Why We Need an Independent National Coalition, Part 1

By John R Irvine Jr., Franchisee, Detroit, Michigan

I was asked to write an article about why we need an independent National Coalition. The simple answer is, “Joe DePinto is an evil guy, so we need the National Coalition!” Except that is not true. Joe DePinto is doing his job. Joe’s job is to maximize the bottom line for the owners of 7-Eleven, Inc. I often hear franchisees say that franchisees and 7-Eleven, Inc. are partners. Nothing could be further from the truth. A 7-Eleven franchisee is a contract employee with none of the benefits or legal protection afforded normal employees.

It is no secret that the profitability of a 7-Eleven franchise is on the decline. We all know that if you throw a frog into a pan of boiling water it will quickly jump out. But, if you put that frog in a pan of cold water and turn on the heat, the process is so slow that by the time the frog realizes there is a problem, the frog is dead. 7-Eleven franchisees are much like that frog—the process of declining income is so slow that by the time we realize there is a problem, we are out of business.

Many franchisees face the problem of minimum wage rising at a rate far outstripping the rate of inflation. For a normal business the solution is to raise the profit margin (retail prices) to meet the new expense. Since all your competition faces the same increased cost, they will also be raising their prices. However, a 7-Eleven franchisee is in a unique situation, as 7-Eleven, Inc. would be receiving over 50 percent of any increase in profit, and therefore the only fix is to raise prices and change the split. The fix is a simple one, yet we see no movement on our “partner’s” part to fix the problem.

An individual franchisee has zero bargaining power with a multinational corporation like 7-Eleven, Inc. 7-Eleven began franchising as a way around the problem of employee unionization. Unionization tends to level the playing field between employees and employers. A 7-Eleven franchisee is a contract employee with none of the benefits or legal protection of a traditional employee, including the right to unionize. Understanding the problem franchisees face is the first step in solving the problem. In order to solve the problem we face today, we must understand it from a historical, legal, and economic standpoint.

Throughout the ‘70s, ‘80s, ‘90s and 2000s the minimum wage did not keep up with inflation. I made a video called “The Minimum Wage Isn’t Fair” in 2013. You can see it on  YouTube—just go to YouTube and type in the title. We can see in the video that the buying power of minimum wage dropped by at least 75 percent during this 40-year period. The real rate of inflation during those years was somewhere between 7 and 9 percent. With customer counts falling, sales because of inflation was rising 1 to 4 percent. Expenses were rising 7 to 9 percent, but payroll in terms of inflation-adjusted dollars was falling. Because of the combination of all the factors described, 7-Eleven franchisee income was rising. The problem was that minimum wage had dropped far below a livable wage, and it became almost impossible for a 7-Eleven franchisee to maintain a viable crew of employees.

Enter the “New Americans!” So called “New Americans” (immigrants) came to 7-Eleven not only with money, but more importantly, with their own workforce willing to man 7-Eleven stores 24 hours a day. The speed with which the “New Americans” took over the 7-Eleven franchise system was amazing.

A 7-Eleven franchisee in the ‘80s could net up to 8 percent of sales, but today that number is somewhere between 2 and 4 percent. The National Coalition during this time started a class action lawsuit against 7-Eleven, Inc. and something interesting happened during the “discovery” phase of the case. 7-Eleven, Inc. did a massive document dump on the National, hoping to overwhelm them with useless information. Found among the documents were communications from the Japanese owners and 7-Eleven management indicating corporate’s belief that American 7-Eleven franchisees process of moving corporate expenses to franchisees had begun.

First it was credit cards. In the ‘90s, franchisees were resisting efforts to have stores take credit cards. 7-Eleven had assured franchisees that if they began accepting credit cards, 7-Eleven, Inc. would assume all associated costs of doing so. Of course, this was never put in writing in a contract addendum, so it was obviously subject to change.

Next came gasoline. 7-Eleven in the ‘70s agreed to pay franchisees 25 percent of the profit on the sale of gasoline, even though the contract mandated 1¢ per gallon would go to franchisees. The average profit margin was about 12¢ per gallon, giving franchisees 3¢ per gallon. Unfortunately, the agreement to give franchisees 25 percent of the profit on gasoline was a policy and was never put in an addendum to the contract. 7-Eleven, Inc. eliminated the policy and offered franchisees 1.5¢ per gallon in a contract addendum, or the franchisee would revert to the original contract commission of 1¢.

Next came the efforts to lower cost of goods by converting vendor labor to franchisee labor. In addition, labor-intensive programs such as hot foods were added. Labor is the number one line item on every profit and loss statement. Increasing franchisees’ labor costs, in the hopes of adding profit dollars for 7-Eleven, Inc., has taken its toll on franchisees’ bottom lines.

If one looks at the current graduated split agreement in the new contract, over time with inflation all stores will eventually be at a split level below 45 percent. With franchisees netting between 2 and 4 percent at current split levels, how can a franchisee survive? With expenses and sales rising because of inflation, split levels will decline for franchisees. The relationship between a franchisee’s share of the profit and expenses will eliminate the possibility of a positive outcome.

Is there any question that we need an independent National Coalition?