Who is to Blame For the Declining Gross Profit?
Romy Singh, Vice Chairman, NCASEF | President, Eastern Virginia FOA
There seems to be a lot of frustration among franchisees regarding the decline of gross profit year after year. Many feel we are hardly receiving the same gross profit percentage we saw a few years ago. Taking a closer look at the situation, I believe the decline in our gross profit percentage is due to numerous factors.
The main reason, I feel, is because SEI only cares about their numbers. This thought is being driven by the actions of the Merchandising Department, which continuously develops aggressive promotions that result in franchisees making less profit than usual, thereby making SEI look like they have their hands in our pockets.
Franchisees used to make better gross profits through the energy drink and isotonic doors, soda machines, water and grill. Via these items, franchisees used to receive 50+ gross profit percentage, which was offset by cigarette, tobacco, and beer categories’ low margins. This was the healthy gross profit franchisees were used to seeing.
Currently, however, it seems as if every promotional item that is forced on us does not truly work in our favor. In reality, the promotion is just a regular price for the particular product or item being sold. For example, the soda and quarter pounder for $3 deal was hurting the franchisee’s pocket. In the summer, SEI decided to give away energy doors and in the wintertime they decided to give away every cup of coffee.
The $0.50 coffee deal was just to bring extra traffic into our stores, but how many additional guests have we truly added? Have we seen a billboard, newspaper, or any TV advertising? All costs for cups, coffee, creamer, stir up holder, in addition to the labor costs, were coming from our pocket, which in return hurts our gross profit.
Another factor leading to our low gross profit is the ETA program. Since we have pushed ETA, our inventory has increased to over 25 thousand items in every store. This has affected the rotation of our inventory, which has decreased, thus resulting in a lower GP throughout our stores.
Cost of goods is another main factor affecting our gross profit. Franchisees are paying more than what a traditional mom and pop store is charged for the same products. The vendors are complaining they are paying an “extra” amount per case for upgrading our APP and ISP. How can we franchisees negotiate the best cost of goods, which directly impacts our gross profit? It is obvious that frustration is building within the franchisee community over the APP promotions that are offered. The end result is franchisees are getting cost (VIP) of the products.
Another example is if a customer buys 5 or more Taquitos we provide a $3 discount, on top of the guest accumulating enough reward points to also grab a Pepsi, Coke, or water. This is at the expense and burden of the franchisee. We franchisees are essentially “giving away” everything to the EXISTING customer base, not necessarily targeting NEW customers. There is not enough advertising being done to let the consumers know about the 7-Eleven app. In addition, the window POP is not enough, which is hurting our GP from already existing customers.
Just look at our competition. There was a point in time where the consumer used to pay an extra 10 cents as a convenience tag. Currently, we are retailing lower in our bakery, cigarettes,and beer categories in comparison to our competition. Why are we hurting our gross profit and who is to blame? If we continue on the current path, I won’t be surprised if our gross profits keep declining in the coming months unless franchisees valuate each promotion, every promo, and CRP those. If SEI wants to see more traffic come through our doors, we must advertise heavily to
target and add new customers, so our GP could be recovered.