Hold the $1 Coffee: Franchisees Set Prices, Not SEI

By Tom Ayres, Witmer, Karp, Warner & Ryan, LLP

With SEI promoting a $1 coffee program nationwide, franchisees are likely asking themselves: “Am I obligated to participate?” The short answer is “No!” The Franchise Agreement contains several provisions that clearly state that franchisees set prices—not SEI. Franchisees can decide for themselves whether it makes economic sense to participate, but they should feel confident knowing that SEI cannot force them to charge only $1 for coffee.

We have been told by a number of franchisees that they have had to affirmatively ask their Field Consultant how to work around the pre-programmed $1 coffee in their POS system because SEI is not volunteering that important piece of practical information. This is unfortunate because it undermines the clear and unequivocal right of franchisees not to participate in these and other deep discounting initiatives.

First and foremost, Paragraph 15(f) on page 10 of the January 2019 Uniform Store Franchise Agreement that deals with Suggested Retail Selling Prices states, “We may suggest retail selling prices for Inventory items and services that you offer at your Store. You have no obligation to sell Inventory items and services at our suggested retail selling prices, but you agree to accurately and timely report to us your actual retail selling prices as required by this Agreement.” Prior versions of this paragraph of the franchise agreement have the same language, although it may be found on a different page.

Second, Paragraph 12(c)(3) on page 8 that deals with Bookkeeping and Financial Matters states: “You also agree to keep us currently advised electronically or in writing, as we specify, of all your actual retail selling prices (which you alone will set) and of all discounts, allowances, and/or premiums you receive.”

Third, Paragraph 19(f) on page 16 similarly says that franchisees agree to “properly record all sales of Inventory at the time of sale at the retail prices you set and generally offer customers of the Store.” It’s worth noting here that the definition of “Inventory” on page 46 says nothing about price. And check out the how “Retail Book Inventory” is defined on page 48, which states that as part of the calculation, SEI will “add[] the retail value (based on your then-current retail selling prices) of subsequent Purchases.”

Franchisees may be asking themselves, “Do I have to offer 7-Eleven Proprietary Products at a price set by SEI?” Again, the short answer is “No!” While Paragraph 15(c) on page 10 indicates that franchisees must “maintain in the Store at all times a Reasonable and Representative Quantity of all Propriety Products,” there is nothing that says that they must be offered at a particular price set by SEI. The definition of “Reasonable and Representative Quantity” on page 47 also says nothing about price, just the minimum number of units for each SKU.

The same is true of Nationally/Regionally Promoted Products and Exclusive Products under Paragraph 15(e). The same Reasonable and Representative Quantity requirements apply and there is no indication that SEI may set the price or that any portion of this subparagraph overrides section 15(f).

Still not sure? Check out the Franchise Disclosure Document that SEI must furnish to every prospective franchisee and submits to state regulators. Item 11(a) on page 34 refers to Paragraph 15 in the Franchise Agreement and states: “We will provide a list of Recommend Vendors on the 7-Eleven Intranet, indicate the type of merchandise you should sell, and suggested retail selling prices. As an independent contractor, you can select merchandise for your store and the vendors you buy from, and establish the retail selling prices for your merchandise (except for consigned gasoline).”

What about other products that have pre-printed prices on them? This is tricky as a practical matter, but as a legal matter there is nothing in the Franchise Agreement that requires you to use the preprinted price on any product. Our law firm has brought this issue to the attention of SEI in the past as this practice is not permitted under the franchise agreement as drafted by SEI.

One last point: there are two exceptions to prices franchisees can set—(1) gasoline and (2) car washes. For those franchisees that offer gasoline and car washes, they must sign amendments that expressly state that SEI will set the prices at which they will be sold. However, the right to set these prices by SEI is not without limits, and from our perspective, must be exercised in accordance with the implied covenant of good faith and fair dealing.

You may want to keep a copy of this article at the ready in your store should your Field Consultant or anyone in SEI state or imply that you are not entitled to set the retail prices within your store.

If you have any questions regarding pricing in the contract, reach me at tayres@wkwrlaw.com.