You Are Not Alone— Chapter 2

ERIC H. KARP, ESQ., GENERAL COUNSEL TO NCASEF

In the most recent edition of Avanti, I described a report of the Australian Joint Parliamentary Commission, which conducted an in-depth investigation of the franchise relationship between Australian franchisees and their franchisors and found systemic exploitation of some franchisees by a subset of franchisors and a regulatory framework that does not provide adequate protection against such practices.

Over the last several months, the relationship between Seven-Eleven Japan and its franchisees has also been in the news in ways that may remind you of the challenges you face dealing with internal and external challenges to your business.

By way of background, on June 22, 2009, the Japanese Fair Trade Commission issued a Cease-And-Desist Order against Seven-Eleven Japan. The Order had to do with the practice of Seven-Eleven Japan requiring franchisees to bear 100 percent of the loss associated with the disposal of unsold or unsalable fresh food and hot food. The Japanese FTC noted that the franchisor had a dominant bargaining position over its franchisees and that its practices have caused those franchisees “to lose opportunities to reduce the loss of the amount equivalent to the cost of such disposed daily goods according to their own rational business judgment.” The Order required Seven-Eleven Japan to cease such practices and to provide periodic training for its officers and employees and periodic audit by legal staff to ensure compliance with the Order and all other provisions of the Japanese Anti-Monopoly Act. The Consent Order can be found here: https://www.jftc.go.jp/en/pressreleases/yearly-2009/jun/individual-000052.html

More recently, there have been many news reports associated with the mandate imposed on Japanese franchisees requiring their stores to be operated 24 hours per day, seven days per week. The same requirements are imposed on the United States franchisees. In fact, under the 2019 franchise agreement, franchisees no longer have the discretion to close on Christmas Day.

A shortage of labor in Japan has caused controversy between the franchisor and the franchisees. According to a Nikkei Asian Business Review article published on April 4,2019 (“Labor Crunch in Japan Costs Seven-Eleven President His Job”), the chronic labor shortage in Japan has caused a management shakeup at Seven & i Holdings, which along with a chronic labor shortage is “…threatening the business model that powered the chain’s growth for more than four decades.” The article goes on to say that some franchisees have rebelled against the 24-hour policy. One storeowner outside of Osaka shortened store hours in protest and other franchisees voiced their support. According to a published report, Seven-Eleven Japan sought to impose a fine of ¥17 million on the franchisee. The franchisor’s response, according to another news article, was to implement shorter hours on a trial basis at company-owned stores.

As a result, the Japanese Federal Trade Commission recently announced that it will begin an investigation of the convenience store industry in Japan on “…whether 24/7 operating models and other restrictions are putting some franchises at a disadvantage.” The investigation will include a questionnaire survey of franchise store operators during the summer of 2019. The survey will examine whether convenience store franchisors are unreasonably refusing demands from storeowners, including requests for changing contract terms. This will be the first such survey of the Japanese convenience store industry in eight years.

In announcing the survey at a press conference, the Japanese FTC Secretary-General stated, “We are concerned whether franchise owners suffer unfair disadvantages.” A news report in The Mainichi, a Japanese daily news outlet, (“FTC to Probe Fairness of Dealings Between Japan’s Convenience Stores, Head Offices”) noted that Japanese 7-Eleven franchisees remain in a weak position and that the FTC will investigate whether that has created a disadvantage in violation of the Impact on Prohibition of Private Monopolization and Maintenance of Fair Trade. The same newspaper editorialized on May 27, 2019 (“Convenience Store Industry Needs to Depart From Current Business Model”) that the practice of shortening store hours at some stores on a trial basis and discounting good products with used-by dates or drawing near by rewarding shoppers with points, were small-scale changes not adequate to match the challenges. In short, said the editorial, “… major convenience store companies
are slow to reform their operations apparently because they do not want to change their existing business model that has supported the firms’ big profits.”

U.S. franchisees have the advantage that waste and spoilage of hot food and fresh food is counted towards cost of goods sold, and thus the pain associated with that waste is shared by both franchisor and franchisee. But there still are unresolved issues regarding how much fresh food and hot food franchisees are required to stock and the incremental labor costs associated with those items.

It is this same unequal bargaining power which has put U.S.-based 7-Eleven franchisees at a severe disadvantage, creating one-sided and unfair contract terms and policies. However, it is certainly useful for franchisees in the United States to know that the challenges they face by adapting a decades-old franchise model in the context of evolving consumer tastes, rising labor costs, eroding margins and pressure to increase the sale of perishable items, are not confined to the United States. In addition, there is an opportunity to create and strengthen alliances between franchisees on different continents in order to share their concerns and strategize on ways to address them.