Holistic Review Or Smoke And Mirrors? Survival Of A Franchisee.
‘Smoke and mirrors’ is a metaphor for a deceptive, fraudulent or insubstantial explanation or description. The source of the name is based on magicians’ illusions, where magicians make objects appear or disappear by extending or retracting mirrors amid a distracting burst of smoke. The expression may have a connotation of virtuosity or cleverness in carrying out such a deception. (Wikipedia)
By the time you read this article seven months of 2015 will have passed, and more and more cities are passing minimum wage laws that will define our businesses and/or decide our viability. Fourteen states have minimum wage increases already enacted, waiting to be implemented. Five states will implement minimum wage increases in 2015, 12 states will implement increases in 2016, and 7 states will implement increases in 2017. These are increases that have already passed. We can expect more states to vote on increases throughout the balance of this year and next at a quickening pace.
I take no position personally or politically on the appropriateness or necessity of these movements. The issue of “income inequality” or wage stagnation is better left to the economists and elected officials. I do know that the 2016 national presidential elections will have this issue front and center. Our very livelihoods, and those of countless other small businesses will be at stake, and every attempt to raise wage rates will further redefine our businesses and decide our viability as well as that of our franchisor. Today franchisees from every system imaginable are being painted as greedy, overzealous employers, and more politicians from cities, towns, counties, and states are jumping on board.
To all this add increases in governmental regulation (ours is a heavily regulated business), channel blurring, increasing competition, delivery and operations complexity, the continued and changing effects of social media, and the fact that many of our stores must compete in spite of having older physical plants. Indeed, the rollout of the hot foods program, currently underway for 1,500 stores, will increase our labor. It’s enough for Excedrin headache 7-1-1.
If we look at the impact of a substantial increase in the minimum wage in our 7-Eleven system, which is based on shared gross profit and not on royalties on sales, and where the franchisee bears the cost of “all labor and labor-related expenses,” we see that 100 percent of the increase in wage rates is borne by the franchisee. Keep in mind too that other labor related expenses, like workers comp and the employer portion of social security taxes are tied to the wage rate, and a 33 percent increase in wages from $7.50 to $10 also carries approximately $.25 in additional tax and insurance costs. This adds another 3.3 percent to the increase.
Can a store sell its way out of this? Probably not. The only recourse is to gut staff, negatively affecting service, or raise prices. When we raise prices our customers lose and we risk losing them, but our franchisor gains, because the price increase is all in gross profit dollars, which we share with SEI. It’s a vicious cycle. Oh, and by the way, an increase from $7.50 to $10 is mild compared to many proposals. Many of us would welcome a minimum wage at $10, if it stopped there. As if this was not enough, sell your way through a wage increase or raise prices without jeopardizing sales and you may get hit with the wrong side of the graduated gross profit split, otherwise known as 7-Eleven’s “success tax.”
The National Coalition team has been in face-to-face meetings with our CEO and his top brass since October of last year. While these meetings have opened up a dialogue, I am not sure if it has been all that fruitful for franchisees. We are talking, but we have no sure sign of relief from our franchisor. Other than a shuffling of top brass, and bringing in a much-needed low volume store relief program, I can honestly say not much is on the horizon.
My personal opinion is it is business as usual in Dallas. National Coalition officers have expressed the urgency franchisees feel, and we are told that every concern is being discussed as part of the company’s holistic review.
In past articles I have confessed to being cautiously optimistic about change. Today I am actually concerned. I am not sure these issues will be resolved to franchisees’ satisfaction. According to our CEO, last year was a stellar year for SEI. They made more money than ever before, and three times more than in 2008. When I look at my bottom line, I am at a loss for words!
Old-timers in the system tell me that back in the early days of franchising at 7-Eleven the split was 50-50. In the late 1970s the energy crisis caused SEI to approach franchisees about changing the split to 52-48 because “the future of the company is at stake,” and franchisees reluctantly agreed. Today, I propose that the future of franchisees is at stake, and the split needs to be 46-54. After all, did your net income increase three times over 2008?
I picked the title for this article because I see it from a different angle than SEI. It is not wrong for a CEO to squeeze as much he or she can out of a business to increase the corporate bottom line, but at what cost? I have seen our income magically disappear while corporate income has increased. Last year we were not being heard. Today we are being heard and that’s just about it!
These are my thoughts, and yours may differ. I would love hear from you.