Impact of reciprocal tariffs on the franchise sector

In the not-so-distant past, there was much discussion with respect to the worldwide COVID pandemic and its impact on, among other things, the global supply chain. The disruption to business was, for the most part, indiscriminate and the franchise sector was by no means immune.  While the COVID era was, in relative terms, short, and the issues caused by the pandemic reached beyond solely supply chain, it did result in significant distress in the franchise sector, which is clearly represented by the number of franchise-related bankruptcies filed either during the height of the pandemic, or shortly thereafter, including franchisees of Wendy’s®, Pizza Hut®, IHOP® and Applebee’s®. However, businesses, and business owners are resilient and through the implementation of certain changes, including but not limited to decreasing employee count, streamlining processes and reducing hours of operation, businesses, including in the franchise sector, have evolved as a result of the COVID pandemic.

Fast forward five years, and while we do not have a worldwide health crisis, we have implemented economic policy in the form of reciprocal tariffs introduced on April 2, 2025. While pundits may disagree on what a “tariff” is and how it impacts the global economy (and admittedly, this author is not an economist) it’s reasonable to look to Merriam-Webster® to, at least, consider the definition provided, which is “(a) a schedule of duties imposed by a government on imported or in some countries exported goods, or (b) a duty or rate of duty imposed on such a schedule.”  With that definition in mind, and remaining neutral, politically, on the viewpoint of tariffs, it is imperative that both franchisors and franchisees consider what impact, if any, the reciprocal tariffs may have on their respective businesses.  “May” is the relevant qualifier in the preceding sentence as it is entirely too early, with the imposition of the tariffs only becoming applicable in early April 2025, to know what the result may be to franchisors and franchisees, but as applies to any significant economic change, it is never too early to try and plan ahead, if possible.

First, it’s important, for purposes of forecasting, to consider what the implications could be from the reciprocal tariffs.  Once that is determined, it likewise equally important to consider what changes, if any, can be instituted, rather immediately, to minimize the impact of the economic changes. While the franchise sector is diversified, including not only personal and business services, but lodging, retail food products and services, and quick service restaurants, it’s difficult to argue that each could not be impacted, in some cases significantly, by the reciprocal tariffs.  With no clear indication of where the reciprocal tariffs with U.S. trading partners may ultimately fall, it’s an economically tense time.

The potential, overarching implication of the reciprocal tariffs is higher supply costs, obviously for goods that are sourced from overseas.  Part and parcel with increased cost is the supply chain itself, as there have been many reports of delayed shipments while inter-governmental discussions and negotiations are conducted. All types of goods could, theoretically, be impacted, from apparel to replacement parts, and foodstuffs and other ingredients. While, ultimately, the increased costs could be borne by the consumer, the immediate and direct impact is on the franchised business itself. Barring some contractual obligation in place in which the costs are contained and not subject to increase, the reciprocal tariffs will, inarguably, result in a financial impact that may not have necessarily been considered. 

To offset the potential impact of increased costs, an option to consider is alternative sourcing, regional or national, provided such sources are not prohibited under any applicable franchise agreement, and the alternative source is able to provide goods that are of similar, if not higher, quality. To the latter, in doing so, it is important to consider the time and effort involved in locating, negotiating with, and ultimately securing an alternative source, all the while ensuring there is no disruption in business. Further, what is the track record of the alternative source’s history and performance, including the quality and sufficiency of goods? Will such an alternative source be a short-term fix, or is it in the best interests of the business in the long run?  Lastly, after weighing and considering the preceding, when it comes to alternative sourcing – provided it is not prohibited – does it outweigh the potential increased costs of the reciprocal tariffs, certainly considering that the longevity of the reciprocal tariffs remains an open question.

Summarily, it is inarguable that the reciprocal tariffs will have an impact on the economy, beyond the franchise sector.  Business, on a global scale, will need to adapt, certainly in the near term, but also, potentially, into the longer-term future.  History will ultimately tell the full story.

Reach out to attorney John Polinko or a member of McDonald Hopkins' franchising, licensing, and distribution team if you have questions on how to best prepare for reciprocal tariffs.