Change is Good, But Franchisees Need to Know What Lies Ahead with 7NOW
BY MICHAEL JORGENSEN, EXECUTIVE VICE CHAIRMAN, NCASEF
Lao Tzu, the ancient Chinese philosopher, sometimes referred to as Confucius, is claimed to have said, “If you do not change direction, you may end up where you are heading.” As we are all keenly aware, retail stores are fighting now more than ever for each and every customer. The retail landscape, while still growing, is shifting. Change for c-stores is not only necessary, it needs to happen quickly.
In the good old days, not that long ago, we could easily identify who our competition was and what they were doing. Through our daily experiences we could identify how they were changing their businesses, their product offerings, and their prices to drive sales in a particular area. Today, with the growth of digital, the trajectory of e-commerce, and the expansion of additional “competitors” into our sales channel, our business has changed forever. According to the most recent NACS data, convenience trips per week are down from 3.6 in 2014 to only 2.5 in 2018.
In an article for Total Retail, Linda Mihalick writes, “In its simplest definition, convenience is often measured by time and effort. In our current time-starved culture, this definition is continually expanding and changing.” She continues, “We presently live in an on-demand and always-on society, where digital is center stage. Consumers want speed, but they also want ease and simplicity.” So when we look at convenience, it makes sense that the next phase involves ordering via smartphone, tablet or some other connected device, with the customer either coming in to pick up or getting it delivered to wherever he or she may be.
Over the past 90-plus years, 7-Eleven has created and defined convenience. In fact, we’ve been the indisputable kings of the convenience store in innovation, in sales, and by sheer store numbers. At the most recent NCASEF Board meeting in Long Beach, Leroy Kelsey, Research Director at NACS, presented a slide summarizing the shifts in the U.S. using data by Commerce Sales, and it showed retail sales up 4 percent thru March 13 of this year. E-Commerce sales were up 16 percent over that same period.
In an effort to avoid ending up where we were headed, our franchisor has again innovated and developed 7NOW, their response to the changing retail environment and today’s digitally enabled consumer. While not available nationwide yet, customers in many areas can now order some of their favorite products “day or night” without leaving their couch—or the beach for that matter. Over the past year, 7-Eleven has continued to adapt and expand this state-of-the-art application and the orderable products available for customers. By building 7NOW from the ground up, 7-Eleven maintains the extremely valuable data and communication channel to the customer and ensures we will not be tethered to any third party delivery providers long term. Unfortunately, franchisees do not share in any revenue or profits derived exclusively from the ownership of this very valuable customer data.
There is no doubt that we need to adapt to the changing landscape and that 7NOW is the right direction. However, 7NOW does still raise some concerns that should be addressed before we get too far down the road.
7-Eleven currently utilizes third party delivery providers to deliver 7NOW orders, but the 2019 contract spells out the fact that the company can dictate, at any time, that franchisees must obtain vehicles and engage personnel who can make deliveries. This is an added expense to the franchisee that is not shared. This is a concern about the store level profitability of 7NOW.
While utilizing the third party delivery providers, 7-Eleven is currently offsetting some of the delivery costs with upcharges to the customer. 7NOW stores can see this breakdown on their 48A on the page titled Computation of 7NOW Delivery Cost. The report shows that the third party delivery costs are being offset in three ways:
1) A retail premium on delivered products. This is a markup price that the consumer pays for items offered through the 7NOW App. For example, the retail price at the store for a Snickers bar may be $1.99, but on 7NOW it is $2.39. That additional $0.40 is not shared GP but instead is accounted for separately to offset the delivery fee.
2) Small basket fees for purchase totals that don’t meet the total threshold to qualify for free delivery. This is actually an upcharge to meet the minimum purchase requirement for free delivery. For example, delivery is free if you order over $20. If the order comes to $15.99, the customer pays the $20 and the $4.01 gets applied here. Again this is not shared GP.
3) Delivery fee a customer knows up front they will pay to have products delivered via 7NOW.
Currently, any difference, or gap, remaining between the total of the offsets and the total delivery costs will be covered by 7-Eleven out of their corporate expense line. But there is no guarantee they will cover that gap forever. Right now delivery is a small percentage of our business, but what happens when it becomes a large percentage of our business? As we continue to promote our 7Rewards loyalty program, 7-Eleven is growing its customer database, making our customers their customers.
We already have a customer count problem today. It is scary to imagine fewer customers visiting our stores because we are delivering to the very customers who once upon a time were visiting our stores, but we may be doing so with added expenses and thinner margins.
The carpet can be pulled out from under us at any time. We have no guarantees, because everything not spelled out in the agreement about delivery SEI will attempt to control by the operations manual, and SEI contends that the operations manual can be changed at any time. This could prove costly for franchisees. It’s better to promote transparency and ask now when the program is still developing rather than when it is a large part of our business.
Franchisees need assurances up front that we will have guaranteed profit from 7NOW deliveries. Although 7-Eleven is now covering any gap in costs, everything can be put on the franchisee to recoup the investment. We need a more concrete financial picture before we get much further down the road. Who will end up paying for the delivery? What about the additional expenses such as packaging and equipment? Additional liability?
I’ll get in the car and I like the direction, but we should all check the tire pressure, windshield wipers and fluid and make sure we put on our seatbelts. We should know we can handle the tight curves and see clearly so that we are all safely secured for the long ride ahead.