Caveat Emptor


Let the buyer beware! Under the doctrine of caveat emptor, a buyer cannot recover from a seller for defects on property that render the property unfit for ordinary purposes. The only exception is if the seller actively conceals latent defects or otherwise makes material misrepresentations amounting to fraud.

Before statutory law, a buyer had no warranty on the quality of goods. In many jurisdictions now, the law requires that goods must be of “merchantable quality.” However, this implied warranty can be difficult to enforce and may not apply to all products. Hence, buyers are still advised to be cautious.

What does this have to do with the 7-Eleven system?

For decades, a 7-Eleven franchise has been viewed as a ticket to financial success, so much so that prospective franchisees would line up to acquire an available store. In the article “South Asians Dominate U.S. C-Store Sector,” which appeared in the March 15, 2007 edition of CSP Daily News, then NCASEF Chairman Tariq Khan stated:

… South Asians own more than 50 percent of the chain”s franchised stores. In California alone, out of the 1,200 7-Eleven stores, around 600 to 700 stores are held by South Asians.

“I really think we are the backbone of the industry. With all the bankruptcies in the ‘90s of convenience stores, I think Indians and Pakistanis are the reason the companies survived because we came in and bought those stores,” Khan told the news service. “All those stores went belly up in the Midwest and when they were gobbled up, they were gobbled up by people like myself.”

As to why South Asians are getting into the industry, he joked, “In this business you don”t need experience—the prices are on the merchandise. You don”t even have to know much English. You can get by with ‘Good morning” and ‘Thank you” and ‘Have a nice casino day.” This business is also recession-proof because every morning people need the newspaper, bread, milk, coffee, and cigarettes. If they don”t have a job, they”re likely to be still drinking coffee, perhaps having more cigarettes, and certainly reading the newspaper.”

Despite the applicant’s country of origin, the 7-Eleven franchise has always been viewed as a desirable business model. This has led to prospective franchisees gobbling up almost any available store. Due to the seemingly inevitable profitability, many individuals bought stores without even reading the franchise agreement, let alone seeking legal advice before signing the contract.

Beginning in 2005, SEI realized the demand for 7-Eleven stores was greater than the supply. The company also realized it then had the opportunity to make three crucial changes: 1) increase the franchise fee; 2) make more money by franchising its corporate stores and collecting the franchise fee; 3) remove existing policies for credit/debit card expenses and change the gasoline commission. The aforementioned realization also led to SEI annually changing the franchise agreement to improve its profitability at the expense of the franchisee.

The most recent expense is the new additional gasoline franchise fee. Also, for the first time SEI has added a franchise renewal fee. Imagine, a successful franchisee that after ten years of building a store’s sales and gross profits for himself and SEI, has to pay a fee to SEI to continue to earn money for SEI. This is in addition to the Graduated Gross Profit Split, where SEI takes a bigger slice of the gross profit from the franchisee as he grows sales and gross profits. This is also despite SEI making no additional investment from their side of the ledger, while the franchisee’s expenses continue to increase with every transaction conducted.

Is there a point where a franchisee no longer wants to increase their sales because they will make less money? Surprisingly, there is still a plethora of applicants, including existing franchisees, for almost every available 7-Eleven store.

There are now complaints from storeowners that the franchisee fee is becoming too expensive and the franchise agreement terms are decreasing the income they are earning from their stores. Franchisees are asking FOA leaders and the National Coalition to intervene to lower the franchise fee and improve the financial terms of the agreement. Franchisees are also asking the National Coalition to become involved in changing the wording of the franchise agreement. Unfortunately, SEI has no contractual obligation to do this. Only with a positive relationship and open two-way communication can the National Coalition affect the wording in the agreement.

The only way SEI will reduce the franchise fee structure and improve the wording in the franchise agreement is when they can no longer franchise stores. It is now the rule of supply and demand, and the demand for 7-Eleven stores has never been greater. With the increasing pace of store acquisitions, the building of new stores, and continuing success of the Business Conversion Program, there is a seemingly never ending supply of stores to franchise. In fact, 7-Eleven continues to rank high on various franchise ranking reports.

About 17 states have “Fair Franchising” laws to help protect franchisees from onerous language in an agreement. Some states have stronger laws than others. There are other franchisee organizations that are trying to find support for every state to have fair franchising laws, or even national legislation. Perhaps it is time for local FOAs to become educated about these efforts to level the playing field with the franchisors.

Maybe then it will become Caveat Venditor.