7-ElevenNOW Program Amendment – More Questions Than Answers
Eric H. Karp, Esq., General Counsel
SEI has rolled out a new 7-ElevenNOW Program Amendment that purports to allow franchisees the opportunity to fulfill orders placed on the 7-ElevenNOW App. The Amendment is in the process of being offered to existing franchisees. It also appears on pages F-129 to F-131 of Exhibit F to SEI’s 2018 franchise disclosure document issued on April 5, 2018. There is also a related Delivery Services Amendment that appears on pages F-127-128 of the same disclosure document.
The entire franchise disclosure document can be found on the website of the Wisconsin Department of Financial Institutions: https://www.wdfi.org/fi/securities/franchise/default.htm
This is how SEI described the 7-ElevenNOW App in a press release issued last December: “When ordering items through 7-ElevenNOW, 7-Eleven customers can choose to receive direct delivery to their location or pick up their prepared order at the participating store of their choice within the 7-ElevenNOW footprint. A wide selection of snacks, cosmetics, gift cards, home goods, beverages and hundreds of other products are available for purchase on the app, making 7-Eleven the go-to place in order to get everything customers may need all from one location.”
Like many similar amendments to the franchise agreement, and consistent with SEI’s treatment of the supply chain with a certain level of secrecy, this 7-ElevenNOW Program Amendment is extremely opaque and raises many more questions than it answers.
The franchise disclosure document, of which the 7-ElevenNOW Program Amendment is a part, is designed not just to comply with federal and state franchise disclosure rules, but more specifically to fulfill the public policy behind those rules, which is to give prospective franchisees sufficient information to make a knowing and intelligent choice whether to execute the franchise agreement and its various amendments. Applying that standard, the 7-ElevenNOW Program Amendment falls short.
In the end, SEI is asking franchisees to sign this document in the dark, without understanding its basic implications for franchisee revenue, gross margin, net profit and equity. SEI is asking franchisees to trust them, but there is no evidence that the company has earned that trust. A good beginning would be to introduce some refreshing transparency with respect to this 7-ElevenNOW Program Amendment. One might ask, what exactly would SEI be risking by doing so?
Here are 60 questions that any franchisee should have the answers to before they are compelled or pressured into signing the 7-ElevenNOW Program Amendment:
1. How will these orders be accounted for in the Financial Summaries?
2. Who are the third party delivery companies (Delivery Providers)?
3. The Amendment states that franchisees may not use any other delivery company, even for orders not placed through the App. What is the purpose of this harsh restriction and why does it exist?
4. Do the Delivery Providers have adequate personnel, infrastructure and resources to carry out their responsibilities?
5. The Delivery Amendment indicates that the delivery fee will be up to 10 percent, but who decides the actual amount that will be paid to the Delivery Providers?
6. Will customers be asked to pay all or a portion of the Delivery Fee?
7. Who decides whether customers will be asked to share in the cost of the Delivery Fee?
8. What impact will the fees of the Delivery Providers have on gross margin?
9. Will corporate stores pay the same Delivery Fee as franchise stores?
10. Will SEI pledge to never receive payments, commissions, kickbacks or other consideration from the Delivery Providers in return for the privilege of deriving revenue from the system? If not, why not?
11. Will SEI provide to the National Coalition copies of their contracts and agreements with the Delivery Providers? If not, why not?
12. Who are the payment processing companies (Payment Processors) that have been retained by SEI?
13. Do the Payment Processors have adequate personnel, infrastructure and resources to carry out their responsibilities?
14. What are the fees that will be paid to the Payment Processors?
15. How will these fees be computed?
16. The 7-ElevenNOW Program Amendment warns that the fees paid to the Payment Processors may be higher than those paid under the current payment card processing arrangement. How much higher will they be?
17. Will those fees be included in the definition of Gross Profit?
18. What impact will the fees of the Payment Processors have on gross margin or net profit?
19. Will corporate stores pay the same fees to the Payment Processors as franchise stores?
20. Will SEI pledge never to receive payments, commissions, kickbacks or other consideration from the Payment Processors in return for the privilege of deriving revenue from the system? If not, why not?
21. Will SEI provide to the National Coalition copies of their contracts and agreements with the Payment Processors? If not, why not?
Special Proprietary Containers
22. Franchisees will be required to order and maintain “adequate” supplies of Special Proprietary Containers. What is the definition of an adequate supply?
23. How will franchisee performance against that standard be measured?
24. From whom will franchisees be required to order Special Proprietary Containers?
25. Will SEI shoulder the risk and the responsibility if the Special Proprietary Containers are not adequate for their intended purposes?
26. To what extent will the Special Proprietary Containers be more expensive than standard packaging?
27. Will SEI pledge to never receive payments, commissions, kickbacks or other consideration from suppliers of Special Proprietary Containers in return for the privilege of deriving revenue from the system? If not, why not?
28. Will SEI provide to the National Coalition copies of their contracts and agreements with suppliers of Special Proprietary Containers? If not, why not? New Equipment
29. What new equipment will SEI be installing for holding hot and cold foods?
30. Will the equipment be new, and not reconditioned?
31. What are the manufacturers’ warranties with respect to this equipment?
32. Will franchisees see the benefit of these warranties?
33. What is the expected useful life of this equipment?
34. What is the anticipated cost of the franchisee’s equipment maintenance responsibility with respect to this equipment?
35. What company or companies will be responsible for maintaining the App?
36. Do these companies have adequate personnel, infrastructure and resources to carry out their responsibilities?
37. What costs, if any, will franchisees incur in connection with the App?
38. What costs, if any, will franchisees incur maintaining the store online?
39. How will customers earn points for ordering on the App?
40. Who pays for the cost of redeeming these points?
41. How will those costs be accounted for and in what format?
42. What percentage of stores are online now?
Incremental Labor Costs
43. Franchisees have long been concerned about the incremental labor associated with fresh foods and hot foods. How much incremental labor is expected to be incurred in connection with the fulfillment of orders placed through the App?
44. Will the incremental labor costs be incurred at higher rates than for fresh food and hot foods sold to walk-in customers?
45. Will the incremental labor costs be incurred at different times of the day than for fresh food and hot foods sold to walk-in customers?
46. How will this incremental labor affect franchisee’s bottom line?
47. Has SEI studied the issue of incremental labor that has been required so far, or will be required in the future in order to fulfill these responsibilities? If not, why not?
48. Franchisees will be required to maintain “adequate” inventories of hot and fresh foods to fill all orders. What is the definition of an adequate inventory?
49. How will franchisee performance against that standard be measured?
50. Does SEI anticipate that the App will result in elevated required inventory of fresh foods and hot foods at different parts of the day than in-store sales?
51. Has SEI studied what parts of the day orders are likely to be received? If not, why not?
52. What impact does SEI expect that incremental write-offs will have on franchisee profit?
53. To what extent will incremental orders fulfilled through the App elevate franchisee exposure to write-offs?
54. Has SEI studied the issue of incremental write-offs that may be generated by the need to maintain adequate inventory to fulfill these orders? If not, why not?
55. Who will set the retail prices at which orders can be placed through the App?
56. Will franchisees be permitted to set retail prices as required by the terms of their franchise agreements?
57. To what extent will special promotions and/or discounts be more prevalent through the App than they are in a retail store?
58. Has SEI studied the issue of pricing through the App and the impact that it may have on the bottom line of franchisees? If not, why not?
59. Franchisees will be required to process orders “as soon as possible,” “promptly” and in a “timely manner.” What are the definitions of these terms?
60. How will franchisee performance against these standards be measured? We ask that SEI probably respond in writing and in detail to each of these questions so that franchisees can make an informed decision as to whether or not to execute the 7-ElevenNOW Program Amendment and the Delivery Services Amendment.