4, 2006

Many independent pharmacies have joined buying groups in search of better prices, wider access to third-party contracts, and a regional or national identity. Franchising offers the same benefits, but there are significant differences between a buying group and a franchise, cautioned pharmacy franchise consultant Bruce Kneeland, president of Pharmacy Connections.

Many independent pharmacies have joined buying groups in search of better prices, wider access to third-party contracts, and a regional or national identity. Franchising offers the same benefits, but there are significant differences between a buying group and a franchise, cautioned pharmacy franchise consultant Bruce Kneeland, president of Pharmacy Connections.

In legal terms, there are two parties to a franchise. The franchisor sells or grants the franchise. The franchisee buys the franchise and operates the franchise business.

In pharmacy, as in other franchises, there are two basic models. The most familiar is the business model, such as a McDonald’s restaurant or a Medicine Shoppe pharmacy. The franchisor profits from royalties on gross sales.

The product model franchise is based on product, such as an auto dealership or a Health Mart pharmacy. The franchisor profits from product sales, and fees are a relatively minor item.

Either way, a franchise is defined by three key points, Kneeland said. The franchisor grants the right to use a specific business plan; the franchisee is required to use the business operation, name, look, and feel created by the franchisor; and the franchisee must pay a fee to the franchisor.

Traditional franchises such as Medicine Shoppe are obvious, Kneeland noted. Product model franchises such as Health Mart look more like buying groups. But where buying groups let members pick and choose which programs to implement, franchisors require participation.

Health Mart franchisees, for example, must join Access Health, McKesson’s third-party contracting entity. ValuRite, McKesson’s buying group, gives members the option to join third-party contracts.

“If you create the business, charge people a fee to use your model, and impose operating standards or quality requirements, you have created a franchise,” Kneeland said.